The central insight of asset pricing is that a security's value depends both on its distribution of payoffs across economic states and on state prices. In fixed income markets, many investors focus exclusively on estimates of expected payoffs, such as credit ratings, without considering the state of the economy in which default occurs. Such investors are likely to be attracted to securities whose payoffs resemble economic catastrophe bonds—bonds that default only under severe economic conditions. We show that many structured finance instruments can be characterized as economic catastrophe bonds, but offer far less compensation than alternatives with comparable payoff profiles.

This paper develops dynamic strategic monetary policies using a standard two-country macro model under flexible exchange rates. The equilibria considered include feedback Nash and feedback Stackelberg, both of which are compared to the Pareto-optimal cooperative equilibrium. The optimal policies are obtained as feedback rules in which real money supplies are adjusted to movements in the real exchange rate. The properties of these policies and their welfare implications are analyzed using numerical simulations.

Our paper in this Review (1984) aroused a controversy we did not anticipate, but no one has yet convinced us that our basic point is wrong. Joe Bell (1988, p. 282) now makes the assertion that our conclusion rests entirely upon unexplained asymmetries in mobility. This seems to us a very curious assertion indeed. The main problem with Bell's analysis is that he treats investment in capital assets as perfectly malleable. A lawyer trained to argue rate cases is not perfectly suited for other jobs when electric utility deregulation occurs. The time and effort spent by the lawyer to acquire the requisite skills are irretrievably lost. This is the point of our paper. Even though future labor can be supplied by this lawyer after deregulation, it definitionally has a lower value. Lawyering before a regulatory commission is a specialized input. When the demand for these services falls, the capital value of the intensive and extensive investments vanish. No asymmetry is implied or required. More generally, capital consumed in using the political process to secure a wealth transfer-the resources devoted to organizing coalitions, investing in lobbying activities, contributing to political campaigns, advertising a point of view, acquiring the stock of human capital necessary for dealing with regulatory bureaucracies, and so onreduces the wealth of society in opportunitycost terms. For the reasons just stated, the cost of obtaining additional output in the regulated industry following deregulation is higher. We also pointed out that the increase in marginal costs due to what Bell calls resource immobility may only be a short-term phenomenon: Over time, resources in the [deregulated] industry will adapt to the new competitive environment, and new resources coming into the industry will embody the r quisite skills for working in a competitive rather than a government-sponsored sector. Thus, after the relevant adjustment period, marginal costs in the deregulated sector may decline, but it is simply wrong to suppose that deregulation enables the capital value of resources specializing in rent-seeking activities to be used again in the production of goods. Anyway, in present-value terms it does not take very long for this adjustment process to impose significant costs on the economy. This point is covered in fn. 7 in our original paper.

Charter takeovers are traditional public schools restarted as charter schools. We develop a grandfathering instrument for takeover attendance that compares students at schools designated for takeover with a matched sample of students attending similar schools not yet taken over. Grandfathering estimates from New Orleans show substantial gains from takeover enrollment. In Boston, grandfathered students see achievement gains at least as large as the gains for students assigned charter seats in lotteries. A non-charter Boston turnaround intervention that had much in common with the takeover strategy generated gains as large as those seen for takeovers, while other more modest turnaround interventions yielded smaller effects.

Concentration-based thresholds for horizontal mergers, such as those in the US Horizontal Merger Guidelines, play a central role in merger analysis but their basis remains unclear. We show that there is both a theoretical and an empirical basis for focusing solely on the change in concentration, and ignoring its level, in screening mergers for whether their unilateral price effects will harm consumers. We also argue that current threshold levels likely are too lax, unless one expects efficiency gains of 5 percent or greater, or other factors such as entry and product repositioning to significantly constrain the exercise of market power postmerger.

We estimate the effects of electricity shortages on Indian manufacturers, instrumenting with supply shifts from hydroelectric power availability. We estimate that India's average reported level of shortages reduces the average plant's revenues and producer surplus by 5 to 10 percent, but average productivity losses are significantly smaller because most inputs can be stored during outages. Shortages distort the plant size distribution, as there are significant economies of scale in generator costs and shortages more severely affect plants without generators. Simulations show that offering interruptible retail electricity contracts could substantially reduce the impacts of shortages.

Consumers' enrollment decisions in Medicare Part D can be explained by Abaluck and Gruber’s (2011) model of utility maximization with psychological biases or by a neoclassical version of their model that precludes such biases. We evaluate these competing hypotheses by applying nonparametric tests of utility maximization and model validation tests to administrative data. We find that 79 percent of enrollment decisions from 2006 to 2010 satisfied basic axioms of consumer theory under the assumption of full information. The validation tests provide evidence against widespread psychological biases. In particular, we find that precluding psychological biases improves the structural model's out-of-sample predictions for consumer behavior.

taxed. Considerable effort has been devoted to characterizing the manner in which the optimal tax rates differ across the taxable commodities.' But the literature has rarely addressed the issue of which commodities should be included in the tax base. In fact, the standard optimal tax model cannot provide a useful answer to this question, because it does not contain any of the resource costs normally associated with the collection of taxes, an omission that seriously diminishes the policy relevance of the model.2