Knowledge that Transforms

We test for residential sorting and changes in neighborhood characteristics in response to the cleanup of hazardous waste sites using restricted access fine-geographical-resolution block data. We examine changes between 1990 and 2000 in blocks within 5km of sites that are proposed to the National Priority List that fall in a narrow interval of Hazardous Ranking Scores, comparing blocks near sites that were cleaned with those near sites that were not. Cleanup leads to increases in population density and housing unit density; increases in mean household income and shares of college-educated; but also to increases in the shares of minorities.

The burden of proof is a central feature of adjudication, and analogues exist in many other settings. It constitutes an important but largely unappreciated policy instrument that interacts with the level of enforcement effort and magnitude of sanctions in controlling harmful activity. Models are examined in which the prospect of sanctions affects not only harmful acts but also benign ones, on account of the prospect of mistaken application of sanctions. Accordingly, determination of the optimal strength of the burden of proof, as well as optimal enforcement effort and sanctions, involves trading off deterrence and the chilling of desirable behavior, the latter being absent in previous work. The character of the optimum differs markedly from prior results and from conventional understandings of proof burdens, which can be understood as involving Bayesian posterior probabilities. Additionally, there are important divergences across models in which enforcement involves monitoring (posting officials to be on the lookout for harmful acts), investigation (inquiry triggered by the costless observation of particular harmful acts), and auditing (scrutiny of a random selection of acts). A number of extensions are analyzed, in one instance nullifying key results in prior work.

I study how limited abilities to process information affect choice behavior. I model the decision-making process by an automaton, and measure the complexity of a specific choice rule by the minimal number of states an automaton implementing the rule uses to process information. I establish that any choice rule that is less complicated than utility maximization displays framing effects. I then prove that choice rules that result from an optimal trade-off between maximizing utility and minimizing complexity are history-dependent satisficing procedures that display primacy and recency effects.

Motivating innovation is important in many incentive problems. This paper shows that the optimal innovation‐motivating incentive scheme exhibits substantial tolerance (or even reward) for early failure and reward for long‐term success. Moreover, commitment to a long‐term compensation plan, job security, and timely feedback on performance are essential to motivate innovation. In the context of managerial compensation, the optimal innovation‐motivating incentive scheme can be implemented via a combination of stock options with long vesting periods, option repricing, golden parachutes, and managerial entrenchment.

Discount‐rate variation is the central organizing question of current asset‐pricing research. I survey facts, theories, and applications. Previously, we thought returns were unpredictable, with variation in price‐dividend ratios due to variation in expected cashflows. Now it seems all price‐dividend variation corresponds to discount‐rate variation. We also thought that the cross‐section of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discount‐rate theories based on central ingredients and data sources. Incorporating discount‐rate variation affects finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics.

We propose a new and direct measure of investor attention using search frequency in Google (Search Volume Index (SVI)). In a sample of Russell 3000 stocks from 2004 to 2008, we find that SVI (1) is correlated with but different from existing proxies of investor attention; (2) captures investor attention in a more timely fashion and (3) likely measures the attention of retail investors. An increase in SVI predicts higher stock prices in the next 2 weeks and an eventual price reversal within the year. It also contributes to the large first‐day return and long‐run underperformance of IPO stocks.