How Demanding Is the Revealed Preference Approach to Demand?

By Timothy K. M. Beatty and Ian A. Crawford

American Economic Review, October 2011

A well-known problem with revealed preference methods is that when data are found to satisfy their restrictions it is hard to know whether this should be viewed as a triumph for economic theory, or a warning that these conditions are so undemanding that a...

Currency Misalignments and Optimal Monetary Policy: A Reexamination

By Charles Engel

American Economic Review, October 2011

This paper examines optimal monetary policy in an open-economy two-country world with sticky prices under pricing to market. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target consumer pric...

Aggregate and Idiosyncratic Risk in a Frictional Labor Market

By Leena Rudanko

American Economic Review, October 2011

This paper develops a tractable extension of a Mortensen-Pissarides style matching model that allows for risk averse workers with limited ability to smooth consumption. I show that this leads to a form of equilibrium wage rigidity, as the inability of wor...

Expectations, Learning, and Business Cycle Fluctuations

By Stefano Eusepi and Bruce Preston

American Economic Review, October 2011

This paper develops a theory of expectations-driven business cycles based on learning. Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics. Learning breaks the tight link betw...

Front Matter

American Economic Journal: Microeconomics, November 2011

Platform Siphoning: Ad-Avoidance and Media Content

By Simon P. Anderson and Joshua S. Gans

American Economic Journal: Microeconomics, November 2011

Content providers rely on advertisers to pay for content. TiVo, remote controls, and pop-up ad blockers are examples of ad-avoidance technologies that allow consumers to view content without ads, and thereby siphon off the content without paying the "pri...

Mnemonomics: The Sunk Cost Fallacy as a Memory Kludge

By Sandeep Baliga and Jeffrey C. Ely

American Economic Journal: Microeconomics, November 2011

We offer a theory of the sunk cost fallacy as an optimal response to limited memory. As new information arrives, a decision-maker may not remember all the reasons he began a project. The sunk cost gives additional information about future profits and info...

Tracking Decision Makers under Uncertainty

By Amos Arieli, Yaniv Ben-Ami, and Ariel Rubinstein

American Economic Journal: Microeconomics, November 2011

Eye tracking is used to investigate the procedures that participants employ in choosing between two lotteries. Eye movement patterns in problems where the deliberation process is clearly identified are used to substantiate an interpretation of the results...

Intermediation Reduces Punishment (and Reward)

By Lucas C. Coffman

American Economic Journal: Microeconomics, November 2011

This paper shows moral decision making is not well predicted by the overall fairness of an act but rather by the fairness of the consequences that follow directly. In laboratory experiments, third-party punishment for keeping money from a poorer player de...

Performance and Turnover in a Stochastic Partnership

By David McAdams

American Economic Journal: Microeconomics, November 2011

Suppose that players in a stochastic partnership have the option to quit and rematch anonymously. If stage-game payoffs are subject to a persistent initial shock, the (unique) social welfare-maximizing equilibrium induces a "dating" process in which all p...

Hyperbolic Discounting and the Sustainability of Rotational Savings Arrangements

By Karna Basu

American Economic Journal: Microeconomics, November 2011

People across the developing world join rotational savings and credit associations (roscas) to fund repeated purchases of nondivisible goods. When the scope for punishment is weak, there is a natural question about why agents not defect from roscas. This ...

Subjective Probabilities on a State Space

By Edi Karni

American Economic Journal: Microeconomics, November 2011

This paper extends the analytical framework of Karni (2011) to include a state space and advances a choice-based definition of subjective probabilities on this space. These probabilities represent the beliefs of Bayesian decision makers regarding the lik...

Competition in Multi-sided Markets: Divide and Conquer

By Bruno Jullien

American Economic Journal: Microeconomics, November 2011

This paper studies Stackelberg price competition in a multi-sided market. The second-mover can engage in divide-and-conquer strategies, which involve cross-subsidies between sides. The paper recovers bounds on profits, and refines the results with a selec...

Front Matter

American Economic Journal: Economic Policy, November 2011

Personal Retirement Accounts and Saving

By Emma Aguila

American Economic Journal: Economic Policy, November 2011

Aging populations are leading countries worldwide to social security reforms. Many countries are moving from pay-as-you-go to personal retirement account (PRA) systems because of their financial sustainability and positive impact on private savings. PRA s...

The Effect of an Employer Health Insurance Mandate on Health Insurance Coverage and the Demand for Labor: Evidence from Hawaii

By Thomas C. Buchmueller, John DiNardo, and Robert G. Valletta

American Economic Journal: Economic Policy, November 2011

We examine the effects of the most durable employer health insurance mandate in the United States, Hawaii's Prepaid Health Care Act, using Current Population Survey data covering the years 1979 to 2005. Relying on a variation of the classical Fisher permu...

Capital Income Taxes with Heterogeneous Discount Rates

By Peter Diamond and Johannes Spinnewijn

American Economic Journal: Economic Policy, November 2011

With heterogeneity in both skills and discount factors, the Atkinson- Stiglitz theorem that savings should not be taxed does not hold. In a model with heterogeneity of preferences at each earnings level, introducing a savings tax on high earners or a sav...

Medicare Part D and the Financial Protection of the Elderly

By Gary V. Engelhardt and Jonathan Gruber

American Economic Journal: Economic Policy, November 2011

We examine the impact of the expansion of public prescription-drug insurance coverage from Medicare Part D and find evidence of substantial crowd-out. Using the 2002-2007 waves of the Medical Expenditure Panel Survey, we estimate the extension of Part D ...

How Do 401(k)s Affect Saving? Evidence from Changes in 401(k) Eligibility

By Alexander M. Gelber

American Economic Journal: Economic Policy, November 2011

This paper investigates the effect of 401(k) eligibility on saving. To address the possibility that eligibility correlates across individuals with their unobserved tastes for saving, I examine a change in eligibility: some individuals are initially inelig...

Did Bankruptcy Reform Cause Mortgage Defaults to Rise?

By Wenli Li, Michelle J. White, and Ning Zhu

American Economic Journal: Economic Policy, November 2011

Homeowners in financial distress can use bankruptcy to avoid defaulting on their mortgages, since filing loosens their budget constraints. But the 2005 bankruptcy reform made bankruptcy less favorable to homeowners and therefore caused mortgage defaults t...