Showing papers by "Andrei Shleifer published in 2012"

Salience Theory of Choice Under Risk

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.

Salience and Consumer Choice

Abstract: We present a theory of context-dependent choice in which a consumer's attention is drawn to salient attributes of goods, such as quality or price. An attribute is salient for a good when it stands out among the good's characteristics, in the precise sense of being furthest away in that good from its average level in the choice set (or more generally, an evoked set). A local thinker chooses among goods by attaching disproportionately high weights to their salient attributes. When goods are characterized by only one quality attribute and price, salience tilts choices toward goods with higher ratios of quality to price. We use the model to account for a variety of disparate bits of evidence, including decoy effects in consumer choice, context-dependent willingness to pay, balance of qualities in desirable goods, and shifts in demand toward low quality goods when all prices in a category rise. We then apply the model to study discounts and sales, and to explain demand for low deductible insurance.

A model of shadow banking

Abstract: We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model: i) outside investor wealth drives the demand for riskless debt and indirectly for securitization, ii) intermediary assets and leverage move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational expectations, the shadow banking system is stable and improves welfare. When investors and intermediaries neglect tail risks, however, the expansion of risky lending and the concentration of risks in the intermediaries create financial fragility and fluctuations in liquidity over time.

A Model of Shadow Banking

Abstract: We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry-ups when investors ignore tail risks.

Psychologists at the Gate: A Review of Daniel Kahneman's Thinking, Fast and Slow

Abstract: The publication of Daniel Kahneman's book, Thinking, Fast and Slow, is a major intellectual event. The book summarizes, but also integrates, the research that Kahneman has done over the past forty years, beginning with his path-breaking work with the late Amos Tversky. The broad theme of this research is that human beings are intuitive thinkers and that human intuition is imperfect, with the result that judgments and choices often deviate substantially from the predictions of normative statistical and economic models. In this review, I discuss some broad ideas and themes of the book, describe some economic applications, and suggest future directions for research that the book points to, especially in decision theory. (JEL A12, D03, D80, D87)

Salience and Consumer Choice

Abstract: We present a theory of context-dependent choice in which a consumer's attention is drawn to salient attributes of goods, such as quality or price An attribute is salient for a good when it stands out among the good's attributes, relative to that attribute's average level in the choice set (or generally, the evoked set) Consumers attach disproportionately high weight to salient attributes and their choices are tilted toward goods with higher quality/price ratios The model accounts for a variety of disparate evidence, including decoy effects, context-dependent willingness to pay, and large shifts in demand in response to price shocks

Salience in Experimental Tests of the Endowment Effect

Abstract: We provide a novel account of experimental evidence for the endowment effect using the salience mechanism (Bordalo, Gennaioli, and Shleifer, 2011). The two-stage procedure implemented in experiments implies that the endowed good and other goods are evaluated in different contexts. We describe conditions under which the standard effect occurs, but also account for recent evidence such as a reverse endowment effect for bads and a role for reference prices in modulating the WTA-WTP gap.

Salience in Experimental Tests of the Endowment Effect

Abstract: Starting with Knetsch (1989), experiments on the “endowment effect” (Thaler 1980) typically rely on a two-stage procedure In the first stage, subjects are endowed with a good, such as a mug In the second stage, the same subjects are given the opportunity to trade this good for another good of similar value, such as a pen The endowment effect holds that very few subjects chose to trade, sometimes as few as ten percent In related experiments, subjects state selling prices for their endowment that are much higher than their buying prices for the same good These patterns are hard to reconcile with standard choice theory, which predicts that about half the subjects would trade and that selling prices and buying prices are similar The common explanation of this evidence relies on prospect theory’s loss aversion (Tversky and Kahneman 1979) Because the pain of parting with the endowment looms larger in the decision maker’s mind than the pleasure of acquiring a good of similar value (Kahneman, Knetsch, and Thaler 1990), a decision maker endowed with a mug is unwilling to trade it for a

Education and the Quality of Government

Abstract: Generally speaking, better educated countries have better governments, an empirical regularity that holds in both dictatorships and democracies. We suggest that a possible reason for this fact is that educated people are more likely to complain about misconduct by government officials, so that, even when each complaint is unlikely to succeed, more frequent complaints encourage better behavior from officials. Newly assembled individual-level survey data from the World Justice Project show that, within countries, better educated people are more likely to report official misconduct. The results are confirmed using other survey data on reporting crime and corruption. Citizen complaints might thus be an operative mechanism that explains the link between education and the quality of government.

The Failure of Judges and the Rise of Regulators

Abstract: Government regulation is ubiquitous today in rich and middle-income countries--present in areas that range from workplace conditions to food processing to school curricula--although standard economic theories predict that it should be rather uncommon. In this book, Andrei Shleifer argues that the ubiquity of regulation can be explained not so much by the failure of markets as by the failure of courts to solve contract and tort disputes cheaply, predictably, and impartially. When courts are expensive, unpredictable, and biased, the public will seek alternatives to dispute resolution. The form this alternative has taken throughout the world is regulation. The Failure of Judges and the Rise of Regulators gathers Shleifer's influential writings on regulation and adds to them a substantial introductory essay in which Shleifer critiques the standard theories of economic regulation and proposes "the Enforcement Theory of Regulation," which sees regulation as the more efficient strategy for social control of business. Subsequent chapters present the theoretical and empirical case against the efficiency of courts, make the historical and theoretical case for the comparative efficiency of regulation, and offer two empirical studies suggesting circumstances in which regulation might emerge as an efficient solution to social problems. Shleifer does not offer an unconditional endorsement of regulation and its expansion but rather argues that it is better than its alternatives, particularly litigation.

The Failure of Judges and the Rise of Regulators

Abstract: Government regulation is ubiquitous today in rich and middle-income countries--present in areas that range from workplace conditions to food processing to school curricula--although standard economic theories predict that it should be rather uncommon In this book, Andrei Shleifer argues that the ubiquity of regulation can be explained not so much by the failure of markets as by the failure of courts to solve contract and tort disputes cheaply, predictably, and impartially When courts are expensive, unpredictable, and biased, the public will seek alternatives to dispute resolution The form this alternative has taken throughout the world is regulation The Failure of Judges and the Rise of Regulators gathers Shleifer’s influential writings on regulation and adds to them a substantial introductory essay in which Shleifer critiques the standard theories of economic regulation and proposes “the Enforcement Theory of Regulation,” which sees regulation as the more efficient strategy for social control of business Subsequent chapters present the theoretical and empirical case against the efficiency of courts, make the historical and theoretical case for the comparative efficiency of regulation, and offer two empirical studies suggesting circumstances in which regulation might emerge as an efficient solution to social problems Shleifer does not offer an unconditional endorsement of regulation and its expansion but rather argues that it is better than its alternatives, particularly litigation

Education and the Quality of Government

Abstract: Generally speaking, better educated countries have better governments, an empirical regularity that holds in both dictatorships and democracies We suggest that a possible reason for this fact is that educated people are more likely to complain about misconduct by government officials, so that, even when each complaint is unlikely to succeed, more frequent complaints encourage better behavior from officials Newly assembled individual-level survey data from the World Justice Project show that, within countries, better educated people are more likely to report official misconduct The results are confirmed using other survey data on reporting crime and corruption Citizen complaints might thus be an operative mechanism that explains the link between education and the quality of government

Letter Grading Government Efficiency

Abstract: We mailed letters to non-existent business addresses in 159 countries (10 per country), and measured whether they come back to the return address in the US and how long it takes. About 60% of the letters were returned, taking over 6 months, on average. The results provide new objective indicators of government efficiency across countries, based on a simple and universal service, and allow us to shed light on its determinants. The evidence suggests that both technology and management quality influence the quality of government.

Seven lessons from post-communist transition

Abstract: The 20th anniversary of the beginning of economic reforms in Eastern Europe and the Former Soviet Union provides a good opportunity to comment on the lessons of transition says Andrei Shleifer, a Professor of Economics at Harvard University. He made a top seven list, which might be useful to future reformers. Some of the issues are relevant not only for communist countries; the problems of heavily statist economies are similar.