Abstract In both corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms and across time, and OLS standard errors can be biased. Historically, the two literatures have used different solutions to this problem. Corporate finance has relied on clustered standard errors, while asset pricing has used the Fama-MacBeth procedure to estimate standard errors. This paper examines the different methods used in the literature and explains when the different methods yield the same (and correct) standard errors and when they diverge. The intent is to provide intuition as to why the different approaches sometimes give different answers and give researchers guidance for their use.

Microeconometrics researchers have increasingly realized the essential need to account for any within-group dependence in estimating standard errors of regression parameter estimates. The typical preferred solution is to calculate cluster-robust or sandwich standard errors that permit quite general heteroskedasticity and within-cluster error correlation, but presume that the number of clusters is large. In applications with few (5-30) clusters, standard asymptotic tests can overreject considerably. We investigate more accurate inference using cluster bootstrap-t procedures that provide asymptotic refinement. These procedures are evaluated using Monte Carlos, including the much-cited differences-in-differences example of Bertrand, Mullainathan and Duflo (2004). In situations where standard methods lead to rejection rates in excess of ten percent (or more) for tests of nominal size 0.05, our methods can reduce this to five percent. In principle a pairs cluster bootstrap should work well, but in practice a wild cluster bootstrap performs better.

We study the effect of the level of inequality in society on individual well-being using a total of 123,668 answers to a survey question about ‘‘happiness’’. We find that individuals have a lower tendency to report themselves happy when inequality is high, even after controlling for individual income, a large set of personal characteristics, and year and country (or, in the case of the US, state) dummies. The effect, however, is more precisely defined statistically in Europe than in the US. In addition, we find striking differences across groups. In Europe, the poor and those on the left of the political spectrum are unhappy about inequality; whereas in the US the happiness of the poor and of those on the left is uncorrelated with inequality. Interestingly, in the US, the rich are bothered by inequality. Comparing across continents, we find that left-wingers in Europe are more hurt by inequality than left-wingers in the US. And the poor in Europe are more concerned with inequality than the poor in America, an effect that is large in terms of size but is only significant at the 10% level. We argue that these findings are consistent with the perception (not necessarily the reality) that Americans have been living in a mobile society, where individual effort can move people up and down the income ladder, while Europeans believe that they live in less mobile societies.

The fraction of U.S. college graduate women entering professional programs increased substantially just after 1970, and the age at first marriage among all U.S. college graduate women began to soar around the same year. We explore the relationship between these two changes and the diffusion of the birth control pill ("the pill") among young, unmarried college graduate women. Although the pill was approved in 1960 by the Food and Drug Administration and spread rapidly among married women, it did not diffuse among young, single women until the late 1960s after state law changes reduced the age of majority and extended "mature minor" decisions. We present both descriptive time series and formal econometric evidence that exploit cross-state and cross-cohort variation in pill availability to young, unmarried women, establishing the "power of the pill" in lowering the costs of long-duration professional education for women and raising the age at first marriage. The careers of college graduate women and their age at first marriage both changed significantly in the United States with cohorts born around 1950. Women were 10 percent of first-year law students in 1970 We have benefited from conversations and communications with

This paper studies the impact of a regional free trade agreement, MERCOSUR, on technology upgrading by Argentinean firms. To guide empirical work, I introduce technology choice in Melitz’s (2003) model of trade with heterogeneous firms. The joint treatment of the technology adoption and exporting choices shows that the increase in revenues produced by trade integration can induce exporters to upgrade technology. An empirical test of the model reveals that firms in industries facing higher reductions in Brazil’s import tariffs increase their investment in technology faster and exporters upgrade technology faster than other firms in the same industry. This paper is a revised version of the second chapter of my Ph.D. dissertation at Harvard University. I would like to thank my advisors Philippe Aghion, Pol Antras, Elhanan Helpman and Marc Melitz for their guidance and support. For helpful suggestions and comments, I also wish to thank Ivan Fernandez-Val, Manuel

Building on an idea in Abadie and Gardeazabal (2003), this article investigates the application of synthetic control methods to comparative case studies. We discuss the advantages of these methods and apply them to study the effects of Proposition 99, a large-scale tobacco control program that California implemented in 1988. We demonstrate that, following Proposition 99, tobacco consumption fell markedly in California relative to a comparable synthetic control region. We estimate that by the year 2000 annual per-capita cigarette sales in California were about 26 packs lower than what they would have been in the absence of Proposition 99. Using new inferential methods proposed in this article, we demonstrate the significance of our estimates. Given that many policy interventions and events of interest in social sciences take place at an aggregate level (countries, regions, cities, etc.) and affect a small number of aggregate units, the potential applicability of synthetic control methods to comparative case studies is very large, especially in situations where traditional regression methods are not appropriate.

Are There Civic Returns to Education? “…since the achievement of American Independence, the universal and ever-repeated argument in favor of Free Schools has been, that the general intelligence which they are capable of diffusing, and which can be imparted by no other human instrumentality, is indispensable to a republican form of government.” Horace Mann (1846)

We estimate the rebound effect for motor vehicles, by which improved fuel efficiency causes additional travel, using a pooled cross section of US states for 1966-2001. Our model accounts for endogenous changes in fuel efficiency, distinguishes between autocorrelation and lagged effects, includes a measure of the stringency of fuel-economy standards, and allows the rebound effect to vary with income, urbanization, and the fuel cost of driving. At sample averages of variables, our simultaneous-equations estimates of the short- and long-run rebound effect are 4.5 % and 22.2%. But rising real income caused it to diminish substantially over the period, perhaps aided by falling fuel prices. With variables at 1997-2001 levels, our estimates are only 2.2 % and 10.7%, considerably smaller than values typically assumed for policy analysis. The point estimates suggest that the rebound effect would remain constant if real incomes continue to grow and fuel prices were to grow about 3.5 times as fast. JEL-codes: Keywords:

A central assumption in public finance is that individuals optimize fully with respect to the incentives created by tax policies. In this paper, we test this assumption using two empirical strategies. First, we conducted an experiment at a grocery store where we posted tax-inclusive prices for 750 products subject to sales tax for a three week period. Using scanner data, we find that posting tax-inclusive prices reduced demand by roughly 8 percent among the treated products relative to control products and stores. Second, we find that state-level increases in excise taxes (which are included in posted prices) reduce aggregate alcohol consumption signi…cantly more than increases in sales taxes (which are added at the register and hence less salient). Both sets of results indicate that tax salience a¤ects behavioral responses. We propose a bounded rationality model to explain why salience matters, and show that it matches our evidence as well as several additional stylized facts. In the model, agents incur second-order (small) utility losses from ignoring some taxes, even though these taxes have first-order (large) effects on social welfare and government revenue. Using this theoretical framework, we develop elasticity-based formulas for the efficiency cost and incidence of commodity taxes when agents do not optimize fully.

This paper uses a unique dataset from Denmark to investigate the impact of family characteristics in corporate decision making, and the consequences of these decisions on firm performance. We focus on the decision to appoint either a family or an external chief executive officer (CEO). The paper uses variation in CEO succession decisions that result from the gender of a departing CEO’s first-born child. This is a plausible instrumental variable (IV) as male firstchild firms are more likely to pass on control to a family CEO relative to female first-child firms, but the gender of a first child is unlikely to affect firms ’ outcomes. We find that family successions have a large negative causal impact on firm performance: operating profitability on assets falls by at least four percentage points around CEO transitions. Our IV estimates are significantly larger than those obtained using ordinary least squares. Furthermore, we show that family-CEO underperformance is particularly large for firms in high-growth industries and for relatively large firms. Overall, the empirical results demonstrate that professional non-family CEOs provide extremely valuable services to the organizations they head.