Knowledge that Transforms

Recent models of reference-dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies. A subset of such expectations-based models predicts an “endowment effect for risk”: that risk attitudes differ when reference points change from certain to stochastic. In two purposefully simple risk preference experiments, eliminating often-discussed confounds, I demonstrate both between and within subjects such an endowment effect for risk. These results provide needed separation between expectations-based reference-dependent models, allow for evaluation of recent theoretical extensions, and may help to close a long-standing debate in decision science on inconsistency between utility elicitation methodologies.

Using survey data from the Promise Academy in the Harlem Children’s Zone, we estimate the effects of high-performing charter schools on human capital, risky behaviors, and health outcomes. Six years after the random admissions lottery, youths offered admission to the Promise Academy middle school score 0.279 (0.073) standard deviations higher on academic achievement outcomes, 0.067 (0.076) standard deviations higher on an index of academic attainment, and 0.313 (0.091) standard deviations higher on a measure of on-time benchmarks. Females are 10.1 percentage points less likely to be pregnant as teenagers, and males are 4.4 percentage points less likely to be incarcerated.

We derive a tractable nonlinear earnings function that we estimate separately individual by individual using NLSY79 data. We obtain three ability measures, a rate of skill depreciation, a time discount rate, and a population-wide estimate of the human capital rental rate. We utilize these parameters to verify a number of heretofore untested theorems based on the life cycle model. We show how these human capital production function parameters relate to cognitive ability, personality traits, and family background. Finally, we show that accounting for individual-specific heterogeneity dramatically reduces estimates of population-wide persistence of permanent and transitory shocks by over 50 percent.

We present a theory and experimental evidence on pricing and portfolio choices under asymmetric reasoning. We show that under asymmetric reasoning, prices do not reflect all (types of) reasoning. Some agents who observe prices that cannot be reconciled with their reasoning switch from perceiving the environment as risky to perceiving it as ambiguous. If they are ambiguity-averse, these agents become price-insensitive. Results from an experiment show that, consistent with the theory, (i) without aggregate risk, mispricing decreases as the fraction of price-sensitive agents increases; and (ii) with aggregate risk, price-insensitive agents trade to more balanced portfolios.

We study the implications of preference heterogeneity for asset pricing. We use recursive preferences in order to separate heterogeneity in risk aversion from heterogeneity in the intertemporal elasticity of substitution and an overlapping-generations framework to obtain a nondegenerate stationary equilibrium. We solve the model explicitly up to the solutions of ordinary differential equations and highlight the effects of overlapping generations and each dimension of preference heterogeneity on the market price of risk, interest rates, and the volatility of stock returns. We find that separating intertemporal elasticity of substitution and risk aversion heterogeneity can have a substantive impact on the model's (qualitative and quantitative) ability to address some key asset-pricing issues.

A major policy issue in standard setting is that patents that are ex ante not that important, by being included into a standard, may become standard-essential patents. In an attempt to curb the monopoly power that they create, most standard-setting organizations require the owners of patents covered by the standard to make a loose commitment to grant licenses on reasonable terms. Such commitments unsurprisingly are conducive to litigation. This paper builds a framework for the analysis of these patents, identifies several types of inefficiencies attached to the lack of price commitments, and shows how structured price commitments restore competition and why such commitments may not arise spontaneously in the marketplace.

We use Spain’s Equality Law to test for the existence of agency problems between party leaders and their constituents. The law mandates a 40 percent female quota on electoral lists in towns with populations above 5,000. Using pre- and postquota data by party and municipality, we implement a triple-difference design. We find that female quotas resulted in slightly better electoral results for the parties that were most affected by the quota. Our evidence shows that party leaders were not maximizing electoral results prior to the quota, suggesting the existence of agency problems that hinder female representation in political institutions.

We provide a general framework for the analysis of institutional dynamics in an environment in which payoffs and political powers change stochastically. Assuming that economic and political institutions as well as individual types can be ordered, and preferences and the distribution of political power satisfy natural “single-crossing” (increasing differences) conditions, we prove existence of a pure-strategy Markov voting equilibrium, provide conditions for its uniqueness, and present a number of comparative static results. We then use this framework to study the dynamics of political rights and repression in the presence of threats from extremist groups and the dynamics of collective experimentation.

How do entrepreneurs vary firm size, capital structure, and default to manage risk? We show that more risk-averse entrepreneurs run smaller, more highly leveraged firms and default less, because running a smaller firm with higher debt reduces personal funds at risk in the firm. Optimal default depends on ex ante debt, consumption forgone from firm liquidation, and owner capacity to inject funds. We show that entrepreneurs sacrifice current consumption in the hope of future success that never materializes for the bottom 25 percent, but entrepreneurship is a path toward great wealth and high consumption for the top quartile.

Medicare spending exceeds 4% of GDP in the US each year, and there are concerns that moral hazard problems have led to overspending. This paper considers whether hospitals that treat patients more aggressively and receive higher payments from Medicare improve health outcomes for their patients. An innovation is a new lens to compare hospital performance for emergency patients: plausibly exogenous variation in ambulance-company assignment among patients who live near one another. Using Medicare data from 2002-2010, we show that ambulance company assignment importantly affects hospital choice for patients in the same ZIP code. Using data for New York State from 2000-2006 that matches exact patient addresses to hospital discharge records, we show that patients who live very near each other but on either side of ambulance service area boundaries go to different types of hospitals. Both identification strategies show that higher-cost hospitals achieve better patient outcomes for a variety of emergency conditions. Using our Medicare sample, the estimates imply that a one standard deviation increase in Medicare reimbursement leads to a 4 percentage point reduction in mortality (10% compared to the mean). Taking into account one-year spending after the health shock, the implied cost per at least one year of life saved is approximately $80,000. These results are found across different types of hospitals and patients, as well across both identification strategies.