Template-Type: ReDIF-Paper 1.0 Author-Name: Jonathan A. Parker Author-X-Name-First: Jonathan Author-X-Name-Last: Parker Author-Workplace-Name: Princeton University and NBER Author-Name: Christian Julliard Author-X-Name-First: Christian Author-X-Name-Last: Julliard Author-Workplace-Name: Princeton University Title: Consumption Risk and the Cross-Section of Expected Returns Abstract: This paper evaluates the central insight of the Consumption Capital Asset Pricing Model (CCAPM) that an asset?s expected return is determined by its equilibrium risk to consumption. Rather than measure the risk of a portfolio by the contemporaneous covariance of its return and consumption growth ? as done in the previous literature on the CCAPM and the pattern of crosssectional returns ? we measure the risk of a portfolio by its ultimate consumption risk defined as the covariance of its return and consumption growth over the quarter of the return and many following quarters. While contemporaneous consumption risk explains little of the variation in observed average returns across the Fama and French 25 portfolios, ultimate consumption risk at a horizon of three years explains a large fraction of this variation. Creation-Date: 2004-03 File-URL: http://personal.lse.ac.uk/julliard/papers/CRCSER.pdf Number: 138 Classification-JEL: G12, G11, E21 Keywords: Consumption Capital Asset Pricing Model, Expected returns, Equity premium, Consumption risk, Consumption smoothing Handle: RePEc:pri:wwseco:dp229.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Ricardo Reis Author-X-Name-First: Ricardo Author-X-Name-Last: Reis Author-Workplace-Name: Princeton University, NBER, and CEPR Title: The time-series properties of aggregate consumption: implications for the costs of fluctuations Abstract: While this is typically ignored, the properties of the stochastic process followed by aggregate consumption affect the estimates of the costs of fluctuations. This paper pursues two approaches to modelling aggregate consumption dynamics and to measuring how much society dislikes fluctuations, one statistical and one economic. The statistical approach estimates the properties of consumption and calculates the cost of having consumption fluctuating around its mean growth. The paper finds that the persistence of consumption is a crucial determinant of these costs and that the high persistence in the data severely distorts conventional measures. It shows how to compute valid estimates and confidence intervals. The economic approach uses a calibrated model of optimal consumption and measures the costs of eliminating income shocks. This uncovers a further cost of uncertainty, through its impact on precautionary savings and investment. The two approaches lead to costs of fluctuations that are higher than the common wisdom, between 0.5% and 5% of per capita consumption. Creation-Date: 2005-04 File-URL: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.594.4103&rep=rep1&type=pdf Number: 134 Classification-JEL: E32, E21, E60 Keywords: Costs of fluctuations; Models of aggregate consumption; Consumption persistence Handle: RePEc:pri:wwseco:dp233.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Ricardo Reis Author-X-Name-First: Ricardo Author-X-Name-Last: Reis Author-Workplace-Name: Princeton University, NBER, and CEPR Title: Inattentive Consumers Abstract: This paper studies the consumption decisions of agents who face costs of acquiring, absorbing and processing information. These consumers rationally choose to only sporadically update their information and re-compute their optimal consumption plans. In between updating dates, they remain inattentive. This behavior implies that news disperses slowly throughout the population, so events have a gradual and delayed effect on aggregate consumption. The model predicts that aggregate consumption adjusts slowly to shocks, and is able to explain the excess sensitivity and excess smoothness puzzles. In addition, individual consumption is sensitive to ordinary and unexpected past news, but it is not sensitive to extraordinary or predictable events. The model further predicts that some people rationally choose to not plan, live hand-to-mouth, and save less, while other people sporadically update their plans. The longer are these plans, the more they save. Evidence using U.S. aggregate and microeconomic data generally supports these predictions. Creation-Date: 2004-10 File-URL: http://economics.yale.edu/sites/default/files/files/Workshops-Seminars/Macroeconomics/reis-040907.pdf Number: 135 Classification-JEL: E2, D9, D1, D8 Handle: RePEc:pri:wwseco:dp232.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Roland Benabou Author-X-Name-First: Roland Author-X-Name-Last: Benabou Author-Workplace-Name: Princeton University, CEPR and NBER Author-Name: Jean Tirole Author-X-Name-First: Jean Author-X-Name-Last: Tirole Author-Workplace-Name: IDEI and GREMAQ, Toulouse, CERAS, Paris, and MIT Title: Incentives and Prosocial Behavior Abstract: We build a theory of prosocial behavior that combines heterogeneity in individual altruism and greed with concerns for social reputation or self-respect. The presence of rewards or punishments creates doubt as to the true motive for which good deeds are performed, and this overjustification effect can result in a net crowding out of prosocial behavior by extrinsic incentives. The model also allows us to identify settings that are conducive to multiple social norms of behavior, and those where disclosing one?s generosity may backfire. Finally, we analyze the equilibrium contracts offered by sponsors, including the level and confidentiality or publicity of incentives. Sponsor competition may cause rewards to bid down rather than up, and can even reduce social welfare by requiring agents to engage in inefficient sacrifices. Creation-Date: 2004-08 File-URL: https://www.princeton.edu/~rbenabou/papers/AER%202006.pdf Number: 137 Classification-JEL: D64, D82, H41, Z13 Keywords: altruism, rewards, motivation, overjustification effect, crowding out, identity, social norms Handle: RePEc:pri:wwseco:dp230.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Vijay Krishna Author-X-Name-First: Vijay Author-X-Name-Last: Krishna Author-Workplace-Name: Penn State University Author-Name: John Morgan Author-X-Name-First: John Author-X-Name-Last: Morgan Author-Workplace-Name: Princeton University Title: A Model of Expertise Abstract: We study a model in which two perfectly informed experts offer advice to a decision maker whose actions affect the welfare of all. Experts are biased and thus may wish to pull the decision maker in different directions and to different degrees. When the decision maker consults only a single expert, the expert withholds substantial information from the decision maker. We ask whether this situation is improved by having the decision maker consult a cabinet of (two) experts. We first show that there is no perfect Bayesian equilibrium direction, it is never beneficial to consult both. In contrast, when experts are biased in opposite directions, it is always beneficial to consult both. Finally, a cabinet of extremists is of no value. Creation-Date: 1999-01 File-URL: http://faculty.haas.berkeley.edu/rjmorgan/Experts%20Final%20QJE%20Version.pdf Number: 154 Classification-JEL: D82 Handle: RePEc:pri:wwseco:dp206.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Eric Noevdal Author-X-Name-First: Eric Author-X-Name-Last: Noevdal Author-Workplace-Name: Princeton University and Agricultural University of Norway Author-Name: Jason F. Shogren Author-X-Name-First: Jason Author-X-Name-Last: Shogren Author-Workplace-Name: University of Wyoming Title: Genetic Variability, Economic Behavior and the Formation of Social Norms: The Case of European Alcohol Consumption Abstract: Alcohol consumption patterns vary across Europe. Northern Europeans frequently engage in excessive drinking in social situations (EDSS), behavior less common in southern Europe. We develop a model to explore whether these behavioral differences could be rooted in genetic variations across Europe and then compounded by social reinforcement mechanisms. Our results suggest conditions exist in which EDSS can emerge as a strategy in a larger fraction of the population than is genetically predisposed to EDSS. Implications for the current effort to harmonize alcohol policy across the European Union are explored. Creation-Date: 2004-06 File-URL: https://www.med.uio.no/helsam/forskning/nettverk/hero/publikasjoner/skriftserie/2006/HERO2006_7.pdf Number: 139 Classification-JEL: I12, Z13 Keywords: genetics, substance abuse, social norms, adaptive preferences; European Union Handle: RePEc:pri:wwseco:dp228.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Jonathan A. Parker Author-X-Name-First: Jonathan Author-X-Name-Last: Parker Author-Workplace-Name: Princeton University and NBER Author-Name: Bruce Preston Author-X-Name-First: Bruce Author-X-Name-Last: Preston Author-Workplace-Name: Columbia University Title: Precautionary Saving and Consumption Fluctuations Abstract: This paper uses the consumption Euler equation to derive a decomposition of consumption growth into four sources. These are new information and three sources of predictable consumption growth: intertemporal substitution, changes in the preferences for consumption, and incomplete markets for consumption insurance. Using data on the expenditures of households, we implement the decomposition for the average growth rate of consumption expenditures on nondurable goods in the U.S. from the beginning of 1982 to the end of 1997. Incomplete markets for trading consumption in future states lead to statistically significant and countercyclical movements in expected consumption growth: consumption growth is expected to be higher when the unemployment rate is high. The economic importance of precautionary saving rivals that of the real interest rate, but the relative importance of each source of movement in the volatility of consumption is not precisely measured. Creation-Date: 2004-03 File-URL: https://mitsloan.mit.edu/shared/ods/documents/?DocumentID=4175 Number: 140 Classification-JEL: E21 Handle: RePEc:pri:wwseco:dp227.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Roland Benabou Author-X-Name-First: Roland Author-X-Name-Last: Benabou Author-Workplace-Name: Princeton University, NBER, CEPR, IRP and BREAD Title: Inequality, Technology, and the Social Contract Abstract: The distribution of human capital and income lies at the center of a nexus of forces that shape a country's economic, institutional and technological structure. I develop here a unified model to analyze these interactions and their growth consequences. Five main issues are addressed. First, I identify the key factors that make both European-style "welfare state" and US-style laissez-faire social contracts sustainable.; I also compare the growth rates of these two politico-economic steady states, which are no Pareto-rankable. Second, I examine how technological evolutions affect the set of redistributive institutions that can be durably sustained, showing in particular how skill-biased technical change may cause the welfare state to unravel. Third, I model the endogenous determination of technology or organizational form that results from firms? tailoring the flexibility of their production processes to the distribution of workers' skills. The greater is human capital heterogeneity, the more flexible and wage-disequalizing is the equilibrium technology. Moreover, firms? choices tend to generate excessive flexibility, resulting in suboptimal growth or even self-sustaining technology-inequality traps. Fourth, I examine how institutions also shape the course of technology; thus, a world-wide shift in the technology frontier results in different evolutions of production processes and skill premia across countries with different social contracts. Finally, I ask what joint configurations of technology, inequality and redistributive policy are feasible in the long run, when all three are endogenous. I show in particular how the diffusion of technology leads to the ?exporting? of inequality across borders; and how this, in turn, generates spillovers between social contracts that make it more difficult for nations to maintain distinct institutions and social structures. Creation-Date: 2003-12 File-URL: https://www.princeton.edu/~rbenabou/papers/handbook4.pdf Number: 141 Classification-JEL: D31, O33, J3, H10 Keywords: inequality, welfare state, technical change, skill bias, human capital, redistribution, social contract, political economy Handle: RePEc:pri:wwseco:dp226.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Gene M. Grossman Author-X-Name-First: Gene Author-X-Name-Last: Grossman Author-Workplace-Name: Princeton University Author-Name: Elhanan Helpman Author-X-Name-First: Elhanan Author-X-Name-Last: Helpman Author-Workplace-Name: Harvard University, Tel Aviv University, and CIAR Author-Name: Adam Szeidl Author-X-Name-First: Adam Author-X-Name-Last: Szeidl Author-Workplace-Name: Harvard University Title: Optimal Integration Strategies for the Multinational Firm Abstract: We examine integration strategies of multinational firms that face a rich array of choices of international organization. Each firm in an industry must provide headquarter services from its home country, produce intermediate inputs, and assemble the intermediate goods into final products. Both production of intermediate goods and assembly can be performed at home, in another Northern country, in the low-wage South, or in several of these locations. We study the equilibrium choices of firms that differ in productivity (and thus size), focusing on the role of industry characteristics such as the fixed costs of foreign subsidiaries, the cost of transporting intermediate and final goods, and the share of the consumer market that resides in the South in determining optimal integration strategies. Creation-Date: 2003-11 File-URL: http://www.personal.ceu.hu/staff/Adam_Szeidl/papers/integration.pdf Number: 142 Classification-JEL: F23, F12, L22 Keywords: direct foreign investment, multinational corporations, intra-firm trade, vertical integration Handle: RePEc:pri:wwseco:dp225.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Roland Benabou Author-X-Name-First: Roland Author-X-Name-Last: Benabou Author-Workplace-Name: Princeton University Author-Name: Efe A. Ok Author-X-Name-First: Efe Author-X-Name-Last: Ok Author-Workplace-Name: New York University Title: Mobility as Progressivity: Ranking Income Processes According to Equality of Opportunity Abstract: Interest in economic mobility stems largely from its perceived role as an equalizer of opportunities, though not necessarily of outcomes. In this paper we show that this view leads very naturally to a methodology for the measurement of social mobility which has strong parallels with the theory of progressive taxation. We characterize opportunity?equalizing mobility processes, and provide simple criteria to determine when one process is more equalizing than another. We then explain how this mobility ordering relates to social welfare analysis, and how it di�ers from existing ones. We also extend standard indices of tax progressivity to mobility processes, and illustrate our general methodology on intra- and intergenerational mobility data from the United States and Italy. Creation-Date: 2000-08 File-URL: https://www.princeton.edu/~rbenabou/papers/w8431.pdf Number: 150 Classification-JEL: D31, D63, H20, J62 Keywords: Social Mobility, Income Distribution, Inequality, Equality of Opportunity, Progressive Taxation Handle: RePEc:pri:wwseco:dp211.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Jonathan A. Parker Author-X-Name-First: Jonathan Author-X-Name-Last: Parker Author-Workplace-Name: Princeton University and NBER Author-Name: Christian Julliard Author-X-Name-First: Christian Author-X-Name-Last: Julliard Author-Workplace-Name: Princeton University Title: Consumption Risk And Expected Stock Returns Abstract: Following the textbook CCAPM, the consumption risk of an asset is typically measured as the contemporaneous covariance of the marginal utility of consumption and the return on that asset. When measured this way, consumption risk is too small to explain the observed equity premium, is negatively related to expected excess returns over time, and fails to explain the cross-sectional differences in average returns of the Fama and French (25) portfolios. This paper evaluates the central insight of the CCAPM -- that consumption risk determines returns -- but take the model less literally by allowing the possibility that households do not instantaneously and completely adjust consumption to the news revealed about wealth in a period. The long-term consumption risk of the aggregate market is signficantly larger than the contemporaneous risk and is positively related to expected excess returns over time. The long-term consumption risk of different portfolios largely explains the observed differences in average returns. Creation-Date: 2003-01 File-URL: http://personal.lse.ac.uk/julliard/papers/CRCSER.pdf Number: 144 Classification-JEL: G12, G11, E21 Keywords: Consumption Capital Asset Pricing Model, Expected returns, Equity premium, Consumption risk, Consumption smoothing Handle: RePEc:pri:wwseco:dp223.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Yacine Ait-Sahalia Author-X-Name-First: Yacine Author-X-Name-Last: Ait-Sahalia Author-Workplace-Name: Princeton University Author-Name: Jonathan A. Parker Author-X-Name-First: Jonathan Author-X-Name-Last: Parker Author-Workplace-Name: Princeton University Author-Name: Motohiro Yogo Author-X-Name-First: Motohiro Author-X-Name-Last: Yogo Author-Workplace-Name: Harvard University Title: Luxury Goods and the Equity Premium Abstract: This paper evaluates the equity premium using novel data on the consumption of luxury goods. Specifying household utility as a nonhomothetic function of the consumption of both a luxury good and a basic good, we derive pricing equations and evaluate the risk of holding equity. Household survey and national accounts consumption data overstate the risk aversion necessary to match the observed equity premium because they mostly reflect basic consumption. The risk aversion implied by equity returns and the consumption of luxury goods is more than an order of magnitude less than that implied by national accounts data. For the very rich, the equity premium is much less of a puzzle. Creation-Date: 2002-08 File-URL: https://www.princeton.edu/~yacine/richc.pdf Number: 145 Classification-JEL: D14, E21, E44, G12 Handle: RePEc:pri:wwseco:dp222.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Markus K. Brunnermeier Author-X-Name-First: Markus Author-X-Name-Last: Brunnermeier Author-Workplace-Name: Princeton University Author-Name: Jonathan A. Parker Author-X-Name-First: Jonathan Author-X-Name-Last: Parker Author-Workplace-Name: Princeton University and NBER Title: Optimal Expectations Abstract: This paper introduces a tractable, structural model of subjective beliefs. Since agents that plan for the future care about expected future utility flows, current felicity can be increased by believing that better outcomes are more likely. On the other hand, expectations that are biased towards optimism worsen decision making, leading to poorer realized outcomes on average. Optimal expectations balance these forces by maximizing the total well-being of an agent over time. We apply our framework of optimal expectations to three different economic settings. In a portfolio choice problem, agents overestimate the return of their investment and under diversify. In general equilibrium, agents? prior beliefs are endogenously heterogeneous, leading to gambling. Second, in a consumption-saving problem with stochastic income, agents are both overconfident and overoptimistic, and consume more than implied by rational beliefs early in life. Third, in choosing when to undertake a single task with an uncertain cost, agents exhibit several features of procrastination, including regret, intertemporal preference, reversal, and a greater readiness to accept commitment. Creation-Date: 2002-12 File-URL: https://scholar.princeton.edu/sites/default/files/optimal_expectations_0.pdf Number: 146 Classification-JEL: D1, D8, E21, G11, G12 Keywords: Expectations formation, beliefs, overconfidence, wishful thinking, procrastination, gambling Handle: RePEc:pri:wwseco:dp221.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Gene M. Grossman Author-X-Name-First: Gene Author-X-Name-Last: Grossman Author-Workplace-Name: Princeton University Author-Name: Elhanan Helpman Author-X-Name-First: Elhanan Author-X-Name-Last: Helpman Author-Workplace-Name: Harvard University, Tel Aviv University, and CIAR Title: Managerial Incentives and the International Organization of Production Abstract: We develop a model in which the heterogeneous firms in an industry choose their modes of organization and the location of their subsidiaries or suppliers. We assume that the principals of a firm are constrained in the nature of the contracts they can write with suppliers or employees. Our main result concerns the sorting of firms with different productivity levels into different organizational forms. We use the model to examine the implications of falling trade costs for the relevant prevalence of outsourcing and foreign direct investment. Creation-Date: 2002-12 File-URL: http://www.tau.ac.il/~helpman/Managerial%20Incentives.pdf Number: 147 Classification-JEL: L22, F23, D23 Keywords: outsourcing, direct foreign investment, theory of the firm, intra-firm trade Handle: RePEc:pri:wwseco:dp220.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Gene M. Grossman Author-X-Name-First: Gene Author-X-Name-Last: Grossman Author-Workplace-Name: Princeton University Author-Name: Elhanan Helpman Author-X-Name-First: Elhanan Author-X-Name-Last: Helpman Author-Workplace-Name: Harvard University, Tel Aviv University, and CIAR Title: Outsourcing versus FDI in Industry Equilibrium Abstract: We study the determinants of the extent of outsourcing and of direct foreign investment in an industry in which producers need specialized components. Potential suppliers must make a relationship-specific investment in order to serve each prospective customer. Such investments are governed by imperfect contracts. A final-good producer can manufacture components for itself, but the per-unit cost is higher than for specialized suppliers. We consider how the size of the cost differential, the extent of contractual incompleteness, the size of the industry, and the relative wage rate affect the organization of industry production. Creation-Date: 2002-12 File-URL: http://www.princeton.edu/~grossman/OutsourcingvsFDIJEEA.pdf Number: 148 Classification-JEL: F12, F23, L22, D23 Keywords: outsourcing, direct foreign investment, multinational corporations, imperfect contracting, intra-industry trade Handle: RePEc:pri:wwseco:dp219.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Gene M. Grossman Author-X-Name-First: Gene Author-X-Name-Last: Grossman Author-Workplace-Name: Princeton University Author-Name: Elhanan Helpman Author-X-Name-First: Elhanan Author-X-Name-Last: Helpman Author-Workplace-Name: Harvard University, Tel Aviv University, and CIAR Title: Outsourcing in a Global Economy Abstract: We study the determinants of the location of sub-contracted activity in a general equilibrium model of outsourcing and trade. We model outsourcing as an activity that requires search for a partner and relationship-specific investments that are governed by incomplete contracts. The extent of international outsourcing depends inter alia on the thickness of the domestic and foreign market for input suppliers, the relative cost of searching in each market, the relative cost of customizing inputs, and the nature of the contracting environment in each country. Creation-Date: 2002-01 File-URL: http://www.princeton.edu/~grossman/outsourcing.pdf Number: 149 Classification-JEL: F12, L14, L22, D23 Keywords: outsourcing, imperfect contracting, trade in intermediate goods, intra-industry trade Handle: RePEc:pri:wwseco:dp218.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Roland Benabou Author-X-Name-First: Roland Author-X-Name-Last: Benabou Author-Workplace-Name: Princeton University, NBER, CEPR and IRP Author-Name: Jean Tirole Author-X-Name-First: Jean Author-X-Name-Last: Tirole Author-Workplace-Name: IDEI, GREMAQ, CERAS, CEPR, and MIT Title: SELF-CONFIDENCE AND SOCIAL INTERACTIONS Abstract: This paper studies the interactions between an individual self-steem and his social environment, whether in the workplace, at school, or in personal relationships. A person generally has only imperfect knowledge of his own ability (or long-term pay) in pursuing a task, and will undertake it only if he has succinct self-confidence. People who interact with him (parent, spouse, friend, teacher, manager, colleague, etc.) often have complementary information about his ability, but also a vested interest in his completing the task. This generates an incentive for such principals to distort their signals so as to manipulate the agent?s self-confidence. We first study situations where an informed principal chooses an incentive structure, such as offering payments or rewards, delegating a task, or simply giving encouragement. We show that rewards may be weak reinforcers in the short term and that, as stressed by psychologists, they may have hidden costs in that they become negative reinforcers once withdrawn. By offering a low?powered incentive scheme, the principal signals that she trusts the agent. Conversely, rewards (extrinsic motivation) have a limited impact on the agent?s current performance, and reduce his intrinsic motivation to undertake similar tasks in the future. Similarly, empowering the agent is likely to increase his motivation and effort, while offers of help or assistance may create dependence. More generally, we identify under which conditions the hidden costs of rewards are a myth or a reality. We then consider the fact that people often criticize or downplay the achievements of their spouse, child, colleague, coauthor, subordinate or teammate. We formalize such situations of ego?bashing, and argue that they may reflect battles for dominance. By lowering the other?s ego, an individual may gain (or regain) real authority within the relationship. Finally, we turn to the case where it is the agent who has superior information, and may attempt to signal it through a variety of self?presentation strategies. In particular, people with low self?esteem often deprecate their own accomplishments in order to obtain leniency (a lowering of expectancies) or a ?helping hand?on various obligations. Such strategies are costly: they are met with disapproval, and may back?re if the desired indulgence is denied. We analyze this signaling game, and characterize the levels of self?esteem that give rise to self?deprecation. Creation-Date: 1999-12 File-URL: http://pages.stern.nyu.edu/~dbackus/Exotic/1Other/BenabouTirole%20self-confidence%20QJE%2002.pdf Number: 151 Classification-JEL: A12, C70, D10, D60, J22 Keywords: Selfconfidence, selfpresentation, motivation, rewards, incentives, standards, signaling, psychology and economics Handle: RePEc:pri:wwseco:dp210.pdf Template-Type: ReDIF-Paper 1.0 Author-Name: Jeffrey R. Kling Author-X-Name-First: Jeffrey Author-X-Name-Last: Kling Author-Workplace-Name: Princeton University and NBER Title: The Effect of Prison Sentence Length on the Subsequent Employment and Earnings of Criminal Defendants Abstract: This paper examines the employment and earnings of people convicted of committing serious crimes, focusing on the effects of serving any time in prison and of the length of time served on long-term labor market outcomes. Regression analyses control directly for some of the most important factors that determine sentences (such as criminal history and offense type) and labor market outcomes (such as education, experience, demographic characteristics, and earnings history). An instrumental variables approach identifies the causal effect by essentially comparing otherwise similar groups of criminal defendants whose labor market outcomes differ because of the systematically difference sentencing decisions of the judge to whom their case was randomly assigned. In order to implement these methods, new data were created by linking information about criminal defendants in California federal district court felony cases from 1983-94 with quarterly earnings data collected through the California Unemployment Insurance system from 1987-97. The results show that incarceration has surprisingly little effect on employment in comparison to those who are not incarcerated, with employment rates only 0-3% lower after 5 to 8 years for those who served prison time. Further, employment rates for those with longer sentences rebound just as quickly to pre-conviction levels as do those with similar characteristics but shorter sentences. Negative earnings effects are more pronounced and are concentrated among white-collar criminals, who earn 10-30% less after 5 to 8 years than those who were convicted at the same time but were not incarcerated. Violent drug offenders have very low earnings in the legitimate sector overall, but these earnings appear to increase over the long-term after release from prison and do not vary with the length of time served. Creation-Date: 1999-02 File-URL: https://web.archive.org/web/20130903130247/http://www.princeton.edu/wwseconpapers/papers/dp208.pdf Number: 156 Classification-JEL: J24, K42 Keywords: prison sentences, labor markets Handle: RePEc:pri:wwseco:dp208.pdf