Knowledge that Transforms

This paper shows how in Medicare Part D insurers' gaming of the subsidy paid to low-income enrollees distorts premiums and raises the program cost. Using plan-level data from the first five years of the program, I find multiple instances of pricing strategy distortions for the largest insurers. Instrumental variable estimates indicate that the changes in a concentration index measuring the manipulability of the subsidy can explain a large share of the premium growth observed between 2006 and 2011. Removing this distortion could reduce the cost of the program without worsening consumer welfare.

This paper provides evidence on the importance of reputation in the context of the Kenyan rose export sector. A model of reputation and relational contracting is developed and tested. A seller's reputation is defined by buyer's beliefs about seller's reliability. We show that (i) due to lack of enforcement, the volume of trade is constrained by the value of the relationship; (ii) the value of the relationship increases with the age of the relationship; and (iii) during an exogenous negative supply shock deliveries are an inverted-U shaped function of relationship's age. Models exclusively focusing on enforcement or insurance considerations cannot account for the evidence.

During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as −19 percent for annuities and −57 percent for life insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008.

We provide a result on prospect theory decision makers who are naïve about the time inconsistency induced by probability weighting. If a market offers a sufficiently rich set of investment strategies, investors postpone their trading decisions indefinitely due to a strong preference for skewness. We conclude that probability weighting in combination with naïveté leads to unrealistic predictions for a wide range of dynamic setups.

The United States currently provides Temporary Protected Status (TPS) to more than 300,000 immigrants. TPS is typically granted if dangerous conditions prevail in migrants' home countries. Individuals with TPS are allowed to stay and work in the United States temporarily. Little is known about how TPS affects beneficiaries, most of whom are unauthorized prior to receiving TPS. Our results suggest that TPS eligibility leads to higher employment rates among women and higher earnings among men. The results have implications for recent programs that allow millions of unauthorized immigrants to receive temporary permission to remain and work in the United States.

An uncertainty-averse agent prefers betting on an event whose probability is known, to betting on an event whose probability is unknown. Such an agent may randomize his choices to eliminate the effects of uncertainty. For what sort of preferences does a randomization eliminate the effects of uncertainty? To answer this question, we investigate an agent's preferences over sets of acts. We axiomatize a utility function, through which we can identify the agent's subjective belief that a randomization eliminates the effects of uncertainty.

Using data from China's Urban Household Survey and exploiting China's mandatory retirement policy, we use the regression discontinuity approach to estimate the impact of retirement on household expenditures. Retirement reduces total non-durable expenditures by 20 percent. Among the categories of non-durable expenditures, retirement reduces work-related expenditures and expenditures on food consumed at home but has an insignificant effect on entertainment expenditures. After excluding these three components, retirement does not have an effect on the remaining non-durable expenditures. It suggests that the retirement consumption puzzle might not be a puzzle if a life-cycle model with home production is considered.

Behavioral economics has become an important and integrated component of modern economics. Behavioral economists embrace the core principles of economics—optimization and equilibrium—and seek to develop and extend those ideas to make them more empirically accurate. Behavioral models assume that economic actors try to pick the best feasible option and those actors sometimes make mistakes. Behavioral ideas should be incorporated throughout the first-year undergraduate course. Instructors should also considering allocating a lecture (or more) to a focused discussion of behavioral concepts. We describe our approach to such a lecture, highlighting six modular principles and empirical examples that support them.

We develop an equilibrium wage-posting model with heterogeneous firms that decide to locate in the formal or the informal sector and workers who search randomly on and off the job. We estimate the model on Brazilian labor force survey data. In equilibrium, firms of equal productivity locate in different sectors, a fact observed in the data. Wages are characterized by compensating differentials. We show that tightening enforcement does not increase unemployment and increases wages, total output, and welfare by enabling better allocation of workers to higher productivity jobs and improving competition in the formal labor market.

Can the well-known experimental phenomenon of present-bias in intertemporal choice be confounded with the risks associated with receiving payment? Can measurements of risk preferences be used to represent desires for smoothness in intertemporal payments? In our two 2012 papers in this journal we explored these two questions and found the answer to the first to be yes and the second to be no. We feel the three papers inspired by our work and published here underscore these arguments and point to interesting new possibilities for modeling and measuring risk over time.