American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 11851202 The Stock Market and Capital Accumulation Robert E.Hall The value of a firm's securities measures the value of the firm's productive assets. If the assets include only capital goods and not a permanent monopoly franchise, the value of the securities measures the value of the capital. Finally, if the price of the capital can be measured or inferred, the quantity of capital is the value divided by the price. A standard model of adjustment costs enables the inference of the price of installed capital. Data from U.S. corporations over the past 50 years imply that corporations have formed large amounts of intangible capital, especially in the past decade. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 12031220 The Information-Technology Revolution and the Stock Market: Evidence BartHobijnBoyanJovanovic Why did the stock market decline so much in the early 1970s and remain low until the early 1980s? We argue that it was because information technology arrived on the scene and the stock-market incumbents of the day were not ready to implement it. Instead, new firms would bring in the new technology after the mid-1980s. Investors foresaw this in the early 1970s and stock prices fell right away. In our model, new capital destroys old capital, but with a lag. The prospect of this causes the value of the old capital to fall right away. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 12211238 Is the Price Level Determined by the Needs of Fiscal Solvency? Matthew B.CanzoneriRobert E.CumbyBehzad T.Diba The fiscal theory of price determination suggests that if primary surpluses evolve independently of government debt, the equilibrium price level "jumps" to assure fiscal solvency. In this non-Ricardian regime, fiscal policy--not monetary policy--provides the nominal anchor. Alternatively, in a Ricardian regime, primary surpluses are expected to respond to debt in a way that assures fiscal solvency, and the price level is determined in conventional ways. This paper argues that Ricardian regimes are as theoretically plausible as non-Ricardian regimes, and provide a more plausible interpretation of certain aspects of the postwar U.S. data than do non-Ricardian regimes. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 12391262 Does Money Illusion Matter? ErnstFehrJean-RobertTyran This paper shows that a small amount of individual-level money illusion may cause considerable aggregate nominal inertia after a negative nominal shock. In addition, our results indicate that negative and positive nominal shocks have asymmetric effects because of money illusion. While nominal inertia is quite substantial and long lasting after a negative shock, it is rather small after a positive shock. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 12631285 Financing Investment Joao F.Gomes We examine investment behavior when firms face costs in the access to external funds. We find that despite the existence of liquidity constraints, standard investment regressions predict that cash flow is an important determinant of investment only if one ignores q. Conversely, we also obtain significant cash flow effects even in the absence of financial frictions. These findings provide support to the argument that the success of cash-flow-augmented investment regressions is probably due to a combination of measurement error in q and identification problems. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 12861310 Financial Markets and Firm Dynamics Thomas F.CooleyVincenzoQuadrini Recent studies have shown that the dynamics of firms (growth, job reallocation, and exit) are negatively correlated with the initial size of the firm and its age. In this paper we analyze whether financial factors, in addition to technological differences, are important in generating these dynamics. We introduce financial-market frictions in a basic model of industry dynamics with persistent shocks and show that the combination of persistent shocks and financial frictions can account for the simultaneous dependence of firm dynamics on size (once we control for age) and on age (once we control for size). http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 13111328 Competition in Loan Contracts Christine A.ParlourUdayRajan We present a model of an unsecured loan market. Many lenders simultaneously offer loan contracts (a debt level and an interest rate) to a borrower. The borrower may accept more than one contract. Her payoff if she defaults increases in the total amount borrowed. If this payoff is high enough, deterministic zero-profit equilibria cannot be sustained. Lenders earn a positive profit, and may even charge the monopoly price. The positive-profit equilibria are robust to increases in the number of lenders. Despite the absence of asymmetric information, the competitive outcome does not obtain in the limit. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 13291349 Why Regulate Insider Trading? Evidence from the First Great Merger Wave (1897-1903) AjeyoBanerjeeE. WoodrowEckard We use event-time methodology to study legal insider trading associated with mergers circa 1900. For mergers with "prospective" disclosures similar to today's, we find substantial value gains at announcement, implying participation by "outside" shareholders despite the absence of insider constraints. Furthermore, preannouncement stock-price runups, relative to total value gain, are no more than those observed for modern mergers. Insider regulation apparently has produced little benefit for outsiders, with the inside information-pricing function and related gains shifting to external "information specialists." Other results suggest market penalties for nondisclosure; i.e., insider trading is less successful in a restricted information environment. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 13501368 Learning from Experience and Learning from Others: An Exploration of Learning and Spillovers in Wartime Shipbuilding Rebecca AcheeThorntonPeterThompson A new data set facilitates study of learning spillovers in World War II shipbuilding. Our results contain two principal but contrasting themes. First, learning spillovers were a significant source of productivity growth, and may have contributed more than conventional learning effects. Second, the size of the learning externalities across yards, as measured by Spence's theta, were small. These findings, which are not mutually inconsistent, suggest an optimistic view of learning spillovers: they are a significant source of productivity growth, but the market failures induced by learning externalities may be modest. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 13691401 The Colonial Origins of Comparative Development: An Empirical Investigation DaronAcemogluSimonJohnsonJames A.Robinson We exploit differences in European mortality rates to estimate the effect of institutions on economic performance. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive institutions. These institutions persisted to the present. Exploiting differences in European mortality rates as an instrument for current institutions, we estimate large effects of institutions on income per capita. Once the effect of institutions is controlled for, countries in Africa or those closer to the equator do not have lower incomes. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 14021422 Ten Little Treasures of Game Theory and Ten Intuitive Contradictions Jacob K.GoereeCharles A.Holt This paper reports laboratory data for games that are played only once. These games span the standard categories: static and dynamic games with complete and incomplete information. For each game, the treasure is a treatment in which behavior conforms nicely to predictions of the Nash equilibrium or relevant refinement. In each case, however, a change in the payoff structure produces a large inconsistency between theoretical predictions and observed behavior. These contradictions are generally consistent with simple intuition based on the interaction of payoff asymmetries and noisy introspection about others' decisions. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 14231453 An Account of Global Factor Trade Donald R.DavisDavid E.Weinstein A half century of empirical work attempting to predict the factor content of trade in goods has failed to bring theory and data into congruence. Our study shows how the Heckscher-Ohlin-Vanek theory, when modified to permit technical differences, a breakdown in factor price equalization, the existence of nontraded goods, and costs of trade, is consistent with data from ten OECD countries and a rest-of-world aggregate. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 14541477 Nursery Cities: Urban Diversity, Process Innovation, and the Life Cycle of Products GillesDurantonDiegoPuga This paper develops microfoundations for the role that diversified cities play in fostering innovation. A simple model of process innovation is proposed, where firms learn about their ideal production process by making prototypes. We build around this a dynamic general-equilibrium model, and derive conditions under which diversified and specialized cities coexist. New products are developed in diversified cities, trying processes borrowed from different activities. On finding their ideal process, firms switch to mass production and relocate to specialized cities where production costs are lower. We find strong evidence of this pattern in establishment relocations across French employment areas 1993-96. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 14781497 Conflicts and Common Interests in Committees HaoLiSherwinRosenWingSuen Committees improve decisions by pooling members' independent information, but promote manipulation, obfuscation, and exaggeration of private information when members have conflicting preferences. Committee decision procedures transform continuous data into ordered ranks through voting. This coarsens the transmission of information, but controls strategic manipulations and allows some degree of information sharing. Each member becomes more cautious in casting the crucial vote than when he alone makes the decision based on own information. Increased quality of one member's information results in his casting the crucial vote more often. Committees make better decisions for members than does delegation. http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 14981507 Do Explicit Warnings Eliminate the Hypothetical Bias in Elicitation Procedures? Evidence from Field Auctions for Sportscards John A.List http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 15081520 Information Cascades: Replication and an Extension to Majority Rule and Conformity-Rewarding Institutions Angela A.HungCharles R.Plott http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 15211538 Minimax Play at Wimbledon MarkWalkerJohnWooders http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 15391545 GARP for Kids: On the Development of Rational Choice Behavior William T.HarbaughKateKrauseTimothy R.Berry http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 15461555 A Test of Game-Theoretic and Behavioral Models of Play in Exchange and Insurance Environments Cary A.Deck http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 15561563 Reversing the Keynesian Asymmetry JohnBennettManfredi M. A.La Manna http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 15641579 Iceland's Natural Experiment in Supply-Side Economics MarcoBianchiBjorn R.GudmundssonGylfiZoega http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 15801593 International Coordination of Trade and Domestic Policies JoshEderington http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 15941607 Monetary Policy and Market Interest Rates ToreEllingsenUlfSoderstrom http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 16081620 Output and Welfare Effects of Inflation with Costly Price and Quantity Adjustments LeifDanziger http://www.aeaweb.org/aer/contents/dec2001.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 91 5 December 2001 16211630 Inflation Is Always and Everywhere a Monetary Phenomenon: Richmond vs. Houston in 1864 Richard C. K.BurdekinMarc D.Weidenmier http://www.aeaweb.org/aer/contents/dec2001.html