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Showing papers in "The American Economic Review in 2014"


Journal ArticleDOI
TL;DR: The converging roles of men and women are among the grandest advances in society and the economy in the last century as discussed by the authors. But what must the last chapter contain for there to be equality in the labor market? The answer may come as a surprise.
Abstract: The converging roles of men and women are among the grandest advances in society and the economy in the last century. These aspects of the grand gender convergence are figurative chapters in a history of gender roles. But what must the “last” chapter contain for there to be equality in the labor market? The answer may come as a surprise. The solution does not (necessarily) have to involve government intervention and it need not make men more responsible in the home (although that wouldn't hurt). But it must involve changes in the labor market, especially how jobs are structured and remunerated to enhance temporal flexibility. The gender gap in pay would be considerably reduced and might vanish altogether if firms did not have an incentive to disproportionately reward individuals who labored long hours and worked particular hours. Such change has taken off in various sectors, such as technology, science, and health, but is less apparent in the corporate, financial, and legal worlds. (JEL J3, J16, ...

1,485 citations


Journal ArticleDOI
TL;DR: In this paper, the pervasiveness of job polarization in 16 Western European countries over the period 1993-2010 was investigated and a framework was proposed to explain job polarization using routine-biased technological change and offshoring.
Abstract: This paper documents the pervasiveness of job polarization in 16 Western European countries over the period 1993-2010. It then develops and estimates a framework to explain job polarization using routine-biased technological change and offshoring. This model can explain much of both total job polarization and the split into within- industry and between-industry components.

1,252 citations


Journal ArticleDOI
TL;DR: This paper studied a macroeconomic model in which financial experts borrow from less productive agents and found that the economy is prone to instability and occasionally enters volatile episodes, and that risk sharing within the financial sector reduces many inefficiencies, it can also amlify systemic risks.
Abstract: This paper studies a macroeconomic model in which financial experts borrow from less productive agents. We pursue four sets of results: (i) The economy is prone to instability and occasionally enters volatile episodes. As volatility spikes agents precautionary motive increases depressing prices even further. Log-linear approximations fail to capture these non-linear effects that can cause economies to be significantly depressed for long periods of time. (ii) Endogenous risk during volatile episodes increases asset price correlations. (iii) Financial experts impose a negative externality on each other and on the labor sector by not maintaining adequate capital cushion, and funding structure. (iv) While risk sharing within the financial sector (through securitization and derivatives contracts) reduces many inefficiencies, it can also amlify systemic risks.

1,107 citations


Journal ArticleDOI
TL;DR: In this paper, the authors show that initial reports cause high-frequency "action and backsliding", but these cycles attenuate over time. And if reports are discontinued after two years, effects are relatively persistent, decaying at 10-20 percent per year.
Abstract: We document three remarkable features of the Opower program, in which social comparison-based home energy reports are repeatedly mailed to more than six million households nationwide. First, initial reports cause high-frequency “action and backsliding,” but these cycles attenuate over time. Second, if reports are discontinued after two years, effects are relatively persistent, decaying at 10–20 percent per year. Third, consumers are slow to habituate: they continue to respond to repeated treatment even after two years. We show that the previous conservative assumptions about post-intervention persistence had dramatically understated cost effectiveness and illustrate how empirical estimates can optimize program design.(JEL D12, D83, L94, Q41)

999 citations


Journal ArticleDOI
TL;DR: In this article, the authors test for bias in value-added measures using previously unobserved parent characteristics and a quasi-experimental design based on changes in teaching sta¤.
Abstract: Are teachers’impacts on students’test scores (“value-added”) a good measure of their quality? One reason this question has sparked debate is disagreement about whether value-added (VA) measures provide unbiased estimates of teachers’causal impacts on student achievement. We test for bias in VA using previously unobserved parent characteristics and a quasi-experimental design based on changes in teaching sta¤. Using school district and tax records for more than one million children, we …nd that VA models which control for a student’s prior test scores exhibit little bias in forecasting teachers’impacts on student achievement. Although teachers have substantial impacts,

996 citations


Journal ArticleDOI
TL;DR: In this article, the role of financial frictions in determining total factor productivity (TFP) was evaluated using producer-level data, and a model of establishment dynamics was proposed to reduce TFP through two channels: finance frictions distort entry and technology adoption decisions.
Abstract: We use producer-level data to evaluate the role of financial frictions in determining total factor productivity (TFP). We study a model of establishment dynamics in which financial frictions reduce TFP through two channels. First, finance frictions distort entry and technology adoption decisions. Second, finance frictions generate dispersion in the returns to capital across existing producers and thus productivity losses from misallocation. Parameterizations of our model consistent with the data imply fairly small losses from misallocation, but potentially sizable losses from inefficiently low levels of entry and technology adoption. (JEL E32, E44, F41, G32, L60, O33, O47)

874 citations


Journal ArticleDOI
TL;DR: In this paper, the authors proposed an accounting framework that breaks up a country's gross exports into various value-added components by source and additional double-counted terms, and integrated all previous measures of vertical specialization and value added trade into a unified framework.
Abstract: This paper proposes an accounting framework that breaks up a country’s gross exports into various value-added components by source and additional double-counted terms. Our parsimonious framework bridges a gap between official trade statistics ( in gross value terms) and national accounts (in value-added terms), and integrates all previous measures of vertical specialization and value-added trade in the literature into a unified framework. To illustrate the potential of such a method, we present a number of applications including re-computing revealed comparative advantages and the magnifying impact of multi-stage production on trade costs. (JEL E01, E16, F14, F23, L14) As different stages of production are now regularly performed in different countries, intermediate inputs cross borders multiple times. As a result, traditional trade statistics become increasingly less reliable as a gauge of the value contributed by any particular country. This paper integrates and generalizes the many attempts in the literature at tracing value added by country and measuring vertical specialization in international trade. We provide a unified conceptual framework that is more comprehensive than the current literature. By design, this is an accounting exercise, and does not directly examine the causes and the consequences of global production chains. However, an accurate and well-defined conceptual framework to account for value added by sources is a necessary step toward a better under standing of all these issues. Supply chains can be described as a system of value-added sources and destinations. Within a supply chain, each producer purchases inputs and then adds value, which is included in the cost of the next stage of production. At each stage, the value added equals the value paid to the factors of production in the exporting country. However, as all official trade statistics are measured in gross terms, which

863 citations



Journal ArticleDOI
TL;DR: In this paper, the authors explore the impact of reduced transaction costs on risk sharing by estimating the effects of a mobile money innovation on consumption, and find that, while shocks reduce consumption by 7 percent for nonusers, the consumption of user households is unaffected.
Abstract: We explore the impact of reduced transaction costs on risk sharing by estimating the effects of a mobile money innovation on consumption. In our panel sample, adoption of the innovation increased from 43 to 70 percent. We find that, while shocks reduce consumption by 7 percent for nonusers, the consumption of user households is unaffected. The mechanisms underlying these consumption effects are increases in remittances received and the diversity of senders. We report robustness checks supporting these results and use the four-fold expansion of the mobile money agent network as a source of exogenous variation in access to the innovation. (JEL E42, G22, O16, O17, Z13) In developing countries, informal networks provide an important means by which individuals and households share risk, though the insurance they provide is often incomplete. Economists have proposed a number of reasons for this incompleteness, including information asymmetries, which manifest in problems of moral hazard, and limited commitment, both of which induce positive correlations between realized income and consumption. In this article we emphasize a complementary source of incompleteness: transaction costs—literally, the costs of transferring resources between individuals. We test the impact of transaction costs on risk sharing by analyzing data from a large panel household survey that we designed and administered in Kenya over a three-year period to capture the expansion of “mobile money.” This financial innovation has allowed individuals to transfer purchasing power by simple short messaging service ( SMS) technology and has dramatically reduced the cost of sending money across large distances. Mobile money is a recent innovation in developing economies—one of the first and most successful examples to date is Kenya’s “M-PESA.” 1 In just four years after its

729 citations


Journal ArticleDOI
TL;DR: The authors studied the effect of US food aid on conflict in recipient countries and found that an increase in food aid increases the incidence and duration of civil conflicts, but has no robust effect on interstate conflicts or the onset of civil conflict.
Abstract: We study the effect of US food aid on conflict in recipient countries. Our analysis exploits time variation in food aid shipments due to changes in US wheat production and cross-sectional variation in a country’s tendency to receive any US food aid. According to our estimates, an increase in US food aid increases the incidence and duration of civil conflicts, but has no robust effect on interstate conflicts or the onset of civil conflicts. We also provide suggestive evidence that the effects are most pronounced in countries with a recent history of civil conflict. (JEL D74, F35, O17, O19, Q11, Q18) We are unable to determine whether our aid helps or hinders one or more parties to the conflict … it is clear that the losses—particularly looted assets—constitutes a serious barrier to the efficient and effective provision of assistance, and can contribute to the war economy. This raises a serious challenge for the humanitarian community: can humanitarians be accused of fueling or prolonging the conflict in these two countries? — Medecins Sans Frontieres, Amsterdam 1

723 citations


Journal ArticleDOI
Koichiro Ito1
TL;DR: In this paper, the authors exploit price variation at spatial discontinuities in electricity service areas, where households in the same city experience substantially different nonlinear pricing and find strong evidence that consumers respond to average price rather than marginal or expected marginal price.
Abstract: Nonlinear pricing and taxation complicate economic decisions by creating multiple marginal prices for the same good. This paper provides a framework to uncover consumers’ perceived price of nonlinear price schedules. I exploit price variation at spatial discontinuities in electricity service areas, where households in the same city experience substantially different nonlinear pricing. Using household-level panel data from administrative records, I find strong evidence that consumers respond to average price rather than marginal or expected marginal price. This suboptimizing behavior makes nonlinear pricing unsuccessful in achieving its policy goal of energy conservation and critically changes the welfare implications of nonlinear pricing. (JEL D12, L11, L94, L98, Q41)

Journal ArticleDOI
TL;DR: In this paper, a lack of evidence on whether teachers' impacts on students' test scores (value-added) is a good measure of their quality has been raised, and the question has sparked debate partly because of a lack-of-evidence on whether high value-ad...
Abstract: Are teachers' impacts on students' test scores (value-added) a good measure of their quality? This question has sparked debate partly because of a lack of evidence on whether high value-ad...

Journal ArticleDOI
TL;DR: This paper used historical data on military procurement to estimate the effects of government spending and developed a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier, which is highly sensitive to how strongly aggregate monetary and tax policy “leans against the wind.
Abstract: We use rich historical data on military procurement to estimate the effects of government spending. We exploit regional variation in military buildups to estimate an “open economy relative multiplier” of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier. The latter is highly sensitive to how strongly aggregate monetary and tax policy “leans against the wind.” Our open economy relative multiplier “differences out” these effects because monetary and tax policies are uniform across the nation. Our evidence indicates that demand shocks can have large effects on output. (JEL E12, E32, E62, F33, H56, H57, R12)

Journal ArticleDOI
TL;DR: In this paper, the authors develop a highly tractable general equilibrium model in which heterogeneous producers face collateral constraints, and study the effect of financial frictions on capital misallocation and aggregate productivity.
Abstract: I develop a highly tractable general equilibrium model in which heterogeneous producers face collateral constraints, and study the effect of financial frictions on capital misallocation and aggregate productivity. My economy is isomorphic to a Solow model but with time-varying TFP. I argue that the persistence of idiosyncratic productivity shocks determines both the size of steady-state productivity losses and the speed of transitions: if shocks are persistent, steady-state losses are small but transitions are slow. Even if financial frictions are unimportant in the long run, they tend to matter in the short run and analyzing steady states only can be misleading.

Journal ArticleDOI
TL;DR: In this paper, the authors study cascades of failures in a network of interdependent financial organizations: how discontinuous changes in asset values (e.g., defaults and shutdowns) trigger further failures, and how this depends on network structure.
Abstract: *We study cascades of failures in a network of interdependent financial organizations: how discontinuous changes in asset values (e.g., defaults and shutdowns) trigger further failures, and how this depends on network structure. Integration (greater dependence on counterparties) and diversification (more counterparties per organization) have different, nonmonotonic effects on the extent of cascades. Diversification connects the network initially, permitting cascades to travel; but as it increases further, organizations are better insured against one another’s failures. Integration also faces trade-offs: increased dependence on other organizations versus less sensitivity to own investments. Finally, we illustrate the model with data on European debt cross-holdings. (JEL D85, F15, F34, F36, F65, G15, G32, G33, G38) Globalization brings with it increased financial interdependencies among many kinds of organizations—governments, central banks, investment banks, firms, etc.— that hold each other’s shares, debts, and other obligations. Such interdependencies can lead to cascading defaults and failures, which are often avoided through massive bailouts of institutions deemed “too big to fail.” Recent examples include the US government’s interventions in AIG, Fannie Mae, Freddie Mac, and General Motors; and the European Commission’s interventions in Greece and Spain. Although such bailouts circumvent the widespread failures that were more prevalent in the nineteenth and early twentieth centuries, they emphasize the need to study the risks created by a network of interdependencies. Understanding these risks is crucial to designing incentives and regulatory responses which defuse cascades before they are imminent. In this paper we develop a general model that produces new insights regarding financial contagions and cascades of failures among organizations linked through a network of financial interdependencies. Organizations’ values depend on each other—e.g., through cross-holdings of shares, debt, or other liabilities. If an

Journal ArticleDOI
TL;DR: In this paper, the authors developed a theoretical framework that combines variable markups due to strategic complementarities and endogenous choice to import intermediate inputs to understand low aggregate exchange rate passthrough as well as the variation in pass-through across exporters.
Abstract: Large exporters are simultaneously large importers. In this paper, we show that this pattern is key to understanding low aggregate exchange rate pass-through as well as the variation in pass-through across exporters. First, we develop a theoretical framework that combines variable markups due to strategic complementarities and endogenous choice to import intermediate inputs. The model predicts that fi rms with high import shares and high market shares have low exchange rate pass-through. Second, we test and quantify the theoretical mechanisms using Belgian fi rm-product-level data with information on exports by destination and imports by source country. We confi rm that import intensity and market share are the prime determinants of pass-through in the cross-section of fi rms. A small exporter with no imported inputs has a nearly complete pass-through of over 90 percent, while a fi rm at the 95th percentile of both import intensity and market share distributions has a pass-through of 56 percent, with the marginal cost and markup channels playing roughly equal roles. The largest exporters are simultaneously highmarket-share and high-import-intensity fi rms, which helps explain the low aggregate pass-through and exchange rate disconnect observed in the data.

Journal ArticleDOI
TL;DR: This article measured intergenerational mobility based on the correlation between parent and child income percentile ranks and calculated transition probabilities, such as a child's chances of reaching the top quintile of the income distribution starting from the bottom quintile.
Abstract: We present new evidence on trends in intergenerational mobility in the United States using administrative earnings records. We find that percentile rank-based measures of intergenerational mobility have remained extremely stable for the 1971-1993 birth cohorts. For children born between 1971 and 1986, we measure intergenerational mobility based on the correlation between parent and child income percentile ranks. For more recent cohorts, we measure mobility as the correlation between a child's probability of attending college and her parents' income rank. We also calculate transition probabilities, such as a child's chances of reaching the top quintile of the income distribution starting from the bottom quintile. Based on all of these measures, we find that children entering the labor market today have the same chances of moving up in the income distribution (relative to their parents) as children born in the 1970s. However, because inequality has risen, the consequences of the “birth lottery” - t...

Journal ArticleDOI
TL;DR: This article examined the differences in reviews for a given hotel between two sites: Expedia.com (only a customer can post a review) and TripAdvisor (anyone can post) and showed that the net gains from promotional reviewing are highest for independent hotels with single-unit owners and lowest for branded chain hotels with multiunit owners.
Abstract: Firms' incentives to manufacture biased user reviews impede review usefulness. We examine the differences in reviews for a given hotel between two sites: Expedia.com (only a customer can post a review) and TripAdvisor.com (anyone can post). We argue that the net gains from promotional reviewing are highest for independent hotels with single-unit owners and lowest for branded chain hotels with multiunit owners. We demonstrate that the hotel neighbors of hotels with a high incentive to fake have more negative reviews on TripAdvisor relative to Expedia; hotels with a high incentive to fake have more positive reviews on TripAdvisor relative to Expedia. (JEL L15, L83, M31)

Journal ArticleDOI
TL;DR: This paper investigated the relationship between violence and economic risk preferences in Afghanistan combining: (i) a two-part experimental procedure identifying risk preferences, violations of Expected Utility, and specific preferences for certainty; (ii) controlled recollection of fear based on established methods from psychology; and (iii) administrative violence data from precisely geocoded military records.
Abstract: We investigate the relationship between violence and economic risk preferences in Afghanistan combining: (i) a two-part experimental procedure identifying risk preferences, violations of Expected Utility, and specific preferences for certainty; (ii) controlled recollection of fear based on established methods from psychology; and (iii) administrative violence data from precisely geocoded military records. We document a specific preference for certainty in violation of Expected Utility. The preference for certainty, which we term a Certainty Premium, is exacerbated by the combination of violent exposure and controlled fearful recollections. The results have implications for risk taking and are potentially actionable for policymakers and marketers.

Journal ArticleDOI
TL;DR: In this article, the authors build a theoretical model of multi-product firms that highlights how competition across market destinations affects both a firm's exported product range and product mix and show how tougher competition in an export market induces a firm to skew its export sales towards its best performing products.
Abstract: We build a theoretical model of multi-product firms that highlights how competition across market destinations affects both a firm's exported product range and product mix. We show how tougher competition in an export market induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Theoretically, this within firm change in product mix driven by the trading environment has important repercussions on firm productivity. A calibrated fit to our theoretical model reveals that these productivity effects are potentially quite large.

Journal ArticleDOI
TL;DR: In this paper, a two-sectors model with agriculture and non-agriculture was developed to understand agricultural and aggregate productivity gaps across countries, showing that small farms of less than 2 hectares represent more than 70% of farms in poor countries but only 15% in rich countries, whereas large farms of more than 20 hectares represent none of the farms in low income countries and almost 40% in high income countries.
Abstract: Using internationally comparable data from the World Agricultural Census, we document a factor of 36 difierence in average farm size between rich and poor countries. Small farms of less than 2 hectares represent more than 70% of farms in poor countries but only 15% in rich countries, whereas large farms of more than 20 hectares represent none of the farms in poor countries and almost 40% in rich countries. Two questions emerge. First, what explains the striking difierences in farm size across countries? Second, are farm-size difierences important in understanding agricultural and aggregate productivity gaps across countries? We develop a two sector model with agriculture and non-agriculture that features a non-degenerate size distribution of farms. The theory embeds a Lucas (1978) span-of-control model of farm size into a standard sectoral model with non-homothetic preferences. In the model calibrated to the United States, a reduction in economy-wide productivity from 1 to 1/4 produces an increase in the share of employment in agriculture from 2.5% to 53%, a 21-fold reduction in average farm size, and a 25-fold reduction in agricultural labor productivity. These results are broadly consistent with data on the sectoral allocation of labor and the size distribution of farms across countries.

Journal ArticleDOI
TL;DR: The authors examined the evolution of real per capita GDP around 100 systemic banking crises and found that it takes about eight years to reach the pre-crisis level of income; the median is about 6 ½ years.
Abstract: We examine the evolution of real per capita GDP around 100 systemic banking crises. Part of the costs of these crises owes to the protracted nature of recovery. On average, it takes about eight years to reach the pre-crisis level of income; the median is about 6 ½ years. Five to six years after the onset of crisis, only Germany and the US (out of 12 systemic cases) have reached their 2007-2008 peak in real income. Forty three percent of the 100 episodes recorded double dips. Post-war business cycles are not the relevant comparator for the recent crises in advanced economies.

Journal ArticleDOI
TL;DR: In this article, the United States Census Bureau suggests that there has been a rise in assortative mating, which contributes to household income inequality, and the high level of married female labor-force participation in 2005 is important for this.
Abstract: Has there been an increase in positive assortative mating? Does assortative mating contribute to household income inequality? Data from the United States Census Bureau suggests there has been a rise in assortative mating. Additionally, assortative mating aects household income inequality. In particular, if matching in 2005 between husbands and wives had been random, instead of the pattern observed in the data, then the Gini coe¢ cient would have fallen from the observed 0.43 to 0.34, so that income inequality would be smaller. Thus, assortative mating is important for income inequality. The high level of married female labor-force participation in 2005 is important for this

Journal ArticleDOI
TL;DR: Anderson et al. as mentioned in this paper used a simple choice model to predict that transit riders are likely to be individuals who commute along routes with severe roadway delays and found that these individuals' choices thus have high marginal impacts on congestion.
Abstract: Author(s): Anderson, ML | Abstract: Public transit accounts for 1 percent of US passenger miles traveled but attracts strong public support. Using a simple choice model, we predict that transit riders are likely to be individuals who commute along routes with severe roadway delays. These individuals' choices thus have high marginal impacts on congestion. We test this prediction with data from a strike in 2003 by Los Angeles transit workers. Estimating a regression discontinuity design, we find that average highway delay increases 47 percent when transit service ceases. We find that the net benefits of transit systems appear to be much larger than previously believed. (JEL H76, J52, L92, R41).

Journal ArticleDOI
TL;DR: The authors developed a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing and proved identification and demonstrate how labor supply data are informative about risk sharing, showing that preference heterogeneity is important in accounting for observed dispersion in consumption and hours.
Abstract: We develop a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing. Closed-form solutions are obtained for equilibrium allocations and for moments of the joint distribution of consumption, hours, and wages. We prove identification and demonstrate how labor supply data are informative about risk sharing. The model, estimated with US data over the period 1967–2006, implies that (i) 39 percent of permanent wage shocks pass through to consumption; (ii ) the share of wage risk insured increased until the early 1980s; and (iii) preference heterogeneity is important in accounting for observed dispersion in consumption and hours. (JEL E21, E23, E31, E52)

Journal ArticleDOI
TL;DR: In this paper, the authors examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an OLG model with nominal rigidities, and show that a systematic increase in interest rates in response to a growing bubble is shown to enhance the rise in the latter.
Abstract: I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an OLG model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the ‡uctuations in the latter,

Journal ArticleDOI
TL;DR: This paper found that long-term unemployment spells in the past do not matter for employers' hiring decisions, suggesting that subsequent work experience eliminates this negative signal and that workers understand that worker/firm matching takes time.
Abstract: The stigma associated with long-term unemployment spells could create large inefficiencies in labor markets. While the existing literature points toward large stigma effects, it has proven difficult to estimate causal relationships. Using data from a field experiment, we find that long-term unemployment spells in the past do not matter for employers' hiring decisions, suggesting that subsequent work experience eliminates this negative signal. Nor do employers treat contemporary short-term unemployment spells differently, suggesting that they understand that worker/firm matching takes time. However, employers attach a negative value to contemporary unemployment spells lasting at least nine months, providing evidence of stigma effects.

Journal ArticleDOI
TL;DR: A significant overall increase in college attainment among lottery winners who attend their first choice school is found, and gains in attainment are concentrated among girls.
Abstract: We study the impact of a public school choice lottery in Charlotte-Mecklenburg schools on college enrollment and degree completion. We find a significant overall increase in college attainment among lottery winners who attend their first choice school. Using rich administrative data on peers, teachers, course offerings and other inputs, we show that the impacts of choice are strongly predicted by gains on several measures of school quality. Gains in attainment are concentrated among girls. Girls respond to attending a better school with higher grades and increases in college-preparatory course-taking, while boys do not.

Journal ArticleDOI
TL;DR: In this paper, the response of investment to changes in uncertainty using data on oil drilling in Texas and the expected volatility of the future price of oil is estimated using a dynamic model of firms' investment problem.
Abstract: This paper estimates the response of investment to changes in uncertainty using data on oil drilling in Texas and the expected volatility of the future price of oil. Using a dynamic model of firms’ investment problem, I find that: (i) the response of drilling activity to changes in price volatility has a magnitude consistent with the optimal response prescribed by theory, (ii) the cost of failing to respond to volatility shocks is economically significant, and (iii) implied volatility data derived from futures options prices yields a better fit to firms’ investment behavior than backward-looking volatility measures such as GARCH. (JEL C58, D92, G13, G31, L71, Q31) The real options literature, beginning with Marschak (1949) and Arrow (1968) and developed in Bernanke (1983), Pindyck (1991), and Dixit and Pindyck (1994), explains how firms should make decisions about investments that involve sunk costs. Real options theory views such investments as options in that, at any point in time, a firm may choose to either invest immediately or delay and observe the evolution of the investment’s payoff. A key insight is that the option to delay has value when future states of the world with positive returns to investing and states with negative returns are both possible, even holding the expected future return constant at its present level. Thus, in the presence of irreversibility and uncertainty, a naive investment timing rule—proceed with an investment if its expected benefit even slightly exceeds its cost—is suboptimal because it does not account for the value of continuing to hold the option. Instead, firms should delay irreversible investments until a significant gap develops between the investments’ expected benefits and costs. Moreover, as uncertainty increases, real options theory tells us that the incentive to delay should grow stronger and the gap between the expected benefit and cost necessary to trigger investment should widen. While real options theory therefore prescribes how firms should carry out irreversible investments in uncertain environments, it is not empirically well-known

Journal ArticleDOI
TL;DR: In this article, the authors used a randomized control trial to test the effect of high-frequency information about residential electricity usage on the price elasticity of demand and found that informed households are three standard deviations more responsive to temporary price increases, an effect that is not attributable to price salience.
Abstract: Imperfect information about product attributes inhibits efficiency in many choice settings, but can be overcome by providing simple, low-cost information. We use a randomized control trial to test the effect of high-frequency information about residential electricity usage on the price elasticity of demand. Informed households are three standard deviations more responsive to temporary price increases, an effect that is not attributable to price salience. Conservation extends beyond pricing events in the short and medium run, providing evidence of habit formation and implying that the intervention leads to greenhouse gas abatement. Survey evidence suggests that information facilitates learning. (JEL D12, D83, L11, L94, Q41, Q54)