Prior research has examined audit pricing for publicly held firms and provided some evidence of a Big 8 premium in pricing. We investigate audit pricing among private firms, and provide evidence that private firms do not pay such a premium on average. The relatively greater degree of dispersion in auditor choice (between Big 5 and non-Big 5 auditors) in our large sample of privately held audit clients allows us to predict the auditor choice for each firm and to control for potential self-selection. We reject the null hypothesis that clients are randomly allocated across Big 5 and non-Big 5 auditors. Using standard OLS regressions, we document a Big 5 premium; however this premium vanishes once we control for self-selection bias. Moreover, we find that client firms choosing Big 5 auditors generally would have faced higher fees had they chosen non-Big 5 auditors, given their firm-specific characteristics. Our results are consistent with audit markets for private firms being segmented along cost-effective lines. Further, our results suggest that auditees in our setting do not, on average, view Big 5 auditors as superior in terms of the perceived quality of the services provided to a degree significant enough to warrant a fee premium.

This article discusses the matching concept in accounting as defined by the 1964 Concepts and Standards Research Study Committee of the American Accounting Association. The committee first considered whether the matching convention is still a useful concept to guide financial reporting practices. Since the fundamental long-term objective of a business entity is to earn a profit, this financial data, to be most meaningful, should include information about profit determinants, including costs and revenues. Only by including these data can the reasons for and the extent of progress of the entity toward its primary objective be disclosed. Following this thought a bit further, one's judgment regarding the effectiveness of a specific effort is improved if it can be related to its contribution toward the recognized objective of the entity. In business operations, costs, defined as resources given up or economic sacrifices made are incurred with the anticipation that they will produce revenue in excess of the outlay. Within this frame of reference, one can then say that costs constitute one measure of business effort, and revenues represent accomplishments coming from those efforts.

Why wealth is systematically lower in the tropics remains a puzzle. We point out that latitude may have fundamental economic consequence because it plays a key role in how countries experience geophysical processes that have economic implications. We demonstrate that annual fluctuations in the El Nino Southern Oscillation (ENSO) leads to hotter and dryer local weather across tropical countries and subsequently to substantial losses in agricultural yields, output, and value-added. If volatility in agricultural production impedes economic growth, the relatively stronger influence of ENSO on the tropics may offer yet another partial explanation for slower historical growth in the tropics.

According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current short-term rate. Put differently, longer-term yields matter. We show how to measure the zero bound's effects on yields of any maturity. Indeed, 1- and 2-year Treasury yields were surprisingly unconstrained throughout 2008 to 2010, suggesting that monetary and fiscal policy were about as effective as usual during this period. Only beginning in late 2011 did these yields become more constrained.

We utilize time series tests with structural breaks to test for an adverse impact on economic growth rates in North Africa associated with the recent US financial crisis and global recession. One or two breaks are identified for each country, except for Morocco where no break is found, while breaks coincide with the 2008 financial crisis in only two of the six countries (Libya and Mauritania). These findings suggest that, in general, shocks from the recent financial crisis have only temporary effects on economic growth in these countries. Impulse response functions with breaks confirm these results. We conclude by suggesting explanations for these findings.

Many individuals' choices and valuations involve a degree of uncertainty/imprecision. This paper reports an experiment designed to obtain some measure of imprecision and to examine the extent to which it can explain preference reversals of two opposite forms, one of which appears not to have been reported previously. The model of imprecision we examine not only predicts both patterns but also provides an account of earlier results that are otherwise not well explained. The results suggest that any successful descriptive theory of choice and valuation will need to allow in some way for the imprecision surrounding people's decisions.

High nominal gas prices, new awareness of threats to national security, and growing concern about global warming have reignited discussion of ways to reduce gasoline consumption in the United States. Debate centers on changing two policies already in place: the federal gas tax and Corporate Average Fuel Economy (CAFE) standards. Two influential recent reports find that increasing the gas tax would attain a given reduction in gas consumption at lower cost than would tightening CAFE standards (National Research Council, 2002; Congressional Budget Office, 2003). The gas tax has this advantage because it encourages not just increases in fuel efficiency, but also reductions in miles driven. In contrast, CAFE standards actually encourage more driving, because increases in fuel efficiency reduce the cost of gas per mile driven. We also compare the costs of the gas tax and CAFE standard but take into account interactions with preexisting tax distortions. Many papers examine the effects of these tax interactions in other contexts, but to our knowledge none of them considers the CAFE standard (see e.g., Lars Bovenberg and Ruud de Mooij, 1994; Ian Parry, 1995; Lawrence Goulder, 1995; Bovenberg and Goulder, 1996; Parry et al., 1999; Don Fullerton and Gilbert Metcalf, 2001). These interactions reduce the cost of the gas tax but increase the cost of CAFE, thus expanding the cost advantage enjoyed by the gas tax. This difference does not arise because the gas tax raises revenue, while the CAFE standard does not. Rather, this result is similar to that in West and Williams (2004a), which showed that, since gasoline and leisure are relative complements, raising the gas tax will increase labor supply, generating additional efficiency gains. In this paper, we estimate a consumer demand system using data from the Consumer Expenditure Survey and the California Air Resources Board and find that miles driven and leisure are relative complements. Thus, the gas tax encourages labor supply by raising the cost per mile driven, producing an additional efficiency gain. Conversely, because CAFE reduces the cost per mile, it discourages labor supply and yields an additional efficiency loss. While the induced changes in labor supply are tiny relative to the labor market, they are still substantial relative to the gas market and thus have a dramatic effect on the relative costs of the two policies. Our point estimates imply that they reduce the social marginal cost of the gas tax (starting from the status quo gas tax rate and ignoring the benefits of reduced gas consumption) by almost 30 percent, while increasing the marginal cost of CAFE by nearly 60 percent. This result implies that the case for raising the gas tax rather than tightening the CAFE standard is far stronger than previous studies suggest. Indeed, it strongly suggests that any tightening at all of the CAFE standard would lower welfare unless the benefits of reduced gas consumption have been seriously underestimated.

Aggregation Bias in the Factor Content of Trade: Evidence from U.S. Manufacturing by Robert C. Feenstra and Gordon H. Hanson. Published in volume 90, issue 2, pages 155-160 of American Economic Review, May 2000

Increasing economic interdependence can perhaps best be defined as a growing impact of external events on national economies. One of its major implications for research is that all national economic models must be opened to encompass meaningfully the foreign sector. Economists in most countries have opened their models long ago, but most American economists have not. Yet the share of exports in the U.S. economy has doubled in the last fifteen years, and the share of imports has doubled in just seven years. These U.S. ratios (about 7 percent, and still rising rapidly) are now only slightly below the same ratios in Japan and the European Common Market as a group (about 9 percent, and fairly stable). In addition, about one-third of the profits of U.S. corporations now derive from overseas activities, primarily their foreign direct investments. If these profits are taken into account along with trade, the U.S. economy has probably become more open than Japan or Western Europe (as a unit) in quantitative terms. Even the absolute numbers are impressive: the U.S. trade balance, excluding the effects of the rise in oil prices, strengthened by at least $35 billion from 1972 through 1975-without which our gross national product would have been over two percentage points lower. This openness has become critically important for U.S. economic policy. The overvaluation of the dollar was adding almost one full percentage point to the U.S. unemployment rate in 1971. External factors accounted for one-quarter to onehalf of the rise in the rate of inflation from 1972 through 1974 (Richard Berner, Peter Clark, J. Enzler and Barbara Lowrey). The United States can no longer export its internal inflation through the operation of a dollar-based system of fixed exchange rates as it did to a significant degree in the late 1960's (Bergsten 1976). Oil and food are only the most obvious examples of external shocks to particular U.S. economic sectors. About 20 percent of U.S. industrial production and over one-third of U.S. farm output are exported. The United States already imports more than 50 percent of its needs of nine of the thirteen key industrial raw materials. Closed models can no longer accurately depict or forecast the U.S. economy at either the macroeconomic or sectoral levels-.

We propose a robust method of discrete choice analysis when agents' choice sets are unobserved. Our core model assumes nothing about agents' choice sets apart from their minimum size. Importantly, it leaves unrestricted the dependence, conditional on observables, between choice sets and preferences. We first characterize the sharp identification region of the model's parameters by a finite set of conditional moment inequalities. We then apply our theoretical findings to learn about households' risk preferences and choice sets from data on their deductible choices in auto collision insurance. We find that the data can be explained by expected utility theory with low levels of risk aversion and heterogeneous non‐singleton choice sets, and that more than three in four households require limited choice sets to explain their deductible choices. We also provide simulation evidence on the computational tractability of our method in applications with larger feasible sets or higher‐dimensional unobserved heterogeneity.