The american economic review

ARTICLES JORDIGALÍ Monetary Policy and Rational Asset Price Bubbles

EM1 NAKAMURA AND JÓN STE1NSSON Fiscal Stimulus in a Monetary Union: Evidence from US Regions

GITA GOP1NATH AND BRENT NE1MAN Trade Adjustment and Productivity in Large Crises

PIERRE DUBOIS, RACHEL GR1FFITH, AND AV1V NEVO Do Prices and Attributes Explain Internatíonal Differences in Food Purchases?

DAVID BESANKO, ULR1CH DORASZELSK1, AND YAROSLAV KRYUKOV The Economics of Predation: What Drives Pricing When There Is Learning-by-Doing?

YANN BRAMOULLÉ, RACHEL KRANTON, Strategic Interactlon and Networks

AND MARTIN D'AMOURS

JEFFREY R. BROWN, STEPHEN G. DIMMOCK, JUN-KOO KANG, AND SCOTT J. WE1SBENNER How University Endowments Respond to Financial Market Shocks: Evidence and Implícatíons

..

::.~

SHORTER PAPERS: R. Hornbeck and S. Naidu; D. J. Deming, J. S. Hastings, T. J. Kane, and D. O. Stàiger; S. Eriksson and D.-O. Rooth; P. Apps, Y. Andrienko, and R. Rees; L. Petersen and A. Winn; E. Fehr and J."R. Tyran; J. Iversen and U. Sodersrrõm

MARCH 2014

THE AMERICAN ECONOMIC ASSOCIATION Founded in 1885 EXECUTIVE COMMITTEE Elected Officers and Members President WILLIAM D. NORDHAUS, Yale University • Typeset by American Economic Association lications. Pinsburgh, Pennsylvania, USA

Pub-

President-elect RICHARD H. THALER, University of Chicago

Vice Presidents • Printed at RR Donnelley City. Missouri. USA

Company,

Jefferson

• Registered in the US Patent and Trademark Office® • Copyright© 2014 by the American Economic Association. Permission to make digital ar hard copies of pan ar alI of American Economic Association publications for personal or c1assroom use is granted without fee provided that copies are not distribuied for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the na me of the author, Copyrights for components of this work owned by others than AEA must be honored. Abstracting witb credit is permitted. Tbe author has the right to republish, post on servers, redistribute to lists and use any component of this work in other works. For others to do 50 requires prior specific permission and/or a fee. Permissions may be requested frorn the American Economic Association, 2014 Braadway, Suite 305, Nashville, TN 37203.

• No responsibility for the views expressed by authars in this Review is assumed by the editors or the publishers, The American Economic Association.

DAVID CARD, University ofCalifomia at Berkeley N. GREGORY MANKIW, Harvard University

Members ANIL K KASHYAP, University of Chicago ROSA L. MATZKIN, University of California at Los Angeles AMY N. FINKELSTEIN, Massachusetts Institute ofTechnology JONATHAN LEVIN, Stanford University DORA L. COSTA, University of Califomia at Los Angeles GUmO w. IMBENS, Stanford University

Ex Officio Members CLAUDIA GOLDIN, Harvard University CHRISTOPHER A. SIMS, Princeton University

Appointed Members Editor, The American Economic Review PINELOPI KOUJIANOU

GOLDBERG,

STEVEN N. DURLAUF, University ofWisconsin

Editor; The Journal of Economic Perspectives

oxvm

H. AUTOR, Massachusetts

Institute ofTechnology

Editor; American Economic Journal: Applied Economics ESTHER DUFLO, Massachusetts

Correspondence relating to advertising, business matters, perrn issioris t'!"IUÓié, back issues, subscriptions, and changes of'address, should be sent to the Arnericarr Economic Association, 2014 Broadway, Suite 305, Nashville, TN 37203. Change of address notice must be received at least six (6) weeks prior to the publication month. A membership ar subscription paid twice is automatically extended for an additional year unless otherwise requested.

Yale University

Editor, The Journal of Economic Literature

Institute ofTechnology

Editor; American Economic Journal: Economic Policy MATIHEW

D. SHAPIRO, University ofMichigan

Editor, American Economic Journal: Macroeconomics JOHN LEAHY, NewYork University

Editor, American Economic Journal: Microeconomics ANDREW POSTLEWAITE,

University ofPennsylvania

Secretary- Treasurer PETER L. ROUSSEAU, Vanderbilt University THE AMERICAN ECONOMIC REVIEW (ISSN 0002-8282), March 2014, Vol. lO4, No. 3. The AER is published 12 times a year (monthly, January thraugh December) by the American Economic Association, 2014 Broadway, Suite 305, Nashville, TN 37203. Annual fees for regular membership are: $20.00, $30.00, ar $40.00, depending on income; for an additional fee, you can receive this journal, or any of the Association's journals, in print. Further information on subscriptions and the American Economic Association can be found at www.vanderbilr.edu/AEA/.

Periodical postage paid at Nashvi lIe, TN and at additional mailing offiees.

POSTMASTER: Send address changes to The American Economic Review, 2014 Broadway, Suite 305, Nashville, TN 37203. Printed in the USA.

OTHER OFFICERS Editor, Resources for Economists WILLIAM GOFFE, State University ofNewYork JANE EMILY VOROS, Pittsburgh

Managing Director of EconLit Product Design and Content STEVEN L. HUSTED, University of Pittsburgh

Assistant Secretary- Treasurer JOHN J. SIEGFRIED, Vanderbilt University and University of Adelaide

Counsel TERRY CALVANI, Freshfields Bruckhaus Deringer LLP Washington, DC

ADMINISTRATORS

f:j

FSC

Administrative MIX Paperfrom responsible sources

FSC" C101537

at Oswego

Director of AEA Publication Services

Director

REGINA H. MONTGOMERY

Convention Manager MARLENE HlGHT

HAROLD DEMSETZ DISTINGUISHED

FELLOW

2013 Harold Demsetz is one of the most creative and deep microeconomists of the twentieth century. Several of his contributions anticipated subsequent research by years or even decades and have offered unusualIy insightfĂşl analyses of fundamental problems of economic theory.

Demsetz's most famous paper, "Production, Information Costs, and Economic Organization," written with Armen Alchian, is one of the most cited papers in all of economics. Published in the American Economic Review in 1972, it analyzes the fundamental question first raised by Coase, "What is a firm?", and tries to understand the difference between contracts occurring inside the firm (for example, with employees) and those occurring in the market (for example, with customers). Alchian and Demsetz argue that some contracts are efficiently brought inside the firm because doing so reduces the costs of monitoring of performance, especialIy when production occurs in teams.

Alchian and Demsetz's approach has been chalIenged by more recent developments, such as Grossman and Hart (1986), but remains a elassic in the theory ofthe firmo In 1968, Demsetz asked the question "Why regulate utilities?" and argued that it is more efficient to get potential suppliers to compete in prices and terms by offering customers contracts than to control prices. Demsetz's framing of the problem has become the dominant approach to the modern theory of regulation; see, for example, Laffont and Tirole (1993).

In the same year, Demsetz published "The Cost of Transacting" in the Quarterly Journal of Economics, which raised fundamental questions about the determinants of transaction costs, and empiricalIy documented the negative relationship between transaction costs and trading volume on different stocks on the New York Stock Exchange. The enormous subfield of finance now known as market microstructure begins with this hugely original artiele.

In 1967, Demsetz published a short but tremendously insightful artiele in the American Economic Review, titled "Toward a Theory of Property Rights," in which he analyzed the amount of property rights protection from the efficiency perspective. The artiele argued that property rights are expensive to enforce, and that institutions enforcing them arise efficiently when the benefit of secure property rights outweighs the costs of these institutions. Today, the economic study of institutions is a massive field, and Demsetz's artiele can be justly seen as a founding contribution.

In 1985, together with Kenneth Lehn, Demsetz published an empirical artiele in the Journal of Political Economy, titled "The Structure of Corporate Ownership: Causes and Consequences." In that artiele, the authors •.document high ownership concentration of US firms in some sectors, such as newspapers and sports teams, and argue that the amenity potential of running these businesses (now known as "private benefits of control") explains ownership concentration. In modern corporate finance, concentrated corporate ownership is seen as a norm rather than an exception, and private benefits of.control as central determinants of ownership structures. Here again, Demsetz's work carne early and accurately grasped both the empirical reality and the fundamental theoretical issues.

The number of are as in which Harold Demsetz's contributions have stood the test of time is remarkable. His work is highly original, independent of prevailing intelIectual currents, and enduring.

HAROLD DEMSETZ

THE

AMERICAN

ECONOMIC

REVIEW

March 2014 Editor PINELOPI KOUJIANOU GOLDBERG

VOLUME

104,

Coeditors MARKAGUIAR MARIANNE BERTRAND MARTIN EICHENBAUM HILARY HOYNES LUIGI PISTAFERRI DEBRAJRAY LARRY SAMUELSON ANDRZEJSKRZYPACZ

Managing Editor

NUMBER

3 COTA

Articles

f,jQit

M

1~~J~j

N? EX._.----.

Monetary Policy and Rational Asset Price Bubbles U j\!'l .

Jordi Galí 721 Fiscal Stimulus in a Monetary Union: Evidence from US Regions Emi Nakamura and lón Steinsson

753

Trade Adjustment and Productivity in Large Crises Gita Gopinath and Brent Neiman

793

Do Prices and Attributes Explain International Differences in Food Purchases?

Pierre Dubois, Rachei Griffith, and Aviv Nevo

832

The Economics of Predation: What Drives Pricing When There Is Learning-by-Doing?

David Besanko, Ulrich Doraszelski, and Yaroslav Kryukov

868

Strategic Interaction and Networks Yann Bramoullé, Rachei Kranton, and Martin D'Amours

898

How University Endowments Respond to Financial Market Shocks: Evidence and Implications leffrey R. Brown, Stephen G. Dimmock, lun-Koo Kang, and Scott 1. Weisbenner

931

STEVEN M. STELLING

Assistant Managing Editor KELLY MARKEL

Board of Editors MANUEL AMADOR POLANTRÀS MARCO BASSETTO SIMONBOARD CRAIG BURNSIDE ARIEL BURSTEIN STEVEN CALLANDER SYLVAIN CHASSANG DIRK ENGELMANN TIMOTHY FEDDERSEN MICHAEL FISHMAN WILLIAM FUCHS GITA GOPINATH GAUTAM GOWRISANKARAN VERONICA GUERRIERI IGALHENDEL SEEMA JAYACHANDRAN SHACHAR KARIV NAVIN KARTIK BRIAN KNIGHT ILANKREMER ARVIND KRISHNAMURTHY JONATHAN LEVIN GILATLEVY BARTLIPMAN HAMISHLOW SHELLY LUNDBERG MATTHEW MITCHELL DILIP MOOKHERJEE GIUSEPPE MOSCARINI TED O'DONOGHUE PHILIP OREOPOULOS JONATHAN PARKER PARAG PATHAK NINA PAVCNIK FABRlZIO PERRI RICARDO REIS JESSE ROTHSTEIN RAJIVSETHI JÓN STEINSSON AMIR SUFI CHRISTOPHER TIMMINS SARAH TURNER ERIC VERHOOGEN LISE VESTERLUND LEEATYARIV

Shorter Papers When the Levee Breaks: Black Migration and Economic Development in the American South Richard Hornbeck and Suresh; 'Naidu

/963

School Choice, School Quality, and Postsecondary Attainment David 1. Deming, lustine S. Hastings, Thomas 1. Kane, anel.Douglas O. Staiger

991

Do Employers Use Unemployment as a Sorting Criterion When Hiring? Evidence from a Field Experiment Stefan Eriksson and Dan-Olof Rooth

1014

Risk and Precautionary Saving in Two-Person Households Patricia Apps, Yuri Andrienko, and Ray Rees

1040

Does Money Illusion Matter?: Comment Luba Petersen and Abel Winn

1047

Ernst Fehr and Jean-Robert Tyran

1063

Does Money Illusion Matter?: Reply

The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models: Comment Jens Iversen and Ulf Sõderstrõm

•••

.::::.

.........•

1072

11;0,-

,

;

-

-

...

Information on how to submit a manuscript is available online: http://www.aeaweb.org/aer/submissions.php It is the policy of The American Economic Review to publish papers only if the data used in the analysis are c1early and precisely documented and are readily available to any researcher for purposes of replication. Details of the computations sufficient to permit replication must be provided. The Editor should be notified at the time of submission if the data used in a paper are proprietary or if, for some other reason, the requirements above cannot be met.