HIER 2008 Abstracts

2146. Edward L. Glaeser and Cass R. Sunstein
Extremism and Social Learning
Abstract | Paper
When members of deliberating groups speak with one another, their predeliberation tendencies often become exacerbated as their views become more extreme. The resulting phenomenon--group polarization - has been observed in many settings, and it bears on the actions of juries, administrative tribunals, corporate boards, and other institutions. Polarization can result from rational Bayesian updating by group members, but in many contexts, this rational interpretation of polarization seems implausible. We argue that people are better seen as Credulous Bayesians who, insufficiently adjust for idiosyncratic features of particular environments and put excessive weight on the statements of others where there are 1) common sources of information; 2) highly unrepresentative group membership; 3) statements that are made to obtain approval; and 4) statements that are designed to manipulate. Credulous Bayesianism can produce extremism and significant blunders. We discuss the implications of Credulous Bayesianism for law and politics, including media policy and cognitive diversity on administrative agencies and courts.

2147. Ulrich Doraszelski and Jori Jaumandreau
R&D and productivity: Estimating production functions when productivity is endogenous
Abstract | Paper
We develop a simple estimator for production functions in the presence of endogenous productivity change that allows us to retrieve productivity and its relationship with R&D at the firm level. By endogenizing the productivity process we build on the recent literature on structural estimation of production functions. Our dynamic investment model can be viewed as a generalization of the knowledge capital model (Griliches 1979) that has remained a cornerstone of the productivity literature for more than 25 year. We relax the assumptions on the R&D process and examine the impact of the investment in knowledge on the productivity of firms.
We illustrate our approach on an unbalanced panel of more than 1800 Spanish manufacturing firms in nine industries during the 1990s. Our findings indicate that the link between R&D and productivity is subject to a high degree of uncertainty and nonlinearity, we extend the knowledge capital model. Moreover, capturing heterogeneity gives us the ability to access the role of R&D in determining the differences in productivity across firms and the evolution of firm level productivity over time.

2148. Edward L. Glaeser and Giacomo A. M. Ponzetto
Did the Death of Distance Hurt Detroit and Help New York?
Abstract | Paper
Urban proximity can reduce the costs of shipping goods and speed the flow of ideas. Improvements in communication technology might erode these advantages and allow people and firms to decentralize. However, improvements in transportation and communication technology can also increase the returns to new ideas, by allowing those ideas to be used throughout the world. This paper presents a model that illustrates these two rival effects that technological progress can have on cities. We then present some evidence suggesting that the model can help us to understand why the past thirty-five years have been kind to idea-producing places, like New York and Boston, and devastating to goods-producing cities, like Cleveland and Detroit.

­­2­149. Edward L. Glaeser
The Economic Approach to Cities­
Abstract | ­Paper
The economic approach to cities relies on a spatial equilibrium for workers, employers and builders. The worker's equilibrium implies that positive attributes in one location, like access to downtown or high wages, are offset by negative attributes, like high housing prices. The employer's equilibrium requires that high wages be offset by a high level of productivity, perhaps due to easy access to customers or suppliers. The search for the sources of productivity differences that can justify high wages is the basis for the study of agglomeration economies which has been a significant branch of urban economics in the past 20 years. The builder's equilibrium condition pushes us to understand the causes of supply differences across space that can explain why some places have abundant construction and low prices while others have little construction and high prices. Since the economic theory of cities emphasizes a search for exogenous causes of endogenous outcomes like local wages, housing prices and city growth, it is unsurprising that the economic empirics on cities have increasingly focused on the quest for exogenous sources of variation. The economic approach to urban policy emphasizes the need to focus on people, rather than places, as the ultimate objects of policy concern and the need for policy to anticipate the mobility of people and firms.

­2­150. Philippe Aghion, Drew Fudenberg and Richard Holden
Subgame Perfect Implementation With Almost Perfect Information
Abstract | ­­Paper
The theory of incomplete contracts has been recently questioned using or extending the subgame perfect implementation approach of Moore and Repullo (1988). We consider the robustness of this mechanism to the introduction of small amounts of asymmetric information. Our main result is that the mechanism may not yield (even approximately) truthful revelation as the amount of asymmetric information goes to zero.

­2­151. Edward L. Glaeser and Joseph Gyourko
Arbitrage in Housing Markets
Abstract | ­Pape­r
Urban economists understand housing prices with a spacial equilibrium approach that assumes people must be indifferent across locations. Since the spatial no arbitrage condition is inherently imprecise, other economists have turned to a different no arbitrage conditions, such as the prediction that individuals must be indifferent between owning and renting. This paper argues the predictions from these non-spatial, financial no arbitrage conditions are also quite imprecise. Owned homes are extremely different from rental units and owners are quite different from renters. The unobserved costs of home owning such as maintenance are also quite large. Furthermore, risk aversion and the high volatility of housing prices compromise short-term attempts to arbitrage by delaying home buying. We conclude that housing cannot be understood with a narrowly financial approach that ignores space any more than it can be understood with a narrowly spatial approach that ignores asset makers.

­­2­152­. David M. Cutler, Edward L. Glaeser and Jacob L. Vigdor
When are Ghettos Bad? Lessons from Immigrant Segregation in the United States
Abstract | ­Pape­r
Recent studies provide conflicting evidence on the connection between ethnic or racial neighborhood segregation and outcomes. Some studies find that residence in an enclave is beneficial, some reach the opposite conclusion, and still others imply that any relationship is small. One hypothesis is that studies differ because the impact of segregation varies across groups, perhaps because its impact is more benign for better-educated groups. This paper presents new evidence on this hypothesis using data on first-generation immigrants in the United States. We confront the endogenous selection into residential enclaves and find that selection produces positive mean effects of segregation, and a positive correlation between group average human capital and the impact of segregation.

­­2­153­. ­David Cutler and Edward L. Glaeser
Social Interactions and Smoking
Abstract | ­Pape­r
Are ­­individuals more likely to smoke when they are surrounded by smokers? In this paper, we examine the evidence for peer effects in smoking. We address the endogeneity of peers by looking at the impact of workplace smoking bans on spousal and peer group smoking. Using these bans as an instrument, we find that individuals whose spouses smoke are 40 percent more likely to smoke themselves. We also find evidence for the existence of a social multiplier in that the impact of smoking bans and individual income becomes stronger at higher levels of aggregation. This social multiplier could explain the large time series drop in smoking among some demographic groups.

­­2­­154. David Besanko, Ulrich Doraszelski, Lauren Xiaoyuan Lu, and Mark Satterthwaite
Lumpy Capacity Investments and Disinvestment Dynamics
Abstract | ­Pape­r
Capacity addition and withdrawal decisions are among the most important strategic decisions made by firms in oligopolistic industries. In this paper, we develop and analyze a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment. We use our model to answer two questions. First, what economic factors facilitate preemption races? Second, what economic factors facilitate capacity coordination? We show that low product differentiation, low investment sunkness, and high depreciation promote preemption races. We also show that low product differentiation and low investment sunkness promote capacity coordination. Although depreciation removes capacity, it may impede capacity coordination. Finally, we show that, at least over some range of parameter values, firms' expectation plays a key role in determining whether or not industry dynamics are characterized by preemption races and capacity coordination. Taken together, our results suggest that preemption races and excess capacity in the short fun often go hand-in-hand with capacity coordination in the long run.

­­2­­15­5. Ron N. Borkovsky, Ulrich Doraszelski and Yaroslav Kryukov
A User's Guide to Solving Dynamic Stochastic Games Using the Homotopy Method
Abstract | ­Pape­r
This paper provides a step-by-step guide to solving dynamic stochastic games using the homotopy method. The homotopy method facilitates exploring the equilibrium correspondence in a systematic fashion; it is especially useful in games that have multiple equilibria. We discuss the theory of the homotopy method and its implementation and present two detailed examples of dynamic stochastic games that are solved using this method.

­­2­­15­6. Ulrich Doraszelski and Juan F. Escobar
A Theory of Regular Markov Perfect Equilibria in Dynamic Stochastic Games: Genericity, Stability and Purification
Abstract | ­Pape­r
This paper develops a theory of regular Markov perfect equilibria in dynamic stochastic games. We show that almost all dynamic stochastic games have a finite number of locally isolated Markov perfect equilibria that are all regular. These equilibria are essential and strongly stable. Moreover, they all admit purification. ­­­

­­2­­157. Alberto Alesina and Richard Holden
Ambiguity and Extremism in Elections
Abstract | ­Pape­r
We analyze a model in which voters are uncertain about the policy preferences of candidates. Two forces affect the probability of electoral success: proximity to the median voter and campaign contributions. First, we show how campaign contributions affect elections. Then we show how the candidates may wish to announce a range of policy prefences, rather than a single point. This strategic ambiguity balances voter beliefs about the appeal of candidates both to the median voter and to the campaign contributors. If primaries precede a general election, they add another incentive for ambiguity, because in the primaries the candidates do not want to reveal too much information, to maintain some freedom of movement in the policy space for the general election. Ambiguity has an option value.

­­2­­158. Edward L. Glaeser, Joseph Gyourko and Albert Saiz
Housing Supply and Housing Bubbles
Abstract | ­Pape­r
Like many other assets, housing prices are quite volatile relative to observable changes in fundamentals. If we are going to understand boom-bust housing cycles, we must incorporate houing supply. In this paper, we present a simple model of housing bubbles which predicts that places with more elastic housing supply have fewer and shorter bubbles, with smaller price increases. However, the welfare consequences of bubbles may actually be higher in more elastic places because those places will overbuild more in response to a bubble. The data show that the price run-ups of the 1980s were almost exclusively experienced in cities where housing supply is more inelastic. More elastic places had slightly large increases in building durring that period. Over the past five years, a modest number of more elastic places also experienced large price booms, but as the model suggests, these booms seem to have been quite short. Prices are already moving back towards construction costs in those areas.

­­2­­159. Alberto Alesina, Francesca Lotti and Paolo Emilio Mistruilli
Do Women Pay More for Credit? Evidence from Italy
Abstract | ­Pape­r
The answer is yes. By using a unique and large data seton overdraft contracts between banks and microfirms and self-employed individuals, we find robust evidence that women in Italy pay more for overdraft facilities than men. We could not find any evidence that women are riskier than men. The male/female differential remains even after controlling for a large number of characteristics of the type of business, the borrower and the market structure of the credit market. The result is not driven by women using a different type of bank than men, since the same bank charges different rates to male and female borrowers. Social capital does play a role: high levels of trust loosen credit conditions by lowering interest rates, but this benefit is not evenely distributed, as women benefit from increased socail capital less than men.

­­2­­160. Rustam Ibragimov and George Lentzas
Coupulas and Long Memory
Abstract | ­Pape­r
This paper focuses on the analysis of long-memory properties of copula-based time series. We show via simulations that there exist Clayton coupula-based stationarty Markov processes that exhibit long memory on the level of copulas. This long memory is captured by an extremly slow hyperbolic decay of copula-based dependence measures between lagged values of the process. In contrast, Gaussian and Eyrand-Farlie-Gumbel-Mongenstern copulas always produce short-memory stationary Markov processes. Application of copula-based Markov processes to volatility modeling captures both non-linear conditional time variation aas well as long memory, thus providing an attractive generalization of GARCH models.

­­2­­161. Edward L. Glaeser and Matthew E. Kahn
The Greenness of Cities: Carbon Dioxide Emissions and Urban Development
Abstract | ­Pape­r
Carbon dioxide emissions may create significant social harm because of global warming, yet American urban development tends to be in low density areas with very hot summers. In this paper, we attempt to quantify the carbon dioxide emmissions associated with new construction in different locations across the country. We look at emissions from driving, public transit, home heating, and household electricity use. We find that the lowest emissions areas are generally in California and that the highest emissions areas are in Texas and Oklahoma. There is a strong negative association between emissions and land use regulations. By restricting new development, the cleanest areas of the country would seem to be pusing new development towards places with higher emissions. Cities generally have significantly lower emissions than suburban areas, and the city-suburb gap is particularly large in older areas, like New York.

­­2­­162. Alberto Alesina and Ekaterina Zhuravskaya
Segregation and the quality of government in a corss-sectin of countries
Abstract | ­Pape­r
This paper has three goals. The first (and perhaps the most important one) is to provide a new compilation of data on ethnic, linguisic and religious composition and the sub-national level for a large number of countries. This data set allows us to measure segregation of different ethnic, religious and linguistic groups within the same country. The second goal is to correlate measures of segregation with measures of quality of the polity and policymaking. The third is to construct an instrument that helps to overcome the endogeneity problem due to the fact that groups move within country borders, partly in response to policies. Our results suggest taht more segregated countries in terms of ethnicity and language, i.e., those where groups live more spatially seperately, have a substantially lower quality of government. In contrast, there is no relationship between religious segregation and the government quality.

­­2­­163. N. Gregory Mankiw
Smart Taxes: An Open Invitation to Join the Pigou Club
Abstract | ­Pape­r
Many economists favor higher taxes on energy-related products such as gasoline, while the general public is more skeptical. This essay discusses various aspects of this policy debate. It focuses, in particular, on the use of these taxes to correct for various externalities--an idea advocated long ago by British economist Arthur Pigou.

­­2­­164. Alberto Alesina, Andrea Ichino, and Loukas Karabarbounis
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 women.  This holds when different elasticities between men and women are taken as exogenous and primitive.  We study GBT in a model in which, instead, elasticity differences emerge endogenously from the bargained allocation of family duties.  We explore two polar cases, which summarize the channels through which GBT affects an economy encompassing a wider set of possible reasons for gender differences.  In the first case, the allocation of family chores is uneven between spouses because men have a superior bargaining power.  In the second, instead, women take up more chores because they have a comparative advantage in household activities.  We show how GBT emerges as an optimal policy tool as result of the interaction between incentives within the family and the Ramsey criterion, which is internalized by the government but not by household members.

­­2­­165. Edward L. Glaeser and William R. Kerr
Local Industrial Conditions and Entrepreneurship: How Much of the Spatial Distribution Can We Explain?
Abstract | ­Pape­r
Why are some places more entrepreneurial than others? We use Census Bureau data to study local determinants of manufacturing startups across cities and industries. Demographics have limited explanatory power. Overall levels of local customers and suppliers are only modestly important, but new entrants seem particularly drawn to areas with many smaller suppliers, as suggested by Chintz (1961). Abundant workers in relevant occupations also strongly predict entry. These forces plus city and industry fixed efforts explain between sixty and eighty percent of manufacturing entry. We use spatial distributions of natural cost advantages to address partially endogeneity concerns.

­­2­­166. Edward L. Glaeser and Joshua D. Gottlieb
The Economics of Place-Making Policies
Abstract | ­Pape­r
Should the national government undertake policies aimed at strengthening the economies of particular localities or regions? Agglomeration economies and human capital spillovers suggest that such policies could enhance welfare.  However, the mere existence of agglomeration exerternalities does not indicate which places should be subsidized.  Without a better understanding of nonlinearities in these externalities, any government spatial policy is as likely to reduce as to increase welfare.  Transportation spending has historically done much to make or break particular places, but current transportation spending subsidized low-income, low-density places where agglomeration effects are likely to be weakest.  Most large-scale place-oriented policies have had little discernable impact.  Some targeted policies such as Empowerment Zones seem to have an effect but are expensive relative to their achievements.  The greatest promise for a national place-based policy lies in impeding the tendency of highly productive areas to restrict their own growth through restrictions on land use.

­­2­­167. Edward L. Glaeser and Charles Redlick
Social Capital and Urban Growth
Abstract | ­Pape­r
Social capital is often place-specific while schooling is portable, so the prospect of migration may reduce the returns to social capital and increase the returns to schooling. If social capital matters for urban success, it is possible that an area can get caught in a bad equilibrium where the prospect of out-migration reduces social capital investment and a lack of social capital investments makes out-migration more appealing. We present a simple model of that process and then test its implications. We find little evidence to suggest that social capital is correlated with returns to human capital across space, and a significant pattern of skilled people disproportionately leaving decling areas. For people in decling areas, the prospect of out-migration may increase the returns to investment in human capital, but it does not seem to impact investment in social capital.

­­2­­168. Edward L. Glaeser, Matt Resseger and Kristina Tobio
Urban Inequality
Abstract | ­Pape­r
What impact does inequality have on metropolitan areas? Crime rates are higher in places with more inequality, and people in unequal cities are more likely to say that they are unhappy. There is also a negative association between local inequality and the growth of both income and population, once we control for the initial distribution of skills. What determines the degree of inequality across metropolitan areas? Twenty years ago, metropolitan inequality was strongly associated with poverty, but today, inequality is more strongly linked to the presence of the wealthy. Inequality in skills can explain about one third of the variation in income inequality, and that skill inequality is itself explained by historical schooling patterns and immigration. There are also substantial differences in the returns to skill, related to local concentrations in different industries, and these too are strongly correlated with inequality.

­­2­­169. Alberto Alesina, Silvia Ardagna, and Vincenzo Galasso
The Euro and Structural Reforms
Abstract | ­Pape­r
This paper investigates whether or not the adoption of the Euro has facilitated the introduction of structural reforms, defined as deregulation in the product markets and liberalization and deregulation in the labor markets. After reviewing the theoretical arguments that may link the adoption of the Euro and structural reforms, we investigate the empirical evidence. We find that the adopiton of the Euro has been associated with an acceleration of the pace of structural reforms in the product market. The adoption of the Euro does not seem to have accelerated labor market reforms in the "primary labor market;" however, the run up to the Euro adoption seems to have been accompanied by wage moderation. We also investigate issues concerning the sequencing of goods and labor market reforms.