HIER 2007 Abstracts

2128. David Besanko, Ulrich Doraszelski, Yaroslav Kryukov and Mark Satterthwaite
Learning-by-Doing, Organizational Forgetting, and Industry Dynamics
Abstract | Paper­
Learning-by-doing and organizational forgetting have been shown to be important in a variety of industrial settings. This paper provides a general model of dynamic competition that accounts for these economic fundamentals and shows how they shape industry structure and dynamics. Previously obtained results regarding the dominance properties of firms' pricing behavior no longer hold in this more general setting. We show that organizational forgetting does not simply negate learning-by-doing. Rather, learning-by-doing and organizational forgetting are distinct economic forces. In partic- ular, a model with both learning-by-doing and organizational forgetting can give rise to aggressive pricing behavior, market dominance, and multiple equilibria, whereas a model with learning-by-doing alone cannot.

2129. Rustam Ibragimov and Ulrich K. MUller
t-statistic based correlation and heterogeneity robust inference
Abstract | Paper
We develop a general approach to robust inference about a scalar parameter when the data is potentially heterogeneous and correlated in a largely unknown way. The key ingredient is the following result of Bakirov and Sz´ekely (2005) concerning the small sample properties of the standard t "test: For a significance level of 5% or lower, the t "test remains conservative for underlying observations that are independent and Gaussian with heterogenous variances. One might thus conduct robust large sample inference as follows: partition the data into q e" 2 groups, estimate the model for each group and conduct a standard t "test with the resulting q parameter estimators. This results in valid inference as long as the groups are chosen in a way that ensures the parameter estimators to be asymptotically independent, unbiased and Gaussian of possibly different variances. We provide examples of how to apply this approach to time series, panel, clustered and spatially correlated data.

2130. Ulrich Doraszelski and Mark Satterthwaite
Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity
Abstract | Paper
We provide a general model of dynamic competition in an oligopolistic industry with investment, entry, and exit. To ensure that there exists a computationally tractable Markov perfect equilibrium, we introduce firm heterogeneity in the form of randomly drawn, privately known scrap values and setup costs into the model. Our game of incomplete information always has an equilibrium in cutoff entry/exit strategies. In contrast, the existence of an equilibrium in the Ericson & Pakes (1995) model of industry dynamics requires admissibility of mixed entry/exit strategies, contrary to the assertion in their paper, that existing algorithms cannot cope with. In addition, we provide a condition on the model's primitives that ensures that the equilibrium is in pure investment strategies. Building on this basic existence result, we first show that a symmetric equilibrium exists under appropriate assumptions on the model's primitives. Second, we show that, as the distribution of the random scrap values/setup costs becomes degenerate, equilibria in cutoff entry/exit strategies converge to equilibria in mixed entry/exit strategies of the game of complete information. Finally, we provide the first example of multiple symmetric equilibria in this literature.

2131.Edward L. Glaeser
Do Regional Economies Need Regional Coordination?
Abstract | Paper
Over the past century, America changed from a nation of distinct cities separated by farmland, to a place where employment and population density is far more continuous. For some purposes, it makes sense to think of the U.S. as consisting of a number of contiguous megaregions. Using the megaregion definitions of the Regional Plan Association, this paper documents the remarkable differences between these areas in productivity, housing prices, commute times and growth rates. Moreover, over the past 20 years, the fastest growing regions have not been those with the highest income or the most attractive climates. Flexible housing supply seems to be the key determinant of regional growth. Land use regulations seem to drive housing supply and determine which regions are growing. A more regional approach to housing supply might reduce the tendency of many localities to block new construction.

2132. Alberto Alesina and Paola Giuliano
The Power of the Family
Abstract | Paper
The structure of family relationships influences economic behavior and attitudes. We define our measure of family ties using individual responses from the World Value Survey regarding the role of the family and the love and respect that children need to have for their parents for over 70 countries. We show that strong family ties imply more reliance on the family as an economic unit which provides goods and services and less on the market and on the government for social insurance. With strong family ties home production is higher, labor force participation of women and youngsters, and geographical mobility, lower. Families are larger (higher fertility and higher family size) with strong family ties, which is consistent with the idea of the family as an important economic unit. We present evidence on cross country regressions. To assess causality we look at the behavior of second generation immigrants in the US and we employ a variable based on the grammatical rule of pronoun drop as an instrument for family ties. Our results overall indicate a significant influence of the strength of family ties on economic outcomes.

2133.Glenn Ellison, Edward L. Glaeser and William Kerr
What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns
Abstract | Paper
Many industries are geographically concentrated. Many mechanisms that could account for such agglomeration have been proposed. We note that these theories make different predictions about which pairs of industries should be coagglomerated. We discuss the measurement of coagglomeration and use data from the Census Bureau s Longitudinal Research Database from 1972 to 1997 to compute pairwise coagglomeration measurements for U.S. manufacturing industries. Industry attributes are used to construct measures of the relevance of each of Marshall s three theories of industry agglomeration to each industry pair: (1) agglomeration saves transport costs by proximity to input suppliers or final consumers, (2) agglomeration allows for labor market pooling, and (3) agglomeration facilitates intellectual spillovers. We assess the importance of the theories via regressions of coagglomeration indices on these measures. Data on characteristics of corresponding industries in the United Kingdom are used as instruments. We find evidence to support each mechanism. Our results suggest that input-output dependencies are the most important factor, followed by labor pooling.

2134. Edward L. Glaeser and Bruce Sacerdote
Aggregation Reversals and the Social Formation of Beliefs
Abstract | Paper
In the past two elections, richer people were more likely to vote Republican while richer states were more likely to vote Democratic. This switch is an aggregation reversal, where an individual relationship, like income and Republicanism, is reversed at some level of aggregation. Aggregation reversals can occur when an independent variable impacts an outcome both directly and indirectly through a correlation with beliefs. For example, income increases the desire for low taxes but decreases belief in Republican social causes. If beliefs are learned socially, then aggregation can magnify the connection between the independent variable and beliefs, which can cause an aggregation reversal. We estimate the model s parameters for three examples of aggregation reversals, and show with these parameters that the model predicts the observed reversals.

2135. Edward L. Glaeser and Kristina Tobio
The Rise of the Sunbelt
Abstract | Paper
In the last 50 years, population and incomes have increased steadily throughout much of the Sunbelt. This paper assesses the relative contributions of rising productivity, rising demand for Southern amenities and increases in housing supply to the growth of warm areas, using data on income, housing price and population growth. Before 1980, economic productivity increased significantly in warmer areas and drove the population growth in those places. Since 1980, productivity growth has been more modest, but housing supply growth has been enormous. We infer that new construction in warm regions represents a growth in supply, rather than demand, from the fact that prices are generally falling relative to the rest of the country. The relatively slow pace of housing price growth in the Sunbelt, relative to the rest of the country and relative to income growth, also implies that there has been no increase in the willingness to pay for sun-related amenities. As such, it seems that the growth of the Sunbelt has little to do with the sun.

2136. Alberto Alesina and Paola Giuliano
Divorce, Fertility and the Value of Marriage
Abstract | Paper
Easier divorce has two effects on marriage rates and fertility. It dilutes the value of marriage, therefore reducing marriage rates and marital fertility and potentially increasing out of wedlock fertility. But easier divorce reduces also the commitment cost of marriage leading women to try marriage especially when in child bearing age or even already pregnant. We find that total fertility and out-of-wedlock fertility decline after the introduction of unilateral divorce. Women planning to have children marry more easily with an easier exit option from marriage. Thus, more children are born in the first years of marriage, while marital fertility does not change, probably as a result of an increase in divorce and marital instability. Therefore we find strong evidence consistent with the commitment effect

2137. Edward L. Glaeser and Joseph Gyourko
Housing Dynamics
Abstract | Paper
The key stylized facts of the housing market are positive serial correlation of price changes at one year frequencies and mean reversion over longer periods, strong persistence in construction, and highly volatile prices and construction levels within markets over time. We calibrate a dynamic model of housing in the spatial equilibrium tradition of Rosen and Roback to see whether such a model can generate these facts. With reasonable parameter values, this model readily explains the mean reversion of prices over five year periods, but cannot explain the observed positive serial correlation at higher frequencies. The model predicts the positive serial correlation of new construction that we see in the data and the volatility of both prices and quantities in the typical market, and it can account for substantial variation on construction intensity across markets. However, the model cannot explain the most volatile markets in terms of low frequency price changes. More research is needed to determine whether measurement errorrelated data smoothing or market inefficiency can best account for the persistence of high frequency price changes. With respect to the extremely high house price change volatility in certain coastal markets, more research is needed to ascertain whether shocks to interest rates or better measurement of local income variability can match this moment of data without appealing to some type of animal spirits.

2138. Philippe Aghion, Alberto Alesina, and Francesco Trebbi
Democracy, Technology, and Growth
Abstract | Paper
We explore the question of how political institutions and particularly democracy affect economic growth. Although empirical evidence of a positive effect of democracy on economic performance in the aggregate is weak, we provide evidence that democracy influences productivity growth in different sectors differently and that this differential effect may be one of the reasons of the ambiguity of the aggregate results. We provide evidence that political rights are conducive to growth in more advanced sectors of an economy, while they do not matter or have a negative effect on growth in sectors far away from the technological frontier. One channel of explanation goes through the beneficial effects of democracy and political rights on the freedom of entry in markets. Overall, democracies tend to have much lower entry barriers than autocracies, because political accountability reduces the protection of vested interests, and entry in turn is known to be generally more growth-enhancing in sectors that are closer to the technological frontier. We present empirical evidence that supports this entry explanation.

2139. Rustam Ibragimov and Johan Walden
Value at Risk Under Dependence and Heavy Tailedness: Models with Comon Shocks*
Abstract | Paper
This paper presents an analysis of diversification and portfolio value at risk for heavy-tailed dependent risks in models with multiple common shocks. We show that, in the framework of value at risk comparisons, diversification is optimal for moderately heavy-tailed dependent risks with common shocks and finite first moments, provided that the model is balanced, i.e., that all the risks are available for portfolio formation. However, diversification is inferior in balanced extremely heavy-tailed risk models with common factors. Finally, in several unbalanced dependent models, diversification is optimal, even though there is extreme heavy-tailedness in common shocks or in idiosyncratic parts of the risks.

2140. Edward L. Glaeser
Entrepreneurship and the City
Abstract | Paper
Why do levels of entrepeneurship differ across America's cities? This paper presents basic facts on two measures of entrepreneurship: the self-employment rate and the number of small firms. Both of these measures are correlated with urban success, suggesting that more entrepeneurial cities are more successful. There is a considerable variation in the self-employment rate across metropolitan areas, but about one-half of this heterogeneity can be explained by demographic and individual variation. Self-employment is particularly associated with abundant, older citizens and with the presence of input suppliers. Conversely, small firm size and employment growth due to unaffiliated new establishments is associated most strongly with the presence of input suppliers and an appropriate labor force. I also find support for the Chinitz (1961) hypothesis that entrepeneurship is linked to a large number of small firms in supplying industries. Finally, there is a strong connection between area-level education and entrepeneurship.

2141. Drew Fudenberg and Lorens A. Imhof
Monotone Imitation Dynamics in Large Populations
Abstract | Paper
We analyze a class of imitation dynamics with mutations for games with any finite number of actions, and give conditions for the selection of a unique equilibrium as the mutation rate becomes small and the population becomes large. Our results cover the multiple-action extensions of the aspiration-and-imitation process of Binmore and Samuelson and the related processes proposed by Benaïm and Weibull and Traulsen et al., as well as the frequency-dependent Moran process studied by Fudenberg et al.. We illustrate our results by considering the effect of the number of periods of repetition on the selected equilibrium in repeated play of the prisoner's dilemma when players are restricted to a small set of simple strategies.

2142. Drew Fudenberg and David K. Levine
Self-Confirming Equilibrium and the Lucas Critique
Abstract | Paper
We examine the role of off-path "superstitions" in macro-economics, and show how a false belief about off-play is the key element underlying both the Lucas Critique and the game-theoretic concept of self-confirming equilibrium. However, the impact of false beliefs in these two cases is different: In the Lucas case, a policy maker's incorrect beliefs about off-path play can lead to the adoption of mistaken policy innovation. However, the consequences of such an innovation provide evidence that the belief that motivated them was wrong. In contrast, play may never escape an undesirable self-confirming equilibrium, as the action implied by the mistaken belief does not generate data that contradicts it; escape from the self-confirming equilibrium requires that payers do a sufficient amount of experimentation with off-path actions. ­

2143. Drew Fudenberg and Satoru Takahashi
Heterogeneous Beliefs and Local Information in Stochastic Fictitious Play
Abstract | ­Paper
Stochastic fictitious play (SFP) assumes that agents do not try to influence the future play of their current opponents, an assumption that is justified by appeal to a setting with a large population of players who are randomly matched to play the game. However, the dynamics of SFP have only been analyzed in models where all agents in a player role have the same beliefs. We analyze the dynamics of SFP in settings where there is a population of agents who observe only outcomes in their own matches and thus have heterogeneous beliefs. We provide conditions that ensure that the system converges to a state with homogeneous beliefs, and that its asymptotic behavior is the­ same as with a single representative agent in each player role.

2144. Jerry R. Green and Daniel A. Hojman
Choice,Rationality and Welfare Measurement
Abstract | Paper
We present a method for evaluating the welfare of a decision maker, based on observed choice data. Unlike the standard economic theory of revealed preference, our method can be used whether or not the observed choices are rational. Paralleling the standard theory we present a model for choice such that the observations arise "as if" they were the result of a specific decision making process. However, in place of the usual preference relation whose maximization induces the observations, we explain choice as arising from a compromise among a set of simultaneously-held, conflicting preference relations. As in revealed preference theory, these simultaneously held preferences are inferred from the choice data and we use them as the basis to discuss the decision maker's welfare. In general our method does not yield a unique set of explanatory preferences and therefore we characterize all the explanatory sets of preferences. We use this set to compute bounds on welfare changes. We show that some standard results of rational choice theory can be extended to irrational decision makers. The theory can be used to explore a number of context-dependent choice patterns found in psychological experiments.

­­2145. Alberto Alesina, Andrea Ichino, and Loukas Karbarbounis
Gender Based Taxation and the Division of Family Chores
Abstract | Paper
Gender Based Taxation (GBT) satisfies Ramsey's optimal criterion by taxing less the more elastic labor supply of (married) women. This holds when different elasticities between men and women are taken as exogenous and primitive. But in this paper we also explore differences in gender elasticities which emerge endogenously in a model in which spouses bargain over the allocation of home duties. GBT changes spouses' implicit bargaining power and induces a more balanced allocation of house work and working opportunities between males and females. Because of decreasing returns to specialization in home and market work, social welfare improves by taxing conditional on gender. When income sharing within the family is substantial, both spouses may gain from GBT.