In the presence of transactions costs, no matter how small, arbitrage activity does not necessarily render equal all riskless rates of return. When two such rates follow stochastic processes, it is not optimal immediately to arbitrage out any discrepancy that arises between them. The reason is that immediate arbitrage would induce a definite expenditure of transactions costs whereas, without arbitrage intervention, there exists some, perhaps sufficient, probability that these two interest rates will come back together without any costs having been incurred. Hence, one can surmise that at equilibrium the financial market will permit the coexistence of two riskless rates that are not equal to each other. For analogous reasons, randomly fluctuating expected rates of return on risky assets will be allowed to differ even after correction for risk, leading to important violations of the Capital Asset Pricing Model. The combination of randomness in expected rates of return and proportional transactions costs is a serious blow to existing frictionless pricing models.

We employ a weighted repeat rent estimator to construct quarterly indexes that expand the profession’s ability to make cross-sectional comparisons of housing markets. Our analysis shows that there is considerable heterogeneity in the behavior of rents across cities over the 2000–2010 decade, but the number of cities and years for which nominal rents fell is substantial; rents fell in many cities following the onset of the housing crisis in 2007; and the repeat rent and Bureau of Labor Statistics indexes differ due to sampling and construction methods.

Stratification is a distinctive feature of competitive education markets that can be explained by a preference for good peers. Learning externalities can lead students to care about the ability of their peers, resulting in across-school sorting by ability. This paper shows that a preference for good peers, and therefore stratification, can also emerge endogenously from reputational concerns that arise when graduates use their college of origin to signal their ability. Reputational concerns can also explain puzzling observed trends including the increase in student investment into admissions exam preparation, and the decline in study time at college. (JEL I21, I23, I26, J24)

The industrial cities of the 19th century were incredibly unhealthy places to live. How much progress has been made in reducing these negative health effects over the past 150 years? To help answer this question, we compare mortality patterns in 19th century England to those in Chinese urban areas in 2000. We document that substantial improvements have been made in improving health in cities over this period. Unlike historical English cities, large cities in China have lower mortality than less populated areas. However, we also provide evidence that in China a substantial relationship between industrial pollution and mortality remains.

We conduct tests for reference dependent loss aversion using slot machine gamblers' decisions on when to quit playing for a visit to a casino. Evidence for a lagged status-quo reference point is found in the aggregate, while endogenously determined reference points are found when conditioning on betting intensity choices. Significant deviations from the distributions implied by random quitting support the loss aversion and diminishing sensitivity hypotheses.

We derive a tractable nonlinear earnings function that we estimate separately individual by individual using NLSY79 data. We obtain three ability measures, a rate of skill depreciation, a time discount rate, and a population-wide estimate of the human capital rental rate. We utilize these parameters to verify a number of heretofore untested theorems based on the life cycle model. We show how these human capital production function parameters relate to cognitive ability, personality traits, and family background. Finally, we show that accounting for individual-specific heterogeneity dramatically reduces estimates of population-wide persistence of permanent and transitory shocks by over 50 percent.

ABSTRACT We introduce a novel approach to estimating latent oil risk factors and establish their significance in pricing nonoil securities. Our model, which features four factors with simple economic interpretations, is estimated using both derivative prices and oil‐related equity returns. The fit is excellent in and out of sample. The extracted oil factors carry significant risk premia, and are significantly related to macroeconomic variables as well as portfolio returns sorted on characteristics and industry. The average nonoil portfolio exhibits a sensitivity to the oil factors amounting to a sixth (in magnitude) of that of the oil industry itself.

ABSTRACT We investigate a potential selection benefit of stock-based compensation for rank-and-file employees, whose pay under this compensation form is insensitive to their individual efforts. We use a laboratory experiment to demonstrate that individuals with higher levels of dispositional optimism are more likely to choose compensation that is contingent on a company's future stock price than to choose fixed pay, even after controlling for the individual's risk preferences. Furthermore, compared to participants selecting fixed pay, those selecting stock-based compensation also perform better on a challenging problem-solving task, a result that we show is due to their higher levels of dispositional optimism. Collectively, we demonstrate that stock-based compensation can have productivity-enhancing effects, even if stock prices are completely insensitive to individual efforts. In doing so, we provide a partial explanation for the puzzling prevalence of stock-based compensation plans at the rank-and-file level and contribute to the broader contract-selection literature.

To deter financial misstatements, many companies have recently adopted compensation recovery policies—commonly known as ‘‘clawbacks’’—that authorize the board to recoup compensation paid to executives based on misstated financial reports. Clawbacks have been shown to reduce financial misstatements and increase investors’ confidence on earnings information. We show that the benefits come with an unintended consequence of certain firms substituting for accruals management with real transactions management (e.g., reduce research and development [R&D] expenditures), especially firms with strong incentives to achieve short-term earnings targets, such as firms with high growth or high transient institutional ownership. As such, the total amount of earnings management does not decrease subsequent to clawback adoption. We further show that although real transactions management temporarily boosts those clawback adopters’ short-term profitability and stock performance, this trend reverses after three years. In summary, clawbacks may have unexpected effects for a subset of firms whose managers are under greater pressure to meet earnings goals.

This paper evaluates the impact of three different performance incentive schemes using data from a social experiment that randomized 88 Mexican high schools with over 40,000 students into three treatment groups and a control group. Treatment 1 provides individual incentives for performance on curriculum-based mathematics tests to students only, treatment 2 to teachers only, and treatment 3 gives both individual and group incentives to students, teachers, and school administrators. Program impact estimates reveal the largest average effects for treatment 3, smaller impacts for treatment 1, and no impact for treatment 2.