Oversight
Private traits and attributes are predictable from digital records of human behavior
Michal Kosinski, David Stillwell & Thore Graepel
Proceedings of the National Academy of Sciences, 9 April 2013, Pages 5802-5805
Abstract:
We show that easily accessible digital records of behavior, Facebook Likes, can be used to automatically and accurately predict a range of highly sensitive personal attributes including: sexual orientation, ethnicity, religious and political views, personality traits, intelligence, happiness, use of addictive substances, parental separation, age, and gender. The analysis presented is based on a dataset of over 58,000 volunteers who provided their Facebook Likes, detailed demographic profiles, and the results of several psychometric tests. The proposed model uses dimensionality reduction for preprocessing the Likes data, which are then entered into logistic/linear regression to predict individual psychodemographic profiles from Likes. The model correctly discriminates between homosexual and heterosexual men in 88% of cases, African Americans and Caucasian Americans in 95% of cases, and between Democrat and Republican in 85% of cases. For the personality trait "Openness," prediction accuracy is close to the test-retest accuracy of a standard personality test. We give examples of associations between attributes and Likes and discuss implications for online personalization and privacy.
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Advertising Expensive Mortgages
Umit Gurun, Gregor Matvos & Amit Seru
NBER Working Paper, March 2013
Abstract:
We use a unique dataset that combines information on advertising by subprime lenders and mortgages originated by them from 2002 to 2007 to study the relationship between advertising and the nature of mortgages obtained by consumers. We exploit the richness of our data and measure the relative expensiveness of a given mortgage as the excess rate of a mortgage after accounting for a broad set of borrower, contract, and regional characteristics associated with a given mortgage--less expensive mortgages, all else equal, are better products from the perspective of the consumer. We find a strong positive relationship between the intensity of local advertising and the expensiveness of mortgages extended by lenders within a given region, with the relationship strongest for advertising through newspapers, the most heavily used channel for local advertising of mortgages. This pattern survives even after conditioning for a rich set of borrower, loan and region characteristics and exploiting differences in advertising within a given lender. Advertisers lend to consumers who, all else equal, default less, making it unlikely that our results are driven by unobservable borrower quality. We also exploit variation in mortgage advertising induced by the entry of Craigslist across different regions to demonstrate that the relation between advertising and expensiveness of mortgages is not likely to be spurious. We corroborate that advertising is most effective when targeted at groups that might be less informed about mortgages, such as the poor, the less educated and minorities. These findings are inconsistent with the "informative view" under which advertising allows consumers to find cheaper products, and instead support the "persuasive view" that advertising in the subprime mortgage market was used to steer consumers into expensive choices.
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Fudging the Nudge: Information Disclosure and Restaurant Grading
Daniel Ho
Yale Law Journal, December 2012, Pages 574-688
Abstract:
One of the most promising regulatory currents consists of "targeted" disclosure: mandating simplified information disclosure at the time of decisionmaking to "nudge" parties along. Its poster child is restaurant sanitation grading. In principle, a simple posted letter grade (‘A,' ‘B,' or ‘C') empowers consumers and properly incentivizes restaurateurs to reduce risks for foodborne illness. Yet empirical evidence of the efficacy of restaurant grading is sparse. This Article fills the void by studying over 700,000 health inspections of restaurants across ten jurisdictions, focusing on San Diego and New York. Despite grading's great promise, we show that the regulatory design, implementation, and practice suffer from serious flaws: jurisdictions fudge more than nudge. In San Diego, grade inflation reigns. Nearly all restaurants receive ‘A's. In New York, inspections exhibit little substantive consistency. A good score does not meaningfully predict cleanliness down the road. Unsurprisingly, New York's implementation of letter grading in 2010 has not discernably reduced manifestations of foodborne illness. Perhaps worse, the system perversely shifts inspection resources away from higher health hazards to resolve grade disputes. These results have considerable implications, not only for food safety, but also for the institutional design of information disclosure.
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The Rise of Carrots and the Decline of Sticks
Gerrit De Geest & Giuseppe Dari-Mattiacci
University of Chicago Law Review, Winter 2013, Pages 341-392
Abstract:
There is a remarkable tendency in modern legal systems to increasingly use carrots. This trend is not limited to legal systems but can also be observed in, for instance, parenting styles, social control mechanisms, and even law schools' teaching methods. Yet, at first glance, sticks appear to be a more efficient means of inducing people to comply with legal rules or social norms because they are not meant to be applied (thus minimizing transaction costs and risks) and may cause fewer unintended distributional distortions. So how can we justify the widespread use of carrots? This Article shows that carrots can be superior in two cases. The first is when the lawmaker faces specification problems, which means that she does not know what to expect from each individual citizen (for instance, she may not know which citizen should spend time composing songs or which part of the cargo of a sinking ship should be rescued). In those cases, sticks are likely to punish citizens who are unable to comply with the norm and likely to cause wasteful transaction costs, risks, and undesirable wealth changes. The second is when the lawmaker needs to require significantly higher efforts from some citizens than from others. We use the term singling-out danger to refer to this problem. This is the case, for instance, when the lawmaker wants only some families to send a family member to the army, or only some families to sacrifice land for a highway project. In such cases, sticks would cause significant unintended distributional distortions (artificially impoverishing those from whom much is required), making carrots superior. Overall, our results predict that in societies with more specialization and division of labor, carrots will be used more often. But they also predict that within each society, carrots will be used more often in situations that involve a higher degree of complexity. Applications include patents, regulatory takings, contract bonuses, the duty to rescue, finders, information disclosure to contract parties, the Endangered Species Act, incentives in the military, slavery, health policy, and parenting.
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Congressional Influence as a Determinant of Subprime Lending
Stuart Gabriel, Matthew Kahn & Ryan Vaughn
NBER Working Paper, April 2013
Abstract:
We apply unique loan level data from New Century Financial Corporation, a major subprime lender, to assess whether attributes of Congressional Representatives were associated with access to and pricing of subprime mortgage credit. Research findings indicate higher likelihoods of subprime loan origination and lower mortgage pricing among borrowers represented by the Republican and Democratic leadership of Congress. Black borrowers also benefitted from significantly larger loan amounts in those same districts. Also, borrowers received mortgage interest rate discounts in districts where New Century donated to the Congressional Representative. Findings provide new insights into the political geography of the subprime crisis and suggest gains to trade between New Century Financial Corporation and targeted Congressional Representatives in the extension, pricing and sizing of subprime mortgage credit.
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Paging Inspector Sands: The Costs of Public Information
Sacha Kapoor & Arvind Magesan
American Economic Journal: Economic Policy, forthcoming
Abstract:
Most empirical studies on the role of information in markets analyze policies that reduce asymmetries in the information that market participants possess, often suggesting that the policies improve welfare. We exploit the introduction of pedestrian countdown signals - timers that indicate when traffic lights will change - to evaluate a policy that increases the information that all market participants possess. We find that although countdown signals reduce the number of pedestrians struck by automobiles, they increase the number of collisions between automobiles. We also find that countdown signals caused more collisions overall. The findings imply welfare gains can be attained by revealing the information to pedestrians and hiding it from drivers. We conclude that policies which increase asymmetries in information can improve welfare.
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Evidence on the Benefits of Alternative Mortgage Products
João Cocco
Journal of Finance, forthcoming
Abstract:
Alternative mortgage products have been identified by many as culprits in the financial crisis. However, because of their lower initial mortgage payments relative to loan amount, they may be a valuable tool for households who expect higher and more certain future labor income, and who wish to smooth consumption over the life‐cycle. Using U.K. household‐level panel data, this paper provides evidence in support of this hypothesis and highlights other important benefits of alternative mortgages, including portfolio diversification, tax benefits, and a reduction in the transaction costs incurred in housing transactions.
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Inspection Technology, Detection and Compliance: Evidence from Florida Restaurant Inspections
Ginger Zhe Jin & Jungmin Lee
NBER Working Paper, April 2013
Abstract:
Many regulations mandate government employees to inspect economic entities on a regular basis. In this paper we show that a small innovation in inspection technology can make substantial differences in inspection outcomes. For restaurant hygiene inspections, the state of Florida has introduced a hand-held electronic device, a portable digital assistant (PDA), which reminds inspectors of about 1,000 potential violations. Using administrative data on inspections from July 2003 to June 2009, we find that the adoption of PDAs led to 16% more detected violations. Subsequently, restaurants increased their compliance effort, but the response was neither immediate nor large enough to offset the initial PDA impact. Nevertheless, the heightened compliance induced by use of PDAs has contributed to reducing the risk of restaurant-related foodborne disease outbreaks.
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Banking Deregulation and Innovation
Sudheer Chava et al.
Journal of Financial Economics, forthcoming
Abstract:
We document empirical support for a key micro-level channel - innovation by young, private firms - through which financial sector deregulation affects economic growth. We find that intrastate banking deregulation, which increased the local market power of banks, decreased the level and risk of innovation by young, private firms. In contrast, interstate banking deregulation, which decreased the local market power of banks, increased the level and risk of innovation by young, private firms. These contrasting effects on innovation also translated into contrasting effects on economic growth. Our study suggests that the nature of financial sector deregulation crucially affects its potential benefits to the real economy.
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Do Bank Regulations Affect Board Independence? A Cross-Country Analysis
Li Li & Frank Song
Journal of Banking & Finance, forthcoming
Abstract:
Based on the hand-collected board structure data of 277 listed banks across 55 countries, and the bank regulation and supervision database compiled by the World Bank, this paper provides the first cross-country assessment of the impacts of bank regulations on board independence of banks. In line with Beck, Demirguc-Kunt and Levine (2006), we examine the effects of two types of regulation policies, the first involving the empowerment of supervisory agencies to monitor and discipline banks directly, and the second focusing on encouraging private monitoring of banks through requiring disclosure of more accurate and complete information. We find that empowering official supervisory agencies to discipline banks directly reduces board independence, but encouraging private sector monitoring of banks increases it. The findings suggest that the first type of regulations tends to crowd out the internal governance of banks, while the second crowds in it. We also find that the legal system with better investor rights protection and better contracts enforcement not only increases board independence but also enhances the crowding in effect of promoting private monitoring and decreases the crowding out effect of direct official supervision on board independence.
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Financial Literacy and High-Cost Borrowing in the United States
Annamaria Lusardi & Carlo de Bassa Scheresberg
NBER Working Paper, April 2013
Abstract:
In this paper, we examine high-cost methods of borrowing in the United States, such as payday loans, pawn shops, auto title loans, refund anticipation loans, and rent-to-own shops, and offer a portrait of borrowers who use these methods. Considering a representative sample of more than 26,000 respondents, we find that about one in four Americans has used one of these methods in the past five years. Moreover, many young adults engage in high-cost borrowing: 34 percent of young respondents (aged 18-34) and 43 percent of young respondents with a high school degree have used one of these methods. Using well-tested questions to measure financial literacy, we document that most high-cost borrowers display very low levels of financial literacy, i.e., they lack numeracy and do not possess knowledge of basic financial concepts. Most importantly, we find that those who are more financially literate are much less likely to have engaged in high-cost borrowing. Our empirical work shows that it is not only the shocks inflicted by the financial crisis or the structure of the financial system but that the level of financial literacy also plays a role in explaining why so many individuals have made use of high-cost borrowing methods.
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Credit Supply and Corporate Innovation
Mario Daniele Amore, Cédric Schneider & Alminas Žaldokas
Journal of Financial Economics, forthcoming
Abstract:
We present evidence that banking development plays a key role in technological progress. We focus on manufacturing firms' innovative performance, measured by patent-based metrics, and employ exogenous variations in banking development arising from the staggered deregulation of banking activities across US states during the 1980s and 1990s. We find that interstate banking deregulation had significant beneficial effects on the quantity and quality of innovation activities, especially for firms highly dependent on external capital and located closer to entering banks. Furthermore, we find that these results are strongly driven by a greater ability of deregulated banks to geographically diversify credit risk.
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Strong Financial Laws Without Strong Enforcement: Is Good Law Always Better than No Law?
Mark Humphery-Jenner
Journal of Empirical Legal Studies, June 2013, Pages 288-324
Abstract:
This article examines whether strong laws are effective when regulatory institutions are weak. This has become especially relevant due to criticisms of financial market regulation in the United States. I test the impact of imposing strong laws on a weak regulatory environment by using China's principled reforms to market manipulation law as a natural experiment. The results from difference-in-difference tests suggest that China's principled law reforms did not improve the market's information environment, as proxied by the level of informed trade and information asymmetry. This implies that principled law reform is ineffective if the regulatory environment is weak.
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Who Should Pay for Credit Ratings and How?
Anil Kashyap & Natalia Kovrijnykh
NBER Working Paper, March 2013
Abstract:
This paper analyzes a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on the unobservable effort exerted by a credit rating agency (CRA). We analyze optimal compensation schemes for the CRA that differ depending on whether a social planner, the firm, or investors order the rating. We find that rating errors are larger when the firm orders it than when investors do. However, investors ask for ratings inefficiently often. Which arrangement leads to a higher social surplus depends on the agents' prior beliefs about the project quality. We also show that competition among CRAs causes them to reduce their fees, put in less effort, and thus leads to less accurate ratings. Rating quality also tends to be lower for new securities. Finally, we find that optimal contracts that provide incentives for both initial ratings and their subsequent revisions can lead the CRA to be slow to acknowledge mistakes.
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Feedback Effects of Credit Ratings
Gustavo Manso
Journal of Financial Economics, forthcoming
Abstract:
Rating agencies are often criticized for being biased in favor of borrowers, for being too slow to downgrade following credit quality deterioration, and for being oligopolists. Based on a model that takes into account the feedback effects of credit ratings, I show that: (i) rating agencies should focus not only on the accuracy of their ratings but also on the effects of their ratings on the probability of survival of the borrower; (ii) even when rating agencies pursue an accurate rating policy, multi-notch downgrades or immediate default may occur in response to small shocks to fundamentals; (iii) increased competition between rating agencies can lead to rating downgrades, increasing default frequency and reducing welfare.
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Dividend payouts: Evidence from U.S. bank holding companies in the context of the financial crisis
José Filipe Abreu & Mohamed Azzim Gulamhussen
Journal of Corporate Finance, forthcoming
Abstract:
We study dividend payouts of 462 U.S. bank holding companies before and during the 2007-09 financial crisis. Fama and French (2001) characteristics (size, profitability and growth opportunities) explain dividend payouts before and during the financial crisis. The agency cost hypothesis explains dividend payouts before and during (more pronouncedly) the financial crisis. The signaling hypothesis explains dividend payouts during the financial crisis. Regulatory pressure was ineffective in limiting dividend payouts by undercapitalized banks before the financial crisis. Our findings have implications for corporate finance and governance theories, and also for the regulatory reforms that are being discussed among policymakers.
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Exclusive Handset Arrangements in the Wireless Industry: A Competitive Analysis
Upender Subramanian, Jagmohan Raju & John Zhang
Marketing Science, March/April 2013, Pages 246-270
Abstract:
In many markets, a handset vendor and a service provider may enter into a tie-in for a handset to be available exclusively through the service provider. We examine when and why a service provider and a handset vendor may find this arrangement mutually profitable. We find that an exclusive handset arrangement (EHA) may serve a dual strategic purpose. By restricting its handsets to one service provider, a handset vendor may be able to induce a rival handset vendor to compete less aggressively. At the same time, the service provider may be able to essentially raise a rival service provider's handset costs by limiting the handsets available to the rival. Interestingly, the handset vendor's market share may be higher when its handset is sold exclusively than when it is not. Our results might explain why EHAs seem more attractive in some markets than in others, why some service providers have exclusive arrangements even for handset models that do not seem popular, and how some handset vendors enjoy high market shares despite having many exclusive models. Furthermore, an EHA may lower the handset vendor's incentives to improve handset quality, supporting concerns raised by proponents of wireless network neutrality.
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Do Local Energy Prices and Regulation Affect the Geographic Concentration of Employment?
Matthew Kahn & Erin Mansur
Journal of Public Economics, May 2013, Pages 105-114
Abstract:
Manufacturing industries differ with respect to their energy intensity, labor-to-capital ratio and their pollution intensity. Across the United States, there is significant variation in electricity prices and labor and environmental regulation. This paper examines whether the basic logic of comparative advantage can explain the geographical clustering of U.S. manufacturing. We document that energy-intensive industries concentrate in low electricity price counties and labor-intensive industries avoid pro-union counties. We find mixed evidence that pollution-intensive industries locate in counties featuring relatively lax Clean Air Act regulation.
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Edward Van Wesep & Christopher Parsons
Journal of Financial Economics, forthcoming
Abstract:
There exists large and persistent variation in not only how, but when employees are paid, a fact unexplained by existing theory. This paper develops a simple model of optimal pay timing for firms. When workers have self-control problems, they under-save and experience volatile consumption between paychecks. Thus, pay whose delivery matches the timing of workers' consumption needs will reduce wage costs. The model also explains why pay timing should be regulated (as it is in practice): although the worker benefits from a timing profile that smoothes her consumption, her lack of self-control induces her to attempt to undo the arrangement, either by renegotiating with her employer or by taking out payday loans. Regulation of pay timing and consumer borrowing is required to counter these efforts, helping the worker help herself.
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Protecting Minority Homeowners: Race, Foreclosure Counseling and Mortgage Modifications
Michael Collins, Maximilian Schmeiser & Carly Urban
Journal of Consumer Affairs, forthcoming
Abstract:
Millions of minority homeowners are at risk of losing their homes as a result of the housing crisis due to mortgage foreclosure and home repossession. One consumer-oriented policy response to this crisis is mortgage default counseling for borrowers. This study examines the rate at which minority borrowers seek default counseling and the resulting correlation between counseling and the probability that a borrower obtains a modification of his/her original mortgage contract terms. The results suggest that African Americans are more likely to be counseled, relative to Whites. However, Latinos or other non-White groups are no more or less likely to be counseled. The probability of loan modifications among counseled African Americans is also higher than other counseled borrowers. These results suggest that counseling policies and the public subsidy of default counseling may be one approach for promoting consumer financial well-being of these households, but also suggest counseling efforts might be better designed for other minority groups. These results also have implications for the application of counseling to other mortgage decisions, such as refinance.
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Appropriate mechanism design, regulations, and wages
Sumit Majumdar
Industrial and Corporate Change, forthcoming
Abstract:
Although economic regulation is ubiquitous, little is known about the impact of different regulatory schemes, and changes in these schemes, on wages. The article evaluates the impact of changes in price regulation on average employee wages among the United States local exchange telecommunications companies using contemporary historical data between 1988 and 2001. Two primary approaches in price regulation have been the rate of return and price cap regulation schemes, with the latter assumed to possess important incentive properties. The results establish that firms regulated via rate of return or other hybrid regulatory approaches have paid significantly lower wages. These wages have been, on average, 5-10% lower than what firms regulated via price cap regulation have paid their employees. These results signify the importance of regulations possessing requisite incentive properties and of appropriate regulatory mechanism design in enhancing employees' real wages in regulated firms.
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Canada-US productivity gap: The role of competition intensity differential
Malick Souare
International Review of Applied Economics, forthcoming
Abstract:
The lower degree of competition in product markets and lower investment in both fundamental and applied innovation are among the potential factors that have been put forward to explain Canada's weak productivity performance with respect to the US. Since competition is generally seen as the single leading catalyst for innovation, this paper analyzes the role of product market competition in the Canada-US productivity level gap. We develop an empirical framework in which competition exerts both direct and indirect effects on productivity, with the indirect impact coming through fundamental and applied innovation. Using industry-level panel data, we find evidence that the competition intensity differential has contributed to the Canada-US productivity level gap directly, as well as indirectly through lower investment in both R&D activities and M&E (including ICT) capital. We also find evidence that Canada's relative poor performance in both M&E (including ICT) investment and productivity have acted as a self-reinforcing mechanism, which further causes detriment to the country's productivity.
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Kartik Kalaignanam, Tarun Kushwaha & Meike Eilert
Journal of Marketing, March 2013, Pages 41-57
Abstract:
Although the goal of a product recall program is to enhance safety, little is known about whether firms learn from product recalls. This study tests the direct effect of product recalls on future accidents and future recall frequency and their indirect effect through future product reliability in the automobile industry. The authors test the hypotheses on 459 make/year observations involving 27 automobile makers between 1995 and 2011. The findings suggest that increases in recall magnitude lead to decreases in future number of injuries and recalls. This effect, in turn, is partially mediated by future changes in product reliability. The results also suggest that the positive relationship between recall magnitude and future product reliability is (1) stronger for firms with higher shared product assets and (2) weaker for brands of higher prior quality. The findings are robust across alternate measures and alternate model specifications and offer valuable insights for managerial practice and public policy.
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Giovanni Federico & Paul Sharp
Economic History Review, forthcoming
Abstract:
This article investigates the costs of transport regulation using the example of agricultural markets in the US. Using a large database of prices by state of agricultural commodities, we find that dispersion fell for many commodities until the First World War. We demonstrate that this reflected changes in transport costs which in turn in the long run depended on productivity growth in railroads. The year 1920 marked a change in this relationship, however, and between the First and Second World Wars we find considerable disintegration of agricultural markets, ultimately as a consequence of the 1920 Transportation Act. We argue that this benefited railroad companies in the 1920s and workers in the 1930s, and we put forward an estimate of the welfare losses for the consumers of railroad services (that is, agricultural producers and final consumers).