Showing papers by "Andrei Shleifer published in 2013"
TL;DR: This paper investigated the determinants of regional development using a newly constructed database of 1569 sub-national regions from 110 countries covering 74 percent of the world surface and 97 percent of its GDP.
Abstract: We investigate the determinants of regional development using a newly constructed database of 1569 sub-national regions from 110 countries covering 74 percent of the world’s surface and 97 percent of its GDP. We combine the cross-regional analysis of geographic, institutional, cultural, and human capital determinants of regional development with an examination of productivity in several thousand establishments located in these regions. To organize the discussion, we present a new model of regional development that introduces into a standard migration framework elements of both the Lucas (1978) model of the allocation of talent between entrepreneurship and work, and the Lucas (1988) model of human capital externalities. The evidence points to the paramount importance of human capital in accounting for regional differences in development, but also suggests from model estimation and calibration that entrepreneurial inputs and possibly human capital externalities help understand the data.
544 citations
TL;DR: In this paper, the authors 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, and their choices are tilted toward goods with higher quality/price ratios.
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, more broadly, the choice context). 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 and context-dependent willingness to pay. It also suggests a novel theory of misleading sales.
446 citations
TL;DR: In this paper, the authors present a new model of shadow banking and securitization in which a financial intermediary can originate or acquire both safe and risky loans, and can finance these loans from its own resources as well as by issuing debt.
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 neglect tail risks. SHADOW BANKING TYPICALLY DESCRIBES financial activities occurring outside the regulated banking sector. In recent years, the most important such activities took the form of rapidly expanding provision of short-term safe debt to financial intermediaries through money market funds and other sources outside of the regulated banking sector (Coval, Jurek, and Stafford (2009a), Gorton and Metrick (2010, 2012), Pozsar et al. (2010), Shin (2009)). Much of that debt was collateralized through the process called securitization, which involves origination and acquisition of loans by financial intermediaries, the assembly of these loans into diversified pools, and the tranching of the pools to manufacture safe pieces. While regulated banks played a key role in securitization and held large amounts of securitized assets, a large share of the ultimate financing of securitized assets was provided by the shadow banking system. The collapse of shadow banking in 2007 to 2008 arguably played a critical role in undermining the regulated banking sector, and in bringing about the financial crisis. In this paper, we present a new model of shadow banking and securitization. In the model, a financial intermediary can originate or acquire both safe and risky loans, and can finance these loans from its own resources as well as by issuing debt. The risky loans are subject to both institution-specific idiosyncratic
309 citations
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TL;DR: In this article, a simple model of asset pricing in which payoff salience drives investors' demand for risky assets is presented, and the key implication is that extreme payoffs receive disproportionate weight in the market valuation of assets.
Abstract: We present a simple model of asset pricing in which payoff salience drives investors' demand for risky assets. The key implication is that extreme payoffs receive disproportionate weight in the market valuation of assets. The model accounts for several puzzles in finance in an intuitive way, including preference for assets with a chance of very high payoffs, an aggregate equity premium, and countercyclical variation in stock market returns.
126 citations
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TL;DR: In this paper, the authors present a model of market competition and product differentiation in which consumers' attention is drawn to the products' most salient attributes, and the strategic positioning of each product affects how all other products are perceived.
Abstract: We present a model of market competition and product differentiation in which consumers' attention is drawn to the products' most salient attributes. Firms compete for consumer attention via their choices of quality and price. With salience, strategic positioning of each product affects how all other products are perceived. With this attention externality, depending on the cost of producing quality some markets exhibit "commoditized" price salient equilibria, while others exhibit "de-commoditized" quality salient equilibria. When the cost of producing quality changes, innovation can lead to a radical change in markets. In the context of financial innovation, the model generates the well documented phenomenon of "reaching for yield".
124 citations
TL;DR: Bordalo, Gennaioli, and Shleifer as discussed by the authors proposed a salience-based probability weighting approach to choice under risk, which accounts for several time series and cross-sectional puzzles in finance.
Abstract: In Bordalo, Gennaioli, and Shleifer (2012a)— henceforth, BGS (2012a)—we described a new approach to choice under risk that we called salience theory. In comparisons of risky lotter ies, we argued, individuals’ attention is drawn to those payoffs which are most different or salient relative to the average. In making choices, individuals overweight these salient payoffs relative to their objective probabilities. A simple for malization of such salience-based probability weighting provides an intuitive account of a variety of puzzling evidence in decision theory, such as Allais paradoxes and preference reversals. Salience theory naturally lends itself to the analysis of the demand for risky assets. After all, risky assets are lotteries evaluated in a context described by the alternative investments available in the market. An asset’s salient payoff is naturally defined as one most different from the average market payoff in a given state of the world. We present a simple model of investor choice and market equilibrium in which salience influences the demand for risky assets. This model accounts for several time series and cross-sectional puzzles in finance in an intuitive way, based on its key implication that extreme payoffs receive disproportionate weight in the market valuation of assets. We focus on four well known puzzles. First, salient thinking leads to a preference for assets characterized by the possibility of high, salient payoffs that are overweighted by investors. One
123 citations
TL;DR: The authors found that teaching practices (e.g., copying from the board versus working on projects together) are related to various dimensions of social capital, and that these practices are correlated with student beliefs about cooperation across schools within countries.
Abstract: such as copying from the board versus working on projects together) are related to various dimensions of social capital. In micro-data from three datasets, teaching practices are also strongly correlated with student beliefs about cooperation across schools within countries. To address omitted variable and reverse causality concerns, we show that, within schools, teaching practices also have an independent and sizeable effect on student beliefs. The evidence supports the idea that progressive education promotes the formation of social capital. ( JEL D83, I21, Z13)
96 citations
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TL;DR: The authors analyzed time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011 and found that investor expectations are strongly negatively correlated with model-based expected returns.
Abstract: We analyze time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. We reconcile the evidence by calibrating a simple behavioral model, in which fundamental traders require a premium to accommodate expectations shocks from extrapolative traders, but markets are not efficient.
70 citations
TL;DR: The authors argued that the historical origin of a country's laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes, and presented a unified interpretation of the evidence.
Abstract: In the last dozen years, economists have produced a considerable body of research suggesting that the historical origin of a country’s laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. Much of this research has dealt with rules governing investor protection and their effects on financial markets. We summarize this evidence and attempt a unified interpretation. We also address several objections to the empirical claim that legal origins matter.
62 citations
TL;DR: This article found that better-educated people are more likely to report official misconduct and that more frequent complaints encourage better behavior from officials, and that citizens' complaints might explain the link between education and the quality of government.
Abstract: Better-educated countries have better governments, an empirical regularity that holds in both dictatorships and democracies. Possible reasons for this fact are that educated people are more likely to complain about misconduct by government officials and that 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. Citizens’ complaints might thus be an operative mechanism that explains the link between education and the quality of government.
46 citations
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TL;DR: In this article, a consumption-based asset pricing model is proposed for the stock market, which captures many features of actual prices and returns, but is also consistent with the survey evidence on investor expectations.
Abstract: Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns: they expect the stock market to perform well (poorly) in the near future if it performed well (poorly) in the recent past. Such beliefs are hard to reconcile with existing models of the aggregate stock market. We study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other investors hold fully rational beliefs. We find that the model captures many features of actual prices and returns, but is also consistent with the survey evidence on investor expectations. This suggests that the survey evidence does not need to be seen as an inconvenient obstacle to understanding the stock market; on the contrary, it is consistent with the facts about prices and returns, and may be the key to understanding them.
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TL;DR: In this article, the authors used a newly assembled sample of 1,503 regions from 82 countries to compare the speed of per capita income convergence within and across countries, finding that regional growth is shaped by similar factors as national growth, such as geography and human capital.
Abstract: We use a newly assembled sample of 1,503 regions from 82 countries to compare the speed of per capita income convergence within and across countries. Regional growth is shaped by similar factors as national growth, such as geography and human capital. Regional convergence is about 2.5% per year, not more than 1% per year faster than convergence between countries. Regional convergence is faster in richer countries, and countries with better capital markets. A calibration of a neoclassical growth model suggests that significant barriers to factor mobility within countries are needed to account for the evidence.
TL;DR: In this paper, the authors propose an activity-generating theory of regulation, which states that when social returns to activity are higher than private returns, it may pay the society to generate some information ex ante about how risky firms are and to impose safety standards based on that information.
Abstract: We propose an activity-generating theory of regulation. When courts make errors, tort litigation becomes unpredictable and as such imposes risk on firms, thereby discouraging entry, innovation, and other socially desirable activity. When social returns to activity are higher than private returns, it may pay the society to generate some information ex ante about how risky firms are and to impose safety standards based on that information. In some situations, compliance with such standards should entirely preempt tort liability; in others, it should merely reduce penalties. By reducing litigation risk, this type of regulation can raise welfare.
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TL;DR: In this article, the authors used a newly assembled sample of 1,503 regions from 82 countries to compare the speed of per capita income convergence within and across countries, finding that regional growth is shaped by similar factors as national growth, such as geography and human capital.
Abstract: We use a newly assembled sample of 1,503 regions from 82 countries to compare the speed of per capita income convergence within and across countries. Regional growth is shaped by similar factors as national growth, such as geography and human capital. Regional convergence is about 2.5% per year, not more than 1% per year faster than convergence between countries. Regional convergence is faster in richer countries, and countries with better capital markets. A calibration of a neoclassical growth model suggests that significant barriers to factor mobility within countries are needed to account for the evidence.
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TL;DR: In this article, a consumption-based asset pricing model is proposed for the stock market, which captures many features of actual prices and returns, but is also consistent with the survey evidence on investor expectations.
Abstract: Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns: they expect the stock market to perform well (poorly) in the near future if it performed well (poorly) in the recent past. Such beliefs are hard to reconcile with existing models of the aggregate stock market. We study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other investors hold fully rational beliefs. We find that the model captures many features of actual prices and returns, but is also consistent with the survey evidence on investor expectations. This suggests that the survey evidence does not need to be seen as an inconvenient obstacle to understanding the stock market; on the contrary, it is consistent with the facts about prices and returns, and may be the key to understanding them.
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TL;DR: In this paper, the authors present a model of judicial decision making in which the judge overweights the salient facts of the case and the context of the judicial decision, which is comparative by nature, shapes which aspects of a case stand out and draw the judge's attention.
Abstract: We present a model of judicial decision making in which the judge overweights the salient facts of the case. The context of the judicial decision, which is comparative by nature, shapes which aspects of the case stand out and draw the judge's attention. By focusing judicial attention on such salient aspects of the case, legally irrelevant information can effect judicial decisions. Our model accounts for a range of recent experimental evidence bearing on the psychology of judicial decisions, including anchoring effects in the setting of damages, decoy effects in choice of legal remedies, and framing effects in the decision to litigate. The model also offers a new approach to positive analysis of damage awards in torts.
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TL;DR: In this paper, the authors propose an activity-generating theory of regulation, which states that when social returns to activity are higher than private returns, it may pay the society to generate some information ex ante about how risky firms are and to impose safety standards based on that information.
Abstract: We propose an activity-generating theory of regulation. When courts make errors, tort litigation becomes unpredictable and as such imposes risk on firms, thereby discouraging entry, innovation, and other socially desirable activity. When social returns to activity are higher than private returns, it may pay the society to generate some information ex ante about how risky firms are and to impose safety standards based on that information. In some situations, compliance with such standards should entirely preempt tort liability; in others, it should merely reduce penalties. By reducing litigation risk, this type of regulation can raise welfare.
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TL;DR: In this paper, the authors introduce the model of asset management developed in Gennaioli, Shleifer, and Vishny (GSV, 2014) into a Solow-style neoclassical growth model with diminishing returns to capital.
Abstract: We introduce the model of asset management developed in Gennaioli, Shleifer, and Vishny (GSV, 2014) into a Solow-style neoclassical growth model with diminishing returns to capital. Savers rely on trusted intermediaries to manage their wealth (claims on capital stock), who can charge fees above costs to trusting investors. In this model, the ratio of financial income to GDP increases with the ratio of aggregate wealth to GDP. Both rise along the convergence path to steady state growth. We examine several further implications of the model for management fees, unit costs of finance, and the consequences of shocks to trust and to the capital stock.
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TL;DR: In this article, individual-level survey data from the World Justice Project show that, within countries, better-educated people are more likely to report official misconduct and that more frequent complaints encourage better behavior from officials.
Abstract: Better-educated countries have better governments, an empirical regularity that holds in both dictatorships and democracies. Possible reasons for this fact are that educated people are more likely to complain about misconduct by government officials and that 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. Citizens’ complaints might thus be an operative mechanism that explains the link between education and the quality of government.
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TL;DR: In this article, the authors present a model of market competition and product differentiation in which consumers' attention is drawn to the products' most salient attributes, and the strategic positioning of each product affects how all other products are perceived.
Abstract: We present a model of market competition and product differentiation in which consumers' attention is drawn to the products' most salient attributes. Firms compete for consumer attention via their choices of quality and price. With salience, strategic positioning of each product affects how all other products are perceived. With this attention externality, depending on the cost of producing quality some markets exhibit "commoditized" price salient equilibria, while others exhibit "de-commoditized" quality salient equilibria. When the cost of producing quality changes, innovation can lead to a radical change in markets. In the context of financial innovation, the model generates the well documented phenomenon of "reaching for yield".
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TL;DR: This paper found that better-educated people are more likely to report official misconduct and that more frequent complaints encourage better behavior from officials, and that citizens' complaints might explain the link between education and the quality of government.
Abstract: Better-educated countries have better governments, an empirical regularity that holds in both dictatorships and democracies. Possible reasons for this fact are that educated people are more likely to complain about misconduct by government officials and that 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. Citizens’ complaints might thus be an operative mechanism that explains the link between education and the quality of government.