Knowledge that Transforms

A significant policy concern about the emerging plaintiff legal funding industry is that loans will undermine settlement. When the plaintiff has private information about damages, we find that the optimal ( plaintiff-funder) loan induces all plaintiff types to make the same demand, resulting in full settlement; implementation may entail a very high repayment amount. Plaintiffs' attorneys with contingent-fee compensation benefit from such financing, as it eliminates trial costs. When the defendant has private information about his likelihood of being found liable, we find that the likelihood of settlement is unaffected. In both settings the defendant's incentive for care-taking is unaffected. (JEL D82, K41, L84)

Using Danish high-frequency payroll data and tax reform variation, we detect year-end tax avoidance among top managers. Five to seven percent of top managers exploit year-end tax planning strategies to save taxes. Around 30 percent of the top managers engaging in year-end tax avoidance do so by retiming bonus payments while the rest shift regular wage income. However, bonus timing is most tax-sensitive. When considering all of the top managers receiving a December bonus, we find that more than one-quarter retime the bonus payment, whereas only 5 percent of those not receiving a bonus shift regular wage income.

Many observers argue that political polarization, particularly on social and cultural issues, has increased in the United States. How does this influence the political competition on economic issues? We analyze this question using a framework in which two officemotivated candidates differ in their fixed ideological position and choose a level of government spending to maximize their vote share. In equilibrium, candidates cater to a set of swing voters who contain socially conservative and economically-liberal voters, as well as socially-liberal and economically-conservative voters. We analyze how voters’ cultural preferences and candidates’ cultural positions influence equilibrium economic positions. (JEL D72, E62, H50, Z13)

We estimate an insurer-specific preference function which rationalizes hospital referrals for privately insured births in California. The function is additively separable in: a hospital price paid by the insurer, the distance traveled, and plan- and severity-specific hospital fixed effects (capturing hospital quality). We use an inequality estimator that allows for errors in price and detailed hospital-severity interactions and obtain markedly different results than those from a logit. The estimates indicate that insurers with more capitated physicians are more responsive to price. Capitated plans send patients further to utilize similar quality, lower-priced hospitals; but the cost-quality trade-off does not vary with capitation rates.

We study a uniform-price auction where k identical common-value objects are allocated amongst z > k bidders who have imperfect signals about the state of the world. The common valuation is determined jointly by the state and an action that is chosen after winning an object. In large auctions, there are symmetric equilibria where the auction price aggregates no information. Moreover, market statistics other than price (e.g., the amount of rationing or the bid distribution) contain extra information about the state. In contrast, in standard large auctions without actions, the price aggregates all relevant information. (JEL D44, D82, D83)

Using new data on real estate listings, we provide new evidence that foreclosures have a causal effect on nearby house prices and disentangle the effect into two sources: competition and disamenities. We identify the causal effect by showing that sellers respond to new REO listings in the exact week of listing, not a week before and not a week after. We disentangle competition and disamenity effects by examining the spillover effect across various stages of the foreclosure process. We find that competition effects are important in all areas, but only find evidence for disamenity effects in high density, low price neighborhoods. (JEL R31)

Hiring inexperienced workers generates information about their abilities. If this information is public, workers obtain its benefits. If workers cannot compensate firms for hiring them, firms will hire too few inexperienced workers. I determine the effects of hiring workers and revealing more information about their abilities through a field experiment in an online marketplace. I hired 952 randomly-selected workers, giving them either detailed or coarse public evaluations. Both hiring workers and providing more detailed evaluations substantially improved workers' subsequent employment outcomes. Under plausible assumptions, the experiment's market-level benefits exceeded its cost, suggesting that some experimental workers had been inefficiently unemployed. (JEL J23, J24, M51)

Term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small-sample bias. We show that accounting for this bias alters the conclusions about the trend, cycle, and macroeconomic determinants of the term premia estimated in Wright (2011). His term premium estimates are essentially acyclical, and often just parallel the secular trend in longterm interest rates. In contrast, bias-corrected term premia show pronounced countercyclical behavior, consistent with theoretical and empirical arguments about movements in risk premia. (JEL E31, E43, E52, G12, H63)

A single worker allocates her time among different projects which are progressively assigned. When the worker works on too many projects at the same time, the output rate decreases and completion time increases according to a law which we derive. We call this phenomenon “task juggling” and argue that it is pervasive in the workplace. We show that task juggling is a strategic substitute of worker effort. We then present a model where task juggling is the result of lobbying by clients, or coworkers, each seeking to get the worker to apply effort to his project ahead of the others’. (JEL J22, M12, M54)

Procurement contracts are often renegotiated because of changes that are required after their execution. Using highway paving contracts we show that renegotiation imposes significant adaptation costs. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs are an important determinant of their bids. A structural empirical model compares adaptation costs to bidder markups and shows that adaptation costs account for 7.5–14 percent of the winning bid. Markups from private information and market power, the focus of much of the auctions literature, are much smaller by comparison. Implications for government procurement are discussed. (JEL D44, D82, D86, H57, L13, L74, R42)