Knowledge that Transforms

We argue that active management’s popularity is not puzzling despite the industry’s poor track record. Our explanation features decreasing returns to scale: As the industry’s size increases, every manager’s ability to outperform passive benchmarks declines. The poor track record occurred before the growth of indexing modestly reduced the share of active management to its current size. At this size, better performance is expected by investors who believe in decreasing returns to scale. Such beliefs persist because persistence in industry size causes learning about returns to scale to be slow. The industry should shrink only moderately if its underperformance continues.

Sellers of perishable goods increasingly use dynamic pricing strategies as technology makes it easier to change prices and track inventory. This paper tests how accurately theoretical models of dynamic pricing describe sellers’ behavior in secondary markets for event tickets, a classic example of a perishable good. It shows that the simplest dynamic pricing models describe very accurately both the pricing problem faced by sellers and how they behave, explaining why sellers cut prices dramatically, by 40 percent or more, as an event approaches. The estimates also imply that dynamic pricing is valuable, raising the average seller’s expected payoff by around 16 percent.

We examine a dynamic model of up-or-down problem solving. A decision maker can either spend resources investigating a new problem before deciding what to do or decide on the basis of similarity with precedent problems. Over time, a decision-making framework, or jurisprudence, develops. We focus on the model’s application to judge-made law. We show that judges summarily apply precedent in some cases. The law may converge to efficient or inefficient rules. With positive probability, identical cases are treated differently. As the court learns over time, inconsistencies become less likely. We discuss the existing empirical evidence and the model’s testable implications.

This paper considers a simple model of credit cycles driven by moral hazard in financial intermediation. Financial agents or bankers must earn moral-hazard rents, but the cost of these rents can be efficiently spread over an agent’s entire career by promising large late-career rewards if the agent has a consistently successful record. Dynamic interactions among different generations of financial agents can create credit cycles with repeated booms and recessions. In recessions, a scarcity of trusted financial intermediaries limits investment and reduces employment. Under such conditions, taxing workers to subsidize bankers may increase employment enough to make the workers better off.

We conduct a field experiment to measure cooperation among groups of recreational fishermen at a privately owned fishing facility. Group earnings are greater when group members catch fewer fish. Consistent with classical economic theory, though in contrast to prior results from laboratory experiments, we find no cooperation. A series of additional treatments identifies causes of the difference. We rule out the subject pool and the laboratory setting as potential causes and identify the type of activity involved as the source of the lack of cooperation in our field experiment. When cooperation requires reducing fishing effort, individuals are not cooperative.

We study an over-the-counter (OTC) market in which the usefulness of assets as a means of payment or collateral is limited by the threat of fraudulent practices. Agents can produce fraudulent assets at a positive cost, which generates upper bounds on the quantity of each asset that can be traded in the OTC market. Each of these endogenous, asset-specific, resalability constraints depends on the cost of fraud, on the frequency of trade, and on the asset price. In equilibrium, assets are partitioned into three liquidity tiers, which differ in their resalability, prices, haircuts, sensitivity to shocks, and responses to policies.

A new model of persuasion is presented. A listener first announces and commits to a codex (i.e., a set of conditions). The speaker then presents a (not necessarily true) profile that must satisfy the codex in order for the listener to be persuaded. The speaker is boundedly rational in the sense that his ability to come up with a persuasive profile is limited and depends on the true profile and the content and framing of the codex. The circumstances under which the listener can design a codex that will implement his goal are fully characterized.

This paper experimentally analyzes the schooling decisions of poor households in urban Brazil. We elicit parents’ choices between monthly government transfers conditional on their adolescent child attending school and guaranteed, unconditional transfers of varying sizes. In the baseline treatment, an overwhelming majority of parents prefer conditional transfers to larger unconditional transfers. However, few parents prefer conditional payments if they are offered text message notifications whenever their child misses school. These findings suggest important intergenerational conflicts in these schooling decisions, a lack of parental control and observability of school attendance, and an additional rationale for conditional cash transfer programs—the monitoring they provide.

We develop a dynamic theory of managerial turnover in a world in which the quality of the match between a firm and its managers changes stochastically over time. Shocks to managerial productivity are anticipated at the time of contracting but privately observed by the managers. Our key positive result shows that the firm’s optimal retention decisions become more permissive with time. Our key normative result shows that, compared to what is efficient, the firm’s contract induces either excessive retention at all tenure levels or excessive firing at the early stages of the relationship, followed by excessive retention after sufficiently long tenure.