Knowledge that Transforms

This paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents: prospecting for customers and advising on the product's “suitability” for the specific needs of customers. When structuring salesforce compensation, firms trade off the expected losses from “misselling” unsuitable products with the agency costs of providing marketing incentives. We characterize how the equilibrium amount of misselling (and thus the scope of policy intervention) depends on features of the agency problem including: the internal organization of a firm's sales process, the transparency of its commission structure, and the steepness of its agents' sales incentives.

We estimate a principal-agent model of moral hazard with longitudinal data on firms and managerial compensation over two disjoint periods spanning 60 years to investigate increased value and variability in managerial compensation. We find exogenous growth in firm size largely explains these secular trends in compensation. In our framework, exogenous firm size works through two channels. First, conflicts of interest between shareholders and managers are magnified in large firms, so optimal compensation plans are now more closely linked to insider wealth. Second, the market for managers has become more differentiated, increasing the premium paid to managers of large versus small firms.

Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008 by Maurice Obstfeld, Jay C. Shambaugh and Alan M. Taylor. Published in volume 99, issue 2, pages 480-86 of American Economic Review, May 2009

We examine the evolutionary foundations of intertemporal preferences. When all the risk affecting survival and reproduction is idiosyncratic, evolution selects for agents who maximize the discounted sum of expected utility, discounting at the sum of the population growth rate and the mortality rate. Aggregate uncertainty concerning survival rates leads to discount rates that exceed the sum of population growth rate and death rate, and can push agents away from exponential discounting.

We explore patterns of vertical integration in the US airline industry. Major airlines subcontract portions of their network to regional partners, which may or may not be owned. We investigate if ownership economizes on ex post renegotiation costs. We estimate whether airlines are more likely to use owned regionals on city pairs with adverse weather (which makes adaptation decisions more frequent) and on city pairs that are more integrated into the major's network (which raises the costs of having adaptation decisions resolved suboptimally). Our results suggest a robust empirical relationship between adaptation and vertical integration in this setting.

What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs by Victor Stango and Jonathan Zinman. Published in volume 99, issue 2, pages 424-29 of American Economic Review, May 2009

Thinking about contingencies, designing covenants, and seeing through their implications is costly. Parties to a contract accordingly use heuristics and leave it incomplete. The paper develops a model of limited cognition and examines its consequences for contractual design.

Using two strategies, we show that consumers underreact to taxes that are not salient. First, using a field experiment in a grocery store, we find that posting tax-inclusive price tags reduces demand by 8 percent. Second, increases in taxes included in posted prices reduce alcohol consumption more than increases in taxes applied at the register. We develop a theoretical framework for applied welfare analysis that accommodates salience effects and other optimization failures. The simple formulas we derive imply that the economic incidence of a tax depends on its statutory incidence, and that even policies that induce no change in behavior can create efficiency losses.

Among the many unusual aspects of the ongoing financial crisis is the unprecedented provision of backstop liquidity by central banks around the world. The Federal Reserve alone had committed $4,400 billion by mid-Novem ber 2008. The Fed funds rate is almost equal to zero. These are extraordinary numbers. This paper establishes a formal relationship between the recent monetary developments and the trends in private leverage and its structure. Over the last few years, some traditional insti tutions, for example broker-dealers, have relied more and more on markets (securitization, money market ) for their funding. Some banks have also increased their dependence on mar kets; the standard illustration is Northern Rock, a UK mortgage bank, which prior to its bailout relied on short-term wholesale markets for 75 percent of its funding. A second factor contributing to the reliance on wholesale markets is the overall shift from a bank-based system to a market-based one. The expanding so-called “shadow banking system” (conduits, hedge funds, investment banks, monolines ) has engaged in substantial transfor mation and, unlike commercial banks, could not avail itself of stable insured deposits. Mutual funds are under the threat of redemptions and may well face liquidity shortages as well. Adding subprime borrowers, who are heavily dependent on high housing prices and, for those with adjustable-rate mortgages (ARMs), on low short-term interest rates, and highly lever