Strategy

Koszegi and Rabin (2006, 2007) develop a model of expectations-based reference-dependent preferences, in which the agent experiences prospect-theory inspired "gain-loss utility" by comparing his actual consumption to all his previously expected consumption outcomes. Koszegi and Rabin (2009) generalize the static model to a dynamic setting by assuming that the agent experiences both contemporaneous gain-loss utility over present consumption and prospective gain-loss utility over changes in expectations about future consumption.

Although consumer behavior theory has traditionally regarded evaluations as instrumental to consumer choice, in reality consumers often assess and express what they like and dislike even when there is no decision at stake. Why are consumers so eager to express their evaluations when there is no ostensible purpose for doing so? In this research, we advance the thesis that this is because consumers derive an inherent pleasure from assessing and expressing their likes and dislikes.

The well-documented underreaction of stock prices to news exhibits substantial time variation. Higher risk-bearing capacity of financial intermediaries, lower passive ownership of stocks, and more informative news increase price responses to contemporaneous news; surprisingly, they also increase price responses to lagged news (underreaction). Our findings are not driven by short-sale constraints, serial correlation in news flow, or improved information processing capacity. We discuss possible mechanisms based on investor behavior and strategic order-splitting by institutions.

We use a labor-search model to explain why the worst employment slumps often follow expansions of household debt. We find that households protected by limited liability suffer from a household-debt-overhang problem that leads them to require high wages to work. Firms respond by posting high wages but few vacancies. This vacancy-posting effect implies that high household debt leads to high unemployment.

We propose the standard neoclassical model of investment under uncertainty with short-run adjustment frictions as a benchmark for earnings-return patterns absent accounting influences. We show that our proposed benchmark generates a wide range of earnings-return patterns documented in prior accounting research. Notably, our model generates a concave earnings-return relation, similar to that of Basu [1997], and predicts that the earnings-return concavity increases in the volatility of firms' underlying shock processes and decreases in investment levels.

I show that venture capitalists' motivation to build reputation can have beneficial effects in the primary market, mitigating information frictions and helping firms go public. Because uninformed reputation-motivated venture capitalists want to appear informed, they are biased against backing firms — by not backing firms, they avoid taking low-value firms to market, which would ultimately reveal their lack of information. In equilibrium, reputation-motivated venture capitalists back relatively few bad firms, creating a certification effect that mitigates information frictions.

The case is built around video clips from top business leaders in emerging markets who were interviewed for Harvard Business School’s innovative Creating Emerging Markets oral history project. The case is focused on the issue of innovation in emerging markets from a business perspective. It considers the nature of innovation, the challenges of accessing knowhow and technology, and leapfrogging.

The 30-year U.S. swap spreads have been negative since September 2008. We offer a novel explanation for this persistent anomaly. Through an illustrative model, we show that underfunded pension plans optimally use swaps for duration hedging. Combined with dealer banks' balance sheet constraints, this demand can drive swap spreads to become negative. Empirically, we construct a measure of the aggregate funding status of Defined Benefit pension plans and show that this measure is a significant explanatory variable of 30-year swap spreads.

We develop an empirical model of exchange rate returns, applied separately to samples of developed (DM) and developing (EM) economies’ currencies against the dollar. Monetary policy stance of the global central banks, measured via a natural-language-based approach, has a large effect on exchange rate returns over the ensuing year, is closely linked to the VIX, and becomes increasingly important in the post-crisis era.