Using panel data on over 300,000 Israeli women from 1999 to 2005, we exploit variation in Israel's child subsidy to identify the impact of changes in the price of a marginal child on fertility. We find a positive, statistically significant, and economically meaningful price effect on overall fertility and, consistent with Becker (1960) and Becker and Tomes (1976), a small effect of income on fertility, which is negative at low and positive at high income levels. We also find a price effect on fertility among older women, suggesting that part of the overall effect is due to a reduction in total fertility.

We exploit a novel setting in which the same piece of information affects two sets of firms: one set of firms requires straightforward processing to update prices, while the other set requires more complicated analyses to incorporate the same piece of information into prices. We document substantial return predictability from the set of easy-to-analyze firms to their more complicated peers. Specifically, a simple portfolio strategy that takes advantage of this straightforward vs. complicated information processing classification yields returns of 118 basis points per month before transaction costs. Consistent with processing complexity driving the return relation, we further show that the more complicated the firm, the more pronounced the return predictability. In addition, we find that sell-side analysts are subject to these same information processing constraints, as their forecast revisions of easy-to-analyze firms predict their future revisions of more complicated firms.

A large body of literature suggests that firm-level stock prices “underreact” to news about future cash flows; i.e., shocks to a firm's expected cash flows are positively correlated with shocks to expected returns on its stock. We examine the joint behavior of returns, cash-flow news, and trading between individuals and institutions. Institutions buy shares from (sell shares to) individuals in response to positive (negative) cash-flow news, thus exploiting the underreaction phenomenon. Institutions are not simply following price momentum strategies: When price goes up (down) in the absence of any cash-flow news, institutions sell shares to (buy shares from) individuals. Although institutions are trading in the “right” direction, institutions as a group outperform individuals by only 1.44% per annum before transaction and other costs, because they are extremely conservative in deviating from the value-weighted market index.

In the past two decades, considerable progress has been made in studying the economic relationships between countries through the linkage of large-scale national econometric models. Examples of these projects include Project Link, the RDX2-MPS experiments of the Bank of Canada, and the multicountry model of the Federal Reserve Board. While these models tell us much, they typically suffer from several important problems. First, the linkages are often incomplete. In some cases the separate country models may only be linked via the trade accounts. Or, if capital and factor flows are considered, they are modeled in only a highly aggregated fashion. Second, as Ray Fair (1979) has noted, no model does an adequate job of linking the underlying sectoral flows of funds accounts with the national income accounts. Therefore, in the interest of modeling aggregate relationships, underlying balance sheet constraints may be violated or ignored. This could have, Fair argues, important consequences for empirical results.' In this paper we suggest our own strategy for modeling the economic linkages between any two countries. Our strategy focuses on the underlying flows between these two countries and the sectoral contributions to these flows. That is, we propose to merge the flow of funds accounts via their bilateral balance of payments. We envision an integrated flow of funds accounting framework with the two countries sharing a common balance of payments. This modeling strategy has several advantages. First, our suggested framework could be used, following the strategy of Fair, to supply the financial underpinning for future economic modeling of international linkages of prices and interest rates. The balance sheet constraints inherent in the framework will impart additional information in any statistical estimation of such a model. Second, this strategy should yield a better understanding of a country's balance of payments since it necessarily links domestic decision making with its international outcome. Third, our framework should be useful to policymakers since it would allow them to model the underlying financial implications of proposed policy changes. Finally, the implementation of our proposal could lead to improved accuracy in balance of payments statements. tDiscLussant: John A. Sawyer, University of Toronto.

We develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts. We account for adverse selection by modeling unobserved heterogeneity in both risk (claim rate) and risk aversion. We find large and skewed heterogeneity in risk attitudes. In addition, women are more risk averse than men, risk aversion exhibits a U-shape with respect to age, and proxies for income and wealth are positively associated with absolute risk aversion. Finally, unobserved heterogeneity in risk aversion is greater than that of risk, and, as we illustrate, has important implications for insurance pricing.