The American Economic Review
Vol. 95, No. 3, June 2005
Contents
William Allen Brock
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Are Two Heads Better Than One? Team versus Individual Play in Signaling Games
David J. Cooper and John H. Kagel
 Abstract
We compare individuals with two-person teams in signaling game experiments. Teams consistently play more strategically than individuals and generate positive synergies in more difficult games, beating a demanding "truth-wins" norm. The superior performance of teams is most striking following changes in payoffs that change the equilibrium outcome. Individuals play less strategically following the change in payoffs than inexperienced subjects playing the same game. In contrast, the teams exhibit positive learning transfer, playing more strategically following the change than inexperienced subjects. Dialogues between teammates are used to identify factors promoting strategic play.
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Sunspots in the Laboratory
John Duffy and Eric O'N. Fisher
Abstract
We show that extrinsic or nonfundamental uncertainty influences markets in a controlled environment. This work provides the first direct evidence of sunspot equilibria. These equilibria require a common understanding of the semantics of the sunspot variable, and they appear to be sensitive to the flow of information. Sunspots always occur in a closed-book call market, but they happen only occasionally in a double auction, where inframarginal bids and offers are observable.
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The Willingness to Pay–Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations
Charles R. Plott and Kathryn Zeiler
Abstract
We conduct experiments to explore the possibility that subject misconceptions, as opposed to a particular theory of preferences referred to as the "endowment effect," account for reported gaps between willingness to pay ("WTP") and willingness to accept ("WTA"). The literature reveals two important facts. First, there is no consensus regarding the nature or robustness of WTP-WTA gaps. Second, while experimenters are careful to control for subject misconceptions, there is no consensus about the fundamental properties of misconceptions or how to avoid them. Instead, by implementing different types of experimental controls, experimenters have revealed notions of how misconceptions arise. Experimenters have applied these controls separately or in different combinations. Such controls include ensuring subject anonymity, using incentive-compatible elicitation mechanisms, and providing subjects with practice and training on the elicitation mechanism before employing it to measure valuations. The pattern of results reported in the literature suggests that the widely differing reports of WTP-WTA gaps could be due to an incomplete science regarding subject misconceptions. We implement a "revealed theory" methodology to compensate for the lack of a theory of misconceptions. Theories implicit in experimental procedures found in the literature are at the heart of our experimental design. Thus, our approach to addressing subject misconceptions reflects an attempt to control simultaneously for all dimensions of concern over possible subject misconceptions found in the literature. To this end, our procedures modify the Becker-DeGroot-Marschak mechanism used in previous studies to elicit values. In addition, our procedures supplement commonly used procedures by providing extensive training on the elicitation mechanism before subjects provide WTP and WTA responses. Experiments were conducted using both lotteries and mugs, goods frequently used in endowment effect experiments. Using the modified procedures, we observe no gap between WTA and WTP. Therefore, our results call into question the interpretation of observed gaps as evidence of loss aversion or prospect theory. Further evidence is required before convincing interpretations of observed gaps can be advanced.
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The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth
Daron Acemoglu, Simon Johnson and James Robinson
Abstract
The rise of Western Europe after 1500 is due largely to growth in countries with access to the Atlantic Ocean and with substantial trade with the New World, Africa, and Asia via the Atlantic. This trade and the associated colonialism affected Europe not only directly, but also indirectly by inducing institutional change. Where "initial" political institutions (those established before 1500) placed significant checks on the monarchy, the growth of Atlantic trade strengthened merchant groups by constraining the power of the monarchy, and helped merchants obtain changes in institutions to protect property rights. These changes were central to subsequent economic growth.
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Mortality Reductions, Educational Attainment, and Fertility Choice
Rodrigo R. Soares
Abstract
This paper develops a model where reductions in mortality are the main force behind economic development. The model generates a pattern of changes similar to the demographic transition, where gains in life expectancy at birth are followed by reductions in fertility and increases in the rate of human capital accumulation. The onset of the transition is characterized by a critical level of life expectancy at birth, which marks the movement of the economy from a Malthusian equilibrium to an equilibrium with investments in human capital and the possibility of long-run growth.
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International Unions
Alberto Alesina, Ignazio Angeloni and Federico Etro
Abstract
We model an international union as a group of countries deciding to centralize the provision of public goods, or policies, that generate externalities across union members. The trade-off between the benefits of coordination and the loss of independent policymaking endogenously determines size, composition, and scope of the union. Policy uniformity reduces the size of the union, may block the entry of new members, and induces excessive centralization. We study flexible rules with nonuniform policies that reduce these inefficiencies, focusing particularly on arrangements that are relevant to the ongoing debate on the institutional structure of the European Union.
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Competition and Incentives with Motivated Agents
Timothy Besley and Maitreesh Ghatak
Abstract
A unifying theme in the literature on organizations such as public bureaucracies and private nonprofits is the importance of mission, as opposed to profit, as an organizational goal. Such mission-oriented organizations are frequently staffed by motivated agents who subscribe to the mission. This paper studies incentives in such contexts and emphasizes the role of matching the mission preferences of principals and agents in increasing organizational efficiency. Matching economizes on the need for high-powered incentives. It can also, however, entrench bureaucratic conservatism and resistance to innovations. The framework developed in this paper is applied to school competition, incentives in the public sector and in private nonprofits, and the interdependence of incentives and productivity between the private for-profit sector and the mission-oriented sector through occupational choice.
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Long-Term Contracting with Markovian Consumers
Marco Battaglini
Abstract
To study how a firm can capitalize on a long-term customer relationship, we characterize the optimal contract between a monopolist and a consumer whose preferences follow a Markov process. The optimal contract is nonstationary and has infinite memory, but is described by a simple state variable. Under general conditions, supply converges to the efficient level for any degree of persistence of the types and along any history, though convergence is history-dependent. In contrast, as with constant types, the optimal contract can be renegotiation-proof, even with highly persistent types. These properties provide insights into the optimal ownership structure of the production technology.
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Equilibrium Investment and Asset Prices under Imperfect Corporate Control
James Dow, Gary Gorton and Arvind Krishnamurthy
Abstract
We integrate a widely accepted version of the separation of ownership and control—Michael Jensen's (1986) free cash flow theory—into a dynamic equilibrium model, and study the effect of imperfect corporate control on asset prices and investment. Aggregate free cash flow of the corporate sector is an important state variable in explaining asset prices, investment, and the cyclical behavior of interest rates and the yield curve. The financial friction causes cash-flow shocks to affect investment, and causes otherwise i.i.d. shocks to be transmitted from period to period. The shocks propagate through large firms and during booms.
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State "Currencies" and the Transition to the U.S. Dollar: Clarifying Some Confusions
Ronald W. Michener and Robert E. Wright
Abstract
Farley W. Grubb's recent papers on the early U.S. monetary system would be important contributions to the common currency area literature were not most of their historical assertions questionable and their key assumption—that the medium of exchange can be inferred from the unit of account— dubious. We contend that after 1781 most Americans eschewed government paper money in favor of full-bodied coins and convertible bank liabilities and that, contrary to Grubb's claim, bankers did not foist the constitutional clause banning state emissions onto an unsuspecting public.
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The Variety and Quality of a Nation's Exports
David Hummels and Peter J. Klenow
Abstract
Large economies export more in absolute terms than do small economies. We use data on shipments by 126 exporting countries to 59 importing countries in 5,000 product categories to answer the question: How? Do big economies export larger quantities of each good (the intensive margin), a wider set of goods (the extensive margin), or higher-quality goods? We find that the extensive margin accounts for around 60 percent of the greater exports of larger economies. Within categories, richer countries export higher quantities at modestly higher prices. We compare these findings to some workhorse trade models. Models with Armington national product differentiation have no extensive margin, and incorrectly predict lower prices for the exports of larger economies. Models with Krugman firm-level product differentiation do feature a prominent extensive margin, but overpredict the rate at which variety responds to exporter size. Models with quality differentiation, meanwhile, can match the price facts. Finally, models with fixed costs of exporting to a given market might explain the tendency of larger economies to export a given product to more countries.
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Understanding European Real Exchange Rates
Mario J. Crucini, Chris I. Telmer and Marios Zachariadis
Abstract
We study good-by-good deviations from the Law-of-One-Price (LOP) for over 1,800 retail goods and services between all European Union (EU) countries for the years 1975, 1980, 1985, and 1990. We find that for each of these years, after we control for differences in income and value-added tax (VAT) rates, there are roughly as many overpriced goods as there are underpriced goods between any two EU countries. We also find that good-by-good measures of cross-sectional price dispersion are negatively related to the tradeability of the good, and positively related to the share of non-traded inputs required to produce the good. We argue that these observations are consistent with a model in which retail goods are produced by combining a traded input with a non-traded input.
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House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle
Matteo Iacoviello
Abstract
I develop and estimate a monetary business cycle model with nominal loans and collateral constraints tied to housing values. Demand shocks move housing and nominal prices in the same direction, and are amplified and propagated over time. The financial accelerator is not uniform: nominal debt dampens supply shocks, stabilizing the economy under interest rate control. Structural estimation supports two key model features: collateral effects dramatically improve the response of aggregate demand to housing price shocks; and nominal debt improves the sluggish response of output to inflation surprises. Finally, policy evaluation considers the role of house prices and debt indexation in affecting monetary policy trade-offs.
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Some Evolutionary Foundations for Price Level Rigidity
Gilles Saint-Paul
Abstract
This paper shows that price rigidity evolves in an economy populated by imperfectly rational agents who experiment with alternative rules of thumb. In the model, firms must set their prices in face of aggregate demand shocks. Their payoff depends on the level of aggregate demand, as well as on their own price and their "neighbor's" price. The latter assumption captures local interactions. Despite the fact that the rational expectations equilibrium (REE) is characterized by a simple pricing rule that firms can easily adopt, the economy does not converge to the REE for all parameter values. When the volatility of monetary innovations is low and interactions among firms are high, the aggregate price level exhibits rigidity, in that it does not fully react to contemporaneous aggregate demand shocks. We discuss the role of the nature of experimentation, and of path dependence driven by interactions, in explaining these results.
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Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment
Robin Burgess and Rohini Pande
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Ethnic Polarization, Potential Conflict, and Civil Wars
José G. Montalvo and Marta Reynal-Querol
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Does Competition for Capital Discipline Governments? Decentralization, Globalization, and Public Policy
Hongbin Cai and Daniel Treisman
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The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence
Emmanuel Saez and Michael R. Veall
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Conglomerate Entrenchment under Optimal Financial Contracting
Antoine Faure- Grimaud and Roman Inderst
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The Wrong Kind of Transparency
Andrea Prat
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The Collapse of a Medical Labor Clearinghouse (and Why Such Failures Are Rare)
C. Nicholas McKinney, Muriel Niederle and Alvin E. Roth
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Heterogeneous Patience and the Term Structure of Real Interest Rates
Yvan Lengwiler
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Risk Aversion and Incentive Effects: Comment
Glenn W. Harrison, Eric Johnson, Melayne M. McInnes and E. Elisabet Rutström
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Risk Aversion and Incentive Effects: New Data without Order Effects
Charles A. Holt and Susan K. Laury
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Auditors' Report/Audited Financial Statements
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