We derive a parsimonious rational model of active portfolio management that reproduces many regularities widely regarded as anomalous. Fund flows rationally respond to past performance in the model even though performance is not persistent and investments with active managers do not outperform passive benchmarks on average. The lack of persistence in returns does not imply that differential ability across managers is nonexistent or unrewarded or that gathering information about performance is socially wasteful. The model can quantitatively reproduce many salient features in the data. The flow-performance relationship is consistent with high average levels of skills and considerable heterogeneity across managers. One of the central mysteries facing financial economics is why financial intermediaries appear to be so highly rewarded, despite the apparent fierce competition between them and the uncertainty about whether

I show that among women likely to use welfare, movers move to higher‐benefit states. I also find that the probability likely welfare users will move at all is lower in higher‐benefit states. This effect is concentrated early in the life cycle, as theory predicts. I construct a theoretical framework to measure the impact of welfare migration on optimal state benefits. Simulation results suggest little impact in higher‐benefit states, but possibly a more substantial impact in other states. Finally, evidence suggests little reason for concern (due to welfare migration) in using cross‐state variation in welfare generosity to identify incentive effects of the welfare system on other outcome variables.

This paper provides a case study of the effect of labor relations on product quality. We consider whether a long, contentious strike and the hiring of replacement workers at Bridgestone/Firestone’s Decatur, Illinois, plant in the mid‐1990s contributed to the production of defective tires. Using several independent data sources and looking before and after the strike and across plants, we find that labor strife at the Decatur plant closely coincided with lower product quality. Monthly data suggest that defects were particularly high around the time concessions were demanded and when large numbers of replacement workers and returning strikers worked side by side.

Despite the centrality of the median voter prediction in political economy models, overwhelming empirical evidence shows that legislators regularly take positions that diverge significantly from the preferences of the median voter in their districts. However, all these empirical studies to date lack the necessary data to directly measure the preferences of the median voter. We utilize a unique data set consisting of individual‐level voting data that allows us to construct direct measures of voter preferences. We find that legislators are most constrained by the preferences of the median voter in homogeneous districts.

Managed care organizations rely on incentives that encourage physicians to limit medical expenditures, but little is known about how physicians respond to these incentives. We address this issue by analyzing the physician incentive contracts in use at a health maintenance organization. By combining knowledge of the incentive contracts with internal company records, we examine how medical expenditures vary with the intensity of the incentive to cut costs. Our investigation leads us to a novel explanation for high‐powered group incentives: such incentives can improve efficiency in the allocation of resources when the allocation process is based on the professional judgment of multiple agents. Our empirical work indicates that medical expenditures at the HMO are 5 percent lower than they would have been in the absence of incentives.