Knowledge that Transforms

Charness et al. (2007b) have shown that group membership has a strong effect on individual decisions in strategic games when group membership is salient through payoff commonality. In this comment, I show that their findings also apply to nonstrategic decisions, even when no outgroup exists, and I relate the effects of group membership on individual decisions to joint decision making in teams. I find in an investment experiment that individual decisions with salient group membership are largely the same as team decisions. This finding bridges the literature on team decision making and on group membership effects.

This reply refutes the objection raised by Levy (2009) about the fit of the upper tail of the city size distribution in Eeckhout (2004). I show that the method on which his conclusion is based is unsubstantiated. The visual interpretation of the fit on log-log plots is misleading. In addition, the methodology used to estimate a truncated subsample of the distribution while testing its significance against a distribution with prespecified parameters is ill-founded. The main conclusion is that Gibrat's law holds: city sizes follow proportionate growth, thus giving rise to a lognormal size distribution, tail included.

Perhaps the crowning achievement of mature democracies is the peaceful acceptance of the ballot box as the primary instrument for deciding who should hold power in society. We do not have to go far back in the history of most democratic states, however, to find a distinct role for political violence. Moreover, many inhabitants of the globe still remain at risk of falling prey to widespread violence in the struggle for political office. Forms of political violence differ a great deal. We focus on two important manifestations: repression and civil war distinguished by whether violence is one-sided or two-sided. We present a unified approach to studying these forms of political violence with common roots in poverty, natural resource rents, and weak political institutions. First, we lay out rudimentary model to analyze whether violence will occur and, if so, manifest itself as repression or civil war. Three regimes — peace, repression and civil war — emerge as alternative equilibrium outcomes in the interaction between an incumbent government and an opposition group. Moreover, the theory suggests a natural ordering of these regimes. We then construct empirical measures of repression and civil war, which we map into ordered variables as suggested by the theory. We investigate how the regime depends on economic and political variables, using an ordered logit model defined over the three regimes. Our estimation results indicate a strong correlation between low incomes, weak political institutions and both forms of political violence.

Identifying Preferences under Risk from Discrete Choices by Pierre-Andre Chiappori, Amit Gandhi, Bernard Salanie and Francois Salanie. Published in volume 99, issue 2, pages 356-62 of American Economic Review, May 2009

This paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents: prospecting for customers and advising on the product's “suitability” for the specific needs of customers. When structuring salesforce compensation, firms trade off the expected losses from “misselling” unsuitable products with the agency costs of providing marketing incentives. We characterize how the equilibrium amount of misselling (and thus the scope of policy intervention) depends on features of the agency problem including: the internal organization of a firm's sales process, the transparency of its commission structure, and the steepness of its agents' sales incentives.

We estimate a principal-agent model of moral hazard with longitudinal data on firms and managerial compensation over two disjoint periods spanning 60 years to investigate increased value and variability in managerial compensation. We find exogenous growth in firm size largely explains these secular trends in compensation. In our framework, exogenous firm size works through two channels. First, conflicts of interest between shareholders and managers are magnified in large firms, so optimal compensation plans are now more closely linked to insider wealth. Second, the market for managers has become more differentiated, increasing the premium paid to managers of large versus small firms.

Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008 by Maurice Obstfeld, Jay C. Shambaugh and Alan M. Taylor. Published in volume 99, issue 2, pages 480-86 of American Economic Review, May 2009

We examine the evolutionary foundations of intertemporal preferences. When all the risk affecting survival and reproduction is idiosyncratic, evolution selects for agents who maximize the discounted sum of expected utility, discounting at the sum of the population growth rate and the mortality rate. Aggregate uncertainty concerning survival rates leads to discount rates that exceed the sum of population growth rate and death rate, and can push agents away from exponential discounting.

We explore patterns of vertical integration in the US airline industry. Major airlines subcontract portions of their network to regional partners, which may or may not be owned. We investigate if ownership economizes on ex post renegotiation costs. We estimate whether airlines are more likely to use owned regionals on city pairs with adverse weather (which makes adaptation decisions more frequent) and on city pairs that are more integrated into the major's network (which raises the costs of having adaptation decisions resolved suboptimally). Our results suggest a robust empirical relationship between adaptation and vertical integration in this setting.

What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs by Victor Stango and Jonathan Zinman. Published in volume 99, issue 2, pages 424-29 of American Economic Review, May 2009