Showing papers in "Quarterly Journal of Economics in 2001"

Boys will be Boys: Gender, Overconfidence, and Common Stock Investment

Abstract: Theoretical models predict that overconedent investors trade excessively We test this prediction by partitioning investors on gender Psychological research demonstrates that, in areas such as enance, men are more overconedent than women Thus, theory predicts that men will trade more excessively than women Using account data for over 35,000 households from a large discount brokerage, we analyze the common stock investments of men and women from February 1991 through January 1997 We document that men trade 45 percent more than women Trading reduces men’s net returns by 265 percentage points a year as opposed to 172 percentage points for women It’s not what a man don’t know that makes him a fool, but what he does know that ain’t so Josh Billings, nineteenth century American humorist It is difecult to reconcile the volume of trading observed in equity markets with the trading needs of rational investors Rational investors make periodic contributions and withdrawals from their investment portfolios, rebalance their portfolios, and trade to minimize their taxes Those possessed of superior information may trade speculatively, although rational speculative traders will generally not choose to trade with each other It is unlikely that rational trading needs account for a turnover rate of

The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior

Abstract: This paper analyzes the impact of automatic enrollment on 401(k) savings behavior. We have two key e ndings. First, 401(k) participation is signie cantly higher under automatic enrollment. Second, a substantial fraction of 401(k) participants hired under automatic enrollment retain both the default contribution rate and fund allocation even though few employees hired before automatic enrollment picked this particular outcome. This “ default” behavior appears to result from participant inertia and from employee perceptions of the default as investment advice. These e ndings have implications for the design of 401(k) savings plans as well as for any type of Social Security reform that includes personal accounts over which individuals have control. They also shed light more generally on the importance of both economic and noneconomic (behavioral) factors in the determination of individual savings behavior.

Are CEOs Rewarded for Luck? The Ones Without Principals Are

Abstract: The contracting view of CEO pay assumes that pay is used by shareholders to solve an agency problem. Simple models of the contracting view predict that pay should not be tied to luck, where luck is defined as observable shocks to performance beyond the CEO's control. Using several measures of luck, we find that CEO pay in fact responds as much to a lucky dollar as to a general dollar. A skimming model, where the CEO has captured the pay-setting process, is consistent with this fact. Because some complications to the contracting view could also generate pay for luck, we test for skimming directly by examining the effect of governance. Consistent with skimming, we find that better governed firms pay their CEO less for luck.

Institutional Investors and Equity Prices

Abstract: We analyze institutional investors' preferences for stocks and the implications that these preferences have for stock-market prices and returns. We find that -- a category including all managers with greater than $100 million under discretionary control -- have nearly doubled their share of the common-stock market from 1980 to 1996 most of this increase driven by the growth in holdings of the largest one-hundred institutions. Large institutions, when compared with other investors, prefer stocks that have greater market capitalizations, are more liquid, and have higher book-to-market ratios and lower returns for the previous year. We discuss how institutional preferences, when combined with the rising share of the market held by institutions, induce changes in the relative prices and returns of large stocks and small stocks. We provide evidence to support the in-sample implications for prices and realized returns and we derive out-of-sample predictions for expected returns.

Peer Effects with Random Assignment: Results for Dartmouth Roommates

Abstract: This paper uses a unique data set to measure peer effects among college age roommates. Freshman year roommates and dormmates are randomly assigned at Dartmouth College. I find that in this group, peer effects are very important in determining levels of academic effort and in decisions to join social groups such as fraternities. Residential peer effects are markedly absent in other major life decisions such as choice of college major. Several forms of peer effects are considered. The data support a model in which peer effects are driven by roommate behavior after the freshmen arrive. Social learning based on a roommate's observable pre-Dartmouth information or skills appears to be less important. Peer effects in GPA occur at the individual room level whereas peer effects in fraternity membership occur both at the room level and the entire dorm level. I also find that a freshman with high social ability is likely to remain with his or her roommates in sophomore year, but high academic ability actually decreases roommate retention.

Prospect Theory and Asset Prices

Abstract: We study asset prices in an economy where investors derive direct utility not only from consumption but also from fluctuations in the value of their financial wealth. They are loss averse over these fluctuations, and the degree of loss aversion depends on their prior investment performance. We find that our framework can help explain the high mean, excess volatility, and predictability of stock returns, as well as their low correlation with consumption growth. The design of our model is influenced by prospect theory and by experimental evidence on how prior outcomes affect risky choice.

Loss Aversion and Seller Behavior: Evidence from the Housing Market

Abstract: Data from downtown Boston in the 1990s show that loss aversion determines seller behavior in the housing market. Condominium owners subject to nominal losses 1) set higher asking prices of 25‐ 35 percent of the difference between the property’ s expected selling price and their original purchase price; 2) attain higher selling prices of 3‐ 18 percent of that difference; and 3) exhibit a much lower sale hazard than other sellers. The list price results are twice as large for owneroccupants as investors, but hold for both. These e ndings suggest that sellers are averse to realizing (nominal) losses and help explain the positive price-volume correlation in real estate markets.

Which is the Fair Sex? Gender Differences in Altruism

Abstract: We study gender differences in altruism by examining a modieed dictator game with varying incomes and prices. Our results indicate that the question “which is the fair sex?” has a complicated answer—when altruism is expensive, women are kinder, but when it is cheap, men are more altruistic. That is, we end that the male and female “demand curves for altruism” cross, and that men are more responsive to price changes. Furthermore, men are more likely to be either perfectly selesh or perfectly seleess, whereas women tend to be “equalitarians” who prefer to share evenly.

Discrimination in a Segmented Society: An Experimental Approach

Abstract: This paper proposes an experimental approach to studying different aspects of discrimination. We let participants play various games with opponents of distinct ethnic affiliation. Strategies based upon such ethnic affiliation provide direct evidence of ethnic discrimination. This approach was utilized to study ethnic discrimination in Israeli Jewish society. Using the “trust game,” we detected a systematic mistrust toward men of Eastern origin. A “dictator game” experiment indicated that this discrimination was due to (mistaken) ethnic stereotypes and not to a “taste for discrimination.” The “ultimatum game” enabled us to trace another ethnic stereotype that reversed the discrimination’s direction. One of the surprising results is that this ethnic discrimination is an entirely male phenomenon.

Moving to Opportunity in Boston: Early Results of a Randomized Mobility Experiment

Abstract: This paper examines the short-run impacts of a change in residential neighborhood on the well-being of low-income families, using evidence from a program in which eligibility for a housing voucher was determined by random lottery. We examine the experiences of households at the Boston site of Moving To Opportunity (MTO), a demonstration program in five cities. Families in high poverty public housing projects applied to MTO and were assigned by lottery to one of three groups: Experimental-offered mobility counseling and a Section 8 subsidy valid only in a Census tract with a poverty rate of less than 10 percent; Section 8 Comparison-offered a geographically unrestricted Section 8 subsidy; or Control-offered no new assistance, but continued to be eligible for public housing. Our quantitative analyses of program impacts uses data on 540 families from a baseline survey at program enrollment, a follow-up survey administered l to 3.5 years after random assignment, and state administrative data on earnings and welfare receipt. 48 percent of the Experimental group and 62 percent of the Section 8 Comparison group moved through the MTO program. One to three years after program entry, families in both treatment groups were more likely to be residing in neighborhoods with low poverty rates and high education levels than were families in the Control group. However, while members of the Experimental group were much more likely to be residing in suburban communities than were those in the Section 8 group, the lower program take-up rate among the Experimental group resulted in more families remaining in the most distressed communities. Households in both treatment groups experienced improvements in multiple measures of well-being relative to the Control group including increased safety, improved health among household heads, and fewer behavior problems among boys. Experimental group children were also less likely to be a victim of a personal crime, to be injured, or to experience an asthma attack. There are no significant impacts of either MTO treatment on the employment, earnings, or welfare receipt of household heads in the first three years after random assignment.

Skill-Biased Organizational Change? Evidence from A Panel of British and French Establishments

Abstract: This paper investigates the determination and consequences of organizational changes (OC) in a panel of British and French establishments. Organizational changes include the decentralization of authority, delayering of managerial functions, and increased multitasking. We argue that OC and skills are complements. We offer support for the hypothesis of "skill-biased" organizational change with three empirical findings. First, organizational changes reduce the demand for unskilled workers in both countries. Second, OC is negatively associated with increases in regional skill price differentials (a measure of the relative supply of skill). Third, OC leads to greater productivity increases in establishments with larger initial skill endowments. Technical change is also complementary with human capital, but the effects of OC is not simply due to its correlation with technological change but has an independent role.

Choice and Procrastination

Abstract: Author(s): O'Donoghue, Ted; Rabin, Matthew | Abstract: Recent models of procrastination due to self-control problems assume that a procrastinator considers just one option and is unaware of her self-control problems. We develop a model where a person chooses from a menu of options and is partially aware of her self-control problems. This menu model replicates earlier results and generates new ones. A person might forego completing an attractive option because she plans to complete a more attractive but never-to-be-completed option. Hence, providing a non-procrastinator additional options can induce procrastination, and a person may procrastinate worse pursuing important goals than unimportant ones.

Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis

Abstract: Although the college-high school wage gap for younger U. S. men has doubled over the past 30 years, the gap for older men has remained nearly constant. In the United Kingdom and Canada the college-high school wage gap also increased for younger relative to older men. Using a model with imperfect substitution between similarly educated workers in different age groups, we argue that these shifts reflect changes in the relative supply of highly educated workers across age groups. The driving force behind these changes is the slowdown in the rate of growth of educational attainment that began with cohorts born in the early 1950s in all three countries.

Welfare and Macroeconomic Interdependence

Abstract: We develop a baseline model of monetary and fiscal transmission in interdependent economies. The welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade. An unanticipated exchange rate depreciation can be beggar-thyself rather than beggar-thy-neighbor, as gains in domestic output are offset by deteriorating terms of trade. Smaller and more open economies are more prone to suffer from inflationary shocks. Larger economies benefit from moderate demand-led expansions, but may be worse off if policy-makers attempt to close the output gap. Fiscal shocks are generally beggar-thy-neighbor in the long run; in the short run they raise domestic demand at given terms of trade, thus reducing the welfare benefits from monetary expansions. Analytical tractability makes our model uniquely suitable as a starting point to approach the recent “new open-economy macroeconomic” literature.

Is Addiction “Rational”? Theory and Evidence

Abstract: This paper makes two contributions to the modeling of addiction. First, we provide new and convincing evidence that smokers are forward-looking in their smoking decisions, using state excise tax increases that have been legislatively enacted but are not yet effective, and monthly data on consumption. Second, we recognize the strong evidence that preferences with respect to smoking are time inconsistent, with individuals both not recognizing the true dife culty of quitting and searching for self-control devices to help them quit. We develop a new model of addictive behavior that takes as its starting point the standard “ rational addiction” model, but incorporates time-inconsistent preferences. This model also exhibits forward-looking behavior, but it has strikingly different normative implications; in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the “ internalities” imposed by smokers on themselves. We estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case.

Social Mobility and the Demand for Redistribution: The Poum Hypothesis

Abstract: This paper examines the often stated idea that the poor do not support high levels of redistribution because of the hope that they, or their offspring, may make it up the income ladder. This “ prospect of upward mobility” (POUM) hypothesis is shown to be fully compatible with rational expectations, and fundamentally linked to concavity in the mobility process. A steady-state majority could even be simultaneously poorer than average in terms of current income, and richer than average in terms of expected future incomes. A e rst empirical assessment suggests, on the other hand, that in recent U. S. data the POUM effect is probably dominated by the demand for social insurance. “ In the future, everyone will be world-famous for e fteen minutes” [Andy Warhol 1968].

Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers

Abstract: During 1984 -1996, welfare and tax policy were changed to encourage work by single mothers. The Earned Income Tax Credit was expanded, welfare benets were cut, welfare time limits were added, and welfare cases were terminated. Medicaid for the working poor was expanded, as were training programs and child care. During this same time period there were unprecedented increases in the employment and hours of single mothers. We show that a large share of the increase in work by single mothers can be attributed to the EITC and other tax changes, with smaller shares for welfare benet cuts, welfare waivers, training programs and child care programs.

Psychological Expected Utility Theory and Anticipatory Feelings

Abstract: We extend expected utility theory to situations in which agents experience feelings of anticipation prior to the resolution of uncertainty. We show how these anticipatory feelings may result in time inconsistency. We provide an example from portfolio theory to illustrate the potential impact of anticipation on asset prices.

Urban Poverty and Juvenile Crime: Evidence from a Randomized Housing-Mobility Experiment

Abstract: This paper uses data from a randomized housing-mobility experiment to study the effects of relocating families from high- to low-poverty neighborhoods on juvenile crime. Outcome measures come from juvenile arrest records taken from government administrative data. Our e ndings seem to suggest that providing families with the opportunity to move to lower-poverty neighborhoods reduces violent criminal behavior by teens.

Measuring The Reaction of Monetary Policy to the Stock Market

Abstract: Movements in the stock market can have a significant impact on the macroeconomy and are therefore likely to be an important factor in the determination of monetary policy. However, little is known about the magnitude of the Federal Reserve's reaction to the stock market. One reason is that it is difficult to estimate the policy reaction because of the simultaneous response of equity prices to interest rate changes. This paper uses an identification technique based on the heteroskedasticity of stock market returns to identify the reaction of monetary policy to the stock market. The results indicate that monetary policy reacts significantly to stock market movements, with a 5% rise (fall) in the S&P 500 index increasing the likelihood of a 25 basis point tightening (easing) by about a half. This reaction is roughly of the magnitude that would be expected from estimates of the impact of stock market movements on aggregate demand. Thus, it appears that the Federal Reserve systematically responds to stock price movements only to the extent warranted by their impact on the macroeconomy.

The Impact of Mass Migration on the Israeli Labor Market

Abstract: Mass migration from the former Soviet Union increased the Israeli population by 12% in the first half of the 1990s. This exodus was precipitated by the lifting of emigration restrictions in an unstable USSR and by the open immigration policy of Israel toward Soviet Jews, who faced more restrictive entry policies elsewhere. I use this natural experiment to study the impact of immigration on the labor market outcomes of native Israelis. OLS yields significant reductions in wages and small reductions in employment. However, OLS is biased if the distribution of immigrants across occupations in Israel was not exogenous to relative wage and employment conditions. I instrument for the entry of Russians into an occupation in Israel, using information on their former occupations in the USSR. There is a significant positive correlation between the former presence of the immigrants in an occupation in the USSR and their presence in that occupation in Israel. But the previous occupational choices of Russians abroad were independent of Israeli wage and employment growth subsequent to their migration. IV estimates indicate that immigration did not have an adverse impact on native Israeli labor market outcomes.

Coase Versus the Coasians

Abstract: Who should enforce laws or contracts: judges or regulators? Many Coasians, though not Coase himself, advocate judicial enforcement. We show that the incentives facing judges and regulators crucially shape this choice. We then compare the regulation of e nancial markets in Poland and the Czech Republic in the 1990s. In Poland, strict enforcement of the securities law by a highly motivated regulator was associated with a rapidly developing stock market. In the Czech Republic, hands-off regulation was associated with a moribund stock market. I. INTRODUCTION At the heart of economists’ traditional skepticism about government regulation is the Coase theorem [Coase 1960]. The theorem states that when property rights are well dee ned and “ transaction costs” are zero, market participants will organize their transactions in ways that achieve efe cient outcomes. When they can do so, it is not necessary for the government to engage in “ corrective” actions through taxes, regulations, or even legal rules. Financial markets are often used to demonstrate the Coase theorem’ s case against regulation. Advocates of the regulation of these markets point to a variety of potential failures, such as the ability of security issuers to “ expropriate” both potential and existing investors through misrepresentation or proe t diversion. Investors’ fear of such expropriation prevents e rms from raising external funds, and keeps efe cient projects from being undertaken. Not so, reply the Coasians. They point out that most securities transactions take place between sophisticated adults, and that both the buyers and the issuers of securities have available to them a vast range of private arrangements to achieve efe ciency, including contracts such as corporate charters, certie cation by intermediaries, and various forms of bonding. Such contracts render most laws and regulations unnecessary [Stigler 1964; Easterbrook and Fischel 1991].

A Model of Expertise

Abstract: We study a model in which perfectly informed experts offer advice to a decision maker whose actions affect the welfare of all. Experts are biased and thus may wish to pull the decision maker in different directions and to different degrees. When the decision maker consults only a single expert, the expert withholds substantial information from the decision maker. We ask whether this situation is improved by having the decision maker sequentially consult two experts. We first show that there is no perfect Bayesian equilibrium in which full revelation occurs. When both experts are biased in the same direction, it is never beneficial to consult both. In contrast, when experts are biased in opposite directions, it is always beneficial to consult both. Indeed, in this case full revelation may be induced in an extended debate by introducing the possibility of rebuttal.

The Impact of Legalized Abortion on Crime

Abstract: We offer evidence that legalized abortion has contributed significantly to recent crime reductions. Crime began to fall roughly eighteen years after abortion legalization. The five states that allowed abortion in 1970 experienced declines earlier than the rest of the nation, which legalized in 1973 with Roe v. Wade. States with high abortion rates in the 1970s and 1980s experienced greater crime reductions in the 1990s. In high abortion states, only arrests of those born after abortion legalization fall relative to low abortion states. Legalized abortion appears to account for as much as 50 percent of the recent drop in crime.

A Model of Financial Crises in Emerging Markets

Abstract: Recent events in Mexico, Asia, Russia, and Brazil have underscored that a satisfactory explanation of financial crises in emerging markets remains elusive. Not too long ago, the prevailing view was that crises were the inevitable outcome of ongoing fiscal imbalances coupled with fixed exchange rates. But this first generation view, pioneered by Krugman [1979], has fallen out of fashion because in many crises the crucial fiscal disequilibria were absent. And, as Obstfeld [1994] has argued, currency crises have sometimes occurred even though central banks had more than enough resources to prevent them: witness much of Europe in the early 1990s. Obstfeld put forward a second generation view in which central banks may decide to abandon an exchange rate peg when the unemployment costs of defending it become too large. This new perspective implied that crises could be driven by self-fulfilling expectations, since the costs of defending the peg may themselves depend on anticipations that the peg will be maintained. But Obstfeld’s emphasis on mounting unemployment and domestic recession, while appropriate for the ERM 1992 crisis, was at odds with the facts in Mexico in 1994 and East Asia in 1997. Asian

The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms

Abstract: In the formative stages of their businesses, entrepreneurs have to provide incentives for employees to protect, rather than steal, the source of organizational rents. We study how the entrepreneur’ s response to this problem determines the organization’s internal structure, growth, and its eventual size. Large, steep hierarchies will predominate in physical-capital-intensive industries, and will have seniority-based promotion policies. By contrast, e at hierarchies will prevail in human-capital-intensive industries and will have up-or-out promotion systems. Furthermore, e at hierarchies will have more distinctive technologies or cultures than steep hierarchies. The model points to some essential differences between organized hierarchies and markets. At the root of most enterprises generating economic surplus is an entrepreneur with a unique critical resource such as an idea, good customer relationships, a new tool, or superior management technique. A fundamental problem of entrepreneurship is how to enlist the cooperation of the many agents necessary for production without ceding to them too much of the surplus generated by the enterprise. The risk of being expropriated, however, is always inherent in production. In particular, the entrepreneur has to give her employees (whom we call managers) close proximity or access to the critical resource for them to learn to produce effectively. For example, a manager has to understand the idea, be in contact with the key customers and suppliers, or even learn the entrepreneur’ s unique managerial techniques, in order to work effectively. But access also gives the manager the opportunity to expropriate this critical resource and compete against the entrepreneur. Managers may steal the idea, walk away with clients, or mimic the entrepreneur’s management style, and start up a rival concern. The greater the access a manager has, the more he can appropriate, and the more effectively he can compete. This paper explores the role of organizational design in

Government Versus Private Ownership of Public Goods

Abstract: There has been a dramatic change in the division of responsibility between the state and the private sector for the delivery of public goods and services in recent years with an increasing trend toward contracting out to the private sector and “public-private partnerships.” This paper analyzes how ownership matters in public good provision. We show that if contracts are incomplete then the ownership of a public good should lie with a party that values the benefits generated by it relatively more. This is true regardless of whether this party is also the key investor, or other aspects of the technology.

Do Mergers Increase Product Variety? Evidence from Radio Broadcasting

Abstract: Mergers can reduce costs and alter incentives about how to position products, so that theory alone cannot predict whether mergers will increase product variety. We document the effect of mergers on variety by exploiting the natural experiment provided by the1996 Telecommunications Act. We find that consolidation reduced station entry and increased the number of formats available relative to the number of stations. We find some evidence that increased concentration increases variety absolutely. Based on the programming overlap of jointly owned stations, we can infer that the effects operate through product crowding that is consistent with spatial preemption.

A Cue-Theory of Consumption

Abstract: Psychological experiments demonstrate that repeated pairings of a cue and a consumption good eventually create cue-based complementarities: the presence of the cue raises the marginal utility derived from consumption. In this paper, such dynamic preferences are embedded in a rational choice model. Behavior that arises from this model is characterized by endogenous cue sensitivities, costly cue-management, commitment, and cue-based spikes in impatience. The model is used to understand addictive/habit-forming behaviors and marketing. The model explains why preferences change rapidly from moment to moment, why temptations should sometimes be avoided, and how firms package and position goods.

Status in Markets

Abstract: This project tests for the effect of social status in a laboratory experimental market. We consider a special "box design" market in which a vertical overlap in supply and demand ensure that there are multiple equilibrium prices. We manipulate the relative social status of our subjects by awarding high status to a subset of the group based on one of two procedures. In the first, a subject's score on a trivia quiz determines his or her status; in another, subjects are assigned randomly to a higher-status or lower-status group. In both treatments we find that average prices are higher in markets where higher-status sellers face lowerstatus buyers, and lower when buyers have higher status than sellers. Across all sessions, the higher-status side of the market captures a greater share of the surplus, earning significantly more than their lower-status counterparts.