Racial Disparity in Federal Criminal Sentences
M. Marit Rehavi and Sonja B. Starr
Using rich data linking federal cases from arrest through to sentencing, we find that initial case and defendant characteristics, including arrest offense and criminal history, can explain most, but not all, of the large raw racial disparity in federal sentences. Across the sentence distribution, blacks receive sentences that are almost 10% longer than comparable whites arrested for the same crimes. Most of this disparity can be explained by prosecutors’ initial charging decisions, particularly the filing of charges carrying mandatory minimum sentences. Ceteris paribus, the odds of black arrestees facing such a charge are 1.75 times higher than those of white arrestees.
Young, Old, Conservative, and Bold: The Implications of Heterogeneity and Finite Lives for Asset Pricing
Nicolae Garleanu and Stavros Panageas
We study the implications of preference heterogeneity for asset pricing. We use recursive preferences in order to separate risk-aversion heterogeneity from IES heterogeneity, and an overlapping-generations framework to obtain a non-degenerate stationary equilibrium. We solve the model explicitly up to the solutions of ordinary differential equations, and highlight the effects of overlapping generations and each dimension of preference heterogeneity on the market price of risk, interest rates, and the volatility of stock returns. We find that separating IES and risk-aversion heterogeneity can have a substantive impact on the model's (qualitative and quantitative) ability to address some key asset pricing issues.
Competing for Consumer Inattention
Geoffroy de Clippel, Kfir Eliaz, and Kareen Rozen
Consumers purchase multiple types of goods, but may be able to examine only a limited number of markets for the best price. We propose a simple model which captures these features, conveying new insights. A firm's price can deflect or draw attention to its market, and consequently, limited attention introduces a new dimension of cross-market competition. We characterize the equilibrium, and show that having partially attentive consumers improves consumer welfare. With less attention, consumers are more likely to miss the best offers; but enhanced cross-market competition decreases average price paid, as leading firms try to stay under the consumers' radar.
Suspense and Surprise
Jeffrey Ely, Alexander Frankel, and Emir Kamenica
We model demand for non-instrumental information, drawing on the idea that people derive entertainment utility from suspense and surprise. A period has more suspense if the variance of the next period's beliefs is greater. A period has more surprise if the current belief is further from the last period's belief. Under these definitions, we analyze the optimal way to reveal information over time so as to maximize expected suspense or surprise experienced by a Bayesian audience. We apply our results to the design of mystery novels, political primaries, casinos, game shows, auctions, and sports.
Mechanism Design with Communication Constraints
Dilip Mookherjee and Masatoshi Tsumagiri
We consider mechanism design where message sets are restricted owing to communication costs, preventing full revelation of information. A Principal contracts with multiple agents each supplying a one-dimensional good at a privately known cost. We characterize optimal mechanisms subject to incentive and communication constraints, without imposing arbitrary restrictions on the number of communication rounds. We show mechanisms which centralize production decisions are strictly dominated by those which decentralize decision-making authority to agents, and optimal communication mechanisms maximize information exchanged directly among agents. Conditions are provided for these to involve gradual release of information over multiple rounds either simultaneously or sequentially.
Robust Comparative Statics in Large Dynamic Economies
Daron Acemoglu and Markin Kaae Jensen
We consider infinite horizon economies populated by a continuum of agents subject to idiosyncratic shocks. This framework contains models of saving and capital accumulation with incomplete markets in the spirit of works by Bewley, Aiyagari, and Huggett, and models of entry, exit and industry dynamics in the spirit of Hopenhayn's work as special cases. Robust and easy-to-apply comparative statics results are established with respect to exogenous parameters as well as various kinds of changes in the Markov processes. These results complement existing literature's numerical methods applied to this class of models and are illustrated using a number of examples.
Crime and the Depenalization of Cannabis Possession: Evidence from a Policing Experiment
Imran Rasul, Jerome Adda, and Brendon McConnell
We evaluate the impact on crime of a localized policing experiment that depenalized the possession of small quantities of cannabis in the London borough of Lambeth. We find that depenalization policy caused the police to reallocate effort towards non-drug crime. Despite the overall fall in crime attributable to the policy, we find the total welfare of local residents likely fell, as measured by house prices. We shed light on what would be the impacts on crime of a citywide depenalization policy, by developing and calibrating a structural model of the market for cannabis and crime.
Misconceptions and Game Form Recognition: Challenges to Theories of Revealed Preference and Framing
Timothy Cason and Charles Plott
This study explores the tension between the standard economic theory of preference and non-standard theories of preference that are motivated by an underlying theory of framing. A simple experiment fails to measure a known preference. The divergence of the measured preference from the known preference reflects a mistake, arising from some subjects' misconception of the game form. We conclude that choice data should not be granted an unqualified interpretation of preference revelation. Mistakes in choices can masquerade as having been produced by non-standard preferences and may reflect an error at the foundation of the theory of framing.
Personality Traits and the Marriage Market
Arnaud Dupuy and Alfred Galichon
Which and how many attributes are relevant for the sorting of agents in a matching market? This paper addresses these questions by constructing indices of mutual attractiveness that aggregate information about agents' attributes. The first k indices for agents on each side of the market provide the best approximation of the matching surplus by a k-dimensional model. The methodology is applied on a unique Dutch households survey containing information about education, height, BMI, health, attitude toward risk and personality traits of spouses.
Extensive and Intensive Investment over the Business Cycle
Boyan Jovanovic and Peter L. Rousseau
Investment of U.S. firms responds asymmetrically to Tobin's Q: investment of established firms—‘intensive’ investment—reacts negatively to Q whereas investment of new firms—‘extensive’ investment—responds positively and elastically to Q. This asymmetry, we argue, reflects a difference between established and new firms in the cost of adopting new technologies. A fall in the compatibility of new capital with old capital raises measured and reduces the incentive of established firms to invest. New firms do not face such compatibility costs and step up their investment in response to the rise in Q. The model is of an Ak endogenous-growth type and has two aggregate shocks: one to TFP and one to the cost of investment. The model fits the data reasonably well using aggregates since 1900.
Productive Cities: Sorting, Selection, and Agglomeration
Kristian Behrens, Gilles Duranton, and Frederic Robert-Nicoud
Large cities produce more output per capita than small cities. This higher productivity may occur because more talented individuals sort into large cities, because large cities select more productive entrepreneurs and firms, or because of agglomeration economies. We develop a model of systems of cities that combines all three elements and suggests interesting complementarities between them. The model can replicate stylized facts about sorting, agglomeration, and selection in cities. It also generates Zipf's law for cities under empirically plausible parameter values. Finally, it provides a useful framework within which to reinterpret extant empirical evidence.
The Nature of Countercyclical Income Risk
Fatih Guvenen, Serdar Ozkan, and Jae Song
This paper studies the nature of business cycle variation in individual earnings risk using a unique and confidential dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2011. We use these data to decompose individual earnings growth during recessions into “between-group” and “within-group” components. We begin with the behavior of within-group (idiosyncratic) shocks. Contrary to past research, we do not find the variance of idiosyncratic earnings shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses—large upward earnings movements become less likely—whereas the bottom end expands—large drops in earnings become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left skewed and, hence, risky during recessions. Second, to study between group differences, we group individuals based on several observable characteristics at the time a recession hits. One of these characteristics—the average earnings of an individual at the beginning of a business cycle episode—proves to be a good predictor of fortunes during a recession: prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings (which is not the case during expansions). Finally, we find that the cyclical nature of earnings risk is dramatically different for the top 1 percent compared with all other individuals—even relative to those in the top 2-5 percent.
Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge Massachusetts
David H. Autor, Christopher J. Palmer, andParag A. Pathak
Externalities from the attributes and actions of neighborhood residents onto the value of surrounding properties and neighborhoods are central to the theory of urban economics and the development of efficient housing policy. This paper measures the capitalization of housing market externalities into residential housing values by studying the sudden and largely unanticipated 1995 elimination of stringent rent controls in Cambridge, Massachusetts, which had previously muted landlords’ incentives to invest in their properties and altered the assignment of residents to locations. Pooling administrative data on the universe of assessed values and transacted prices of all Cambridge residential properties between 1988 and 2005, we find that rent decontrol generated substantial, robust price appreciation at decontrolled units and nearby never-controlled units, accounting for an estimated 30 percent of the $7.8 billion in Cambridge residential property appreciation during this period. The majority of this contribution is due to induced appreciation of never-controlled properties, while residential investments can explain only a small fraction of the total.
Jan Eeckhout, Roberto Pinheiro, and Kurt Schmidheiny
We investigate the role of complementarities in production and skill mobility across cities. We propose a general equilibrium model of location choice by heterogeneously-skilled workers, and consider different degrees of complementarities between the skills of workers. The nature of the complementarities determines the equilibrium skill distribution across cities. We prove that with extreme-skill complementarity, the skill distribution has thicker tails in large cities; with top-skill complementarity, there is first-order stochastic dominance. Using the model to back out skills from wage and housing price data, we find robust evidence of thick tails in large cities: large cities disproportionally attract both high and low-skilled workers, while average skills are constant across city size. This pattern of spatial sorting is consistent with extreme-skill complementarity, where the productivity of high-skilled workers and of the providers of low skilled services is mutually enhanced.
Dynamic Inputs and Resource (Mis)Allocation
John Asker, Allan Collard-Wexler, and Jan De Loecker
We investigate the role of dynamic production inputs and their associated adjustment costs in shaping the dispersion of static measures of capital misallocation within industries (and countries). Across 9 datasets, spanning 40 countries, we find that industries exhibiting greater time-series volatility of productivity have greater cross-sectional dispersion of the marginal revenue product of capital. We use a standard investment model with adjustment costs to show that variation in the volatility of productivity across these industries and economies can explain a large share (80-90%) of the cross-industry (and cross-country) variation in the dispersion of the marginal revenue product of capital.
“A” Business by Any Other Name: Firm Name Choice as a Signal of Firm Quality
Ryan C. McDevitt
This paper considers when a firm's deliberately chosen name can signal meaningful information. The average plumbing firm whose name begins with “A” or a number receives five times more service complaints than other firms, and also charges higher prices. Relatedly, plumbers with “A” names advertise more in the Yellow Pages and on Google, and doing so is positively correlated with receiving complaints. As the use of “A” names is more prevalent in larger markets, I reconcile these findings with a simple model in which firms have heterogeneous qualities and consumers have heterogeneous search costs.
The Private Returns to Public Office
Raymond Fisman, Florian Schulz, and Vikrant Vig
We study the wealth accumulation of Indian state politicians using public disclosures required of all candidates. The annual asset growth of winners is 3-5 percent higher than runners-up, a difference that holds also in a set of close elections. The relative asset growth of winners is greater in more corrupt states and for those holding ministerial positions. These results are consistent with a rent-seeking explanation for the relatively high rate of growth in winners' assets.
Communication in Federal Politics: Universalism, Policy Uniformity, and the Optimal Allocation of Fiscal Authority
Anke S. Kessler
The paper presents a positive model of communication in federal legislatures to study the incentives of members to engage in a meaningful exchange of information, and how this shapes policy outcomes. Depending on the type of policy under consideration, communication between delegates generally suffers from a bias that makes truthful revelation difficult and sometimes impossible. This generates inefficient policy choices at the federal level that are often are endogenously characterized by overspending, universalism and uniformity. Building on these findings, I develop a simple theory of fiscal decentralization, which revisits Oates’ (1972) decentralization theorem in a world of incomplete information and strategic communication. Empirical results from a cross section of U.S. municipalities are consistent with the predicted pattern of spending.
Implications of an Economic Theory of Conflict: Hindu-Muslim Violence in India
Anirban Mitra and Debraj Ray
We model inter-group conflict driven by economic changes within groups. We show that if group incomes are low, increasing group incomes raises violence against that group, and lowers violence generated by it. We then apply the model to data on Hindu-Muslim violence in India. Our main result is that an increase in per-capita Muslim expenditures generates a large and significant increase in future religious conflict. An increase in Hindu expenditures has negative or no effect. These findings speak to the origins of Hindu-Muslim violence in post-Independence India.
Aligning Learning Incentives of Students and Teachers: Results from a Social Experiment in Mexican High Schools
Jere R. Behrman, Susan W. Parker, Petra E. Todd, and Kenneth I. Wolpin
This paper evaluates the impact of three different performance incentives schemes using data from a social experiment that randomized 88 Mexican high schools with over 40,000 students into three treatment groups and a control group. Treatment one provides individual incentives for performance on curriculum-based mathematics tests to students only, treatment two to teachers only and treatment three gives both individual and group incentives to students, teachers and school administrators. Program impact estimates reveal the largest average effects for treatment three, smaller impacts for treatment one and no impact for treatment two.
Estimating the Cream Skimming Effect of School Choice
Joseph G. Altonji, Ching-I Huang, and Christopher R. Taber
We derive a simple formula that may be used to determine the degree to which a school choice program may harm public school stayers by luring the best students to other schools. The formula shows that the “cream-skimming” effect is increasing in the degree of heterogeneity within schools, the school choice take up rate of strong students relative to weak students, and the dependence of school outcomes on student body quality. We use the formula to investigate the cream skimming effect of hypothetical voucher programs on the high school graduation rate and other outcomes of the students who would remain in public school. We employ NELS:88 data to measure the characteristics of public school students, to estimate a model of the private school entrance decision, and to estimate student body effects on graduation. We supplement the econometric estimates with a wide range of alternative assumptions about school choice and student body effects. We find that the cream skimming effect is small and that this result is robust across a wide variety of model specifications and types of modest voucher programs.
Implementing the "Wisdom of the Crowd"
Ilan Kremer, Yishay Mansour, and Motty Perry
We study a novel mechanism design model in which agents each arrive sequentially and choose one action from a set of actions with unknown rewards. The information revealed by the principal affects the incentives of the agents to explore and generate new information.
We characterize the optimal disclosure policy of a planner whose goal is to maximize social welfare. One interpretation of our result is the implementation of what is known as the "wisdom of the crowd". This topic has become increasingly relevant with the rapid spread of the Internet over the past decade.
A Nation of Immigrants: Assimilation and Economic Outcomes in the Age of Mass Migration
Ran Abramitzky, Leah Platt Boustan, and Katherine Eriksson
During the Age of Mass Migration (1850-1913), the US maintained an open border, absorbing 30 million European immigrants. Prior cross-sectional work finds that immigrants initially held lower-paid occupations than natives but converged over time. In newly-assembled panel data, we show that, in fact, the average immigrant did not face a substantial occupation-based earnings penalty upon first arrival and experienced occupational advancement at the same rate as natives. Cross-sectional patterns are driven by biases from declining arrival cohort quality and departures of negatively-selected return migrants. We show that assimilation patterns vary substantially across sending countries and persist in the second generation.
Comment on the Campbell-Cochrane Habit Model
Lars Ljungqvist and Harald Uhlig
Campbell and Cochrane (1999) formulate a model that successfully explains a wide variety of asset pricing puzzles, by augmenting the standard power utility function with a time-varying “external habit,” that adapts nonlinearly to current and past average consumption in the economy. We demonstrate that their preference specification has the unusual implications that habit can move negatively with consumption, and that reductions in consumption can increase welfare. As a result, government interventions that occasionally destroy part of the aggregate endowment can lead to substantial welfare improvements.
Coagglomeration, Clusters, and the Scale and Composition of Cities
Robert W. Helsley and William C. Strange
Cities are neither completely specialized nor completely diverse. However, prior research has focused almost entirely on the polar cases of complete specialization and complete diversity. This paper develops a model that can also generate the intermediate case of cities that feature the coagglomeration of some but not all industries, thus giving theoretical foundations to the analysis of business clusters. The analysis sharply challenges the conventional wisdom that the size and composition of cities are necessarily driven primarily by agglomerative efficiencies.
Disease and Development Revisited
David E. Bloom, David Canning, and Günther Fink
Acemoglu and Johnson (2007) present evidence that improvements in population health do not promote economic growth. We show that their result depends critically on the assumption that initial health has no causal effect on subsequent economic growth. We argue that such an effect is likely, primarily because childhood health affects adult productivity. In our augmented model, which includes initial health, the instrumental variable proposed by Acemoglu and Johnson has no significant predictive power for improvements in health and does not identify the effect of contemporaneous improvements in health on economic growth.
Disease and Development: A Reply to Bloom, Canning, and Fink
Daron Acemoglu and Simon Johnson
Bloom, Canning, and Fink (2014) argue that the results in Acemoglu and Johnson (2006,
2007) are not robust because initial level of life expectancy (in 1940) should be included in our regressions of changes in GDP per capita on changes in life expectancy. We assess their claims controlling for potential lagged effects of initial life expectancy using data from 1900, employing a nonlinear estimator suggested by their framework, and using information from microeconomic estimates on the effects of improving health. There is no evidence for a positive effect of life expectancy on GDP per capita in this important historical episode.