Nanny diaries
Economic Experts versus Average Americans
Paola Sapienza & Luigi Zingales
American Economic Review, May 2013, Pages 636-642
Abstract:
We compare answers to policy questions by economic experts and a representative sample of the US population. We find a 35 percentage point difference between the two groups. This gap is only partially explained by differences in ideological or personal characteristics of the two samples. Interestingly, the difference is the largest on the questions where economists agree the most and where there is the largest amount of literature. Informing people of the expert opinions does not seem to have much of an impact. Ordinary people seem to be skeptical of the implicit assumptions embedded into the economists' answers.
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Education and support for scientists and elected officials in public policy decisions
Timothy O'Brien
Science and Public Policy, June 2013, Pages 340-353
Abstract:
This paper uses survey data from the United States to examine the relationship between education and public support for scientific experts and elected leaders in knowledge-intensive policy decisions. Results show that most individuals agree that scientists should have more influence than elected leaders over public policy related to global warming, stem cell research, genetically modified food, and nuclear energy. However, compared to those with less schooling, college graduates are up to nearly three times more likely to express the minority opinion that elected leaders should have policy priority. The analysis shows that this pattern results primarily from college graduates' increased support for elected officials rather than decreased support for scientists. Findings provide evidence for democratic theory, and more generally, highlight the value of incorporating political theory in empirical research on science and public policy.
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Court-Appointed Neutral Economic Experts
Gregory Sidak
Journal of Competition Law & Economics, June 2013, Pages 359-394
Abstract:
Complex civil litigation routinely includes expert economic testimony. However, it may be hard for a jury to determine at trial which expert economist is more credible, and it may be hard for the judge to determine at the Daubert hearing whether the methodology upon which a given expert economist relies is intellectually rigorous enough to produce results that constitute admissible testimony. One solution rarely employed is for the court to appoint its own neutral economic expert under Rule 706 of the Federal Rules of Evidence when a lawsuit contains a claim for damages that will require rigorous analysis of data. Based on my recent experience as Judge Richard Posner's court-appointed economic expert on damages in patent infringement litigation, I explain how the wider use of Rule 706 would assist the judge and jury and would facilitate the prompt settlement of intellectual property, antitrust, securities, contract, business tort, and other complex disputes. The benefits to courts and litigants would surely exceed the costs.
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Competition and Unconscionability
Ezra Friedman
American Law and Economics Review, forthcoming
Abstract:
This paper argues that the conventional legal doctrine that emphasizes lack of choice among suppliers or contracts as an element of unconscionability is misguided. I show that when a seller with significant market power offers only one contract, fear of alienating sophisticated customers can discourage the seller from exploiting the unsophisticated with an inefficient contract. In contrast, competitive sellers may lose money on sophisticated customers, and be willing to sacrifice them in order to exploit the unsophisticated. Likewise, offering a choice of contracts enables sellers to exploit the unsophisticated while offering an efficient contract to the sophisticated.
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Using the Right Yardstick: Assessing Financial Literacy Measures by Way of Financial Well-Being
Maximilian Schmeiser & Jason Seligman
Journal of Consumer Affairs, forthcoming
Abstract:
Despite the proliferation of academic studies examining financial literacy and financial outcomes, no consistent definition or empirically validated measures of financial literacy exist. While a handful of questions have become the standard measures of financial literacy in previous research, little work has been done examining whether responses to these questions accurately capture underlying financial capability, or whether they causally relate to subsequent financial well-being. Taking advantage of longitudinal data from the Health and Retirement Study we examine whether some of the questions previously used as measures of financial literacy are consistent measures of financial knowledge and effective predictors of future changes in wealth. We find that respondents frequently do not consistently answer questions across survey waves and that the context in which a question is asked affects the likelihood of correctly responding. Moreover, our regression analyses suggest that correctly answering these questions, consistently or not, has little significant relationship to changes in wealth over time, and is often related to a decrease in future wealth. Our findings should give pause to researchers using the financial literacy questions examined here, particularly from cross-sectional data.
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Victor Stango & Jonathan Zinman
NBER Working Paper, May 2013
Abstract:
We document cross-individual variation in U.S. credit card borrowing costs (APRs) that is large enough to explain substantial differences in household saving rates. Borrower default risk and card characteristics explain roughly 40% of APRs. The remaining dispersion exists because a borrower can receive offers and hold cards with wide-ranging APRs, as different issuers price the same observable risk metrics quite differently. Borrower debt (mis)allocation across cards explains little dispersion. But self-reported borrower search/shopping (along with instruments for shopping implied by Fair Lending law) can explain APR differences comparable to moving someone from the worst credit score decile to the best.
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Consumer Misunderstanding of Credit Card Use, Payments, and Debt: Causes and Solutions
Jack Soll, Ralph Keeney & Richard Larrick
Journal of Public Policy & Marketing, May 2013, Pages 66-81
Abstract:
The authors identify several judgmental biases related to paying off credit card debt. Participants with stronger numerical skills made fewer errors, as did those who used the new statement format mandated by Congress in the CARD Act of 2009. Study 1 shows that people underestimate how long it takes to eliminate a debt when payments barely cover interest owed. Study 2 shows that less numerate people tend to underestimate the monthly payment required to pay off a debt in three years, whereas more numerate people tend to overestimate the payment. The newly revised statement required by the CARD Act substantially reduced these biases. However, even with the new statement, many people still underestimate required payments when still using the credit card. Study 3 identifies ambiguities in the revised statement that can lead to misjudgments about how much to pay on monthly bills. The authors recommend additional public policy actions to help cardholders understand the relationship between payments and debt elimination.
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Corporate Lobbying, Political Connections, and the Bailout of Banks
Benjamin Blau, Tyler Brough & Diana Thomas
Journal of Banking & Finance, August 2013, Pages 3007-3017
Abstract:
Political involvement has long been shown to be a profitable investment for firms that seek favorable regulatory conditions or support in times of economic distress. But how important are different types of political involvement for the timing and magnitude of political support? To answer this question, we take a comprehensive look at the lobbying expenditures and political connections of banks that were recipients of government support under the 2008 Troubled Asset Relief Program (TARP). We find that politically-engaged firms were not only more likely to receive TARP support, but they also received a greater amount of TARP support and received the support earlier than firms that were not politically involved.
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Executive Compensation and Business Policy Choices at U.S. Commercial Banks
Robert DeYoung, Emma Peng & Meng Yan
Journal of Financial and Quantitative Analysis, February 2013, Pages 165-196
Abstract:
We show that contractual risk-taking incentives for chief executive officers (CEOs) increased at large U.S. commercial banks around 2000, when industry deregulation expanded these banks' growth opportunities. Our econometric models indicate that CEOs responded positively to these incentives, especially at the larger banks best able to take advantage of these opportunities. Our results also suggest that bank boards responded to higher-than-average levels of risk by moderating CEO risk-taking incentives; however, this feedback effect is absent at the very largest banks with strong growth opportunities and a history of highly aggressive risk-taking incentives.
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Scandal Enforcement at the SEC: The Arc of the Option Backdating Investigations
Stephen Choi, Anat Carmy Wiechman & A.C. Pritchard
American Law and Economics Review, forthcoming
Abstract:
We study the Securities and Exchange Commission's (SEC) enforcement decisions in the context of the highly salient back-dating scandal. We find that (1) the SEC shifted its mix of investigations significantly toward backdating and away from other accounting issues; (2) event studies of stock market reactions to the initial disclosure of backdating investigations shows that those reactions declined over our sample period; (3) later backdating investigations are less likely to target individuals and be accompanied by a parallel criminal investigation; (4) later investigations were more likely to be terminated or produce no monetary penalties; and (5) the magnitude of the option backdating accounting errors diminished over time relative to other accounting errors that drew SEC scrutiny. Although we cannot directly test whether the SEC substituted toward lower-stake (but more salient) cases, the evidence presented here strongly suggests that the agency did so.
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Sarbanes-Oxley Act and Corporate Credit Spreads
Ali Nejadmalayeri, Takeshi Nishikawa & Ramesh Rao
Journal of Banking & Finance, August 2013, Pages 2991-3006
Abstract:
Stock market reaction suggests that despite improved disclosure and increased accountability, Sarbanes-Oxley Act (SOX) is too costly and not beneficial. Noting that bondholders are likely to reap the many potential benefits of SOX without bearing the brunt of costs, we examine how SOX affected corporate credit spreads to better assess its benefits. SOX has led to a significant structural decline in spreads of at least 27 basis points. Riskier firms (low rating, long maturity, high leverage, and small size) and firms closely related to SOX major provisions (earning variability, managerial trading, and corporate governance) experience greater declines in spreads.
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Harris Dellas & Ana Fernandes
Economic Journal, forthcoming
Abstract:
We investigate the role of financial constraints for product market competition in a general equilibrium model, where firms may differ in terms of own wealth and/or efficiency. We find that, in general, the amelioration of financial constraints increases competition (it lowers the Lerner index of markups) in financially dependent sectors even when other standard concentration indexes indicate otherwise. Our analysis implies that disruptions in financial markets (such as the recent financial crisis) may have adverse effects on competition in product markets, a cost that has not been identified before.
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Federal regulation and aggregate economic growth
John Dawson & John Seater
Journal of Economic Growth, June 2013, Pages 137-177
Abstract:
We introduce a new time series measure of the extent of federal regulation in the U.S. and use it to investigate the relationship between federal regulation and macroeconomic performance. We find that regulation has statistically and economically significant effects on aggregate output and the factors that produce it - total factor productivity (TFP), physical capital, and labor. Regulation has caused substantial reductions in the growth rates of both output and TFP and has had effects on the trends in capital and labor that vary over time in both sign and magnitude. Regulation also affects deviations about the trends in output and its factors of production, and the effects differ across dependent variables. Regulation changes the way output is produced by changing the mix of inputs. Changes in regulation offer a straightforward explanation for the productivity slowdown of the 1970s. Qualitatively and quantitatively, our results agree with those obtained from cross-section and panel measures of regulation using cross-country data.
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Financial dependence, global growth opportunities, and growth revisited
Simone Manganelli & Alexander Popov
Economics Letters, July 2013, Pages 123-125
Abstract:
We show that financial development has a non-monotonic effect on growth in the Rajan and Zingales (1998) and Fisman and Love (2007) sample. Beyond a threshold, financially dependent industries and industries facing good growth opportunities grow disproportionately more slowly.
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The regulator's trade-off: Bank supervision vs. minimum capital
Florian Buck & Eva Schliephake
Journal of Banking & Finance, forthcoming
Abstract:
We develop a simple model of banking regulation with two policy instruments: minimum capital requirements and the supervision of domestic banks. The regulator faces a trade-off: high capital requirements cause a drop in the banks' profitability, whereas strict supervision reduces the scope of intermediation and is costly for taxpayers. We show that a mix of both instruments minimises the costs of preventing the collapse of financial intermediation. Once we allow for cross-border banking, the optimal policy is not feasible. If domestic supervisory effort is not observable, our model predicts a race to the bottom in capital requirement regulation. Therefore, countries are better off by harmonising regulation on an international standard.
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Testing Enforcement Strategies in the Field: Threat, Moral Appeal and Social Information
Gerlinde Fellner, Rupert Sausgruber & Christian Traxler
Journal of the European Economic Association, June 2013, Pages 634-660
Abstract:
We run a large-scale natural field experiment to evaluate alternative strategies to enforce compliance with the law. The experiment varies the text of mailings sent to potential evaders of TV license fees. We find a strong effect of mailings, leading to a substantial increase in compliance. Among different mailings, a threat treatment which makes a high detection risk salient has a significant deterrent effect. Neither appealing to morals nor imparting information about others' behavior enhances compliance on aggregate. However, the information condition has a weak positive effect in municipalities where evasion is believed to be common.