RELATIVE RISK AVERSION IS CONSTANT: EVIDENCE FROM PANEL DATA

Most classical tests of constant relative risk aversion (CRRA) based on individual portfolio composition use cross‐sectional data. Such tests must assume that the distributions of wealth and preferences are independent. We use panel data to analyze how individuals’ portfolio allocation between risky and riskless assets varies in response to changes in total financial wealth. We find the elasticity of the risky asset share to wealth to be small and statistically insignificant, supporting the CRRA assumption; this finding is robust when the sample is restricted to households experiencing large income variations. In addition, we find a small but significant negative correlation between wealth and risk aversion. Various extensions are discussed.     

EXPONENTIAL‐GROWTH BIAS AND LIFECYCLE CONSUMPTION

Exponential‐growth bias (EGB) is the tendency for individuals to partially neglect compounding of exponential growth. We develop a model wherein biased agents misperceive the intertemporal budget constraint, and derive conditions for overconsumption and dynamic inconsistency. We construct an incentivized measure of EGB in a US‐representative population and find substantial bias, with approximately one third of subjects estimated as the fully biased type. The magnitude of the bias is negatively associated with asset accumulation, and does not respond to a simple graphical intervention.     

FINANCIAL DEVELOPMENT AND VERTICAL INTEGRATION: THEORY AND EVIDENCE

Existing evidence is mostly inconclusive on the relevance of financial development as a determinant of vertical integration. This paper presents evidence that, once industry heterogeneity in firm size distribution is taken into account, financial development is an important determinant of cross‐country differences in vertical integration. Financial development fosters entry of firms and increases competition in the industry. This reduces vertical integration of larger firms, but also leads smaller, non‐integrated, firms to exit the industry. As a result, higher financial development reduces vertical integration in industries where a high share of output is produced by small firms. The positive effect of financial development on entry also reduces vertical integration by fostering the development of input markets.     

THE DEMAND FOR LIQUID ASSETS,CORPORATE SAVING,AND INTERNATIONAL CAPITAL FLOWS

The recent period of capital outflows from emerging economies has coincided with an increase in their corporate saving. In this paper, we model corporate saving as a demand for liquid assets by credit‐constrained firms in a dynamic open‐economy macroeconomic model. We find that the implications of this model are very different from standard models, because the demand for foreign bonds is a complement to domestic investment rather than a substitute. We show that this complementarity is at work when an emerging economy is on its convergence path or when it has a higher TFP growth rate. This framework is consistent with a number of stylized facts found in high‐growth, high‐investment emerging economies.     

RISK AVERSION AND EXPECTED UTILITY THEORY: AN EXPERIMENT WITH LARGE AND SMALL STAKES

We employ a novel data set to estimate a structural econometric model of the decisions under risk of players in a game show where lotteries present payoffs in excess of half a million dollars. The decisions under risk of players in the presence of large payoffs allow us to estimate the parameters of the curvature of the von Neumann–Morgenstern utility function—not only locally, as in previous studies in the literature, but also globally. Our estimates of relative risk aversion indicate that a constant relative risk aversion parameter of about 1 captures the average of the sample population. We also find that individuals are practically risk neutral at small stakes and risk averse at large stakes—a necessary condition, according to Rabin’s calibration theorem, for expected utility to provide a unified account of individuals’ attitudes toward risk. Finally, we show that for lotteries characterized by substantial stakes, nonexpected utility theories fit the data equally as well as expected utility theory.     

DETERMINISTIC TIME‐VARYING DEMAND LOT‐SIZING MODELS WITH LEARNING AND FORGETTING IN SETUPS AND PRODUCTION

We study the deterministic time‐varying demand lot‐sizing problem in which learning and forgetting in setups and production are considered simultaneously. It is an extension of Chiu's work. We propose a near‐optimal forward dynamic programming algorithm and suggest the use of a good heuristic method in a situation in which the computational effort is extremely intolerable. Several important observations obtained from a two‐phase experiment verify the goodness of the proposed algorithm and the chosen heuristic method.     

MEASURING SELF‐CONTROL PROBLEMS: A STRUCTURAL ESTIMATION

Abstract We adopt a two‐stage Method of Simulated Moments to estimate the preference parameters in a life‐cycle consumption‐saving model augmented with temptation disutility. Our approach estimates the parameters from the comparison between simulated moments with empirical moments observed in the US Survey of Consumer Finances; to identify the parameters we consider moments from liquid and illiquid asset holdings at different ages. We find evidence of a small but significantly positive degree of temptation. The temptation model predicts consumption choices similar to the model with standard preferences, and holdings of liquid and illiquid assets closer to those observed in the empirical data.     

THE CHOICE OF EXCHANGE‐RATE REGIME AND SPECULATIVE ATTACKS

We develop a framework that makes it possible to study, for the first time, the strategic interaction between the ex ante choice of exchange‐rate regime and the likelihood of ex post currency attacks. The optimal regime is determined by a policymaker who trades off the loss from nominal exchange‐rate uncertainty against the cost of adopting a given regime. This cost increases, in turn, with the fraction of speculators who attack the local currency. Searching for the optimal regime within the class of exchange‐rate bands, we show that the optimal regime can be either a peg (a zero‐width band), a free float (an infinite‐width band), or a nondegenerate band of finite width. We study the effect of several factors on the optimal regime and on the probability of currency attacks. In particular, we show that a Tobin tax induces policymakers to set less flexible regimes. In our model, this generates an increase in the probability of currency attacks. (JEL: F31, D84)     

LETTER GRADING GOVERNMENT EFFICIENCY

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 United States and how long it takes. About 60% of the letters were returned, taking over six 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 government efficiency, just as they do that of the private sector.     

UNBUNDLING THE INCUMBENT: EVIDENCE FROM UK BROADBAND

We consider the impact of a regulatory process forcing an incumbent telecom operator to make its local broadband network available to other companies (local loop unbundling, or LLU). Entrants are then able to upgrade their individual lines and offer Internet services directly to customers. Employing a very detailed data set covering the whole of the United Kingdom, we find that, over the course of time, many entrants have begun to take advantage of unbundling. LLU entry only had a positive effect on broadband penetration in the early years, and no longer in the recent years as the market reached maturity. In contrast, LLU entry continues to have a positive impact on the quality of the service provided, as entrants differentiate their products upwards compared to the incumbent. We also assess the impact of competition from an alternative form of technology (cable) which is not subject to regulation, and what we discover is that inter‐platform competition has a positive impact on both penetration and quality.     

EXPECTATIONS‐BASED REFERENCE‐DEPENDENT PREFERENCES AND ASSET PRICING

This paper explores the quantitative asset‐pricing implications of expectations‐based reference‐dependent preferences, as introduced by Koszegi and Rabin (2009, American Economic Review, 99(3), 909–936), in an otherwise traditional Lucas‐tree model. I find that the model easily succeeds in matching the historical equity premium and its variability when the preference parameters are calibrated in line with micro evidence. The equity premium is high because expectations‐based loss aversion makes uncertain fluctuations in consumption more painful. Additionally, loss aversion introduces variation in returns because unexpected cuts in consumption are particularly painful, and the agent wants to postpone such cuts to let his reference point decrease. This variation generates strong predictability. However, it also causes counterfactually high volatility in the risk‐free rate, which I address by allowing for variation in expected consumption growth, heteroskedasticity in consumption growth, time‐variant disaster risk, and sluggish belief updating.     

SELECTIVE ATTENTION AND LEARNING

What do we notice and how does this affect what we learn and come to believe? I present a model of an agent who learns to make forecasts on the basis of readily available information, but is selective as to which information he attends to: he chooses whether to attend as a function of current beliefs about whether such information is predictive. If the agent does not attend to some piece of information, it cannot be recalled at a later date. He uses Bayes' rule to update his beliefs given attended‐to information, but does not attempt to fill in missing information. The model demonstrates how selective attention may lead the agent to persistently fail to recognize important empirical regularities, make systematically biased forecasts, and hold incorrect beliefs about the statistical relationship between variables. In addition, it identifies factors that make such errors more likely or persistent. The model is applied to shed light on stereotyping and discrimination, persistent learning failures and disagreement, and the process of discovery.     

LOT‐SIZING RULE AND FREEZING THE MASTER PRODUCTION SCHEDULE UNDER CAPACITY CONSTRAINT AND DETERMINISTIC DEMAND

This paper investigates the performance impact of lot‐sizing rule (LSR) selection and freezing of the master production schedule (MPS) in multi‐item single‐level systems with a single resource constraint under deterministic demand. The results of the study show that the selection of LSRS and the parameters for freezing the MPS have a significant impact on total cost, schedule instability, and the service level of the system. However, the selection of LSRS does not significantly influence the selection of the MPS freezing parameters. The basic conclusions concerning the performance of the freezing parameters under a capacity constraint agreed with previous research findings without consideration of capacity constraints.     

LABOR‐MARKET HETEROGENEITY,AGGREGATION, AND POLICY (IN)VARIANCE OF DSGE MODEL PARAMETERS

Data from a heterogeneous‐agents economy with incomplete asset markets and indivisible labor supply are simulated under various fiscal policy regimes and an approximating representative‐agent model is estimated. Preference and technology parameter estimates of the representative‐agent model are not invariant to policy changes and the bias in the representative‐agent model’s policy predictions is large compared to predictive intervals that reflect parameter uncertainty. Since it is not always feasible to account for heterogeneity explicitly, it is important to recognize the possibility that the parameters of a highly aggregated model may not be invariant with respect to policy changes.     

PROXYING FOR UNOBSERVABLE VARIABLES WITH INTERNET DOCUMENT‐FREQUENCY

The internet contains billions of documents. We show that document frequencies in large decentralized textual databases can capture the cross‐sectional variation in the occurrence frequencies of social phenomena. We characterize the econometric conditions under which such proxying is likely. We also propose using recently‐introduced internet search volume indexes as proxies for fundamental locational traits, and discuss their advantages and limitations. We then successfully proxy for a number of economic and demographic variables in US cities and states. We further obtain document‐frequency measures of corruption by country and US state and replicate the econometric results of previous research studying its covariates. Finally, we provide the first measure of corruption in American cities. Poverty, population size, service‐sector orientation, and ethnic fragmentation are shown to predict higher levels of corruption in urban America.     

Misallocation and Total Factor Productivity in Italy: Evidence from Firm‐Level Data

Over the last two decades, total factor productivity (TFP) in Italy decreased by 0.2% per year, while increasing on average in the Euro‐area countries. This decline suggests the existence of large inefficiencies in the allocation of resources, making the Italian case particularly interesting and suitable in order to study the role of misallocation. In this article, I quantify the within‐industry misallocation of inputs in Italy over the period 1993–2011, by applying the Hsieh and Klenow's methodology. Using a micro‐level longitudinal dataset of Italian manufacturing firms, I find that, in the hypothetical absence of distortions, aggregate TFP in manufacturing would be boosted by 58% in 1993, by 67% in 2006 and by 80% in 2011. This leads to a twofold conclusion: first, misallocation plays a crucial role in determining the inefficiency level of the Italian manufacturing sector; second, misallocation has increased over time. Given the magnitude of the results obtained and the policy implications related thereto, I take a step ahead by checking to what extent the degree of misallocation can be attributed to specific characteristics of the Italian firms: it emerges that misallocation is higher for firms located in the south and at low‐technological intensity, as well as for small or young firms.     

ROUTES OF INFECTION: EXPORTS AND HIV INCIDENCE IN SUB‐SAHARAN AFRICA

This paper estimates whether exports affect the incidence of HIV in Africa. This relationship has implications for HIV prevention policy as well as for the consequences of trade increases in Africa. I estimate this impact using two sources of data on HIV incidence, one generated based on UNAIDS estimates and the other based on observed HIV mortality. These data are combined with data on export value and volume. I find a fairly consistent positive relationship between exports and new HIV infections: doubling exports leads to a 10%–70% increase in new HIV infections. Consistent with theory, this relationship is larger in areas with higher baseline HIV prevalence. I interpret the result as suggesting that increased exports increase the movement of people (trucking), which increases sexual contacts. Consistent with this interpretation, the effect is larger for export growth than for income growth per se and is larger in areas with more extensive road networks.     

PRICE‐LEVEL CHANGES AND THE REDISTRIBUTION OF NOMINAL WEALTH ACROSS THE EURO AREA

We show that unexpected price‐level movements generate sizable wealth redistribution in the Euro Area (EA), using sectoral accounts and newly available data from the Household Finance and Consumption Survey. The EA as a whole is a net loser of unexpected price‐level decreases, with Italy, Greece, Portugal, and Spain losing most in per capita terms, and Belgium and Malta being net winners. Governments are net losers of deflation, while the household (HH) sector is a net winner in the EA as a whole. HHs in Belgium, Ireland, Malta, and Germany experience the biggest per capita gains, while HHs in Finland and Spain turn out to be net losers. Considerable heterogeneity exists also within the HH sector: relatively young middle class HHs are net losers of deflation, while older and richer HHs are winners. As a result, wealth inequality in the EA increases with unexpected deflation, although in some countries (Austria, Germany, and Malta) inequality decreases due to the presence of relatively few young borrowing HHs. We document that HHs' inflation exposure varies systematically across countries, with HHs in high‐inflation EA countries holding systematically lower nominal exposures.     

PREDICTING LOTTO NUMBERS: A NATURAL EXPERIMENT ON THE GAMBLER'S FALLACY AND THE HOT‐HAND FALLACY

We investigate the “law of small numbers” using a data set on lotto gambling that allows us to measure players' reactions to draws. While most players pick the same set of numbers week after week, we find that those who do change, react on average as predicted by the law of small numbers as formalized in recent behavioral theory. In particular, players tend to bet less on numbers that have been drawn in the preceding week, as suggested by the “gambler's fallacy”, and bet more on a number if it was frequently drawn in the recent past, consistent with the “hot‐hand fallacy”.     

MEDIA MERGERS AND MEDIA BIAS WITH RATIONAL CONSUMERS

We present an economic model of media bias and media mergers. Media owners have political motives as well as profit motives, and can influence public opinion by withholding information that is pejorative to their political agenda—provided that their agenda is not too far from the political mainstream. This is true even with rational consumers who understand the media owners’ biases, because the public do not know how much information the news organizations have and so do not know when news is being withheld. In line with conventional wisdom, this problem can be undone by competition; but competition can be defeated in equilibrium by media mergers that enhance profits at the expense of the public interest. We thus derive a motive for media merger policy that is completely distinct from the motives behind conventional antitrust. While media bias may reduce the profit incentives to merge, media markets nonetheless err by being insufficiently competitive, and the consequences of merger are more severe than in other markets.