Knowledge that Transforms

The well-known double marginalization problem understates the inefficiencies arising from vertical relations in consumer search markets where consumers are uninformed about the wholesale prices charged by manufacturers to retailers. Consumer search provides a monopoly manufacturer with an additional incentive to increase its price, worsening the double marginalization problem and lowering the manufacturer's profits. Nevertheless, manufacturers in more competitive wholesale markets may not have an incentive to reveal their prices to consumers. We show that retail prices decrease in search cost, and so both industry profits and consumer surplus increase in search cost.

This paper considers the effect of different dimensions of the FOMC's forward guidance on ex ante investor expectations about future changes in US Treasury yields. Options and Futures data for 2- and 10-year Treasuries is used to extract State-Price Densities of investor beliefs, and the corresponding standard deviation, skewness, and excess kurtosis of these densities are computed. Announcements about extension of the zero-lower bound in 2012-13 are found to reduce the expectations about crash risk, but increase the uncertainty about future yields for the 10-year. Policies about long-security purchases lead investors to place greater weight on no change in future yields.

We provide a life-cycle framework for comparing insurance and disincentive effects of disability benefits. The risks that individuals face and the parameters of the Disability Insurance (DI ) program are estimated from consumption, health, disability insurance, and wage data. We characterize the effects of disability insurance and study how policy reforms impact behavior and welfare. DI features high rejection rates of disabled applicants and some acceptance of healthy applicants. Despite worse incentives, welfare increases as programs become less strict or generosity increases. Disability insurance interacts with welfare programs: making unconditional means-tested programs more generous improves disability insurance targeting and increases welfare.

A burgeoning “Climate-Economy” literature has uncovered many effects of changes in temperature and precipitation on economic activity, but has made considerably less progress in modeling the effects of other associated phenomena, like natural disasters. We develop new, objective data on floods, focusing on Bangladesh. We show that rainfall and self-reported exposure are weak proxies for true flood exposure. These data allow us to study adaptation, giving accurate measures of both long-term averages and short term variation in exposure. This is important in studying climate change impacts, as people will not only experience new exposures, but also experience them differently.

We propose a new approach to test the full-information rational expectations hypothesis which can identify whether rejections of the null arise from information rigidities. This approach quantifies the economic significance of departures from the null and the underlying degree of information rigidity. Applying this approach to US and international data of professional forecasters and other agents yields pervasive evidence consistent with the presence of information rigidities. These results therefore provide a set of stylized facts which can be used to calibrate imperfect information models. Finally, we document evidence of state-dependence in the expectations formation process.

This paper studies, theoretically and empirically, the role of overconfidence in political behavior. Our model of overconfidence in beliefs predicts that overconfidence leads to ideological extremeness, increased voter turnout, and stronger partisan identification. The model also makes nuanced predictions about the patterns of ideology in society. These predictions are tested using unique data that measure the overconfidence and standard political characteristics of a nationwide sample of over 3,000 adults. Our numerous predictions find strong support in these data. In particular, we document that overconfidence is a substantively and statistically important predictor of ideological extremeness, voter turnout, and partisan identification.

This paper estimates historical intergenerational elasticities between fathers and children of both sexes in the United States using a novel empirical strategy. The key insight of our approach is that the information about socioeconomic status conveyed by first names can be used to create pseudo-links across generations. We find that both father-son and father-daughter elasticities were flat during the nineteenth century, increased sharply between 1900 and 1920, and declined slightly thereafter. We discuss the role of regional disparities in economic development, trends in inequality and returns to human capital, and the marriage market in explaining these patterns.

It is well established that consumption is “hump” shaped over an individual's lifecycle, peaking in middle age and then declining in the years that follow. Prior research has documented that consumption declines at retirement, which is inconsistent with the standard lifecycle model with consumption smoothing. Using a unique dataset with detailed administrative records of credit and debit card transactions, we show the hump shaped lifecycle consumption pattern as documented in the literature. Additionally, we show compositional changes in consumption expenditures across individuals in the years surrounding retirement confirming the results of Aguiar and Hurst (2005, 2013).

This paper develops a new laboratory test of the hypothesis that individual investors sell winners too early and ride losers too long. In the experiment, subjects invest in a risky asset, whose price evolves in near-continuous time, and they are provided with the option to liquidate it at a fixed salvage value. Optimal behavior is characterized by an upper and a lower stopping thresholds in the asset price space, thus producing a clear rational benchmark and eliminating known confounds. This design allows me to detect and quantify the disposition effect in a sample of 108 subjects.