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Law and Economics

 

 

 

  • Uses and Abuses of Empirical Evidence in the Death Penalty Debate
    Joint with John J. Donohue
    Published, Stanford Law Review (2005) 58:791-846.
    Also reprinted in Economics of Criminal Law, Steven Levitt and Thomas Miles (eds), 2008, Elgar Publishing.
    Also available as NBER Working Paper #11982

         Does the death penalty save lives? A surge of recent interest in this question has yielded a series of papers that purport to show robust and precise estimates of a substantial deterrent effect of capital punishment. We assess the various approaches that have been used in this literature, testing the robustness of these inferences. Specifically, we start by assessing the time series evidence, comparing the history of executions and homicides in the United States and Canada, and within the United States, between executing and non-executing states. We analyze the effects of the judicial experiments provided by the 1972 Furman and 1976 Gregg decisions and assess the relationship between execution and homicide rates in state panel data since 1934. We then revisit the existing instrumental variables approaches and assess two recent state-specific execution moratoria. In each case, we find that previous inferences of large deterrent effects based upon specific samples, functional forms, control variables, comparison groups, or IV strategies are extremely fragile and that even small changes in specifications yield dramatically different results. The fundamental difficulty facing the econometrician is that the death penalty - at least as it has been implemented in the United States - is applied so rarely that the number of homicides that it can plausibly have caused or deterred cannot be reliably disentangled from the large year-to-year changes in the homicide rate caused by other factors. As such, short samples and particular specifications may yield large but spurious correlations. We conclude that existing estimates appear to reflect a small and unrepresentative sample of the estimates that arise from alternative approaches. Sampling from the broader universe of plausible approaches suggests not just reasonable doubt about whether there is any deterrent effect of the death penalty, but profound uncertainty - even about its sign.

    Link to Donohue and Wolfers dataset (and other death penalty data).

    An executive summary; Paul Rubin's response; And our rejoinder, followed by his rejoinder.

    Press reactions:
          - New York Times
          - Sydney Morning Herald
          - AP report (picked up by about 200 newspapers)
          - NPR News and Notes (mp3)
          - Chronicle of Higher Education
          - My Washington Post oped with Cass Sunstein (background info)

     

  • Marriage and Divorce: Changes and their Driving Forces
    Joint with Betsey Stevenson
    Published, Journal of Economic Perspectives, 21(2) 27-52, Spring 2007.
    Previously: NBER Working Paper #12994

    We document marriage and divorce behavior, comparing trends through the past 150 years and outcomes across demographic groups and countries.  While divorce rates have risen over the past 150 years, they have been falling for the past quarter century.  Marriage rates have also been falling, but more strikingly, the importance of marriage at different points in the life cycle has changed, reflecting rising age at first marriage, rising divorce followed by high remarriage rates, and a combination of increased longevity with a declining age gap between husbasnds and wives.  Cohabitation has also become increasingly important, emerging as a widely used step on the path to marriage.  Out-of-wedlock fertility has also risen, consistent with declining "shotgun marriages".  Compared with other countries, marriage maintains a central role in American life.  We then turn to documenting some of the driving forces causing these changes in the marriage market: the rise of the pill and women's control over their own fertility; sharp changes in wage structure, including a rise in inequality and partial closing of the gender wage gap; dramatic changes in home production technologies; and the emergence of the internet as a new matching technology.  Finally, we discuss how these facts should inform family policy debates.

    Press reactions:
         - New York Times (html)
         - Knowledge at Wharton (with mp3 podcast)
         - Australian Financial Review (original)
         - NBER Digest
         - Wall Street Journal
         - Washington Post
         - Jet magazine
         - Santa Cruz Sentinel
         - Radio: The Al Sharpton Show
     

 

  • Bargaining in the Shadow of the Law:
    Divorce Laws and Family Distress
    Joint with Betsey Stevenson
    Published, Quarterly Journal of Economics 121(1), February 2006
     
  • Over the past thirty years changes in divorce law have significantly increased access to divorce. The different timing of divorce law reform across states provides a useful quasi-experiment with which to examine the effects of this change. We analyze state panel data to estimate changes in suicide, domestic violence and spousal murder rates arising from the change in divorce law.  Suicide rates are used as a quantifiable measure of happiness and well-being, albeit one that focuses on the extreme lower tail of the distribution. We find a large, statistically significant, and econometrically robust decline in the number of women committing suicide following the introduction of unilateral divorce. No significant effect is found for men. Domestic violence is analyzed using both data on family conflict resolution, and intimate homicide rates. The results indicate a large decline in domestic violence for both men and women in states that adopted unilateral divorce. We find suggestive evidence that unilateral divorce led to a decline in females murdered by their partners, while the data revealed no discernible effects for men murdered. In sum, we find strong evidence that legal institutions have profound real effects on outcomes within families.

    (Previously circulated under the title "Til Death Do Us Part: The Effects of Divorce Laws on Suicide, Domestic Violence and Intimate Homicide")
    Link to Data appendix, dataset and Stata programs.

    Press reactions:
            - Summarized in NBER Digest (html)
           - The Washington Post (reprinted in Times Record News, Naples Daily News,  The Milwaukee Journal Sentinel, The Cincinnati Post et. al.)
           - The Chicago Tribune (reprinted in The Baltimore Sun)
           - NPR Morning Edition (mp3)
           - Slate (excerpting Tim Harford's "The Logic of Life")

     

  • Did Unilateral Divorce Raise Divorce Rates?
    A Reconciliation and New Results
     Published, American Economic Review, 96(5), December 2006, 1802-1820.
         Previously: NBER Working Paper #10014 (contains model)

    Becker has argued that the rise in divorce rates over the last thirty years does not reflect liberalized divorce laws. His argument rests on a basic application of the Coase theorem to marital bargaining. Each iteration of the ensuing empirical literature has come to a different conclusions. This paper reconciles these various estimates, showing that differences reflect a failure to carefully consider both the political endogeneity of these decisions, and the dynamic response of divorce rates to a regime change. New estimates suggest that unilateral divorce laws led to a large increase in divorce rates that lasted about a decade, followed by a significant reversal.

    Link to Data appendix, dataset and Stata programs.

    Press reactions:
    - The Chicago Tribune
    - Legal Affairs Debate
    - NPR Morning Edition (mp3)
    -  Slate (excerpting Tim Harford's "The Logic of Life")

Labor Markets

  • Diagnosing Discrimination: Stock Returns and CEO Gender
         Published, Journal of the European Economic Association, 4(2-3), May 2006.
    Previously: NBER Working Paper #11989

    A vast labor literature has found evidence of a "glass ceiling", whereby women are under-represented among senior management.  A key question remains the extent to which this reflects unobserved differences in productivity, preferences, prejudice, or systematically biased beliefs about the ability of female managers.  Disentangling these theories would require data on productivity, on the preferences of those who interact with managers, and on perceptions of productivity.  Financial markets provide continuous measures of the market's perception of the value of firms, taking account of the beliefs of market participants about the ability of the men and women in senior management.  As such, financial data hold the promise of potentially providing insight into the presence of mistake-based discrimination.  Specifically if female-headed firms were systematically under-estimated, this would suggest that female-headed firms would outperform expectations, yielding excess returns.  Examining data on S&P 1500 firms over the period 1992-2004 I find no systematic differences in returns to holding stock in female-headed firms, although this result reflects the weak statistical power of our test, rather than a strong inference that financial markets either do or do not under-estimate female CEOs.

    Link to dataset and Stata programs.

     
  • Is Business Cycle Volatility Costly?
    Evidence From Surveys of Subjective Wellbeing
    Published, International Finance, Volume 6 #1, 2003. (Lead article)
    And in Council on Foreign Relations Conference volume, "Stabilizing the Economy".
    Previously: NBER Working Paper #9619

    This paper analyzes the effects of business cycle volatility on measures of subjective wellbeing, including self-reported happiness and life satisfaction. I find robust evidence that inflation, and particularly unemployment, lower perceived wellbeing. Conditional on levels of unemployment and inflation, greater macroeconomic volatility undermines wellbeing. These effects are moderate but important: eliminating unemployment volatility would raise wellbeing by an amount roughly equal to that from lowering unemployment by a quarter of a percentage point. The effects of inflation volatility on wellbeing are less easy to detect and are likely smaller.

    Press reactions:
           - The Economist ( html)
           - Seattle Post-Intelligencer (html)
           - Business Week ( html)
           - Regional Review, Federal Reserve Bank of Boston
           - Monthly Labor Review

     

  • The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence
    Joint with Olivier Blanchard
    Published, Economic Journal, March 2000
    Previously: NBER Working Paper 7282

    Two key facts about European unemployment must be explained: the rise in unemployment since the 1960s, and the heterogeneity of individual country experiences.  While adverse shocks can potentially explain much of the rise in unemployment, there is insufficient heterogeneity in these shocks to explain cross-country differences.  Alternatively, while explanations focusing on labor market institutions explain cross-country differences well, many of these institutions pre-date the rise in unemployment.  Based on a panel of institutions and shocks for 20 OECD nations since 1960, we find that the interaction between shocks and institutions is crucial to explaining both stylized facts.  Our first specification assumes that there are common, but unobservable, shocks across countries; we find that these shocks have a larger and more persistent effect in countries with poor labor market institutions.  Our second specification constructs series for the macro shocks, and again finds evidence that the same size shock has differential effects on unemployment when labor market institutions differ.  These findings suggest that institutions determine the relevance of the unemployed to wage-setting, thereby determining the evolution of equilibrium unemployment rates following a shock.

    Link to Dataset and Data Appendix
    Press reactions:

  • Employment Protection and Job Flows:
    Evidence from Seasonal Cycles
    Accepted subject to minor revision, Economic Inquiry

    Theory implies that employment protection will unambiguously decrease job flows. However, cross-country comparisons of annual rates of job reallocation seem to show that employment protection has no discernible effect on job flows. This paper presents a model that shows that employment protection does not significantly alter a firm’s response to highly persistent shocks such as those present in annual data. By contrast, quarterly job flows will reflect highly transitory shocks such as those associated with the seasonal cycle. It is here that employment protection should reduce job flows. Testing this hypothesis requires a consistent set of cross-country set of quarterly job flows.  In the absence of such data, this paper takes a novel approach, manipulating available household survey data. Specifically, a measure of job flows caused by the seasonal cycle is constructed. Analyzing these flows across 14 OECD countries, employment protection is shown to have significant and economically meaningful effects on job flows. Indeed, the size of the effect is sufficient to confirm Blanchard and Portugal’s hypothesis that it is employment protection that explains the different pattern of labor turnover between Portugal and the USA.

 

Positive Political Economy

  • Party Influence in Congress and the Economy
    Joint with Erik Snowberg and Eric Zitzewitz
    Published, Quarterly Journal of Political Science, 2(3) 277-286, August 2007.
    Previously: NBER Working Paper #12751

    To understand the extent to which partisan majorities in Congress influence economic policy, we compare financial market responses in recent midterm elections to Presidential elections.  We use prediction markets tracking election outcomes as a means of precisely timing and calibrating the arrival of news, allowing substantially more precise estimates than a traditional event study methodology.  We find that equity values, oil prices, and Treasury yields are slightly higher with Republican majorities in Congress, and that a switch in the majority party in a chamber of Congress has an impact that is only 10-30 percent of that of the Presidency.  We also find evidence inconsistent with the popular view that divided government is better for equities, finding instead that equity valuations increase monotonically, albeit slightly, with the degree of Republican control.

    Link to Dataset and Data Appendix

    Press reactions:
          - New York Times (html)
          - Podcast: Interview with New York Times (mp3)
          - Bloomberg TV's "Money and Politics" (avi)

 

  • Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections
    Joint with Erik Snowberg and Eric Zitzewitz
    Published, Quarterly Journal of Economics, May 2007, 122(2) 807-829.
    Previously: NBER Working Paper #12073

    Political economists interested in discerning the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections.  We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during election day.  Analyzing high frequency financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry.  A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest.  Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2‑3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.

    Link to Dataset and Data Appendix

Press reactions:
       - NBER Digest (html)
       - Bloomberg (html)
       - Wall Street Journal
       - Wall Street Journal Econoblog (html)
       - Wall Street Journal (again) (html)
 

  • Using Markets to Inform Policy: The Case of the Iraq War
    Joint with Eric Zitzewitz
    Forthcoming, Economica

    Market prices incorporate large amounts of information, and our aim in this paper is to demonstrate that prediction markets can help extract this information, prospectively allowing this aggregated expertise to inform policy decisions in real-time.  We provide a case study, exploiting data from a market trading in contracts which paid off if Saddam Hussein was removed as leader of Iraq, to learn about financial market participants’ expectations of the consequences of the 2003 Iraq war.  We conducted an ex-ante analysis, which we disseminated before the war, finding that a 10 percent increase in the probability of war was accompanied by a $1 increase in spot oil prices that futures markets suggested was expected to dissipate quickly.  Equity prices movements implied that the same shock led to a 1½ percent decline in the S&P 500.  Further, the existence of widely-traded options allows us to back out the entire distribution of market expectations of the war’s near-term effects, finding that these large effects reflected a negatively skewed distribution, with a substantial probability of an extremely adverse outcome.  The flow of war-related news through our sample explains a large proportion of daily oil and equity price movements.  Subsequent analysis suggests that these relationships continued to hold out-of-sample.  Our analysis also allows us to characterize which industries and countries were most sensitive to war news, and when the war turned out somewhat better than ex-ante expectations, these sectors recovered, confirming these cross-sectional implications.  We highlight the particular features of this case study that make it particularly amenable to this style of policy analysis, and discuss some of the issues in applying this method to other policy contexts.

    This paper incorporates much of the material in the following paper, which was produced prior to the war in Iraq:

Press reactions:
       - The New York Times (html)
       - Reprinted in Sydney Morning Herald, Houston Chronicle,
         Moscow Times
       - The Australian (html)
       - ABC Radio National interview (transcript , listen here)
       - CBS MarketWatch
        - Wired (html)
       - Sacramento Business Journal (html)
       - Boston Globe
        - The Age (html)
       - Chartered Financial Analyst
        - Algemeen Dagelad (in Dutch)

Are voters rational? Standard agency theory suggests that rational voters will seek to re-elect politicians who deliver favorable outcomes. A second implication is that it makes little sense to re-elect politicians following good outcomes that are not a reflection of their competence. Indeed, rational voters will filter such exogenous shocks from their assessments in order to avoid electing incompetent, but lucky, politicians. This paper measures the extent to which voters in state gubernatorial elections irrationally attribute credit to the state governor for economic fluctuations unrelated to their actions. Simple tests of relative performance evaluation reveal that voters evaluate their state’s economic performance relative to the national economy. However, this is only evidence of rule-of-thumb performance filtering. More sophisticated tests reveal that voters in pro-cyclical states are consistently fooled into re-electing incumbents during national booms, only to dump them during national recessions. Similarly, voters in oil-producing states tend to re-elect incumbent governors during oil price rises, and vote them out of office when the oil price drops. Consonant with an emerging behavioral literature, this suggests that voters make systematic attribution errors and are best characterized as quasi-rational.


            

Prediction Markets

  • The Promise of Prediction Markets
    Arrow, Forsythe, Gorham, Hahn, Hanson, Ledyard, Levmore, Litan, Milgrom, Nelson, Neumann, Ottaviani, Schelling, Shiller, Smith, Snowberg, Sunstein, Tetlock, Tetlock, Varian, Wolfers and Zitzewitz
    Published, Science, 320, p.877, May 16 2008.

    Reviews the extant literature on prediction markets, and how they can be harnessed for use in both public policy and business settings.  We assess current legal impediments to the adoption of prediction markets, and describe how CFTC regulation may create a more useful regulatory environment.

 

  • Using Prediction Markets to Track Information Flows: Evidence from Google
    Joint with Bo Cowgill and Eric Zitzewitz

    In the last 2.5 years, Google has conducted the largest corporate experiment with prediction markets we are aware of. In this paper, we illustrate how markets can be used to study how an organization processes information. We document a modest optimistic bias in Google's markets. Newly hired employees are on the optimistic side of these markets, and optimistic biases are significantly more pronounced on days when Google stock is appreciating. We find strong correlations in trading for those who sit within a few feet of one another; social networks and work relationships also play a secondary explanatory role. The results are interesting in light of recent research on the role of optimism in entrepreneurial firms, as well as recent work on the importance of geographical and social proximity in explaining information flows in firms and markets.

    Press reactions:

 

  • Prediction Markets in Theory and Practice
    Joint with Eric Zitzewitz
    Forthcoming, The New Palgrave Dictionary of Economics, 2nd ed. Larry Blume and Steve Durlauf (eds.)
    Previously: NBER Working Paper #12083

    Prediction Markets, sometimes referred to as "information markets," "idea futures" or "event futures", are markets where participants trade contracts whose payoffs are tied to a future event, thereby yielding prices that can be interpreted as market-aggregated forecasts.  This article summarizes the recent literature on prediction markets, highlighting both theoretical contributions that emphasize the possibility that these markets efficiently aggregate disperse information, and the lessons from empirical applications which show that market-generated forecasts typically outperform most moderately sophisticated benchmarks.  Along the way, we highlight areas ripe for future research.

    Link to a video of a talk given to the New Horizons in Science Briefing.
    A review of the field of prediction markets on "This week in Science" (mp3 file)
     
  • Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty and Risk
    Joint with Refet Gurkaynak
    Published, NBER International Seminar on Macroeconomics, 2005.
    Previously: NBER Working Paper #11929

    In September 2002, a new market in "Economic Derivatives" was launched allowing traders to take positions on future values of several macroeconomic data releases.  We provide an initial analysis of the prices of these options.  We find that market-based measures of expectations are similar to survey-based forecasts although the market-based measures are somewhat more accurate better predict financial market responses to surprises in data.  These markets also provide implied probabilities of the full range of specific outcomes, allowing us to measure uncertainty, assess its driving forces, and comparing this measure of uncertainty with the dispersion of point-estimates among individual forecasters (a measure of disagreement).  We also assess the accuracy of market-generated probability density forecasts.  A consistent theme is that few of the behavioral anomalies present in surveys of professional forecasts survive in equilibrium, and these markets are remarkably well calibrated.  Finally we assess the role of risk, finding little evidence that risk-aversion drives a wedge between market prices and probabilities in this market.

    Link to Dataset and Data Appendix
    Simplified version: San Francisco Economic Letter
    Published discussions by Chris Carroll and Adam Szeidl

    Press reactions:
         - NBER Digest
         - International Herald Tribune
         - Bloomberg TV "Bloomberg on Markets"
          
     
  • Explaining the Favorite-Longshot Bias: Is it Risk-Love, or Misperceptions?
    Joint with Erik Snowberg

    The favorite-longshot bias presents a challenge for theories of decision making under uncertainty: This longstanding empirical regularity is that betting odds provide biased estimates of the probability of a horse winning, and longshots are overbet, while favorites are underbet. Neoclassical explanations have rationalized this puzzle by appealing to rational gamblers who overbet longshots due to risk-love, or alternatively information asymmetries.  The competing behavioral explanations emphasize the role of misperceptions of probabilities. We provide a novel empirical test that can differentiate these competing theories, focusing on the pricing of compound or "exotic" bets.  We test whether the model that best explains gamblers' choices in one part of their choice set (betting to win) can also rationalize decisions over a wider choice set, including betting in the win, exacta, quinella or trifecta pools. We have a new large-scale dataset ideally suited to test these predictions and find evidence in favor of the view that misperceptions of probability drive the favorite-longshot bias, as suggested by Prospect Theory.  Along the way we provide more robust evidence on the favorite-longshot bias, falsifying the conventional wisdom that the bias is large enough to yield profit opportunities (it isn't) and that it becomes more severe in the last race (it doesn't).

    Press reactions:
          - The Guardian Newspaper
     
  • Interpreting Prediction Market Prices as Probabilities
    Joint with Eric Zitzewitz
    Revise and resubmit, Review of Economics and Statistics
     NBER Working Paper #12200

    While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice.  We provide relevant analytic foundations, describing sufficient conditions under which prediction markets prices correspond with mean beliefs.  Beyond these specific sufficient conditions, we show that for a broad class of models prediction market prices are usually close to the mean beliefs of traders.  The key parameters driving trading behavior in prediction markets are the degree of risk aversion and the distribution on beliefs, and we provide some novel data on the distribution of beliefs in a couple of interesting contexts.  We find that prediction markets prices typically provide useful (albeit sometimes biased) estimates of average beliefs about the probability an event occurs.
     
  • Five Open Questions About Prediction Markets
    Joint with Eric Zitzewitz
    Published, Information Markets: A New Way of Making Decisions in the Public and Private Sectors, AEI-Brookings Press, eds: Robert Hahn and Paul Tetlock.
    Previously: NBER Working Paper #12060
    Final chapter; Whole book.

    Interest in prediction markets has increased in the last decade, driven in part by the hope that these markets will prove to be valuable tools in forecasting, decision-making and risk management - in both the public and private sectors.  This paper outlines five open questions in the literature, and we argue that resolving these questions is crucial to determining whether current optimism about prediction markets will be realized.
     
  • Prediction Markets
    Joint with Eric Zitzewitz
    Published, Journal of Economic Perspectives, 18(2), Spring 2004.
    Previously: NBER Working Paper #10504

We analyze the extent to which simple markets can be used to aggregate disperse information into efficient forecasts of unknown future events.  Drawing together data from a range of prediction contexts, we show that market-generated forecasts are typically fairly accurate, and they outperform most moderately sophisticated benchmarks.  Carefully designed contracts can yield insight into the market's expectations about not only probabilities, means and medians, and also uncertainty about these parameters.  Moreover, conditional markets can effectively reveal the market's beliefs about regression coefficients, although we still have the usual problem of disentangling correlation from causation.  We discuss a number of market design issues and highlight domains in which prediction markets are most likely to be useful.

Press reactions:
     - The Economist (html)
     - Science News
     - Time Magazine
     - CBS Market Watch (html)
     - NBER Digest (html)
     - Securities Industry News
     - Melbourne Age
     - Bloomberg radio (mp3)
     - Washington Post
     - Public Radio International: Fair Game (mp3)

 

  • Prediction Markets: Does Money Matter?
    Joint with Emile Servan-Schreiber, David Pennock and Brian Galebach
    Electronic Markets, 14(3), September 2004.

    The accuracy of prediction markets has been documented for both markets based on real-money and those based on play-money. To test how much extra accuracy can be obtained by using real money versus play-money, we set up a real-world on-line experiment pitting the predictions of TradeSports.com (real-money) against those of NewsFutures.com (play-money) regarding American Football outcomes during the fall/winter 2003 NFL season. As expected, both types of markets exhibited significant prediction powers, and remarkable performance compared to individual humans. But, perhaps surprisingly, the play-money markets did not perform any worse than the real-money markets. We speculate that this result reflects two opposing forces: real-money markets may better motivate information discovery while play-money market may yield more efficient information aggregation.

 

Macroeconomics

  • Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox
    Joint with Betsey Stevenson
    Prepared for Brookings Papers on Economic Activity, Spring 2008.

    The "Easterlin Paradox" suggests that there is no link between the level of economic development of a society and average levels of happiness.  We return to Easterlin's question: "Will raising the incomes of all increase the happiness of all?" and analyze multiple rich datasets spanning recent decades and a broader array of countries.  We establish a clear positive link between GDP and average levels of subjective well-being across countries with no evidence of a satiation point beyond which wealthier countries have no further increases in subjective well-being.  Moreover, we show that this relationship is consistent with the relationship between income and happiness within countries, suggesting a minimal role for relative income comparisons as drivers of happiness.  Finally, we examine the relationship between changes in subjective well-being and income over time within countries, finding that economic growth has been associated with rising happiness.

    Press reactions:

    •  

  • Aggregate Shocks or Aggregate Information?  Costly Information and Business Cycle Comovement (Appendix)
    Joint with Laura Veldkamp
    Published, Journal of Monetary Economics, 54: 37-55, September 2007.
    NBER Working Paper #12557

    When similar patterns of expansion and contraction are observed across sectors, we call this a business cycle. Yet explaining the similarity and synchronization of these cycles across industries remains a puzzle. Whereas output growth across industries is highly correlated, identifiable shocks, like shocks to productivity, are far less correlated. While previous work has examined complementarities in production, we propose that sectors make similar input decisions because of complementarities in information acquisition. Because information about driving forces has a high fixed cost of production and a low marginal cost of replication, it can be more efficient for firms to share the cost of discovering common shocks than to invest in uncovering detailed sectoral information. Firms basing their decisions on this common information make highly correlated production choices. This mechanism amplifies the effects of common shocks, relative to sectoral shocks.
     
  • Disagreement About Inflation Expectations
    Joint with Greg Mankiw and Ricardo Reis
    Published, NBER Macroeconomics Annual (2003).
    Previously: NBER Working Paper version #9796

    Analyzing 50 years of inflation expectations data from several sources, we document substantial disagreement among both consumers and professional economists about expected future inflation.  Moreover, this disagreement shows substantial variation through time, moving with inflation, the absolute value of the change in inflation, and relative price variability.  We argue that a satisfactory model of economic dynamics must speak to these important business cycle moments.  Noting that most macroeconomic models do not endogenously generate disagreement, we show that a simple “sticky-information” model broadly matches many of these facts.  Moreover, the sticky-information model is consistent with other observed departures of inflation expectations from full rationality, including autocorrelated forecast errors and insufficient sensitivity to recent macroeconomic news.
  • Institutional Determinants of Inflation Expectations
    Work in progress with Greg Mankiw and Ricardo Reis

A growing literature on monetary institutions suggests that a key feature is the ability of the central bank to clearly and credibly communicate its intentions and policy actions to the public.  We exploit a unique dataset containing the inflation and output expectations of senior executives in 40 countries over the past twenty years to ask how the inflation expectations formation process is shaped by institutions such as central bank independence, the adoption of an inflation target, monetary unions or a currency peg.

 

Australia:Mostly Economics, Some Politics

 

  • Competing Approaches to Forecasting Elections:
    Economic Models, Opinion Polling and Prediction Markets
    Joint with Andrew Leigh
     Published, Economic Record 82(258), September 2006.
     NBER Working Paper #12053 (contains data appendices)

     We review the efficacy of three approaches to forecasting elections: econometric models that project outcomes on the basis of the state of the economy; public opinion polls; and election betting (prediction markets).  We assess the efficacy of each in light of the 2004 Australian election.  This election is particularly interesting both because of innovations in each forecasting technology, and also because the increased majority achieved by the Coalition surprised most pundits. While the evidence for economic voting has historically been weak for Australia, the 2004 election suggests an increasingly important role for these models.  The performance of polls was quite uneven, and predictions both across pollsters, and through time, vary too much to be particularly useful.  Betting markets provide an interesting contrast, and a slew of data from various betting agencies suggests a more reasonable degree of volatility, and useful forecasting performance both throughout the election cycle and across individual electorates.

    Press reactions:
           - The Australian Financial Review
           - The Melbourne Age
           - The Sydney Morning Herald

 

Conference Discussions

  • Discussion of González and Özcan
    "The Risk of Divorce and Household Saving Behavior"
    by Libertad González and Berkay Özcan
    IFN Conference on Family, Children and Work, Stockholm, May 22, 2008
  • Discussion of Greenwood and Guner
    "Marriage and Divorce Since World War II: Analyzing the Role of Technological Progress on the Formation of Households"
    by Jeremy Greenwood and Nezih Guner
    NBER Macroeconomics Annual, April 4, 2008.

  • Discussion of Gil and Levitt
    "Testing the Efficiency of Markets in the 2002 World Cup"
    by Ricard Gil and Steven Levitt
    American Economic Association Meetings, New Orleans, January 4, 2008.

  • Discussion of Blinder and Morgan
    "Do Monetary Policy Committees Need Leaders?  A Report on an Experiment"
    by Alan Blinder and John Morgan
    American Economic Association Meetings, New Orleans, January 4, 2008.

  • Discussion of Broz, Frieden and Weymouth
    "Exchange-Rate Policy Attitudes: Direct Evidence from Survey Data"
    by J. Lawrence Broz, Jeffry Frieden and Stephen Weymouth
    IMF Annual Research Conference, Washington DC, November 15, 2007
     
  • Discussion of Abrams
    "Do Judges Vary in their Treatment of Race?"
    by David Abrams, Marianne Bertrand and Sendhil Mullainathan
    Conference on Empirical Legal Studies, New York, November 9, 2007.
     
  • Discussion of Olken and Barron
    "The Simple Economics of Extortion: Evidence from Trucking in Aceh"
    by Ben Olken and Patrick Barron
    NBER Economics of Crime Working Group, Cambridge, September 14, 2007.

  • Discussion of Fischman
    "Decision-Making Under a Norm of Consensus: A Structural Analysis of Three-Judge Panels"
    by Joshua Fischman
    NBER Summer Institute - Law and Economics, Cambridge, July 31, 2007.

  • Discussion of DellaVigna and La Ferrara
    "Detecting Illegal Arms Trade"
    by Stefano DellaVigna and Eliana La Ferrara
    NBER Summer Institute - Political Economy, Cambridge, July 17, 2007.

  • Comments on Prediction Market Accuracy
    Comments cover three papers:
    1. "Bookmaker and Pari-Mutuel Betting: Is a (Reverse) Favourite-Longshot Bias Built-in?", by Alexander Koch and Hui-Fai Shing
    2. "Public Signal Bias and Prediction Market Accuracy", by Tom Gruca and Joyce Berg
    3. "Ignorance Prior Bias in Prediction Markets", by Lionel Page
    Workshop on The Growth of Gambling and Prediction Markets: Economic and Financial Implications, U.C. Riverside, May 21, 2007.
     
  • Comments on Gender Discrimination
    Comments cover two papers:
    1. "Do Women in Top Corporate Management and Governance Help Women to Advance?", by Lois Joy and Sarah Lang
    2. "Women in Science - Fulfillment or Frustration?", by Sara Connolly and Susan Long
    Society of Labor Economists Annual Meetings, Chicago, May 4, 2007.
     
  • Discussion of Durlauf, Navarro and Rivers
    "Notes on the Econometric Analysis of Crime"
    by Steven Durlauf, Salvador Navarro and David Rivers
    Workshop on Understanding Crime Trends, Committee on Law and Justice, National Academies of Science and Engineering, Washington D.C., April 24, 2007.
     
  • Discussion of Rothstein and Yoon
    "Mismatch in Law School" and
    "Affirmative Action in Law School Admissions: What Do Racial Preferences Do?"
    by Jesse Rothstein and Albert Yoon
    NBER Law and Economics Spring Meeting, Cambridge, March 1, 2007.
     
  • Discussion of Foster, Haltiwanger and Krizan
    "The Evolution of National Retail Chains: How We Got Here"
    by Lucia Foster, John Haltiwanger, and CJ Krizan
    American Economic Association Meetings, Chicago, January 7, 2007.
     
  • Discussion of Akabayashi
    "Who Suffered from Superstition in the Marriage Market: The Case of Hinoeuma in Japan"
    by Hideo Akabayashi
    American Economic Association Meetings, Chicago, January 7, 2007.
     
  • Discussion of Faggio, Salvanes and Van Reenen
    "Understanding the Evolution of Wage and Productivity Dispersion: Cross Country Evidence"
    by Giulia Faggio, Kjell Salvanes and John Van Reenen
    Global Network on Inequality Conference on "New Directions in Inequality and Stratification", Princeton, April 8, 2006.
     
  • Discussion of Aguiar and Hurst
    "Measuring Trends in Leisure: The Allocation of Time over Five Decades"
    by Mark Aguiar and Erik Hurst
    San Francisco Federal Reserve Bank Conference on "Labor Markets and the Macroeconomy", San Francisco, March 3, 2006.
     
  • Discussion of Fisman, Iyengar, Kamenica and Simonson
    "Dating Markets - Theory and Experimental Evidence"
    by Ray Fisman, Sheena Iyengar, Emir Kamenica and Itamar Simonson
    American Economic Association meetings, Boston, January 6, 2006.
     
  • Discussion of Clark and Etile
    "Values, Votes and Slopes - Political Behavior and the Marginal Utility of Income"
    by Andrew Clark and Fabrice Etile
    American Economic Association Meetings, Boston, January 6, 2006.
     
  • Discussion of Barth, Li, McCarthy, Phumiwasana and Yago
    "Economic Impacts of Global Terrorism: From Munich to Bali"
    by James Barth, Tong Li, Don McCarthy, Triphon Phumiwasana and Glenn Yago
    American Economic Association Meetings, Boston, January 8, 2006.
     
  • Comments on Careers and Advancements within Firms
    Comments cover 3 papers:
    1. "Promotions, State Dependence and Intrafirm Job Mobility: Insiders vs. New Hires", by Pablo Acosta
    2. "Three Forms of Inequality: Advantage, the Absence of Advantage, and Disadvantage", by Nancy DiTomaso, Corinne Post, Randall Smith, George Farris, Rene Cordero
    3. "Career System Practices: An Examination of Factors Affecting the Development of Managerial Capital", by Schalon Harrison Newton.
    Wharton Careers and Career Transitions: New Evidence for a New Economy, Philadelphia, June 24 2005.
     
  • Comments on Retirement Modeling
    Comments cover 5 papers:
    1. "Estimating early retirement with private alternatives", by Matias     Eklof and Daniel Hallberg
    2. "Welfare Effects of Social Security Reforms Across Europe: the case of France and Italy", by Raquel Fonseca and Thepthida Sopraseuth
    3. "A Qualitative Investigation of the Laffer Curve on the Continued Work Tax: The French Case", by     Francois Langot, Jean-Olivier Hairault, and Thepthida Sopraseuth
    4. "Labor Force Participation Dynamics and Social Security Claiming Decisions", by Pierre-Carl Michaud
    5. "Back to Work: Expectations and Realizations of Work after Retirement", by Nicole Maestas
    EALE/SOLE Joint Annual Meetings, June 4, 2005.
     
  • Discussion of Grant and Koeniger
    "Redistributive Taxation and Bankruptcy in US States"
    by Charles Grant and Winfried Koeniger
    IZA Workshop on Labor Market Institutions, December 3, 2004.
     
  • Discussion of Aakvik, Salvanes and Vaage
    "Measuring Heterogeneity in the Returns to Education in Norway Using Educational Reforms"
    by Arild Aakvik, Kjell Salvanes and Kjell Vaage
    ZEW Evaluation Conference, Mannheim Germany, October 22, 2004
     
  • Discussion of Bertrand, Kramarz, Schoar and Thesmar
    "Politically-Connected CEOs and Corporate Outcomes: Evidence from France"
    by Marianne Bertrand, Francis Kramarz, Antoinette Schoar and David Thesmar
    European Summer Symposium in Labour Economics, September 18, 2004
     
  • Discussion of Prat and Stromberg
    "State Television and Voter Information"
    by Andrea Prat and David Stromberg
    Stanford Conference on the Media and Economic Performance, March 6, 2004.

  • Discussion of Gibbs, Ierulli and Meyersson Milgrom  
    "Careers in Firm & Occupational Labor Markets", 
     by Michael Gibbs, Kathryn Ierulli and Eva Meyersson Milgrom
     Society of Labor Economists Annual Meetings, September 27, 2003.
  • "The Business of Sports: An Introduction to Sports Economics"
    Presentation to the Young President's Organization for discussion by a panel including Bill Walsh, Mike Sullivan, Jim Plunkett, Rick Barry, Jamie Baker, Dennis Gilbert and Larry Baer. 
    San Jose Sharks Stadium, February 6, 2003.

  • Comments on Kubik and Moran
    "Lethal Elections: Gubernatorial Politics and the Timing of Elections"
    Econometric Society (ASSA) Meetings, Washington DC, January 5, 2003.

  • Comments on Dieppe, Henry and McAdam
    "Labour Market Dynamics in the Euro Area: A Model-Based Sensitivity Analysis"
    by Alistair Dieppe,     Jerome Henry and Peter McAdam (ECB)
    Monetary Policy and the Labor Market in the US, the Euro-area and Japan.  A Conference in Honor of James Tobin. New York, November 22, 2002.

  • Comments on "Correlates and Consequences of Domestic Violence for Low-Income Women"
    Comments cover three papers:
    1. "Child Support Enforcement and Domestic Violence among Non-Cohabiting Couples", by Angela Fertig, Sara McLanahan and Irv Garfinkel
    2. "Domestic Violence Over Time: What Does It Mean For Child And Adolescent Functioning In Low-Income Families?", by Brenda Lohman, Elizabeth Votruba-Drzal and Lindsay Chase-Lansdale
    3. "Does Employment Protect Women From Domestic Violence?", by Christina Gibson, Katherine Magnuson, Lisa Gennetian and Greg Duncan
    APPAM annual conference, Dallas, November 7 2002.

  • Comment on Ziedonis
    "When the Giants' Shoulders are Crowded: Fragmented Rights and Patent Strategies in Semiconductors"
    by Rosemarie Ziedonis
    Business Environment Conference, Stanford GSB, March 22 2002.

  • Comments on Edlund and Pande
    "Why Have Women Become Left-wing: The Political Gender Gap and the Decline in Marriage", by Lena Edlund and Rohini Pande
    Wallis Conference on Political Economy, Rochester, September 29 2001

Research papers also available through the SSRN, or the NBER.

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