AER Contents: Data Sets and Additional Materials

Relative Prices and Relative Prosperity
Chang-Tai Hsieh and Peter J. Klenow

Abstract

The positive correlation between real investment rates and real income levels across countries is driven largely by differences in the price of investment relative to output. The high relative price of investment in poor countries is due to the low price of consumption goods in those countries. Investment prices are no higher in poor countries. Thus, the low real investment rates in poor countries are not driven by high tax or tariff rates on investment. Poor countries, instead, appear to be plagued by low efficiency in producing investment goods and in producing consumer goods to trade for them. (JEL E22, E23, O16, O47)

Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach
Frank Smets and Rafael Wouters

Abstract

Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macroeconomic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model, we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the "Great Moderation"? (JEL D58, E23, E31, E32)

The paper generalizes the Taylor principle—the proposition that central banks can stabilize the macroeconomy by raising their interest rate instrument more than one-for-one in response to higher inflation—to an environment in which reaction coefficients in the monetary policy rule change regime, evolving according to a Markov process. We derive a long-run Taylor principle which delivers unique bounded equilibria in two standard models. Policy can satisfy the Taylor principle in the long run, even while deviating from it substantially for brief periods or modestly for prolonged periods. Macroeconomic volatility can be higher in periods when the Taylor principle is not satisfied, not because of indeterminacy, but because monetary policy amplifies the impacts of fundamental shocks. Regime change alters the qualitative and quantitative predictions of a conventional new Keynesian model, yielding fresh interpretations of existing empirical work. (JEL E31, E43, E52)

The Timing of Monetary Policy Shocks
Giovanni Olivei and Silvana Tenreyro

Abstract

A vast empirical literature has documented delayed and persistent effects of monetary policy shocks on output. We show that this finding results from the aggregation of output impulse responses that differ sharply depending on the timing of the shock. When the monetary policy shock takes place in the first two quarters of the year, the response of output is quick, sizable, and dies out at a relatively fast pace. In contrast, output responds very little when the shock takes place in the third or fourth quarter. We propose a potential explanation for the differential responses based on uneven staggering of wage contracts across quarters. Using a dynamic general equilibrium model, we show that a realistic amount of uneven staggering can generate differences in output responses quantitatively similar to those found in the data. (JEL E23, E24, E58, J41)

Learning Your Earning: Are Labor Income Shocks Really Very Persistent?
Fatih Guvenen

Abstract

The current literature offers two views on the nature of the labor income process. According to the first view, individuals are subject to very persistent income shocks while facing similar life-cycle income profiles (the RIP process, Thomas MaCurdy 1982). According to the alternative, individuals are subject to shocks with modest persistence while facing individual-specific profiles (the HIP process, Lee A. Lillard and Yoram A. Weiss 1979). In this paper we study the restrictions imposed by these two processes on consumption data—in the context of a life-cycle model—to distinguish between the two views. We find that the life-cycle model with a HIP process, which has not been studied in the previous literature, is consistent with several features of consumption data, whereas the model with a RIP process is consistent with some, but not with others. We conclude that the HIP model could be a credible contender to—and along some dimensions, a more coherent alternative than—the RIP model. (JEL D83, D91, E21, J31)

Valuing New Goods in a Model with Complementarity: Online Newspapers
Matthew Gentzkow

Abstract

Many important economic questions hinge on the extent to which new goods either crowd out or complement consumption of existing products. Recent methods for studying new goods rule out complementarity by assumption, so their applicability to these questions has been limited. I develop a new model that relaxes this restriction, and use it to study competition between print and online newspapers. Using new micro data from Washington, DC, I estimate the relationship between the print and online papers in demand, the welfare impact of the online paper's introduction, and the expected impact of charging positive online prices. (JEL C25, L11, L82)

Estimating Risk Preferences from Deductible Choice
Alma Cohen and Liran Einav

Abstract

We develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts. We account for adverse selection by modeling unobserved heterogeneity in both risk (claim rate) and risk aversion. We find large and skewed heterogeneity in risk attitudes. In addition, women are more risk averse than men, risk aversion exhibits a U-shape with respect to age, and proxies for income and wealth are positively associated with absolute risk aversion. Finally, unobserved heterogeneity in risk aversion is greater than that of risk, and, as we illustrate, has important implications for insurance pricing. (JEL D81, G22)

Estimating the Effects of Private School Vouchers in Multidistrict Economies
Maria Marta Ferreyra

Abstract

This paper estimates a general equilibrium model of school quality and household residential and school choice for economies with multiple public school districts and private (religious and nonsectarian) schools. The estimates, obtained through full-solution methods, are used to simulate two large-scale private school voucher programs in the Chicago metropolitan area: universal vouchers and vouchers restricted to nonsectarian schools. In the simulations, both programs increase private school enrollment and affect household residential choice. Under nonsectarian vouchers, however, private school enrollment expands less than under universal vouchers, and religious school enrollment declines for large nonsectarian vouchers. Fewer households benefit from nonsectarian vouchers. (JEL H75, I21, I22)

The Pluralism of Fairness Ideals: An Experimental Approach
Alexander W. Cappelen , Astri Drange Hole , Erik Ø Sørensen and Bertil Tungodden

Abstract

A core question in the contemporary debate on distributive justice is how to understand fairness in situations involving production. Important theories of distributive justice, such as strict egalitarianism, liberal egalitarianism, and libertarianism, provide different answers to this question. This paper presents the results from a dictator game where the distribution phase is preceded by a production phase. Each player's contribution is a result of a freely chosen investment level and an exogenously given rate of return. We estimate simultaneously the prevalence of three principles of distributive justice among the players and the distribution of the weight they attach to fairness. (JEL D63)

Efficient Kidney Exchange: Coincidence of Wants in Markets with Compatibility-Based Preferences
Alvin E. Roth , Tayfun Sönmez and M. Utku Ünver

Abstract

Patients needing kidney transplants may have donors who cannot donate to them because of blood or tissue incompatibility. Incompatible patient-donor pairs can exchange donor kidneys with other pairs only when there is a "double coincidence of wants." Developing infrastructure to perform three-way as well as two-way exchanges will have a substantial effect on the number of transplants that can be arranged. Larger than three-way exchanges have less impact on efficiency. In a general model of type-compatible exchanges, the size of the largest exchanges required to achieve efficiency equals the number of types. (JEL C78, I12)

Signaling Character in Electoral Competition
Navin Kartik and R. Preston McAfee

Abstract

We study a one-dimensional Hotelling-Downs model of electoral competition with the following innovation: a fraction of candidates have "character" and are exogenously committed to a campaign platform; this is unobservable to voters. Character is desirable, and a voter's utility is a convex combination of standard policy preferences and her assessment of a candidate's character. This structure induces a signaling game between strategic candidates and voters, since a policy platform affects voters' utilities not only directly, but also indirectly through inferences about a candidate's character. The model generates a number of predictions, starting with a failure of the median voter theorem. (JEL D72, D82)

Meeting Strangers and Friends of Friends: How Random Are Social Networks?
Matthew O. Jackson and Brian W. Rogers

Abstract

We present a dynamic model of network formation where nodes find other nodes with whom to form links in two ways: some are found uniformly at random, while others are found by searching locally through the current structure of the network (e.g., meeting friends of friends). This combination of meeting processes results in a spectrum of features exhibited by large social networks, including the presence of more high- and low-degree nodes than when links are formed independently at random, having low distances between nodes in the network, and having high clustering of links on a local level. We fit the model to data from six networks and impute the relative ratio of random to network-based meetings in link formation, which turns out to vary dramatically across applications. We show that as the random/network-based meeting ratio varies, the resulting degree distributions can be ordered in the sense of stochastic dominance, which allows us to infer how the formation process affects average utility in the network. (JEL D85, Z13)

Social Interactions in High School: Lessons from an Earthquake
Piero Cipollone and Alfonso Rosolia

Abstract

After an earthquake hit Southern Italy in 1980, young men from certain towns were exempted from compulsory military service. We show that the exemption raised high-school-graduation rates of boys by more than 2 percentage points. We do this by comparing high-school-graduation rates of young exempt men and older nonexempt men from the least damaged areas and men of the same age groups from nearby towns that were not hit by the quake. Similar comparisons show that graduation rates of young women in the affected areas also increased. Since in Italy women are not subject to the draft, the findings suggest the presence of spillover effects. (JEL I21, J13)

Measuring Self-Control Problems
John Ameriks , Andrew Caplin , John Leahy and Tom Tyler

Abstract

We develop a survey instrument to measure self-control problems in a sample of highly educated adults. This measure relates in the manner that theory predicts to liquid wealth accumulation and personality measures. Yet while self-control problems are typically seen as resulting in overconsumption and low wealth, we identify a significant group who underconsume and thereby accumulate high levels of wealth. In addition, self-control problems are smaller in scale for older than for younger respondents. Those who put money aside in retirement accounts may be delaying access to a point at which self-control problems are no longer important. (JEL D12, D14)

Regulation, Capital, and the Evolution of Organizational Form in US Life Insurance
George Zanjani

Abstract

This paper studies the association between regulation and the organizational form of new life insurers between 1900 and 1949. The mutual form was popular in states with low initial capital requirements for mutual companies and differentially higher requirements for stock companies, but was rarely used elsewhere. This suggests that entrepreneurs took a "path of least resistance" when choosing organizational form and that the mutual's disadvantage in raising capital contributed to its decline–a decline that accelerated as states raised requirements and eliminated the aforementioned differentials. Contrary to previous analysis, the paper finds little evidence connecting other regulations to mutual decline. (JEL G21, L51, N21, N22)

Sticky-Price Models and Durable Goods
Robert B. Barsky , Christopher L. House and Miles S. Kimball

Abstract

The inclusion of a durable goods sector in sticky-price models has strong and unexpected implications. Even if most prices are flexible, a small durable goods sector with sticky prices may be sufficient to make aggregate output react to monetary policy as though most prices were sticky. In contrast, flexibly priced durables with sufficiently long service lives can undo the implications of standard sticky price models. In a limiting case, flexibly priced durables cause monetary policy to have no effect on aggregate output. Our analysis suggests that durable goods prices are the most relevant data for calibrating price rigidity. (JEL E21, E23, E31, E52)

Tradeoffs from Integrating Diagnosis and Treatment in Markets for Health Care
Christopher C. Afendulis and Daniel P. Kessler

Abstract

To identify the important tradeoffs in consulting a single expert for both diagnosis and treatment, we examine the costs and health outcomes of elderly Medicare beneficiaries with coronary artery disease. We compare the empirical consequences of diagnosis by cardiologists who can provide surgical treatment – "integrated" cardiologists – to the consequences of diagnosis by a nonintegrated cardiologist. Diagnosis by an integrated cardiologist leads, on net, to higher health spending but similar health outcomes. The net effect contains three components: reduced spending and improved outcomes from better allocation of patients to surgical treatment options; increased spending conditional on treatment option; and worse outcomes from poorer provision of nonsurgical care. (JEL I11, I18)

The American Economic Review
Articles with Accompanying Datasets/Additional Material

Vol. 97 Issue: 3 June 2007

The American Economic Review Articles with Accompanying Datasets/Additional Material

Vol. 97 Issue: 3 June 2007

The American Economic Review
Articles with Accompanying Datasets/Additional Material