Knowledge that Transforms

This paper studies the life-cycle labor supply of three cohorts of American women, born in the 1930s, 1940s, and 1950s. We focus on the increase in labor supply of mothers between the 1940s and 1950s cohorts. We construct a life-cycle model of female participation and savings, and calibrate the model to match the behavior of the middle cohort. We investigate which changes in the determinants of labor supply account for the increases in participation early in the life-cycle observed for the youngest cohort. A combination of a reduction in the cost of children alongside a reduction in the wage-gender gap is needed. (JEL D91, J16, J22, J31)

We study the asset pricing implications of Tversky and Kahneman's (1992) cumulative prospect theory, with a particular focus on its probability weighting component. Our main result, derived from a novel equilibrium with nonunique global optima, is that, in contrast to the prediction of a standard expected utility model, a security's own skewness can be priced: a positively skewed security can be “overpriced” and can earn a negative average excess return. We argue that our analysis offers a unifying way of thinking about a number of seemingly unrelated financial phenomena. (JEL D81, G11, G12)

Many older US households have done little or no planning for retirement, and there is a substantial population that seems to undersave for retirement. Of particular concern is the relative position of older women, who are more vulnerable to old-age poverty due to their longer longevity. This paper uses data from a special module we devised on planning and financial literacy in the 2004 Health and Retirement Study. It shows that women display much lower levels of financial literacy than the older population as a whole. In addition, women who are less financially literate are also less likely to plan for retirement and be successful planners. These findings have important implications for policy and for programs aimed at fostering financial security at older ages.

We study information transmission via polling. A policymaker polls constituents, who differ in their information and ideology, to determine policy. Full revelation is an equilibrium in a poll with a small sample, but not with a large one. In large polls, full information aggregation can arise in an equilibrium where constituents endogenously sort themselves into centrists, who respond truthfully, and extremists, who do not. We find polling statistics that ignore strategic behavior yield biased estimators and mischaracterize the poll's margin of error. We construct estimators that account for strategic behavior. Finally, we compare polls and elections. (JEL C42, D83)

The term “illegal price manipulation ” is diffi-cult to define. Current U.S. law does not explic-itly define it. The finance and economics litera-ture uses the term “manipulation ” in an impre-cise manner. This paper proposes that a trading strategy not be classified as “illegal price manip-ulation ” unless the violator’s intent is to pursue a scheme that undermines economic efficiency both by making prices less accurate as signals for efficient resource allocation and by making mar-kets less liquid for risk transfer. Since price ef-fects are market-wide, we treat the terms “price manipulation ” and “market manipulation ” as synonyms. Our definition applies equally to fi-nancial and commodities markets.

Susan Athey is an applied theorist who has made important contributions to economic theory, empirical economics, and econometrics. She has built a research program focused on using theory to understand substantive economic issues, especially in industrial organization. She has developed tools and techniques that provide the basis for empirical work grounded in sound economic theory. She has made particularly important advances in developing and applying tools that replace strong functional form assumptions in models with more plausible conditions such as monotonicity, thereby facilitating the development of more robust empirical results.

Decision makers tend to exhibit a higher degree of impatience when considering a delay to an immediate reward than when contemplating an identical delay to an equal future reward. This work argues that diminishing impatience originates from the distinction between the certain present and the risky future. A simple functional representation of preferences, exhibiting time inconsistency when the future is uncertain, is derived. Experimental evidence, which is inconsistent with other formulations that account for diminishing impatience, supports the proposed approach. The new theory uncovers a tight relation between diminishing impatience and well-known behavioral regularities in choice under risk and uncertainty. (JEL D12, D81)

Existing studies establish a strong cross-country correlation between income and democracy but do not control for factors that simultaneously affect both variables. We show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and various measures of democracy. We present instrumental-variables estimates that also show no causal effect of income on democracy. The cross-country correlation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years. This pattern is consistent with the idea that societies embarked on divergent political-economic development paths at certain critical junctures. (JEL D72, E21)

Language is a powerful coordination device. We generalize the cheap-talk approach to pre-play communication by way of introducing a meaning correspondence between messages and actions, and by postulating two axioms met by natural languages. Players have a lexicographic preference, second to material payoffs, against deviating from the meaning correspondence. Under two-sided communication in generic and symmetric n × n-coordination games, a Nash equilibrium component in such a lexicographic communication game is evolutionarily stable if and only if it results in the unique Pareto efficient outcome of the underlying game. We extend the analysis to one-sided communication in arbitrary finite two-player games. (JEL C72, C73, Z13)

“I want to tell my foreman to f*** off, but I can’t.” So says “Mike,” a steel handler we meet in Stud Terkel’s book Working (1974, xxxv). Many workers’ stories we read in Working and in ethnographies suggest workers greatly resent supervision. As a result, they exert lower effort and may sabotage production. Mike puts dents in the steel. Ethnographies also reveal workers who are not strictly monitored develop work group output norms. This paper uses the con cept of identity to study trade-offs in supervi sory policy. 1 We follow the social psychology literature and examine intrinsic incentives that depend on how workers see themselves in rela tion to the firm. When a supervisor monitors workers, workers adopt an identity in opposition to the firm. The firm gains information and can fine-tune its incentive pay. But resentful workers require high compensation to work in the firm’s interest. With no monitoring, workers are less hostile to the firm. But they may forge a work group identity, with norms that restrict output. We show that a firm may find it profitable to have lax supervision. When workers take on a work group identity, the cost per unit of effort can be lower than when workers view them selves in opposition to the firm. We shall present the model, and then discuss some classic studies of workplaces that portray these trade-offs. Our identity framework synthesizes an emerg ing body of economic theory and empirics on incentives and monitoring (e.g., Bruno Frey 1993; Gary Charness 2000; Daniel S. Nagin et al. 2002; Michael T. Rauh and Giulio Seccia 1 This paper provides a simple formal model of tradeoffs described loosely in Akerlof and Kranton (2005). We also discuss further implications of supervision versus work group cohesion.