Subjective Expectations and Asset-Return Puzzles

By Martin L. Weitzman

American Economic Review, September 2007

In textbook expositions of the equity-premium, riskfree-rate and equity-volatility puzzles, agents are sure of the economy's structure while growth rates are normally distributed. But because of parameter uncertainty the thin-tailed normal distribution...

On the Cyclicality of Research and Development

By Gadi Barlevy

American Economic Review, September 2007

Economists have recently argued recessions play a useful role in fostering growth. Yet a major source of growth, R&D, is procyclical. This paper argues one reason for procyclical R&D is a dynamic externality inherent in R&D that makes entrepreneurs sho...

Inventories and the Business Cycle: An Equilibrium Analysis of (S, s) Policies

By Aubhik Khan and Julia K. Thomas

American Economic Review, September 2007

We develop an equilibrium business cycle model where nonconvex delivery costs lead firms to follow (S, s) inventory policies. Calibrated to postwar US data, the model reproduces two-thirds of the cyclical variability of inventory investment. Moreover, ...

Markets in China and Europe on the Eve of the Industrial Revolution

By Carol H. Shiue and Wolfgang Keller

American Economic Review, September 2007

Why did Western Europe industrialize first? An influential view holds that its exceptionally well-functioning markets supported with a certain set of institutions provided the incentives to make investments needed to industrialize. This paper examines t...

Projection Bias in Catalog Orders

By Michael Conlin, Ted O'Donoghue, and Timothy J. Vogelsang

American Economic Review, September 2007

Evidence suggests that people understand qualitatively how tastes change over time, but underestimate the magnitudes. This evidence is limited, however, to laboratory evidence or surveys of reported happiness. We test for such projection bias in field ...

Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency

By Kira R. Fabrizio, Nancy L. Rose, and Catherine D. Wolfram

American Economic Review, September 2007

While neoclassical models assume static cost-minimization by firms, agency models suggest that firms may not minimize costs in less-competitive or regulated environments. We test this using a transition from cost-of-service regulation to marketoriented ...

Selection Bias, Demographic Effects, and Ability Effects in Common Value Auction Experiments

By Marco Casari, John C. Ham, and John H. Kagel

American Economic Review, September 2007

Inexperienced women, along with economics and business majors, are much more susceptible to the winner's curse, as are subjects with lower SAT/ACT scores. There are strong selection effects in bid function estimates for inexperienced and experienced su...

Naked Exclusion, Efficient Breach, and Downstream Competition

By John Simpson and Abraham L. Wickelgren

American Economic Review, September 2007

Previous papers by Eric B. Rasmusen, J. Mark Ramseyer, and John S. Wiley, Jr. (1991) and Ilya R. Segal and Michael D. Whinston (2000) argue that exclusive contracts can inefficiently deter entry in the presence of scale economies and multiple buyers. W...

Do Vertical Mergers Facilitate Upstream Collusion?

By Volker Nocke and Lucy White

American Economic Review, September 2007

We investigate the impact of vertical mergers on upstream firms' ability to collude when selling to downstream firms in a repeated game. We show that vertical mergers give rise to an outlets effect: the deviation profits of cheating unintegrated firms ...

Individual Behavior and Group Membership

By Gary Charness, Luca Rigotti, and Aldo Rustichini

American Economic Review, September 2007

People who are members of a group and identify with it behave differently from people who perceive themselves as isolated individuals. This paper shows that group membership affects preferences over outcomes, and saliency of the group affects the perce...

Political Bias and War

By Matthew O. Jackson and Massimo Morelli

American Economic Review, September 2007

We examine how countries' incentives to go to war depend on the "political bias" of their pivotal decision makers. This bias is measured by a decision maker’s risk/ reward ratio from a war compared to that of the country at large. If there is no poli...

A Political-Economy Theory of Trade Agreements

By Giovanni Maggi and Andrés Rodríguez-Clare

American Economic Review, September 2007

We present a model where trade agreements are motivated by the desire of governments to commit vis-à-vis domestic lobbies, in addition to standard terms-of-trade externalities. The model predicts that trade liberalization is deeper when capital is...

Auctions with Anticipated Regret: Theory and Experiment

By Emel Filiz-Ozbay and Erkut Y. Ozbay

American Economic Review, September 2007

This paper demonstrates theoretically and experimentally that in first-price auctions overbidding with respect to the risk neutral Nash equilibrium might be driven from anticipated loser regret (felt when bidders lose at an affordable price). Different in...

Labor and the Market Value of the Firm

By Monika Merz and Eran Yashiv

American Economic Review, September 2007

What role does labor play in firms' market value? We use a production-based asset pricing model with factor adjustment costs and forward-looking agents to explore this question. We posit that the hiring of labor is akin to investment in capital and that t...

Contracting with Repeated Moral Hazard and Private Evaluations

By William Fuchs

American Economic Review, September 2007

A repeated moral hazard setting in which the Principal privately observes the Agent's output is studied. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible r...

Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?

By Charles R. Plott and Kathryn Zeiler

American Economic Review, September 2007

Systematic asymmetries in exchange behavior have been widely interpreted as support for "endowment effect theory," an application of prospect theory positing that loss aversion and utility function kinks set by entitlements explain observed asymmetries. W...

Surviving Andersonville: The Benefits of Social Networks in POW Camps

By Dora L. Costa and Matthew E. Kahn

American Economic Review, September 2007

Twenty-seven percent of the Union Army prisoners captured July 1863 or later died in captivity. At Andersonville, the death rate may have been as high as 40 percent. How did men survive such horrific conditions? Using two independent datasets, we find tha...

Individual Consumption Risk and the Welfare Cost of Business Cycles

By Massimiliano De Santis

American Economic Review, September 2007

We measure the welfare gain from removing aggregate consumption fluctuations in a model where each individual faces incomplete consumption insurance. We show that, because this welfare gain is a convex function of the overall consumption risk—aggreg...

Good-bye Lenin (or Not?): The Effect of Communism on People's Preferences

By Alberto Alesina and Nicola Fuchs-Schündeln

American Economic Review, September 2007

Preferences for redistribution, as well as the generosity of welfare states, differ significantly across countries. This paper tests whether there exists a feedback process of the economic regime on individual preferences. We exploit the experiment of Ger...

The Case for Forecast Targeting as a Monetary Policy Strategy

[Symposium: Monetary Policy]

By Michael Woodford

Journal of Economic Perspectives, Fall 2007

At central banks around the world, including the Bank of England, Sweden's Riksbank, Norway's Norges Bank, and the Reserve Bank of New Zealand, policy is conducted on the basis of "inflation-forecast targeting": the central bank constructs quantitative pr...