Showing papers in "The American Economic Review in 2009"

Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market

Abstract: Using a newly developed measure of global real economic activity, a structural decomposition of the real price of crude oil into three components is proposed: crude oil supply shocks; shocks to the global demand for all industrial commodities; and demand shocks that are specific to the crude oil market. The latter shock is designed to capture shifts in the price of oil driven by higher precautionary demand associated with concerns about future oil supply shortfalls. The paper estimates the dynamic effects of these shocks on the real price of oil. A historical decomposition sheds light on the causes of the major oil price shocks since 1975. The implications of higher oil prices for U.S. real GDP and CPI inflation are shown to depend on the cause of the oil price increase. Changes in the composition of shocks help explain why regressions of macroeconomic aggregates on oil prices tend to be unstable. Evidence that the recent increase in crude oil prices was driven primarily by global aggregate demand shocks helps explain why this oil price shock so far has failed to cause a major recession in the U.S.

Group Identity and Social Preferences

Abstract: We present a laboratory experiment that measures the effects of induced group identity on social preferences. We find that when participants are matched with an ingroup member, they show a 47 percent increase in charity concerns and a 93 percent decrease in envy. Likewise, participants are 19 percent more likely to reward an ingroup match for good behavior, but 13 percent less likely to punish an ingroup match for misbehavior. Furthermore, participants are significantly more likely to choose social-welfare-maximizing actions when matched with an ingroup member. All results are consistent with the hypothesis that participants are more altruistic toward an ingroup match. (

Doing Good or Doing Well? Image Motivation and Monetary Incentives in Behaving Prosocially

Abstract: Most charitable organizations depend on private contributions, in the form of monetary gifts, volunteer efforts, or other tangible contributions, such as blood donations. The magnitude of private contributions is impressive?in the United States 89 percent of households donate, aver? aging $1,620 per year, and 44 percent of US adults volunteer the equivalent of 9 million full time jobs (Independent Sector 2001). This level of prosocial behavior is striking in light of the economic incentive to free-ride in the provision of public goods. In order to elicit contributions, charitable organizations use many creative efforts to incentivize voluntary giving: wrist bands, thank-you gifts, organized walks, concerts, and advertised donors lists. The government also helps promote charitable giving by offering tax breaks for donations. The various types of charitable contributions and the many real-life ways of soliciting such donations suggest that there may be different motives for individuals to behave prosocially. These motives are roughly divisible into three broad categories: intrinsic, extrinsic, and image motiva? tion. Intrinsic motivation is the value of giving per se, represented by private preferences for others' well-being, such as pure altruism or other forms of prosocial preferences (for surveys, see Ernst Fehr and Klaus Schmidt 2003; Meier 2007). Extrinsic motivation is any material reward or benefit associated with giving, such as thank-you gestures and tax breaks. Image motivation, or signaling motivation, refers to an individual's tendency to be motivated partly by others' percep? tions. Image motivation therefore captures the rule of opinion in utility, i.e., the desire to be liked and respected by others and by one's self. If individuals are looking to gain social approval of their behavior, they should try to signal traits defined as "good" based on the community's norms

Job Polarization in Europe

Abstract: The structure of employment is always changing, and economists are always trying to understand those changes. In the 1990s the idea of skill-biased technological change (SBTC) was used to understand the shift in employment toward more educated workers (see David H. Autor and Lawrence F. Katz 1999, for a survey). However, in recent years, it has become appar ent that a more nuanced approach is needed. The idea of SBTC might lead one to predict a uni form shift in employment away from low-skilled and toward high-skilled occupations, but studies for the United States (Autor, Katz, and Melissa S. Kearney 2006) and the United Kingdom (Goos and Manning 2007) have shown that there is growth in employment in both the high est-skilled (professional and managerial) and lowest-skilled (personal services) occupations, with declining employment in the middle of the distribution (manufacturing and routine office jobs). This is what Goos and Manning (2007) term job polarization (although see the introduc tion to Goos and Manning 2007 for antecedents of these ideas). There are several hypotheses about the rea sons for job polarization. First, the "routiniza tion" hypothesis (first put forward by Autor, Frank Levy, and Richard Murnane 2003) sug gests that the effect of technological progress is to replace "routine" labor which tends to be clerical and craft jobs in the middle of the wage distribution. Second, there is the view that globalization in general, and offshoring in par ticular, is an important source of change in the job structure in the richest countries (see, for example, Alan S. Blinder 2007). Third, there may be a link between job polarization and

The Aftermath of Financial Crises

Abstract: A year ago, we presented a historical analysis comparing the run-up to the 2007 US subprime financial crisis with the antecedents of other banking crises in advanced economies since World War II (Reinhart and Rogoff 2008a ). We showed that standard indicators for the United States, such as asset price inflation, rising lever age, large sustained current account deficits, and a slowing trajectory of economic growth, exhibited virtually all the signs of a country on the verge of a financial crisis—indeed, a severe one. In this paper, we engage in a similar com

Are risk aversion and impatience related to cognitive ability

Abstract: Is the way that people make risky choices, or tradeoffs over time, related to cognitive ability? This paper investigates whether there is a link between cognitive ability, risk aversion, and impatience, using a representative sample of the population and incentive compatible measures. We conduct choice experiments measuring risk aversion, and impatience over an annual time horizon, for a randomly drawn sample of roughly 1,000 German adults. Subjects also take part in two different tests of cognitive ability, which correspond to sub-modules of one of the most widely used IQ tests. Interviews are conducted in subjects' own homes. We find that lower cognitive ability is associated with greater risk aversion, and more pronounced impatience. These relationships are significant, and robust to controlling for personal characteristics, educational attainment, income, and measures of credit constraints. We perform a series of additional robustness checks, which help rule out other possible confounds.

Peers at Work

Abstract: We study peer effects in the workplace. Specifically, we investigate whether, how, and why the productivity of a worker depends on the productivity of coworkers in the same team. Using high-frequency data on worker productivity from a large supermarket chain, we find strong evidence of positive productiv ity spillovers from the introduction of highly productive personnel into a shift. Worker effort is positively related to the productivity of workers who see him, but not workers who do not see him. Additionally, workers respond more to the presence of coworkers with whom they frequently interact. We conclude that social pressure can partially internalize free-riding externalities that are built into many workplaces. (JEL J24, L81, M54)

The Origins of State Capacity: Property Rights, Taxation, and Politics

Abstract: Economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes. This paper develops a framework where "policy choices" in market regulation and taxation are constrained by past investments in legal and fiscal capacity. It studies the economic and political determinants of such investments, demonstrating that legal and fiscal capacity are typically complements. The results show that, among other things, common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity. Some correlations in cross-country data are consistent with the theory.

Under the Weather: Health, Schooling, and Economic Consequences of Early-Life Rainfall

Abstract: Life in rural areas of developing countries is prone to many kinds of risk, such as illness or mortality of household members, crop or other income loss due to natural phenomena (weather, insect infestations, or fire, for example), and civil conflict In addition to their contemporaneous effects, the effects of certain types of shocks may still be felt many years or even decades later From a public policy standpoint, it is particularly important to identify shocks that have large long-run effects Moreover, the mechanics underlying the persistence of shocks may be of con siderable interest For example, a health shock may have a long-run effect simply because the health shock itself persists over time Alternately, the health shock may not directly affect long run outcomes, but it could affect some other outcome?such as educational attainment?that helps determine long-run well-being In this paper, we focus on shocks that occur at the very beginning of life We ask how sensi tive long-run individual well-being is to environmental conditions around the time of birth In particular, we examine the effect of weather shocks around the time of birth on the adult health, education, and socioeconomic outcomes of Indonesian women and men born between 1953 and 1974 In addition, we attempt to shed light on the intervening pathways connecting early-life rainfall to adult outcomes, illuminating the roles of health and educational attainment in deter mining adult socioeconomic status This investigation has considerable data requirements It necessitates information on weather shocks experienced by individuals several decades earlier, as well as detailed current informa tion on adult outcomes We use information in the Indonesian Family Life Surveys (IFLS) on an individual's year and location of birth, and link each individual in that survey to locality specific rainfall data for their birth year For individuals born in rural areas (on whom we focus), rainfall variation across space and time should generate corresponding variation in agricultural output and thus household income To deal with measurement error in the rainfall data, we run instrumental variables regressions where variables for rainfall measured at slightly more distant rainfall stations serve as instruments for rainfall in the individual's birthplace and birth year We examine the impact of early-life rainfall on a range of adult outcomes observed in 2000 We find that higher early-life rainfall leads to improved health, schooling, and socioeconomic status for women Women with 20 percent higher rainfall (relative to normal local rainfall) in their year and location of birth are 38 percentage points less likely to self-report poor or very poor health They attain 057 centimeters greater height, attain 022 more completed grades of

Immigration and Inequality

Abstract: Immigration is often viewed as a proximate cause of the rising wage gap between highand low-skilled workers. Nevertheless, there is controversy over the appropriate theoretical and empirical framework for measuring the presumed effect, and over the precise magnitudes involved. This paper offers an overview and synthesis of existing knowledge on the relationship between immigration and inequality, focusing on evidence from cross-city comparisons in the U.S. While some researchers have claimed that a cross-city research design is inherently flawed, I argue that the evidence from cross-city comparisons is remarkably consistent with recent findings based on aggregate time series data. In particular, cross-city and aggregate time series comparisons provide support for three key conclusions: (1) workers with below high school education are perfect substitutes for those with a high school education; (2) “high school equivalent” and “college equivalent” workers are imperfect substitutes, with an elasticity of substitution on the order of 2; (3) within education groups, immigrants and natives are imperfect substitutes. Together these results imply that the average impacts of recent immigrant inflows on the relative wages of U.S. natives are small. The effects on overall wage inequality (including natives and immigrants) are larger, reflecting the concentration of immigrants in the tails of the skill distribution and higher residual inequality among immigrants than natives. Even so, immigration accounts for a small share (5%) of the increase in U.S. wage inequality between 1980 and 2000.

Optimal Sticky Prices under Rational Inattention

Abstract: This paper presents a model in which price setting firms decide what to pay attention to, subject to a constraint on information flow. When idiosyncratic conditions are more variable or more important than aggregate conditions, firms pay more attention to idiosyncratic conditions than to aggregate conditions. When we calibrate the model to match the large average absolute size of price changes observed in micro data, prices react fast and by large amounts to idiosyncratic shocks, but only slowly and by small amounts to nominal shocks. Nominal shocks have strong and persistent real effects. We use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms’ environment. JEL :E 3, E5, D8.

Innovation Diffusion in Heterogeneous Populations: Contagion, Social Influence, and Social Learning

Abstract: New ideas, products, and practices take time to diffuse, a fact that is often attributed to some form of heterogeneity among potential adopters. This paper examines three broad classes of diffusion models-contagion, social influence, and social learning-and shows how to incorporate heterogeneity into each at a high level of generality without losing analytical tractability. Each type of model leaves a characteristic "footprint" on the shape of the adoption curve which provides a basis for discriminating empirically between them. The approach is illustrated using the classic study of Ryan and Gross (1943) on the diffusion of hybrid corn.

Can news about the future drive the business cycle

Abstract: Aggregate and sectoral comovement are central features of business cycles, so the ability to generate comovement is a natural litmus test for macroeconomic models. But it is a test that most models fail. We propose a unified model that generates aggregate and sectoral comovement in response to contemporaneous and news shocks about fundamentals. The fundamentals that we consider are aggregate and sectoral total factor productivity shocks as well as investment specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that allow us to parameterize the strength of short-run wealth effects on the labor supply. (JEL

Is the 2007 US Sub-prime Financial Crisis So Different? An International Historical Comparison

Abstract: The first major financial crisis of the twenty first century involves esoteric instruments, unaware regulators, and skittish investors. It also follows a well-trodden path laid down by centuries of financial folly. Is the 'special' problem of sub-prime mortgages really different? Our examination of the longer historical record finds stunning qualitative and quantitative parallels across a number of standard financial crisis indicators. At this juncture, the book is still open on how the current dislocations in the United States will play out. The precedent found in the aftermath of other episodes suggests that the strains can be quite severe, depending especially on the initial degree of trauma to the financial system (and to some extent, the policy response). The average drop in real per capita output growth is over 2 percent, and it typically takes two years to return to trend. For the five most catastrophic cases (which include episodes in Finland, Japan, Norway, Spain, and Sweden), the drop in annual output growth from peak to trough is over 5 percent, and growth remained well below pre-crisis trend even after three years.

Spousal Control and Intra-household Decision Making: An Experimental Study in the Philippines

Abstract: I elicit causal effects of spousal observability and communication on financial choices of married individuals in the Philippines. When choices are private, men put money into their personal accounts. When choices are observable, men commit money to consumption for their own benefit. When required to communicate, men put money into their wives' account. These strong treatment effects on men, but not women, appear related more to control than to gender: men whose wives control household savings respond more strongly to the treat - ment and women whose husbands control savings exhibit the same response. Changes in information and communication interact with underlying control to produce mutable gender-specific outcomes. (

Governance Institutions and Economic Activity

Abstract: Governance Institutions and Economic Activity By AVINASH DIXIT The concept of “governance” has risen from obscurity to buzzword status in just three decades. EconLit shows only 5 mentions of the word governance in the 1970s; by the end of 2008, it was mentioned 33,177 times. The much more specific phrase “economic governance” has appeared 192 times; its more popular cousin, “corporate governance,” 9,717 times. My focus is on economic governance, but I also examine its relation to corporate governance. As with any buzzword, everyone understands the concept a little differently. This is unavoidable, so I will just give my definition for the purpose of this article, and leave it at that. By economic governance I mean the structure and functioning of the legal and social institutions that support economic activity and economic transactions by protecting property rights, enforcing contracts, and taking collective action to provide physical and organizational infrastructure.

Indirect Effects of an Aid Program: How Do Cash Transfers Affect Ineligibles' Consumption?

Abstract: Cash transfers to eligible households indirectly increase the consumption of ineligible households living in the same villages. This effect operates through insurance and credit markets: ineligible households benefit from the transfers by receiving more gifts and loans and by reducing their savings. Thus, the transfers benefit the local economy at large; looking only at the effect on the treated underestimates the impact. One should analyze the effects of this class of programs on the entire local economy, rather than on the treated only, and use a village-level randomization, rather than selecting treatment and control subjects from the same community.

Rare Disasters, Asset Prices, and Welfare Costs

Abstract: A representative-consumer model with Epstein-Zin-Weil preferences and i.i.d. shocks, including rare disasters, accords with observed equity premia and risk-free rates if the coefficient of relative risk aversion equals 3-4. If the intertemporal elasticity of substitution exceeds one, an increase in uncertainty lowers the price-dividend ratio for equity, and a rise in the expected growth rate raises this ratio. Calibrations indicate that society would willingly reduce GDP by around 20 percent each year to eliminate rare disasters. The welfare cost from usual economic fluctuations is much smaller, though still important, corresponding to lowering GDP by about 1.5 percent each year.

Reference-Dependent Consumption Plans

Abstract: We develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption. Because changes in wealth are news about future consumption, preferences over money are reference-dependent. If news resonates more when about imminent consump - tion than when about future consumption, a decision maker might (to generate pleasant surprises ) overconsume early relative to the optimal committed plan, increase immediate consumption following surprise wealth increases, and delay decreasing consumption following surprise losses. Since higher wealth mitigates the effect of bad news, people exhibit an unambiguous first-order precautionary-savings motive. (

Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data

Abstract: This paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor-augmented vector autoregression estimated on a large data set. On the basis of this estimation, we establish eight facts: (1) Macroeconomic shocks explain only about 15% of sectoral inflation fluctuations; (2) The persistence of sectoral inflation is driven by macroeconomic factors; (3) While disaggregated prices respond quickly to sector-specific shocks, their responses to aggregate shocks are small on impact and larger thereafter; (4) Most prices respond with a significant delay to identified monetary policy shocks, and show little evidence of a "price puzzle," contrary to existing studies based on traditional VARs; (5) Categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least; (6) The observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power; (7) Prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks; (8) The sector-specific components of prices and quantities move in opposite directions

Distributional and Efficiency Impacts of Increased US Gasoline Taxes

Abstract: We examine the impacts of increased US gasoline taxes in a model that links the markets for new, used, and scrapped vehicles and recognizes the consider able heterogeneity among households and cars. Household choice parameters derive from an estimation procedure that integrates individual choices for car ownership and miles traveled. We find that each cent-per-gallon increase in the price of gasoline reduces the equilibrium gasoline consumption by about 0.2

Taxing Capital? Not a Bad Idea after All!

Abstract: We quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks and permanent productivity difierences of households. The optimal capital income tax rate is signiflcantly positive at 36 percent. The optimal progressive labor income tax is, roughly, a ∞at tax of 23 percent with a deduction of $7,200 (relative to average household income of $42,000). The high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system. JEL: E62, H21, H24

Global Imbalances and Financial Fragility

Abstract: The United States is currently engulfed in the most severe financial crisis since the Great Depression. The crisis was triggered by the crash in the real estate “bubble” and amplified by the extreme concentration of risk in a highly leveraged financial sector. Conventional wisdom is that both the bubble and the risk concentration were the result of mistakes in regulatory policy: an expansionary monetary policy during the boom period of the bubble, and failure to reign in the practices of unscrupulous lenders. In this paper we argue that, while correct in some dimensions, this story misses two key structural factors behind the securitization process that supported the real estate boom and the corresponding lever age. First, over the last decade, the US has experienced large and sustained capital inflows from foreigners seeking US assets to store value (Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas 2008 ). Second, especially after the NASDAQ/tech bubble and bust, excess world savings have looked predominantly for safe debt investments. This should not be surprising because a large amount of the capital flow into the US has been from foreign central banks and governments that are not expert investors and are merely looking for a store of value (Krishnamurthy and Annette Vissing-Jorgenson 2008). In this paper we develop a stylized model that captures the essence of this environment. The model accounts for three facts observed during the boom and bust phases of the current crisis. First, during a period of good shocks— which we interpret as the period up to the end

Efficient Pollution Regulation: Getting the Prices Right

Abstract: This paper argues for efficient environmental regulations that equate the mar ginal damage of pollution to marginal abatement costs across space. The paper estimates the source-specific marginal damages of air pollution and calculates the welfare gain from making the current sulfur dioxide allowance trading pro gram for power plants more efficient. The savings from using trading ratios based on marginal damages are between $310 and $940 million per year. The potential savings from setting aggregate emissions efficiently and from includ ing more sources of air pollution are many times higher. (JEL H23, Q53, Q58)

Investment in Schooling and the Marriage Market

Abstract: We present a model in which investment in schooling generates two kinds of returns: the labor-market return, resulting from higher wages and a marriagemarket return, defined as the impact of schooling on the marital surplus share one can extract. Men and women may have different incentives to invest in schooling because of different market wages or household roles. This asymmetry can yield a mixed equilibrium with some educated individuals marrying uneducated spouses. When the labor-market returns to schooling rises, home production demands less time and the traditional spousal labor division norms weaken, more women may invest in schooling than men.

Intra-Industry Foreign Direct Investment

Abstract: We use a new firm level data set that establishes the location, ownership, and activity of 650,000 multinational subsidiaries—close to a comprehensive picture of global multinational activity. A number of patterns emerge from the data. Most foreign direct investment (FDI) occurs between rich countries. The share of vertical FDI (subsidiaries which provide inputs to their parent firms) is larger than commonly thought, even within developed countries. More than half of all vertical subsidiaries are only observable at the four-digit level because the inputs they are supplying are so proximate to their parent firms’ final good that they appear identical at the two-digit level. We call these proximate subsidiaries ‘intra-industry’ vertical FDI and find that their location and activity are significantly different to the inter-industry vertical FDI visible at the two-digit level. These subsidiaries are not readily explained by the comparative advantage considerations in traditional models, where firms locate their low skill production stages abroad in low skill countries to take advantage of factor cost differences. We find that overwhelmingly, multinationals tend to own the stages of production proximate to their final production giving rise to a class of high-skill intra-industry vertical FDI.

Money, Liquidity, and Monetary Policy

Abstract: In a market-based financial system, banking and capital market developments are inseparable, and funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Offering a window on liquidity, the balance sheet growth of broker-dealers provides a sense of the availability of credit. Contractions of broker-dealer balance sheets have tended to precede declines in real economic growth, even before the current turmoil. For this reason, balance sheet quantities of market-based financial intermediaries are important macroeconomic state variables for the conduct of monetary policy.

The Credit Crisis: Conjectures about Causes and Remedies

Abstract: What caused the financial crisis that is sweeping across the world? What keeps asset prices and lending depressed? What can be done to remedy matters? While it is too early to arrive at definite answers to these questions, it is certainly time to offer informed conjectures, and these are the focus of this paper.

Strategies for Promoting Healthier Food Choices

Abstract: Between 1960 and 2004, the proportion of Americans meeting standard criteria for obesity increased from 13 percent to 31 percent (Katherine M. Flegal et al. 2002), and it has been proposed that, if this trend is not reversed, obesity may soon overtake smoking as the leading preventable cause of death (Ali H. Mokdad et al. 2004). Consequently, obesity is now one of the major causes of rising health care costs (Eric A. Finkelstein, Christopher J. Ruhm, and Katherine M. Kosa 2005). Empirical analyses suggest that an increase in caloric intake, rather than a change in calorie expenditure, is responsible for much of the trend (David M. Cutler, Edward L. Glaeser, and Jesse M. Shapiro 2003). The main policy response to what is often referred to as the “obesity epidemic” has been to enhance access to information. The most prominent example of such a policy is the Nutrition Labeling and Education Act (United States Food and Drug Administration 1994), but, recently, the tactic has been receiving more attention after New York City required restaurants with 15 or more outlets to post the caloric content of each food item next to its price on menu boards. Lawmakers and independent companies alike are now following New York City’s lead (Kim Severson 2008). However, there is little evidence that information alone does much to improve diet (Jayachandran N. Variyam and AQ 1 The Psychology of food consumPTion †

Incentives and Stability in Large Two-Sided Matching Markets

Abstract: The paper analyzes incentives and stability in two-sided matching markets when the number of participants is large and the length of the preference list is finite. Building on and extending Immorlica and Mahdian (2005), we first investigate the scope for manipulation in a many-to-one market. When preference lists are drawn from an arbitrary distribution for one side of the market and under a mild independence assumption on the distribution for the other side, we establish that the fraction of participants who can profitably misrepresent their preferences via truncation is small. Moreover, the scope of manipulations via capacities and pre-arranged matches approaches zero as the size of the market becomes large. With an additional bounded distribution assumption, truthful reporting is an approximate equilibrium, implying efficiency of the resulting matching.