Showing papers by "Andrei Shleifer published in 2010"
TL;DR: The authors found that distrust creates public demand for regulation, while regulation in turn discourages social capital accumulation, leading to multiple equilibria, and that individuals in low trust countries want more government intervention even though the government is corrupt.
Abstract: In a cross-section of countries, government regulation is strongly negatively correlated with social capital. We document this correlation, and present a model explaining it. In the model, distrust creates public demand for regulation, while regulation in turn discourages social capital accumulation, leading to multiple equilibria. A key implication of the model is that individuals in low trust countries want more government intervention even though the government is corrupt. We test this and other implications of the model using country- and individual-level data on social capital and beliefs about government's role, as well as on changes in beliefs and in trust during the transition from socialism.
716 citations
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TL;DR: In this paper, the authors overview theoretical and empirical research on asset fire sales, which shows how they can arise, how they lead to asset under-valuations, how contracts and bankruptcy regimes adjust to the risk of fire sales and how fire sales can lead to downward spirals or cascades in asset prices.
Abstract: Fire sales are forced sales of assets in which high-valuation bidders are sidelined, typically due to debt overhang problems afflicting many specialist bidders simultaneously. We overview theoretical and empirical research on asset fire sales, which shows how they can arise, how they can lead to asset under-valuations, how contracts and bankruptcy regimes adjust to the risk of fire sales, how fire sales can lead to downward spirals or cascades in asset prices, how arbitrage fails in the presence of fire sales, and how fire sales can reduce productive investment. We conclude by showing how asset fire sales shed light on several aspects of the recent financial crisis, and can account for the success of the liquidity provision and asset purchase policies of the Federal Reserve.
613 citations
TL;DR: In this paper, the authors present new data on effective corporate income tax rates in 85 countries in 2004 and show that corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy.
Abstract: We present new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with PricewaterhouseCoopers, of all taxes imposed on "the same" standardized mid-size domestic firm. In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. Corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy. The results are robust to the inclusion of many controls.
447 citations
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TL;DR: A model of judgment under uncertainty is presented, in which an agent combines data received from the external world with information retrieved from memory to evaluate a hypothesis, which can account for some of the evidence on heuristics and biases presented by Kahneman and Tversky.
Abstract: We present a model of intuitive inference, called “local thinking,” in which an agent combines data received from the external world with information retrieved from memory to evaluate a hypothesis. In this model, selected and limited recall of information follows a version of the respresentativeness heuristic. The model can account for some of the evidence on judgment biases, including conjunction and disjunction fallacies, but also for several anomalies related to demand for insurance.
357 citations
TL;DR: In this paper, the authors collected data on the rules and practices of financial and conflict disclosure by politicians in 175 countries and found that disclosure is correlated with lower perceived corruption when it is public, when it identifies sources of income and conflicts of interest, and when a country is a democracy.
Abstract: We collect data on the rules and practices of financial and conflict disclosure by politicians in 175 countries. Although two thirds of the countries have some disclosure laws, less than a third make disclosures available to the public. Disclosure is more extensive in richer and more democratic countries. Disclosure is correlated with lower perceived corruption when it is public, when it identifies sources of income and conflicts of interest, and when a country is a democracy.
107 citations
TL;DR: In a January 2009 lecture on the financial crisis, Federal Reserve Chairman Bernanke advocated a new Fed policy of credit easing, defined as a combination of lending to financial institutions, providing liquidity directly to key credit markets, and buying of long term securities as discussed by the authors.
Abstract: In a January 2009 lecture on the financial crisis, Federal Reserve Chairman Bernanke advocated a new Fed policy of credit easing, defined as a combination of lending to financial institutions, providing liquidity directly to key credit markets, and buying of long term securities. We show that Bernanke's analysis and recommendations can be naturally considered in a model of "unstable banking," which relies on two mechanisms: 1) fire sales reduce asset prices below fundamental values, and 2) financial institutions prefer speculation to new lending when markets are dislocated. We analyze credit easing and compare it to alternative government interventions during the crisis.
64 citations
TL;DR: In this paper, the authors match the U.S. data with a relative risk aversion of 4 and an elasticity of intertemporal substitution (EIS) of 2 and show that extrapolators' overreaction to dividend news generates countercyclical expected returns while attenuating their consumption response.
Abstract: Many stockholders irrationally believe that high recent stock market returns predict high future stock market returns. The presence of these extrapolators can help resolve the equity premium puzzle if the elasticity of intertemporal substitution (EIS) is greater than one. In our model, extrapolators’ overreaction to dividend news generates countercyclical expected returns while attenuating their consumption response. The equity premium is high because extrapolators believe stocks are a bad hedge and rational investors’ limited risk-bearing capacity prevents them from fully compensating for extrapolators’ reluctance to hold stocks. We match the U.S. data with a relative risk aversion of 4 and an EIS of 2.
52 citations
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TL;DR: In this article, the authors present a theory of choice among lotteries in which the decision maker's attention is drawn to (precisely defined) salient payoffs, and they also use the model to modify the standard asset pricing framework, and use that application to explore the growth/value anomaly in finance.
Abstract: We present a theory of choice among lotteries in which the decision maker's attention is drawn to (precisely defined) salient payoffs. This leads the decision maker to a context-dependent representation of lotteries in which true probabilities are replaced by decision weights distorted in favor of salient payoffs. By endogenizing decision weights as a function of payoffs, our model provides a novel and unified account of many empirical phenomena, including frequent risk-seeking behavior, invariance failures such as the Allais paradox, and preference reversals. It also yields new predictions, including some that distinguish it from Prospect Theory, which we test. We also use the model to modify the standard asset pricing framework, and use that application to explore the well-known growth/value anomaly in finance.
49 citations
TL;DR: In a January 2009 lecture on the financial crisis, Federal Reserve Chairman Bernanke advocated a new Fed policy of credit easing, defined as a combination of lending to financial institutions, providing liquidity directly to key credit markets, and buying of long term securities.
Abstract: In a January 2009 lecture on the financial crisis, Federal Reserve Chairman Bernanke advocated a new Fed policy of credit easing, defined as a combination of lending to financial institutions, providing liquidity directly to key credit markets, and buying of long term securities. We show that Bernanke's analysis and recommendations can be naturally considered in a model of "unstable banking," which relies on two mechanisms: 1) fire sales reduce asset prices below fundamental values, and 2) financial institutions prefer speculation to new lending when markets are dislocated. We analyze credit easing and compare it to alternative government interventions during the crisis.
42 citations
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TL;DR: In this article, the authors present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions: first, investors neglect certain unlikely risks.
Abstract: We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.
41 citations
TL;DR: In this article, the authors trace the evolution of the economic loss rule in construction disputes from 1970 to 2005 and find that the law did not converge to any stable resting point and evolved differently in different states.
Abstract: Efficient legal rules are central to efficient resource allocation in a market economy. But the question whether the common law actually converges to efficiency in commercial areas has remained empirically untested. We create a data set of 461 state court appellate decisions involving the economic loss rule in construction disputes and trace the evolution of this law from 1970 to 2005. We find that the law did not converge to any stable resting point and evolved differently in different states. Legal evolution is influenced by plaintiffs’ choice of which legal claims to make, the relative economic power of the parties, and nonbinding federal precedent.
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TL;DR: In this paper, the authors present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions: first, investors neglect certain unlikely risks.
Abstract: We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive. Financial innovation can make both investors and intermediaries worse off. The model mimics several facts from recent historical experiences, and points to new avenues for financial reform.
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TL;DR: In this article, the authors present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions: first, investors neglect certain unlikely risks.
Abstract: We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.
Posted Content•
TL;DR: In this article, a dataset of 461 state-court appellate decisions involving the economic loss rule in construction disputes is used to trace the evolution of this law from 1970 to 2005 and find that the law did not converge to any stable resting point and evolved differently in different states.
Abstract: Efficient legal rules are central to efficient resource allocation in a market economy. But the question whether the common law actually converges to efficiency in commercial areas has remained empirically untested. We create a dataset of 461 state-court appellate decisions involving the economic loss rule in construction disputes and trace the evolution of this law from 1970 to 2005. We find that the law did not converge to any stable resting point and evolved differently in different states. Legal evolution is influenced by plaintiffs’ choice of which legal claims to make, the relative economic power of the parties, and nonbinding federal precedent.
Posted Content•
TL;DR: In this article, the authors present new data on effective corporate income tax rates in 85 countries in 2004 and show that corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy.
Abstract: We present new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with PricewaterhouseCoopers, of all taxes imposed on "the same" standardized mid-size domestic firm. In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. Corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy. The results are robust to the inclusion of many controls. (JEL E22, F23, G31, H25, H32, L26)
TL;DR: In this paper, the authors present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions: first, investors neglect certain unlikely risks.
Abstract: We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive. Financial innovation can make both investors and intermediaries worse off. The model mimics several facts from recent historical experiences, and points to new avenues for financial reform.
Posted Content•
TL;DR: In this paper, the authors present a theory of choice among lotteries in which the decision maker's attention is drawn to (precisely defined) salient payoffs, which leads the decision-maker to a context-dependent representation of lotsteries, in which true probabilities are replaced by decision weights distorted in favor of salient payoff.
Abstract: We present a theory of choice among lotteries in which the decision maker's attention is drawn to (precisely defined) salient payoffs. This leads the decision maker to a context-dependent representation of lotteries in which true probabilities are replaced by decision weights distorted in favor of salient payoffs. By specifying decision weights as a function of payoffs, our model provides a novel and unified account of many empirical phenomena, including frequent risk-seeking behavior, invariance failures such as the Allais paradox, and preference reversals. It also yields new predictions, including some that distinguish it from prospect theory, which we test.
Posted Content•
TL;DR: In this article, the authors overview theoretical and empirical research on asset fire sales, which shows how they can arise, how they lead to asset under-valuations, how contracts and bankruptcy regimes adjust to the risk of fire sales and how fire sales can lead to downward spirals or cascades in asset prices.
Abstract: Fire sales are forced sales of assets in which high-valuation bidders are sidelined, typically due to debt overhang problems afflicting many specialist bidders simultaneously. We overview theoretical and empirical research on asset fire sales, which shows how they can arise, how they can lead to asset under-valuations, how contracts and bankruptcy regimes adjust to the risk of fire sales, how fire sales can lead to downward spirals or cascades in asset prices, how arbitrage fails in the presence of fire sales, and how fire sales can reduce productive investment. We conclude by showing how asset fire sales shed light on several aspects of the recent financial crisis, and can account for the success of the liquidity provision and asset purchase policies of the Federal Reserve.
Posted Content•
TL;DR: In a January 2009 lecture on the financial crisis, Federal Reserve Chairman Bernanke advocated a new Fed policy of credit easing, defined as a combination of lending to financial institutions, providing liquidity directly to key credit markets, and buying of long term securities as mentioned in this paper.
Abstract: In a January 2009 lecture on the financial crisis, Federal Reserve Chairman Bernanke advocated a new Fed policy of credit easing, defined as a combination of lending to financial institutions, providing liquidity directly to key credit markets, and buying of long term securities. We show that Bernanke's analysis and recommendations can be naturally considered in a model of "unstable banking," which relies on two mechanisms: 1) fire sales reduce asset prices below fundamental values, and 2) financial institutions prefer speculation to new lending when markets are dislocated. We analyze credit easing and compare it to alternative government interventions during the crisis.
Posted Content•
01 Jan 2010
TL;DR: In this paper, the authors present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions: first, investors neglect certain unlikely risks.
Abstract: We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive. Financial innovation can make both investors and intermediaries worse off. The model mimics several facts from recent historical experiences, and points to new avenues for financial reform.