Organizations & Markets

The fields of judgment and decision making (JDM) and cultural psychology have not seen much overlap, but recent research at the intersection of culture and JDM has provided new insights for both fields. This chapter reviews recent advances, with a focus on how studying cultural variations in JDM has yielded novel perspectives on basic psychological processes. JDM perspectives can propose novel explanations for differences across national cultures beyond those suggested by the prevailing models of culture.

We estimate a short term reversal process for daily US equity returns. Over our primary sample period of 1972-2014, and for our sample of the 100 largest traded firms, on average approximately 90% of idiosyncratic price shocks are permanent. The remaining 10% is temporary, and decays exponentially toward zero, with a half life of about 2.5 days. While the rate of decay (the half life) is relatively constant over time, the magnitude decay varies considerably over the sample. Our findings are consistent with the slow movement of capital (Duffie 2010).

Can subsidies promote Pareto-optimum coordination? We found that partially subsidizing the cooperative actions for two out of six players in a laboratory coordination game usually produced better coordination and higher total social welfare with both deterministic and stochastic payoffs. Not only were the subsidized players more likely to cooperate (choose the Pareto-optimum action), but the unsubsidized players increased their expectations on how likely others would cooperate, and they cooperated more frequently themselves.

This paper studies the optimal level of discretion in policymaking. We consider a fiscal policy model where the government has time-inconsistent preferences with a present bias towards public spending. The government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have flexibility to react to privately observed shocks to the value of spending. We analyze the optimal fiscal rule when the shocks are persistent.

Value stocks earn higher returns than growth stocks on average, but it is well documented that those returns come with risk. This paper supplies an understanding of that risk in terms of fundamentals. The fundamental analysis informs that, in buying value stocks, the investor may be trapped into buying firms where prospective earnings growth is quite risky. However, the trap can be avoided by recognizing how earnings and book value are accounted for in financial statements. Specifically, the application of conservative accounting informs the investor ex ante of the risk involved.

This paper investigates the impact of lower mortgage rates on household balance sheets and other economic outcomes during the housing crisis. We use proprietary loan-level panel data matched to consumer credit records using borrowers' Social Security numbers, which allows for accurate measurement of the effects. Our main focus is on borrowers with agency loans, which constitute the vast majority of U.S. mortgage borrowers.

We conduct and analyze two large surveys of hypothetical annuitization choices. We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to a situation where annuitization is an "all or nothing" decision. Very few respondents choose declining real payout streams over flat or increasing real payout streams of equivalent expected present value. Highlighting the effects of inflation increases demand for cost of living adjustments. Frames that highlight flexibility, control, and investment significantly reduce annuitization.

This essay in celebration of Grossman and Hart (1986) (GH) discusses how the introduction of incomplete contracts has fundamentally changed economists' perspectives on corporate finance and control. Before GH, the dominant theory in corporate finance was the tradeoff theory pitting the tax advantages of debt (relative to equity) against bankruptcy costs. After GH, this theory has been enriched by the introduction of control considerations and investor protection issues.

A central decision faced by firms is whether to make intermediate components internally or to buy them from specialized producers. We argue that firms producing products for which rapid technological change is characteristic will benefit from outsourcing to avoid the risk of not recouping their sunk cost investments when new production technologies appear. This risk is exacerbated when firms produce for low volume internal use, and is mitigated for those firms which sell to larger markets.