Knowledge that Transforms

Abstract Many companies use color codes in their internal performance reports to highlight how current performance compares to performance in a previous period. We examine whether the use of color coding affects managers' decision‐making in a resource allocation task. We argue that managers' decision accuracy will be lower if they receive noisier feedback, but that this detrimental effect of noise can be mitigated through color coding. Using two experiments, we find evidence consistent with our theory. Managers who receive reports in which performance increases are color‐coded green and performance decreases are color‐coded red are less affected by noise than managers who receive feedback reports without color coding. Supplemental analyses suggest that color coding induces managers to process feedback in a more holistic manner, which reduces the adverse effect of noise on managers' learning processes. Our findings have several important implications for research and practice.

Abstract I examine whether a strategic focus on data analytics is associated with improvements in firms' internal information quality. Using textual analysis of firm disclosures to identify a data analytics strategy, I first document that firm, leadership, and operating environment characteristics are all important determinants of the decision to adopt a data analytics strategy. I next use operating and financial reporting outcomes to infer whether a data analytics strategy improves internal information quality. I find that a data analytics strategy is associated with enhanced operating efficiency, as adopting firms invest and utilize existing resources more efficiently. I also find that a data analytics strategy is associated with more accurate management forecasts. These results, collectively, are consistent with a data analytics strategy improving firms' internal information quality. Lastly, I corroborate and extend my findings with job postings data, and the results suggest that firm leadership signals their support for data analytics initiatives through disclosure.

Abstract Auditor changes are significant corporate events marking disruptions in the auditor‐client relationship. Prior studies have primarily examined the impact of such changes on audit quality and investment decisions of market participants. We study the effect of auditor changes on the voluntary disclosure of forward‐looking information. Managers may choose to reduce disclosure due to the possible adverse effect of the disruptions on disclosure credibility. Alternatively, shareholders may demand increased disclosure to intensify monitoring, as the auditor change signals potential issues between the company and the auditor. Employing multiple identification strategies, we find that firms are less likely to issue management earnings forecasts (MEFs) following auditor changes. We also find that governance quality mitigates the negative impact of auditor changes on the issuance of MEFs. Additionally, auditor changes are associated with lower market reactions to forecast releases. The overall evidence is consistent with the notion of reduced forecast credibility. Lastly, we conduct cross‐sectional analyses on characteristics of the auditor changes and find evidence consistent with signaling and anticipated successor audit quality to be underlying mechanisms for the association between auditor changes and MEFs. Our study provides the first large sample evidence that auditor changes have a disruptive effect on the voluntary disclosure of forward‐looking information.

This paper uses a laboratory experiment to study beliefs and their relationship to action and strategy choices in finitely and indefinitely repeated prisoners’ dilemma games. We find subjects’ elicited beliefs about the other player’s action are generally accurate despite some systematic deviations, and anticipate the evolution of behavior differently between the finite and indefinite games. We also use the elicited beliefs over actions to recover beliefs over supergame strategies played by the other player. We find these beliefs over strategies correctly capture the different classes of strategies played in each game, vary substantially across subjects, and rationalize their strategies. (JEL C72, C73, C92, D83)

This paper characterizes the effects of ambiguity aversion under dispersed information. The equilibrium outcome is observationally equivalent to a Bayesian forecast of the fundamental with increased sensitivity to signals and a pessimistic bias. This equivalence result takes a simple form that accommodates dynamic information and strategic interactions. Applying the result, we show that ambiguity aversion helps rationalize the joint empirical pattern between the bias and persistence of inflation forecasts conditional on household income. In a policy game à la Barro and Gordon (1983) with ambiguity-averse agents, the policy rule features higher average inflation and increased responsiveness to fundamentals. (JEL D81, D83, E31, E37, E71)

A prominent argument in the political correctness debate is that people feel pressure to publicly espouse sociopolitical views they do not privately hold, and that such misrepresentations might render public discourse less vibrant and informative. This paper formalizes the argument in terms of social image and evaluates it experimentally in the context of college campuses. The results show that (i) social image concerns drive a wedge between the sensitive sociopolitical attitudes that college students report in private and in public; (ii) public utterances are indeed less informative than private utterances; and (iii) information loss is exacerbated by (partial) audience naïveté. (JEL D72, D83, D91, I23, Z13)

Scientific evidence has documented we are undergoing a mass extinction of species, caused by human activity. However, allocating conservation resources is difficult due to scarce evidence on damages from losing individual species. This paper studies the collapse of vultures in India, triggered by the expiry of a patent on a painkiller. Our results suggest the functional extinction of vultures—efficient scavengers that removed carcasses from the environment—increased human mortality by over 4 percent because of a large negative shock to sanitation. We quantify damages at $69.4 billion per year. These results suggest high returns to conserving keystone species such as vultures. (JEL I12, O13, O15, Q53, Q57, Q58)

Most of the rise in overall earnings inequality from 1996 to 2018 is accounted for by rising between-industry dispersion. The contribution of industries is right-skewed with the top 10 percent of four-digit NAICS industries dominating. The top 10 percent are clustered in high-paying high-tech and low-paying retail sectors. In the top industries, high-wage workers are increasingly sorted to high-wage industries with rising industry premia. In the bottom industries, low-wage workers are increasingly sorted into lowwage industries, with rising employment and falling industry wage premia. (JEL J23, J24, J31, L25, M52)

This paper concerns Saez and Stantcheva’s (2016) generalized social marginal welfare weights, which aggregate losses and gains due to tax policies while incorporating nonutilitarian ethical considerations. The approach evaluates local tax changes without a global social objective. I show that local tax policy comparisons implicitly entail global comparisons. Moreover, whenever welfare weights do not have a utilitarian structure, these implied global comparisons are inconsistent. I argue that broader ethical values cannot in general be represented simply by modifying the weights placed on benefits to different people, and a more thoroughgoing modification of the utilitarian approach is required. (JEL D60, D63, D71, H21, H23, I31)

We estimate an equilibrium sorting model of housing location and commuting mode choice with endogenous traffic congestion to evaluate urban transportation policies. Leveraging fine-scale data from travel diaries and housing transactions identifying residents' home and work locations, we recover rich preference heterogeneity over both travel mode and residential location decisions. While different policies produce the same congestion reduction, their impacts on social welfare differ drastically. In addition, sorting undermines the congestion reduction under driving restrictions and subway expansion but strengthens it under congestion pricing. The combination of congestion pricing and subway expansion delivers the greatest congestion relief and efficiency gains. (JEL H76, O18, P25, R23, R31, R41, R48)