This article develops a dynamic asset pricing model with persistent heterogeneous beliefs. The model features competitive traders who receive idiosyncratic signals about an underlying fundamentals process. We adapt Futia's (1981) frequency domain methods to derive conditions on the fundamentals that guarantee non-invertibility of the mapping between observed market data and the underlying shocks to agents' information sets. When these conditions are satisfied, agents remain asymmetrically informed in equilibrium and must ‘forecast the forecasts of others’. An econometrician, who incorrectly imposes a homogeneous beliefs equilibrium, will find that the asset price displays violations of variance bounds, predictability of excess returns, and rejections of cross-equation restrictions.

In the presence of high uncertainty and limited experience, can observing the actions of other acquiring predecessors help firms make better acquisition decisions? Using a sample of cross-border M&As conducted by US acquirers in developing countries, we document a positive and significant relationship between an acquirer's performance and its predecessors' acquisition activity. This relationship is especially pronounced in the prevalence of news events about the outcome of predecessors' acquisitions, when predecessors consist of US peers from the same industry and/or when targets are based in culturally distant countries. Our findings shed light on one channel through which information spillovers across industries and acquiring firms could be a key driver of value creation in developing market cross-border M&As.

We show that sellers may earn a reputation for their “ability” to deliver high-quality goods on average by honestly announcing the realized quality of items for sale every period. As the expected revenue stream from continuing with honest communication increases with their ability, high-ability sellers remain honest while low-ability sellers find it too costly and sometimes lie about quality for short-term gain. Thus, cheap-talk communication facilitates the market's learning of a seller's ability and strengthens reputation effects. We study this new reputation mechanism and the induced market dynamics, first when sellers cannot restart with a new identity and second when they can. We extend the analysis to various other situations such as voluntary refund and moral hazard.

Pay distributions fan out with experience. The leading explanations for this pattern are that over time, either employers learn about worker productivity but productivity remains fixed or workers' productivities themselves evolve heterogeneously. We propose a dynamic specification that nests both employer learning and dynamic productivity heterogeneity. We estimate this model on a 20-year panel of pay and performance measures from a single, large firm. The advantage of these data is that they provide us with repeat measures of productivity, some of which have not yet been observed by the firm when it sets wages. We use our estimates to investigate how learning and dynamic productivity heterogeneity jointly contribute to the increase in pay dispersion with age. We find that both mechanisms are important for understanding wage dynamics. The dispersion of pay increases with experience primarily because productivity differences increase. Imperfect learning, however, means that wages differ significantly from individual productivity all along the life cycle because firms continuously struggle to learn about a moving target in worker productivity. Our estimates allow us to calculate the degree to which imperfect learning introduces a wedge between the private and social incentives to invest in human capital. We find that these disincentives exist throughout the life cycle but increase rapidly after about 15 years of experience. Thus, in contrast to the existing literature on employer learning, we find that imperfect learning might have especially large effects on investments among older workers.

This paper explores the determinants of financial development by focusing on the role played by barriers to the diffusion of financial technology. These barriers are measured using human genetic distance from the technology frontier. The results based on cross-sectional data for 123 countries suggest that genetic distance to the global frontier has an economically and statistically significant effect on financial development, in that countries that are genetically far from the technology leader tend to have lower levels of financial development. Genetic distance is found to have the largest effect, even after controlling for other determinants of financial development established in the literature. These findings indicate that cultural barriers to the diffusion of financial technology across borders impact financial development by influencing the follower countries’ ability to adopt and adapt innovations from the frontier.

Investors face significant barriers in evaluating the performance of hedge funds and commodity trading advisors (CTAs). The only available performance data comes from voluntary reporting to private companies. Funds have incentives to strategically report to these companies, causing these data sets to be severely biased. And, because hedge funds use nonlinear, state-dependent, leveraged strategies, it has proven difficult to determine whether they add value relative to benchmarks. We focus on commodity trading advisors, a subset of hedge funds, and show that during the period 1994-2007 CTA excess returns to investors (i.e., net of fees) averaged 85 basis points per annum over US T-bills, which is insignificantly different from zero. We estimate that CTAs on average earned gross excess returns (i.e., before fees) of 5.4%, which implies that funds captured most of their performance through charging fees. Yet, even before fees we find that CTAs display no alpha relative to simple futures strategies that are in the public domain. We argue that CTAs appear to persist as an asset class despite their poor performance, because they face no market discipline based on credible information. Our evidence suggests that investors' experience of poor performance is not common knowledge.

We examine whether disagreement between managers and investors, in the context of mergers and acquisitions, affects the information contained in bidder returns. We test the disagreement hypothesis, which posits that disagreement causes investors to be less certain about their revaluation of acquiring firms, making bidder returns less informative. Consistent with this hypothesis, we find an inverse relation between bidder returns, which proxy for the degree of disagreement, and the change in the bidders' implied volatility. Also consistent with the hypothesis, we find that the significant inverse relation between bidder returns and the change in implied volatility holds only for cases of negative bidder returns. We test for alternative explanations of this relation, but continue to find robust support for the disagreement hypothesis. Finally, the relation between bidder returns and the likelihood of deal completion is stronger when announcement returns are more informative, suggesting managers “listen to the market” more when the market response is more informative.

A carbon tax is a promising tool for discouraging the greenhouse gas emissions that cause climate change. In principle, a well-designed tax could reduce the risk of climate change, minimize the cost of emissions reductions, encourage innovation in low-carbon technologies, and raise new public revenue. But designing a real-world carbon tax poses significant challenges. We analyze those challenges from a public finance perspective, emphasizing three tax policy design issues: setting the tax rate, collecting the tax, and using the resulting revenue. The benefits of a carbon tax will depend on how policymakers address those issues.

We examine board structure in France, which since 1966 has allowed firms the freedom to choose between unitary and two-tier boards. We analyze how this choice relates to characteristics of the firm and its environment. Firms with severe asymmetric information tend to opt for unitary boards; firms with a potential for private benefits extraction tend to adopt two-tier boards. Chief executive officer turnover is more sensitive to performance at firms with two-tier boards, indicating greater monitoring. Our results are broadly consistent with the Adams and Ferreira (2007) model and suggest that gains result from allowing freedom of contract about board structure.