Knowledge that Transforms

This paper develops a revealed preference theory for the equity premium around macroeconomic announcements. Stock returns realized around pre‐scheduled macroeconomic announcements, such as the employment report and the FOMC statements, account for 55% of the market equity premium. We provide a characterization theorem for the set of intertemporal preferences that generates a nonnegative announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from time‐separable expected utility and provides asset‐market‐based evidence for a large class of non‐expected utility models. We also provide conditions under which asset prices may rise prior to some macroeconomic announcements and exhibit a pre‐announcement drift.

We show how an insight from taxation theory allows identification of both the supply and demand elasticities using only one instrument. Most models of taxation since Ramsey (1927) assume that a tax levied on the demand side only affects demand through the price after taxation. Econometrically, we show that this assumption acts as an exclusion restriction. Under the Ramsey Exclusion Restriction (RER), a single tax reform can serve to simultaneously identify the demand and supply elasticity. We develop an estimation method, which includes 2SLS estimators for the elasticities, and a test for strength of the instrument. We discuss possible applications.

Work schedules play an important role in utilizing labor in organizations. In this study of emergency department physicians in shift work, schedules induce two distortions: First, physicians “slack off†by accepting fewer patients near end of shift (EOS). Second, physicians distort patient care, incurring higher costs as they spend less time on patients assigned near EOS. Examining how these effects change with shift overlap reveals a tradeoff between the two. Within an hour after the normal time of work completion, physicians are willing to spend hospital resources more than six times their market wage to preserve their leisure. Accounting for overall costs, I find that physicians slack off at approximately second†best optimal levels.

We prove that a subtle but substantial bias exists in a common measure of the conditional dependence of present outcomes on streaks of past outcomes in sequential data. The magnitude of this streak selection bias generally decreases as the sequence gets longer, but increases in streak length, and remains substantial for a range of sequence lengths often used in empirical work. We observe that the canonical study in the influential hot hand fallacy literature, along with replications, are vulnerable to the bias. Upon correcting for the bias we find that the long-standing conclusions of the canonical study are reversed.

Unlike present‐biased individuals, agents who suffer self‐control costs as in Gul and Pesendorfer, 2001 may choose to restrict their choice set even when they expect to resist temptation. To identify these self‐control types, I design an experiment in which the temptation was to read a story during a tedious task. The identification strategy relies on a two‐step procedure. First, I measure commitment demand by eliciting subjects' preferences over menus that did or did not allow access to the story. I then implement preferences using a random mechanism, allowing to observe subjects who faced the choice yet preferred commitment. A quarter to a third of subjects can be classified as self‐control types according to their menu preferences. When confronted with the choice, virtually all of them behaved as they anticipated and resisted temptation. These findings suggest that policies restricting the availability of tempting options could have larger welfare benefits than predicted by standard models of present bias.

This paper analyzes a general equilibrium economy featuring input‐output connections, imperfect competition, and external economies of scale owing to entry and exit. The interaction of input‐output networks with industry‐level market structure affects the amplification of shocks and the pattern of diffusion in the model, generating cascades of firm entry and exit across the economy. In this model, sales provide a poor measure of the systemic importance of industries. Unlike the relevant notions of centrality in competitive constant‐returns‐to‐scale models, systemic importance depends on the industry's role as both a supplier and a consumer of inputs, as well as the market structure of industries. A basic calibration of the model suggests that aggregate output is three times more volatile in response to labor productivity shocks when compared to a perfectly competitive model.

In this paper, we develop algorithms to independently draw from a family of conjugate posterior distributions over the structural parameterization when sign and zero restrictions are used to identify structural vector autoregressions (SVARs). We call this family of conjugate posteriors normal‐generalized‐normal. Our algorithms draw from a conjugate uniform‐normal‐inverse‐Wishart posterior over the orthogonal reduced‐form parameterization and transform the draws into the structural parameterization; this transformation induces a normal‐generalized‐normal posterior over the structural parameterization. The uniform‐normal‐inverse‐Wishart posterior over the orthogonal reduced‐form parameterization has been prominent after the work of Uhlig (2005). We use Beaudry, Nam, and Wang's (2011) work on the relevance of optimism shocks to show the dangers of using alternative approaches to implementing sign and zero restrictions to identify SVARs like the penalty function approach. In particular, we analytically show that the penalty function approach adds restrictions to the ones described in the identification scheme.

Basu and Bundick, 2017 showed an intertemporal preference volatility shock has meaningful effects on real activity in a New Keynesian model with Epstein and Zin, 1991 preferences. We show that when the distributional weights on current and future utility in the Epstein–Zin time aggregator do not sum to 1, there is an asymptote in the responses to such a shock with unit intertemporal elasticity of substitution. In the Basu–Bundick model, the intertemporal elasticity of substitution is set near unity and the preference shock only hits current utility, so the sum of the weights differs from 1. We show that when we restrict the weights to sum to 1, the asymptote disappears and preference volatility shocks no longer have large effects. We examine several different calibrations and preferences as potential resolutions with varying degrees of success.

This study examines how the historical state conditions long‐run development, using Vietnam as a laboratory. Northern Vietnam (Dai Viet) was ruled by a strong, centralized state in which the village was the fundamental administrative unit. Southern Vietnam was a peripheral tributary of the Khmer (Cambodian) Empire, which followed a patron‐client model with more informal, personalized power relations and no village intermediation. Using a regression discontinuity design, the study shows that areas exposed to Dai Viet administrative institutions for a longer period prior to French colonization have experienced better economic outcomes over the past 150 years. Rich historical data document that in Dai Viet villages, citizens have been better able to organize for public goods and redistribution through civil society and local government. We argue that institutionalized village governance crowded in local cooperation and that these norms persisted long after the original institutions disappeared.

Many time series exhibit “long memory”: Their autocorrelation function decays slowly with lag. This behavior has traditionally been modeled via unit roots or fractional Brownian motion and explained via aggregation of heterogeneous processes, nonlinearity, learning dynamics, regime switching, or structural breaks. This paper identifies a different and complementary mechanism for long‐memory generation by showing that it can naturally arise when a large number of simple linear homogeneous economic subsystems with short memory are interconnected to form a network such that the outputs of the subsystems are fed into the inputs of others. This networking picture yields a type of aggregation that is not merely additive, resulting in a collective behavior that is richer than that of individual subsystems. Interestingly, the long‐memory behavior is found to be almost entirely determined by the geometry of the network, while being relatively insensitive to the specific behavior of individual agents.