Decision Making & Negotiations

We show that equity market liberalizations, on average, lead to a one percent increase in annual real economic growth over a five-year period. The effect is robust to alternative definitions of liberalization and does not reflect variation in the world business cycle. The effect also remains intact when liberalization is instrumented with quality of institutions-variables that explain liberalization but not growth and when a growth opportunity measure is included in the regression. Capital account liberalization has a less robust effect on growth than equity market liberalization has.

We provide a formal treatment of both static and dynamic portfolio choice using the Disappointment Aversion preferences of Gul (1991. Econometrica 59(3), 667-686), which imply asymmetric aversion to gains versus losses. Our dynamic formulation nests the standard CRRA asset allocation problem as a special case. Using realistic data generating processes, we find reasonable equity portfolio allocations for disappointment averse investors with utility functions exhibiting low curvature.

We present an equilibrium production economy in which default occurs in equilibrium. The borrower chooses optimal default and consumption policies, taking into account that default is costly and the lender gains access to the technology upon default. We derive asset prices and default premia in this economy. The borrower's relative risk aversion in wealth increases with decreases in wealth due to the increased possibility of default at low wealth levels. This produces a time-varying pricing kernel and a countercyclical equity premium.

Dispersion in investor beliefs and short-selling constraints can lead to stock market bubbles. This paper argues that firms, unlike investors, can exploit such bubbles by issuing new shares at inflated prices. This lowers the cost of capital and increases real investment. Perhaps surprisingly, large bubbles are not eliminated in equilibrium nor do large bubbles necessarily imply large distortions. Using the variance of analysts?

Participants recalled instances when they felt vicariously ashamed or guilty for another's wrongdoing and rated their appraisals of the event and resulting motivations. The study tested aspects of social association that uniquely predict vicarious shame and guilt. Results suggest that the experience of vicarious shame and vicarious guilt are distinguishable. Vicarious guilt was predicted by one's perceived interdependence with the wrongdoer (e.g., high interpersonal interaction), an appraisal of control over the event, and a motivation to repair the other person's wrongdoing.

This paper investigates the effect of decision-makers'culture on their implicit choice of how to make decisions. In a content analysis of major decisions described in American and Chinese twentieth-century novels, we test a series of hypotheses based on prior theoretical and empirical investigations of cross-cultural variation in human motivation and decision processes.