HIER 2004 Abstracts

2029. Alberto Alesina and Roberto Perotti
The European Union: A Politically Incorrect View
Abstract | Paper
In this paper, we present our view of the recent evolution of European integration. We first briefly describe the main features of the institution and decision making process in the European Union, with particular attention to the debate between federalists and super nationalists. We then identify two key issues in the process of European integration: 1) an emphasis on “institutional balance” based on a complex web of institutions with overlapping jurisdiction; 2) A conflict between a dirigiste versus a more laissez faire approach to government. We argue that the first problem leads to a lack of clarity in the allocation of powers between European institutions, confusion in the allocation of prerogatives between national governments and EU institutions, and lack of transparency and accountability. The dirigiste culture also manifests itself in an abundant production of verbose rhetoric, which in our view is far from innocuous and direct set the European policy debate in the wrong direction. We then study how these problems play out in 4 important areas: employment policies, culture and scientific research, foreign and defense policies, and fiscal policy. Finally, we study the implications of the recently proposed European Constitution a potential solution of these two problems.

2030. Edward L. Glaeser, Eric A. Hanushek and John M. Quigley
Opportunities, Race, and Urban Location: The Influence of John Kain
Abstract | Paper
Today, no economist studying the spatial economy of urban areas would ignore the effects of race on housing markets and labor market opportunities, but this was not always the case. Through what can be seen as a consistent and integrated research plan, John Kain developed many central ideas of urban economics but, more importantly, legitimized and encouraged scholarly consideration of the geography of racial opportunities. His provocative (and prescient) study of the linkage between housing segregation and the labor market opportunities of Blacks was a natural outgrowth of his prior work on employment decentralization and housing constraints on Black households. His more recent program of research on school outcomes employing detailed administrative data was an extension of the same empirical interest in how the economic opportunities of minority households vary with location. This paper identifies the influence of John Kain’s ideas on different areas of research and suggests that his scientific work was thoroughly interrelated.

2031. Jung-Wook Kim, Jason Lee and Randall Morck
Heterogeneous Investors and their Changing Demand and Supply Schedules for Individual Common Stocks
Abstract | Paper
Using 550 million limit orders submitted in the Korea Stock Exchange, we estimate demand and supply elasticities of heterogeneous investor types and their changes around the Asian financial crisis. We find that domestic individuals have substantially more inelastic demand and supply curves than domestic institutions and foreign investors. The crisis permanently reduced price elasticities of domestic individuals by 50% but had no effect on those of foreign investors. Institutional changes restricting margin purchases, implemented after the crisis, seem particularly important in explaining the dramatic drop. Information heterogeneity, availability of close substitutes and arbitrage risk also explain time-series variations in elasticities.

2032. Oliver Hart and John Moore
Agreeing Now to Agree Later: Contracts that Rule Out but do not Rule In
Abstract | Paper
We view a contract as a list of outcomes. Ex ante, the parties commit not to consider outcomes not on the list, i.e., these are “ruled out”. Ex post, they freely bargain over outcomes on the list, i.e., the contract specifies no mechanism to structure their choice; in this sense outcomes on the list are not “ruled in”. A “loose” contract (long list) maximizes flexibility but may interfere with ex ante investment incentives. When these incentives are important enough, the parties may write a “tight” contract (short list), even though this leads to ex post inefficiency.

2033. Drew Fudenberg, Markus M. Mobius and Adam Szeidl
Existence of Equilibrium in Large Double Auctions
Abstract | Paper
We show the existence of a pure strategy, symmetric, increasing equilibrium in double auction markets with correlated private valuations and many participants. The equilibrium we find is arbitrarily close to fully revealing as the market size grows. Our results provide strategic foundations for price-taking behavior in large markets.

2034. Drew Fudenberg and David K. Levine
Steady State Learning and the Code of Hammurabi
Abstract | Paper
The code of Hammurabi specified a “trial by surviving in the river” as a way of deciding whether an accusation was true. This system is puzzling for two reasons. First, it is based on a superstition: We do not believe that the guilty are any more likely to drown than the innocent. Second, if people can be easily persuaded to hold a superstitious belief, why such an elaborate mechanism? Why not simply assert that those who are guilty will be struck dead by lightning? We attack these puzzles from the perspective of the theory of learning in games. We give a partial characterization of patiently stable outcomes that arise as the limit of steady states with rational learning as players become more patient. These “subgame-confirmed Nash equilibria” have self-confirming beliefs at certain information sets reachable by a single deviation. We analyze this refinement and use it as a tool to study the broader issue of the survival of superstition. According to this theory Hammurabi had it exactly right: his law uses the greatest amount of superstition consistent with patient rational learning.

2035. Jeffrey Ely, Drew Fudenberg and David K. Levine
When is Reputation Bad?
Abstract | Paper
In traditional reputation theory, reputation is good for the long-run player. In “Bad Reputation,” Ely and Valimaki give an example in which reputation is unambiguously bad. This paper characterizes a more general class of games in which that insight holds, and presents some examples to illustrate when the bad reputation effect does and does not play a role. The key properties are that participation is optional for the short-run players, and that every action of the long-run player that makes the short-run players want to participate has a chance of being interpreted as a signal that the long-run player is “bad.” We also broaden the set of commitment types, allowing many types, including the “Stackelberg type” used to prove positive results on reputation. Although reputation need not be bad if the probability of the Stackelberg type is too high, the relative probability of the Stackelberg type can be high when all commitment types are unlikely.

2036. Ariel Pakes, Michael Ostrovsky, and Steve Berry
Simple Estimators for the Parameters of Discrete Dynamic Games (with Entry/Exit Examples)
Abstract | Paper
This paper considers the problem of estimating the distribution of payoffs in a discrete dynamic game, focusing on models where the goal is to learn about the distribution of firms' entry and exit costs. The idea is to begin with non parametric first stage etimates of entry and continuation values obtained by computing sample averages of the realized continuation values of entrants who do enter and incumbents who do continue. Under certain assumptions these values are linear functions of the parameters of the problem, and hence are not computationally burdensome to use. Attention is given to the small sample problem of estimation error in the non parametric estimates and this leads to a preference for use of particularly simple estimates of continuation values and moments.

2037.Randall Morck
Behavioral Finance in Corporate Governance-Independent Directors and Non-Executive Chairs
Abstract | Paper
Corporate governance disasters could often be averted had directors asked their CEOs questions, demanded answers, and blown whistles. Work in social psychology by Milgram (1974) and others shows human subjects to have an innate predisposition to obey legitimate authority. This may explain directors’ eerily compliant behavior towards unrestrained CEOs. Other work reveals factors that weaken this disposition to include dissenting peers, conflicting authorities, and distant authorities. This suggests that independent directors, non-executive chairs, and committees composed of independent directors that meets without the CEO might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant. This may reflect measurement problems, in that many apparently independent directors actually have financial or personal ties to their CEOs. It might also reflect other behavioral considerations that reinforce director subservience to CEOs.

2038.Timothy J. Hatton and Jeffrey G. Williamson
International Migration in the Long-Run: Positive Selection, Negative Selection and Policy
Abstract | Paper
Most labor scarce overseas countries moved decisively to restrict their immigration during the first third of the 20th century. This autarchic retreat from unrestricted and even publicly-subsidized immigration in the first global century before World War I to the quotas and bans introduced afterwards was the result of a combination of factors: public hostility towards new immigrants of lower quality, public assessment of the impact of those immigrants on a deteriorating labor market, political participation of those impacted, and, as a triggering mechanism, the sudden shocks to the labor market delivered by the 1890s depression , the Great War, postwar adjustment and the great depression. The paper documents the secular drift from very positive to much more negative immigrant selection which took place in the first global century after 1820 and in the second global century after 1950, and seeks explanations for it. It then explores the political economy of immigrant restriction in the past and seeks historical lessons for the present.

2039.David Clingingsmith and Jeffjrey G. Williamson
India's De-Industrialization Under British Rule: New Ideas, New Evidence
Abstract | Paper
India was a major player in the world export market for textiles in the early 18th century, but by the middle of the 19th century it had lost all of its export market and much of its domestic market. Other local industries also suffered some decline, and India underwent secular de-industrialization as a consequence. While India produced about 25 percent of world industrial output in 1750, this figure fell to only 2 percent by 1900. We use an open, specific-factor model to organize our thinking about the relative role played by domestic and foreign forces in India’s de-industrialization. The construction of new relative price evidence is central to our analysis. We document trends in the ratio of export to import prices (the external terms of trade) from 1800 to 1913, and that of tradable to non-tradable goods and own-wages in the tradable sectors going back to 1765. With this new relative price evidence in hand, we ask how much of the de-industrialization was due to local supply-side influences (such as the demise of the Mughal empire) and how much to world price shocks (such as world market integration and rapid productivity advance in European manufacturing), both of which had to deal with an offset – the huge net transfer from India to Britain before 1815. Whether the Indian de-industrialization shocks and responses were big or small is then assessed by comparisons with other parts of the periphery.

2040.Christopher Blattman, Jason Hwang and Jeffrey G. Williamson
The Impact of the Terms of Trade on Economic Development in the Periphery, 1870-1939: Volatility and Secular Change
Abstract | Paper
Most countries in the periphery specialized in the export of just a handful of primary products for most of their history. Some of these commodities have been more volatile than others, and those with more volatile prices have grown slowly relative both to the industrial leaders and to other primary product exporters. This fact helps explain the growth puzzle noted by Easterly, Kremer, Pritchett and Summers more than a decade ago: that the contending fundamental determinants of growth—institutions, geography and culture—exhibit far more persistence than do the growth rates they are supposed to explain. Using a new panel database for 35 countries, this paper estimates the impact of terms of trade volatility and secular change on country performance between 1870 and 1939. Volatility was much more important for accumulation and growth than was secular change. Additionally, both effects were asymmetric between Core and Periphery, findings that speak directly to the terms of trade debates that have raged since Prebisch and Singer wrote more than 50 years ago. The paper also investigates one channel of impact, and finds that foreign capital inflows declined steeply where commodity prices were volatile.

2041. Chaim Fershtman and Ariel Pakes
Finite State Dynamic Games with Asymmetric Information: A Computational Framework
Abstract | Paper
We present a simple algorithm for computing an intuitive notion of MPE for ?nite state dynamic games with asymmetric information. The algorithm does not require; storage and updating of posterior distributions, explicit integration over possible future states to deter- mine continuation values, or storage and updating of information at all possible points in the state space. It is also easy to program. To il- lustrate we compute the MPE of a collusive industry in which ?rms do not know each other?s cost positions. Costs evolve with the (privately observed) outcomes of their investment decisions. Costly meetings are called when a ?rm perceives that its relative cost position has improved. The meetings reveal information and realign pro?ts accod- ingly. We show that parameters determining information ?ows can e¤ect market structure and through market structure, producer and consumer surplus.

2042. James L. Medoff and Ronald W.Sellers
Labor's Capital, Business Confidence, And the Market for Loanable Funds
Abstract | Paper
The market for loanable funds provides a useful framework for determining changes in investment and interest rates. In the United States, a significant source of supply originates from labor in the form of pension assets. However, despite the increased contribution by labor to the supply curve over the past several decades, levels of investment have remained less than robust. Here, we highlight the changes in the demand curve for loanable funds in order to explain the empirical trends. Data series provided by the Conference Board capture the confidence of U.S. business and thus provide a gauge of Keynes’ “animal spirits”—an essential factor in the demand curve shifts. Correlation of the data series with both quarterly changes in real interest rates and quarterly changes in payroll employment offers documentation for these macroeconomic claims.

2043. Edward L. Glaeser and Raven Saks
Corruption in America
Abstract | Paper
We use a data set of federal corruption convictions in the U.S. to investigate the causes and consequences of corruption. More educated states, and to a less degree richer states, have less corruption. This relationship holds even when we use historical factors like education in 1928 or Congregationalism in 1890, as instruments for the level of schooling today. The level of corruption is weakly correlated with the level of income inequality and racial fractionalization, and uncorrelated with the size of government. There is a weak negative relationship between corruption and employment and income growth. These results echo the cross-country findings, and support the view that the correlation between development and good political outcomes occurs because more education improves political institutions.

2044. Edward L. Glaeser, Giacomo A. M. Ponzetto and Jesse M. Shapiro
Strategic Extremism: Why Republicans and Democrats Divide on Religious Values
Abstract | Paper
Party platforms differ sharply from one another, especially on issues with religious content, such as abortion or gay marriage. Religious extremism in the U.S. appears to be strategically targeted to win elections, since party platforms diverge significantly, while policy outcomes like abortion rates are not affected by changes in the governing party. Given the high returns from attracting the median voter, why do vote-maximizing politicians veer off into extremism? In this paper, we find that strategic extremism depends on an important intensive margin where politicians want to induce their core constituents to vote (or make donations) and the ability to target political messages towards those core constituents. Our model predicts that the political relevance of religious issues is highest when around one-half of the voting population attends church regularly. Using data from across the world and within the U.S., we indeed find a nonmonotonic relationship between religious extremism and religious attendance.

2045. John Y. Campbell and Joao F. Cocco
How Do House Prices Affect Consumption? Evidence From Micro F. Data
Abstract | Paper
Housing is a major component of wealth. Since house prices fluctuate considerably over time, it is important to understand how these fluctuations affect households’ consumption decisions. Rising house prices may stimulate consumption by increasing households’ perceived wealth, or by relaxing borrowing constraints. This paper investigates the response of household consumption to house prices using UK micro data. We estimate the largest effect of house prices on consumption for older homeowners, and the smallest effect, insignificantly different from zero, for younger renters. This finding is consistent with heterogeneity in the wealth effect across these groups. It suggests that as the population ages and becomes more concentrated in the old homeowners group, aggregate consumption may become more responsive to house prices. In addition, we find that regional house prices affect regional consumption growth. Predictable changes in house prices are correlated with predictable changes in consumption, particularly for households that are more likely to be borrowing constrained, but this effect is driven by national rather than regional house prices and is important for renters as well as homeowners, suggesting that UK house prices are correlated with aggregate financial market conditions.

2046. John Y. Campbell, Tarun Ramadorai and Tuomo O. Vuolteenaho
Caught on Tape: Predicting Institutional Ownership With Order Flow
Abstract | Paper
Many questions about institutional trading can only be answered if one can track institutional equity ownership continuously. However, these data are only available on quarterly reporting dates. We infer institutional trading behavior from the "tape," the Transactions and Quotes database of the New York Stock Exchange, by regress- ing quarterly changes in reported institutional ownership on quarterly buy and sell volume in different trade size categories. Our regression method predicts institutional ownership signifcantly better than the simple cutoff rules used in previous research. We also find that total buy (sell) volume predicts increasing (decreasing) institutional ownership, consistent with institutions demanding liquidity in aggregate. Furthermore, institutions tend to trade in large or very small sizes: buy (sell) volume at these sizes predicts increasing (decreasing) institutional ownership, while the pattern reverses at intermediate trade sizes that appear favored by individuals. We then explore changes in institutional trading strategies. Institutions appear to prefer medium size trades on high volume days and large size trades on high volatility days.

2047. Michael Jansson and Marcelo J. Moreira
Optimal Inference in Regression Models with Nearly Integrated Regressors
Abstract | Paper
This paper considers the problem of conducting inference on the regression coeffcient in a bivariate regression model with a highly persistent regressor. Gaussian power envelopes are obtained for a class of testing procedures satisfying a conditionality restriction. In addition, the paper proposes feasible testing procedures that attain these Gaussian power envelopes whether or not the innovations of the regression model are normally distributed.

2048. Marcelo J. Moreira, Jack R. Porter and Gustavo A. Suarez
Bootstrap and Higher-Order Expansion Validity When Instruments May Be Weak
Abstract | Paper
It is well-known that size-adjustments based on Edgeworth expansions for the t-statistic perform poorly when instruments are weakly correlated with the endogenous explanatory variable. This paper shows, however, that the lack of Edgeworth expansions and bootstrap validity are not tied to the weak instrument framework, but instead depends on which test statistic is examined. In particular, Edgeworth expansions are valid for the score and conditional likelihood ratio approaches, even when the instruments are uncorrelated with the endogenous explanatory variable. Furthermore, there is a belief that the bootstrap method fails when instruments are weak, since it replaces parameters with inconsistent estimators. Contrary to this notion, we provide a theoretical proof that guarantees the validity of the bootstrap for the score test, as well as the validity of the conditional bootstrap for many conditional tests. Monte Carlo simulations show that the bootstrap actually decreases size distortions in both cases.

2049. Drew Fudenberg and David K. Levine
A Dual Self Model of Impulse Control
Abstract | Paper
We propose that a simple “dual-self” model gives a unified explanation for several empirical regularities, including the apparent time-inconsistency that has motivated models of hyperbolic discounting and Rabin’s paradox of risk aversion in the large and small. The model also implies that self-control costs imply excess delay, as in the O’Donoghue and Rabin models of hyperbolic utility, and it explains experimental evidence that increased cognitive load makes temptations harder to resist. Finally, the reduced form of the base version of our model is consistent with the Gul-Pesendorfer axioms.

2050. Drew Fudenberg and Lorens A. Imhof
Imitation Processes with Small Mutations
Abstract | Paper
This note characterizes the impact of adding rare stochastic muta- tions to an "imitation dynamic," meaning a process with the properties that any state where all agents use the same strategy is absorbing, and all other states are transient. The work of Freidlin and Wentzell [10] and its extensions implies that the resulting system will spend almost all of its time at the absorbing states of the no-mutation process, and provides a general algorithm for calculating the limit distribution, but this algorithm can be complicated to apply. This note provides a sim- pler and more intuitive algorithm. Loosely speaking, in a process with K strategies, it is sufficient to find the invariant distribution of a K x K Markov matrix on the K homogeneous states, where the probability of a transit from "all play i" to "all play j" is the probability of a transition from the state "all agents but 1 play i, 1 plays j" to the state "all play j."

2051. Drew Fudenberg, David K. Levine, and Satoru Takahashi
Perfect Public Equilibrium When Players Are Patient
Abstract | Paper
The limit set of perfect public equilibrium payoffs of a repeated game as the discount factor goes to one is characterized, with examples, even when the full-dimensionality condition fails.

2052. Kaushik Basu
Child labor and the Law: Notes on Possible Pathologies
Abstract | Paper
The paper demonstrates that the standard policy for controlling child labor imposing a fine on firms caught employing children can cause child labor to rise. This pathological’ reaction is, however, reversed as the size of the fine increases.

2053. Kaushik Basu
Consumer Cognition and Pricing in the 9's in Oligopolistic Markets
Abstract | Paper
The paper fully characterizes the Bertrand equilibria of oligopolistic markets where consumers may ignore the last (i.e. the right-most) digits of prices. Consumers, in this model, do not do this reflexively or out of irrationality, but only when they expect the time cost of acquiring full cognizance of the exact price to exceed the expected loss caused by the slightly erroneous amounts that is likely to be purchased or the slightly higher price that may be paid by virtue of ignoring the information concerning the last digits of prices. It is shown that in this setting there will always exist firms that set prices that end in nine though there may also be some (non-strict) equilibria where a non-nine price ending occurs. It is shown that all firms earn positive profits even in Bertrand equilibria. The model helps us understand in what kinds of markets we are most likely to encounter pricing in the 9’s.

2054. Kaushik Basu
Gender and Say A Model of Household Behavior with Endogenously-determined Balance of Power
Abstract | Paper
The evidence that the same total income can lead a household to choose different consumption vectors, depending on who brings in how much of the income, has led to an effort to replace the standard unitary model of the household with the ‘collective model’, which recognizes that the husband and the wife may have different preferences and depending on the balance of power between them the household may choose differently. One weakness of this new literature is that it fails to recognize that the household’s choice could in turn influence the balance of power. Once this two-way relation between choice and power is recognized we are forced to confront some new questions concerning how to model the household. This paper tries to answer these by defining a ‘household equilibrium’, examining its game-theoretic properties and drawing out its testable implications. It is shown, for instance, that once we allow for dynamic interaction a household can exhibit inefficient behavior, and that (for a certain class of parameters) children will be less likely to work in a household where power is evenly balanced, than one in which all power is concentrated in the hands of either the father or the mother. The paper also draws out the implications for female labor supply.

2055. Julie Holland Mortimer
Price Discrimination and Copyright Law: Evidence from the Introduction of DVDs
Abstract | Paper
This paper examines the welfare effects of intellectual property protection, accounting for firms’ optimal responses to legal environments. I examine firms’ use of indirect price discrimination in response to U.S. copyright law preventing direct price discrimination. Using data covering VHS and DVD movie distribution, I explain studios’ optimal pricing strategies under U.S. copyright law, and determine optimal pricing strategies under E.U. copyright law, which allows for direct price discrimination. I find that studios’ use of indirect price discrimination benefits consumers and harms retailers. Optimal pricing under E.U. copyright law further benefits studios and consumers. I also reanalyze these issues assuming continued DVD adoption.

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