OQOUARTERLY JOURNAL OF ECONOMICS FOUNDED 1886 VOLUME CXX Board of Editors Robert J. Barro Edward L. Glaeser Lawrence F. Katz Assistant Editor Harriet E. Hoffman PUBLISHED FOR HARVARD UNIVERSITY BY THE MIT PRESS, CAMBRIDGE, MASSACHUSETTS 2005 CONTENTS FOR VOLUME CXX Authors AGHION, PHILIPPE, NICK BLooM, RICHARD BLUNDELL, RACHEL GRIFFITH, AND PETER Howitt. Competition and Innovation: An Inverted-U Relationship AGHION, PHILIPPE, PETER Howitt, AND Davip MAYER-FOULKES. The Effect of Financial Development on Convergence: Theory and Evidence ALMOND, DouGLas, KENNETH Y. CHAY, AND Davin S. Leg. The Costs of Low Birth AUSTEN-SMITH, DAVID, AND ROLAND G. FRYER, JR. An Economic Analysis of “Acting White” BAICKER, KATHERINE, AND DOUGLAS STAIGER. Fiscal Shenanigans, Targeted Fed- eral Health Care Funds, and Patient Mortality BANDIERA, ORIANA, IWAN BARANKAY, AND IMRAN RASUL. Social Preferences and the Response to Incentives: Evidence from Personnel Data BARANKAY, IWAN, ORIANA BANDIERA, AND IMRAN RASUL. Social Preferences and the Response to Incentives: Evidence from Personnel Data BarRO, ROBERT J., AND RACHEL M. McC.eary. Which Countries Have State IT, ais asscaiccicasiisaidecdnlespesisbibcticninsncosscdcsnotesakesrsaniusecaunemedieesachasininnannaee BENMELECH, EFRAIM, MARK J. GARMAISE, AND ToBIAS J. Moskow!ITz. Do Liquida- tion Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation BERNANKE, BEN S., JEAN BOoIvIN, AND PioTR ELIASZ. Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach BLack, SANDRA E., PAUL J. DEVEREUX, AND KJELL G. SALVANES. The More the Merrier? The Effect of Family Size and Birth Order on Children’s Education BLoom, Nick, PHILIPPE AGHION, RICHARD BLUNDELL, RACHEL GRIFFITH, AND PETER Howitt. Competition and Innovation: An Inverted-U Relationship BLUNDELL, RICHARD, PHILIPPE AGHION, NICK BLOOM, RACHEL GRIFFITH, AND PETER Howitt. Competition and Innovation: An Inverted-U Relationship Boivin, JEAN, BEN S. BERNANKE, AND PIoTR ELIASz. Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach Brown, Craic O., AND I. SerpAR Dinc. The Politics of Bank Failures: Evidence from Emerging Markets Cuay, KENNETH Y., DOUGLAS ALMOND, AND Davin S. LEE. The Costs of Low Birth CuHeTTY, RAJ, AND EMMANUEL SAEZ. Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut COHEN, RANDOLPH B., CHRISTOPHER POLK, AND TUOMO VUOLTEENAHO. Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis CURRIE, JANET AND MATTHEW NEIDELL. Air Pollution and Infant Health: What Can We Learn from California’s Recent Experience? .................::ccccssseeeeeeees DEVEREUX, PauL J., SANDRA E. BLACK, AND KJELL G. SALVANES. The More the Merrier? The Effect of Family Size and Birth Order on Children’s Education Din¢, I. SERDAR, AND CRAIG O. Brown. The Politics of Bank Failures: Evidence from Emerging Markets vi CONTENTS FOR VOLUME CXX ELIASz, Piotr, BEN S. BERNANKE, AND JEAN BOIvIN. Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Ap- proach ELLISON, GLENN. A Model of Add-on Pricing FEENSTRA, ROBERT C., AND GORDON H. HANSON. Ownership and Control in Out- sourcing to China: Estimating the Property-Rights Theory of the Firm FERNANDEZ, RAQUEL, NEZIH GUNER, AND JOHN KNOWLES. Love and Money: A Theoretical and Empirical Analysis of Household Sorting and Inequality . FRYER, JR., ROLAND G., AND DAviID» AUSTEN-SMITH. An Economic Analysis of “Acting White” FUCHS-SCHUNDELN, NICOLA, AND MATTHIAS SCHUNDELN. Precautionary Savings and Self-Selection: Evidence from the German Reunification “Experiment”. 1085 GARMAISE, MARK J., EFRAIM BENMELECH, AND TosiAS J. Moskowitz. Do Liquida- tion Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation 1121 GHIRONI, FABIO, AND Marc J. MELITz. International Trade and Macroeconomic Dynamics with Heterogeneous Firms 865 GLAESER, EDWARD L. The Political Economy of Hatred 45 GLAESER, EDWARD L., GiAcoMo A. M. PONZETTO, AND JESSE M. SHAPIRO. Strategic Extremism: Why Republicans and Democrats Divide on Religious Values . 1283 GRIFFITH, RACHEL, PHILIPPE AGHION, N!cK BLOOM, RICHARD BLUNDELL, AND PETER Howitt. Competition and Innovation: An Inverted-U Relationship 701 GROSECLOSE, TIM, AND JEFFREY MILyo. A Measure of Media Bias ....................... 1191 GROSSMAN, GENE M., AND ELHANAN HELPMAN. A Protectionist Bias in Majoritar- ian Politics 1239 GUNER, NEZIH, RAQUEL FERNANDEZ, AND JOHN KNOWLES. Love and Money: A Theoretical and Empirical Analysis of Household Sorting and Inequality . 273 HANSON, GORDON H., AND RoBerT C. FEENSTRA. Ownership and Control in Out- sourcing to China: Estimating the Property-Rights Theory of the Firm 729 Harstap, BARD. Majority Rules and Incentives 1535 HELPMAN, ELHANAN, AND GENE M. GROSSMAN. A Protectionist Bias in Majoritar- ian Politics 1239 Howitt, PETER, PHILIPPE AGHION, AND DaAviD MAYER-FOULKES. The Effect of Financial Development on Convergence: Theory and Evidence Howi!1T, PETER, PHILIPPE AGHION, NICK BLOoM, RICHARD BLUNDELL, AND RACHEL GRIFFITH. Competition and Innovation: An Inverted-U Relationship IMBS, JEAN, HAROON MuMTAZ, MoRTEN O. RAVN, AND HELENE REY. PPP Strikes Back: Aggregation and the Real Exchange Rate ..................:ccccccssseeesecesseeees JONES, BENJAMIN F., AND BENJAMIN A. OLKEN. Do Leaders Matter? National Leadership and Growth Since World War II JONES, CHARLES I. The Shape of Production Functions and the Direction of Technical Change Katz, LAWRENCE F., JEFFREY R. KLING, AND JENS LupwiG. Neighborhood Effects on Crime for Female and Male Youth: Evidence from a Randomized Hous- ing Voucher Experiment KHwaJA, ASIM IJAz, AND ATIF MIAN. Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market KLING, JEFFREY R., JENS LUDWIG, AND LAWRENCE F. Katz. Neighborhood Effects on Crime for Female and Male Youth: Evidence from a Randomized Hous- ing Voucher Experiment KNOWLES, JOHN, RAQUEL FERNANDEZ, AND NEZIH GUNER. Love end Money: A Theoretical and Empirical Analysis of Household Sorting and Inequality . LEE, David S., DouGLAS ALMOND, AND KENNETH Y. CHay. The Costs of Low Birth CONTENTS FOR VOLUME CXX LERNER, JOSH, AND ANTOINETTE SCHOAR. Does Legal Enforcement Affect Finan- cial Transactions? The Contractual Channel in Private Equity LEVIN, JONATHAN, AND STEVEN TADELIS. Profit Sharing and the Role of Profes- sional Partnerships Levy, GiLaT. The Politics of Public Provision of Education LLAVADOR, HUMBERTO, AND ROBERT J. Oxosy. Partisan Competition, Growth, and the Franchise LUDWIG, JENS, JEFFREY R. KLING, AND LAWRENCE F. Katz. Neighborhood Effects on Crime for Female and Male Youth: Evidence from a Randomized Hous- ing Voucher Experiment LuTTMER, Erzo F. P. Neighbors as Negatives: Relative Earnings and Well- MAYER-FOULKES, DAVID, PHILIPPE AGHION, AND PETER Howitt. The Effect of Financial Development on Convergence: Theory and Evidence McCLeary, RACHEL M., AND RoBert J. BARRO. Which Countries Have State INL... scinsncisnsieedisoabatshnnndiihcbuniiiaantttteecnh snaiLa saabtni tetsediiaaaiss deicsthinadine ds MELITz, Marc J., AND FaBio GHIRONI. International Trade and Macroeconomic Dynamics with Heterogeneous Firms MIAN, ATIF, AND Asim Ijaz KHwaJA. Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market MILYO, JEFFREY, AND TIM GROSECLOSE. A Measure of Media Bias Moskowitz, TosiAs J., EFRAIM BENMELECH, AND MARK J. GARMAISE. Do Liquida- tion Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation MULLIGAN, CASEY B., AND ANDREI SHLEIFER. The Extent of the Market and the Supply of Regulation Mumtaz, HAROON, JEAN IMBs, MoRTEN O. RAvN, AND HELENE REY. PPP Strikes Back: Aggregation and the Real Exchange Rate NEIDELL, MATTHEW, AND JANET CurRRIE. Air Pollution and Infant Health: What Can We Learn from California’s Recent Experience? ..................:.ccccsseceeeeeees OLKEN, BENJAMIN A., AND BENJAMIN F. JONES. Do Leaders Matter? National Leadership and Growth Since World War II ORNELAS, EMANUEL. Rent Destruction and the Political Viability of Free Trade Agreements OsTER, EMILY. Sexually Transmitted Infections, Sexual Behavior, and the HIV/ AIDS Epidemic Oxosy, ROBERT J., AND HUMBERTO LLAVADOR. Partisan Competition, Growth, and the Franchise POLK, CHRISTOPHER, RANDOLPH B. COHEN, AND TUOMO VUOLTEENAHO. Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis PoNnzETTO, Giacomo A. M., EpwarpD L. GLAESER, AND JESSE M. SHAPIRO. Strategic Extremism: Why Republicans and Democrats Divide on Religious Values . RASUL, IMRAN, ORIANA BANDIERA, AND IWAN BARANKAY. Social Preferences and the Response to Incentives: Evidence from Personnel Data Ravn, Morten O., JEAN IMBS, HAROON MUMTAZ, AND HELENE REY. PPP Strikes Back: Aggregation and the Real Exchange Rate Rey, HELENE, JEAN IMBs, HAROON MUMTAZ, AND MortTEN O. Ravn. PPP Strikes Back: Aggregation and the Real Exchange Rate SAEZ, EMMANUEL, AND RAJ CHETTY. Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut SALVANES, KJELL G., SANDRA E. BLACK, AND PAUL J. DEVEREUX. The More the Merrier? The Effect of Family Size and Birth Order on Children’s Education ScHoAR, ANTOINETTE, AND JOSH LERNER. Does Legal Enforcement Affect Finan- cial Transactions? The Contractual Channel in Private Equity Vili CONTENTS FOR VOLUME CXX SCHUNDELN, MATTHIAS, AND NICOLA FUCHS-SCHUNDELN. Precautionary Savings and Self-Selection: Evidence from the German Reunification “Experiment”. SHAPIRO, JESSE M., EDWARD L. GLAESER, AND GIACOMO A. M. PONZETTO. Strategic Extremism: Why Republicans and Democrats Divide on Religious Values . SHLEIFER, ANDREI, AND CASEY B. MULLIGAN. The Extent of the Market and the Supply of Regulation Sinai, ToDD, AND NICHOLAS S. SOULELES. Owner-Occupied Housing as a Hedge against Rent Risk STAIGER, DOUGLAS, AND KATHERINE BAICKER. Fiscal Shenanigans, Targeted Fed- eral Health Care Funds, and Patient Mortality STEIN, JEREMY C. Why Are Most Funds Open-End? Competition and the Limits of Arbitrage TADELIS, STEVEN, AND JONATHAN LEVIN. Profit Sharing and the Role of Profes- I ia aac En dg idan ne paca napunann eapwasionsbbannaibdaedhd VUOLTEENAHO, TUOMO, RANDOLPH B. COHEN, AND CHRISTOPHER POLK. Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis YOUNG, ALWYN. The Gift of the Dying: The Tragedy of AIDS and the Welfare of Future African Generations Titles Air Pollution and Infant Health: What Can We Learn from California’s Recent Experience?. Janet Currie and Matthew Neidell Competition and Innovation: An Inverted-U Relationship. Philippe Aghion, Nick Bloom, Richard Blundell, Rachel Griffith, and Peter Howitt The Costs of Low Birth Weight. Douglas Almond, Kenneth Y. Chay, and David I IIE Si ili lveedaa gsi descent an in al aioli iacatancaenrek An ccoaciaiitoesiinaa aiaahdaainigescaicgadios Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut. Raj Chetty and Emmanuel Saez Do Leaders Matter? National Leadership and Growth Since World War II. Benjamin F. Jones and Benjamin A. Olken Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market. Asim Ijaz Khwaja and Atif Mian Do Liquidation Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation. Efraim Benmelech, Mark J. Gar- maise, and Tobias J. Moskowitz Does Legal Enforcement Affect Financial Transactions? The Contractual Chan- nel in Private Equity. Josh Lerner and Antoinette Schoar An Economic Analysis of “Acting White.” David Austen-Smith and Roland G. I fac srdealt aicnscck cc canmca culpa thcocies otcaceseaabecctietersaiinaincrndaepnsiansiahnsoessoannansne bedaiine The Effect of Financial Development on Convergence: Theory and Evidence. Philippe Aghion, Peter Howitt, and David Mayer-Foulkes ........................... The Extent of the Market and the Supply of Regulation. Casey B. Mulligan and Andrei Shleifer Fiscal Shenanigans, Targeted Federal Health Care Funds, and Patient Mortal- ity. Katherine Baicker and Douglas Staiger The Gift of the Dying: The Tragedy of AIDS and the Welfare of Future African Generations. Alwyn Young International Trade and Macroeconomic Dynamics with Heterogeneous Firms. Fabio Ghironi and Marc J. Melitz Love and Money: A Theoretical and Empirical Analysis of Household Sorting and Inequality. Raquel Fernandez, Nezih Guner, and John Knowles ......... Majority Rules and Incentives. Bard Harstad CONTENTS FOR VOLUME CXX A Measure of Media Bias. Tim Groseclose and Jeffrey Milyo Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autore- gressive (FAVAR) Approach. Ben S. Bernanke, Jean Boivin, and Piotr A Model of Add-on Pricing. Glenn Ellison Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis. Randolph B. Cohen, Christopher Polk, and Tuomo Vuolteenaho The More the Merrier? The Effect of Family Size and Birth Order on Children’s Education. Sandra E. Black, Paul J. Devereux, and Kjell G. Salvanes Neighborhood Effects on Crime for Female and Male Youth: Evidence from a Randomized Housing Voucher Experiment. Jeffrey R. Kling, Jens Ludwig, and Lawrence F. Katz Neighbors as Negatives: Relative Earnings and Well-Being. Erzo F. P. Luttmer Owner-Occupied Housing as a Hedge against Rent Risk. Todd Sinai and Nicholas S. Souleles Ownership and Control in Outsourcing to China: Estimating the Property- Rights Theory of the Firm. Robert C. Feenstra and Gordon H. Hanson Partisan Competition, Growth, and the Franchise. Humberto Llavador and Robert J. Oxoby The Political Economy of Hatred. Edward L. Glaeser The Politics of Bank Failures: Evidence From Emerging Markets. Craig O. Brown and I. Serdar Ding The Politics of Public Provision of Education. Gilat Levy PPP Strikes Back: Aggregation and the Real Exchange Rate. Jean Imbs, Haroon Mumtaz, Morten O. Ravn, and Helene Rey Precautionary Savings and Self-Selection: Evidence from the German Reunifi- cation “Experiment.” Nicola Fuchs-Schiindeln and Matthias Schtndeln Profit Sharing and the Role of Professional Partnerships. Jonathan Levin and Steven Tadelis A Protectionist Bias in Majoritarian Politics. Gene M. Grossman and Elhanan Helpman Rent Destruction and the Political Viability of Free Trade Agreements. Emanuel! IOI ccevsiscicsemncaiansanianitdibnatelivlipioniepenascopsbioulsqesiuie eueipduaaeianiatatni dade ae Sexually Transmitted Infections, Sexual Behavior, and the HIV/AIDS Epidemic. Emily Oster The Shape of Production Functions and the Direction of Technical Change. CIS GBI bance cntn snsniensinircisibtatinieetinedehacpbtonichaneitaasinanailiaaammaninaae Social Preferences and the Response to Incentives: Evidence from Personnel Data. Oriana Bandiera, Iwan Barankay, and Imran Rasul Strategic Extremism: Why Republicans and Democrats Divide on Religious Values. Edward L. Glaeser, Giacomo A. M. Ponzetto, and Jesse M. Shapiro Which Countries Have State Religions?. Robert J. Barro and Rachel M. Mc- Why Are Most Funds Open-End? Competition and the Limits of Arbitrage. Jeremy C. Stein