a political economy model of congressional careers our main goal is to quantify the returns to a career in the united states congress we specify a dynamic model of career decisions of a member of congress and estimate this model using a newly collected dataset given estimates of the structural model we assess reelection probabilities estimate the effect of congressional experience on private and public sector wages and quantify the value of congressional seat moreover we assess how an increase in the congressional wage or the imposition of term limits would affect the career decisions of politicians and the returns from a career in congress

bidder preferences among auction institutions i introduction auctions have become a pervasive method of exchange in the online world as each day thousands of auctions take place online and this trade volume totals to billions of dollars worth of goods per year 1 this large volume of auction transactions implies the existence of a large number of sellers competing for buyers the obvious implication is that the competition among the sellers for the pool of potential buyers can be fierce and any competitive edge a seller can find could be important one such competitive edge a seller might exploit is using an auction design that attracts bidders away from their competitors when designing a real auction or modeling a theoretical one the entry decision of prospective bidders is rarely considered most auction analysis is performed assuming that a certain number of bidders will participate for certain or perhaps that the number of bidders is unknown and randomly determined it should be clear however that the most crucial part of a successful auction is encouraging as many bidders as possible to participate in general this should be expected to have a positive effect on revenue at least in noncommon value environments and in certain types of auctions it may help combat the possibility of bidder collusion because there are typically competing auctions available for similar goods or even outside options that bidders can pursue when auctions are for unique goods it is important to understand how the aspects of an auction format can effect the entry decision of a bidder consider a bidder who is faced with the choice of entering one of two auctions for similar or even identical objects how does this bidder make the decision of which auction to enter the obvious answer is that the bidder will enter into the auction that maximizes his or her expected utility so long as that expected utility is greater than some reservation value the real question then is how are these expected utilities constructed profit from participating in the auction is an obvious argument there are also a number of environmental considerations that might effect this decision that would be difficult to account for precisely such as the reputation and trustworthiness of the auctioneer quality of the advertisement for the auction and things of this nature it is also possible that the format of the auction itself can have an impact on the preferences of the bidder this latter point will be the issue of this study the particular focus will be looking at bidder preferences between the two most common standard auction formats used in the field the sealed bid first price will be abbreviated as just the sealed bid auction and the ascending or english auction the other reason we are interested in comparing these two auction formats rather than the ascending and second price or first price and descending is that it seems reasonable to expect bidders to have preferences between the two due to the strategic differences between them such differences lead to substantial differences in terms of the difficulty of deciding how to bid and also in the possibility that an outcome leads to a bidder experiencing some form of regret regret may occur in a first price auction when a bidder loses to a bid that is below his value as he may think that if only he had bid higher he could have won although such feelings of regret may be considered irrational that does not preclude their existence such a scenario should not reasonably occur in an ascending auction if one considers the situation of a bidder choosing between two auctions that differ only in regard to whether the auction is being conducted according to an ascending or sealed bid format it is not immediately obvious which would be the most preferred even assuming a standard symmetric independent private values environment were all bidders risk neutral then of course revenue equivalence would hold and the bidders would be indifferent

small and large stakes risk aversion implications of concavity calibration for decision theory abstract a growing literature reports the conclusions that a expected utility theory does not provide a plausible theory of risk aversion for both small stakes and large stakes gambles and b this decision theory should be replaced with an alternative theory characterized by loss aversion this paper explains that the arguments in previous literature fail to support these conclusions either concavity calibration has no general implication for expected utility theory or it has problematic implications for all decision theories that involve concave transformations utility or value functions of positive money payoffs which makes loss aversion irrelevant to the argument

correlates of narrow bracketing we examine whether different phenomena of narrow bracketing can be traced back to some common characteristic and whether and how different phenomena are related we find that making dominated lottery choices or ignoring the endowment when making risky choices are related phenomena and are both associated with low levels of cognitive reflection in contrast the phenomena of setting narrow goals or narrow mental budgets seem not to reflect choice errors due to low cognitive reflection but are tools to overcome self control problems buying small scale insurance is associated with having narrow mental budgets suggesting that people buy such insurance to insure themselves against the consequences of their own self control strategy

anomalies risk aversion economists ubiquitously employ a simple and elegant explanation for risk aversion it derives from the concavity of the utility of wealth function within the expected utility framework we show that this explanation is not plausible in most applications since anything more than economically negligible risk aversion over moderate stakes requires a utility of wealth function that is so concave that it predicts absurdly severe risk aversion over very large stakes we present examples of how the expected utility framework has misled economists and why we believe a better explanation for risk aversion must incorporate loss aversion and mental accounting

what is the economic cost of the investment home bias overinvesting domestically is well known as an investment home bias ihb we define an economic home bias ehb whereby the ihb measures the investment weights and the ehb measures the economic cost induced by the ihb we may have a large ihb and a negligible ehb with the increase in the average correlation between foreign markets from 0 4 for the decade ending in 1988 to about 0 9 for more recent decades the u s ehb is becoming negligible despite the domestic investment of 77 5 since 2009 the correlations have decreased indicating that the hb puzzle is emerging once again

competition and price variation when consumers are loss averse we modify the salop 1979 model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase consumers sensitivity to losses in money increases the price responsiveness of demand and hence the intensity of competition at higher relative to lower market prices reducing or eliminating price variation both within and between products when firms face common stochastic costs in any symmetric equilibrium the markup is strictly decreasing in cost even when firms face different cost distributions we identify conditions under which a focal price equilibrium where firms always charge the same focal price exists and conditions under which any equilibrium is focal

robustness of bidder preferences among auction institutions i introduction the answer to the question of how bidders choose to enter one auction versus an alternative competing auction is important to understand in providing a complete picture of the nature of endogenous entry decisions into auctions the issue of how a bidder chooses which among alternative auctions to enter as well as whether to enter an auction at all is of substantial importance to auctioneers attempting to attract bidders to their auctions there is a growing literature addressing issues in endogenous entry in auctions there are several papers such as engelbrecht wiggans 1993 pevnitskaya 2004 and palfrey and pevnitskaya 2008 that consider the decision of whether to enter an auction or not and study the effect of endogenous entry on bidding behavior there is a much larger group for example harstad 1990 engelbrecht wiggans 1993 levin and smith 1994 mcafee 1993 and mcafee and mcmillan 1987 that considers competition between auctioneers in which the auctioneers are competing along some characteristic such as entry price we consider the case in which auctioneers may be competing with each other based on the choice of auction mechanism our interest is in the degree to which the auction mechanism itself might impact the entry decisions of potential bidders of course there would be a direct pecuniary impact of the mechanism in that bidders should be more likely to enter auction mechanisms that they believe allow them to get lower prices but there may be other cognitive issues in regard to the structure of the mechanism that may also impact the choice behavior in ivanova stenzel and salmon iss 2004a we introduced an experimental design aimed at eliciting and measuring preferences subjects might possess for different auction institutions and applied the design to testing bidder preferences between ascending a dynamic mechanism and sealed bid first price a static mechanism auctions it seems reasonable to expect bidders to have preferences between these two auction mechanisms due to the strategic differences between them in a first price auction the winner pays a price equal to his own bid whereas in the ascending auction he pays a price that is an increment above the second highest bid these differences might result in difficulty of deciding how to bid and in the possibility of experiencing some form of regret 1 the design involved having subjects make a choice between entering into a two bidder sealed bid first price auction versus a two bidder ascending auction each with different entry prices by varying the entry prices we could measure the subjects willingness to pay for either auction our main finding in the paper was that while subjects exhibited strong preferences for the ascending auction at equal entry prices they were not willing to pay up to the expected profit difference between the two auctions to participate in an ascending auction thus they ended up entering the supposedly less preferred sealed bid first price auction even in situations in which they would expect to make a higher net surplus including the cost of the entry fee by entering into the ascending auction instead that paper proposed one possible answer to the puzzle that involved assuming that bidders were risk averse in their bidding behavior and then risk averse to the same degree in their auction choice behavior this explanation worked because neither risk averse nor approximately risk neutral bidders should be expected to pay much to enter into an ascending auction instead of a sealed bid first price auction just as we observed in the experiment for the most risk averse bidders this is because while they bid the highest in the first price auction and therefore expected little surplus in the event that they win they consequently end up winning with higher probability than less risk averse bidders this is a trade off risk a verse bidders are willing to accept and consequently it is easy to show that highly risk averse bidders should not be willing to pay much to get into the more lucrative though risky ascending auction

a lifetime portfolio of risky and risk free sexual behaviour and the prevalence of aids abstract a lifetime portfolio of risky and risk free sexual activities is conceptually constructed in this paper people s time allocation between risky and risk free sexual activities affects and is affected by the prevalence of aids a small satisfaction differential between risky and risk free sex can lead to a significant prevalence of aids numerical simulations suggest that the reduction in the prevalence of aids generated by a 1 improvement in the sensual quality of freely distributed condoms can be 0 855 when the initial satisfaction differential between risky and risk free sex is 50 or 0 464 when the initial satisfaction differential is 100

a simultaneous approach to the estimation of risk aversion and the subjective time discount rate in this paper we analyze a sample of 1832 individuals who responded to six randomly generated lottery questions that differ with respect to chance prize and the timing of the draw using a model that explicitly allows for consumption smoothing we obtain an estimate of relative risk aversion of 82 instead assuming consumption to be immediate gives an estimate of 2 close to what is traditionally reported while a model of full asset integration gives estimates higher by several orders of magnitude our results show that estimated risk aversion is sensitive to the assumptions made with respect to the consumption profile and that it is possible to determine the level of asset integration endogenously the average subjective time discount rate which includes a preference for the present equals 6 percent per month it is found that both parameters vary strongly over individuals and that the variation can be explained by income age gender and entrepreneurship consistent with the majority of previous evidence

rejecting small gambles under expected utility this paper contributes to an important recent debate around expected utility and risk aversion rejecting a gamble over a given range of wealth levels imposes a lower bound on risk aversion using this lower bound and empirical evidence on the range of the risk aversion coefficient we calibrate the relationship between risk attitudes over small stakes and large stakes gambles we find that rejecting small gambles is consistent with expected utility contrary to a recent literature that concludes that expected utility is fundamentally unfit to explain decisions under uncertainty paradoxical behavior is only obtained when calibrations are made in a region of the parameter space that is not empirically relevant

asset integration and attitudes to risk theory and evidence measures of risk attitudes derived from experiments are often questioned because they are based on small stakes bets and do not account for the extent to which the decision maker integrates the prizes of the experimental tasks with personal wealth we exploit the existence of detailed information on individual wealth of experimental subjects in denmark and directly estimate risk attitudes and the degree of asset integration consistent with observed behavior the behavior of the adult danes in our experiments is consistent with partial asset integration they behave as if some small fraction of personal wealth is combined with experimental prizes in a utility function and that this combination entails less than perfect substitution our subjects do not perfectly asset integrate the implied risk attitudes from estimating these specifications imply risk premia and certainty equivalents that are a priori plausible under expected utility theory or rank dependent utility models these are reassuring and constructive solutions to payoff calibration paradoxes in addition the rigorous structural modeling of partial asset integration points to a rich array of neglected questions in risk management and policy evaluation in important field settings

making the implicit explicit a look inside the implicit discount rate implicit discount rates idrs are employed in energy models to capture household investment decisions yet the factors behind the idr and their respective implications for policy making usually remain blurred and fractional the proposed comprehensive framework distinguishes three broad categories of factors underlying the idr for household adoption of energy efficient technologies eets preferences notably over time risk loss debt and the environment predictable ir rational behavior bounded rationality rational inattention behavioral biases and external barriers to energy efficiency existing empirical findings suggest that the factors underlying the idrs that differ across household characteristics and technologies should be accounted for in energy models furthermore the framework allows for a fresh look at the interplay of idrs and policies we argue that a simple observation of high idrs or observing correlations between idrs and socio economic characteristics does not provide guidance for policy making since the underlying sources cannot be identified instead we propose that some of the factors underlying the idr notably external barriers can be changed through directed policy interventions whereas other factors notably preferences and predictable ir rational behavior are innate and can only be taken into account through reactive policy interventions

the effect of myopia and loss aversion on risk taking an experimental test myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently two implications of myopic loss aversion are tested experimentally 1 investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often 2 if all payoffs are increased enough to eliminate losses investors will accept more risk in a task in which investors learn from experience both predictions are supported the investors who got the most frequent feedback and thus the most information took the least risk and earned the least money language en

does remuneration affect the discipline and the selection of politicians evidence from pay harmonization in the european parliament we study the harmonization of the base pay for the members of the european parliament meps prior to this reform implemented in 2009 base pay was aligned with that of national parliamentarians causing large differences in pay between the meps representing 27 member states based on detailed information on individual meps between 2004 and 2011 we find that the reform which introduced an exceptional base pay increase of 200 per national delegation on average has a positive incentive effect on in office effort proxied by the number of speeches written declarations and reports drafted however more generous remuneration is associated with higher rates of absenteeism with respect to political selection we find that higher pay also raises reelection rates the composition of the pool of meps in terms of ex ante quality approximated by formal education previous political experience in elected office and occupational background is however unaffected if we restrict our attention to newly elected meps a salary increase is related to fewer meps with previous political experience at the highest national level

terrorism the relevance of the rational choice model terrorism in general and suicidal terrorism in particular is popularly seen as irrational but many economists and political scientists argue otherwise this paper distinguishes three different senses of irrationality unresponsiveness to incentives deviation from narrow self interest and failure of rational expectations it concludes that an intermediate position on the rationality of terrorism is appropriate the typical terrorist sympathizer deviates only slightly from homo economicus but active terrorists arguably stray from narrow self interest and rational expectations and suicidal terrorists probably violate both deterrence remains a viable anti terrorism strategy but deviations from rational expectations increase the potential of persuasion and appeasement

a micro econometric analysis of risk aversion and the decision to self insure this study estimates a von neumann morgenstern utility function using market data and micro econometric methods we investigate the decision whether to purchase insurance against the risk of telephone line trouble in the home using the choices of approximately 10 000 residential customers we determine the shape of the utility function and the degree of risk aversion we find that risk aversion varies systematically in the population and varies with the level of income and that the observed choice behavior is consistent with expected utility maximization we are unable to detect the presence of ambiguity effects or over weighting of low probability events

capital adjustment costs a nonrenewable resource industry the exploitation of a nonrenewable resource by a monopolist or by competitive firms has been studied extensively since hotelling 2 one focal point has been the investigation of markets characterized by a cartel competing with a group of smaller firms as in the oil industry salant 7 and gilbert 1 conclude that the opec cartel will increase its market share and attain monopoly status the industry s history from 1980 through 1986 however suggests that this is not the case the price set by the cartel has encouraged expansion by other firms pushing opec to the point of near collapse further the structure of the nickel and other resource industries has changed from monopoly into competition the fact that existing models fail to track observed trends in market structure implies that important economic elements have been omitted from the analysis as the present study will show including limitations on the ability of firms to expand production quickly yields a more general model of the evolution of market structure

the small sample bias of the gini coefficient results and implications for empirical research the gini coefficient is a downward biased measure of inequality in small populations when income is generated by one of three common distributions the paper discusses the sources of bias and argues that this property is far more general this has implications for i the comparison of inequality among subsamples some of which may be small and ii the use of the gini in measuring firm size inequality in markets with a small number of firms the small sample bias has often led to misperceptions about trends in industry concentration a small sample adjustment results in a reduced bias which can no longer be signed this remaining bias rises with the dispersion and falls with increasing skewness of the distribution finally an empirical example illustrates the importance of using the adjusted gini in this example it is shown that controlling for market characteristics larger shipping cartels include a set of firms that is stochastically identical in terms of relative size to those of smaller shipp

a time to make laws and a time to fundraise on the relation between salaries and time use for state politicians we study the relationship between the level of compensation and time use for us state legislators using survey data on time use we show that higher salary is robustly associated with legislators spending more time on fundraising in contrast higher salary is also robustly associated with less time spent on legislative activities and has no clear relation to time spent on constituent services the fundraising results are particularly strong for legislators who do not intend to run for higher office our results are consistent with an interpretation that higher salary raises the value of office and politicians respond with more fundraising because increased fundraising raises the chance of getting re elected more than does increased legislative activity back of the envelope calculations suggest that a 30 000 increase in salary is associated with politicians annually devoting 13 more hours to fundraising and 18 fewer hours to legislative activity resume un temps pour faire les lois et un autre pour lever des fonds etude du rapport entre le salaire et l emploi du temps des legislateurs d etat dans cet article nous examinons le lien entre le niveau de remuneration et l emploi du temps des legislateurs d etat aux etats unis en nous appuyant sur plusieurs donnees d enquetes relatives a la gestion du temps nous montrons que plus leur salaire est eleve plus les legislateurs ont tendance a consacrer du temps a lever des fonds le temps devolu aux activites legislatives ayant quant a lui tendance a diminuer sans lien evident avec le temps passe en circonscription au service des citoyens les resultats relatifs aux levees de fonds sont particulierement forts des lors que les legislateurs ne briguent pas de plus hautes fonctions et sont conformes a l interpretation selon laquelle un salaire eleve accroit l interet pour une fonction et puisque l augmentation des activites de financement ne se traduit pas par davantage d activites legislatives mais par des chances de reelection accrues les politiciens multiplient les levees de fonds des calculs rapides et approximatifs suggerent qu une hausse du salaire des politiciens de 30 000 par an representerait 13 heures de collecte de fonds en plus mais 18 heures d activites legislatives en moins annuellement

higher pay worse outcomes the impact of mayoral wages on local government quality in peru abstract in this paper i study how wages earned by local politicians affect local government quality to identify the effects i use caps imposed by the peruvian central government on mayoral wages as an excluded instrument the results show that mayoral wages do not improve government performance in particular there is a negative impact on public investment implementation and on performance goals set by the central government moreover there is no evidence of a positive effect on politician selection municipal bureaucratic capacity and political effort wages do strongly affect the local political landscape increasing political competition and reducing political support for the mayor these changes may help explain the drop in performance as local authorities may face more political obstacles when implementing their policy agenda overall the results show that higher politician wages need not improve local government quality

paying politicians theory and evidence this paper looks at the theory behind the idea that paying politicians better will improve their performance the paper lays out a political agency model with adverse selection and moral hazard where politicians are subject to two period term limits this model provides a number of predictions about how the pay of politicians affects agency problems we also consider what happens when the pool of politicians is endogenous the main ideas in the model are confronted with data on u s governors jel d72 j33

term length and the effort of politicians we evaluate the eects of a fundamental lever of constitutional design the dura tion of public o ce terms we present a simple model grounded in interviews with legislators and highlight three forces shaping incentives to exert legislative eort we exploit two natural experiments in the argentine congress where term lengths were assigned randomly to ascertain which forces are empirically dominant results for separate measures as well as an aggregate index of legislative eort show that longer terms increase eort shorter terms appear to discourage eort not due to campaign distractions but due to an investment payback logic when eort yields returns over multiple periods longer terms yield a higher chance of capturing those returns a broader implication is that job stability may promote eort despite making individuals less accountable rossi acknowledges nancial support from grant pict 2007 787 we thank the editor marco

productivity crowding out in labor markets with motivated workers abstract when workers intrinsic motivation matters a wage increase has mixed consequences on applicants productivity and motivation as shown in public service healthcare education and politics in a simple theoretical framework where ability and motivation are workers private information we rationalize these differentiated responses and identify intuitive conditions for higher wages inducing self selection of more or less productive and motivated workers the selection patterns depend both on the statistical association between workers characteristics and on the difference between the incentivized returns to ability across sectors we emphasize a crowding out effect of wage on workers productivity that has not been analyzed in the theoretical literature before

an experiment on risk taking and evaluation periods does the period over which individuals evaluate outcomes influence their investment in risky assets results from this study show that the more frequently returns are evaluated the more risk averse investors will be the results are in line with the behavioral hypothesis of myopic loss aversion which assumes that people are myopic in evaluating outcomes over time and are more sensitive to losses than to gains the results have relevance for the equity premium puzzle and also for the marketing strategies of fund managers

timid choices and bold forecasts decision makers have a strong tendency to consider problems as unique they isolate the current choice from future opportunities and neglect the statistics of the past in evaluating current plans

individual preferences monetary gambles and stock market participation a case for narrow framing we argue that narrow framing whereby an agent who is offered a new gamble evaluates that gamble in isolation may be a more important feature of decision making than previously realized our starting point is the evidence that people are often averse to a small independent gamble even when the gamble is actuarially favorable we find that a surprisingly wide range of utility functions including many nonexpected utility specifications have trouble explaining this evidence but that this difficulty can be overcome by allowing for narrow framing our analysis makes predictions as to what kinds of preferences can most easily address the stock market participation puzzle

risk aversion and expected utility theory a calibration theorem within the expected utility framework the only explanation for risk aversion is that the utility function for wealth is concave a person has lower marginal utility for additional wealth when she is wealthy than when she is poor this paper provides a theorem showing that expected utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes within expected utility theory for any concave utility function even very little risk aversion over modest stakes implies an absurd degree of risk aversion over large stakes illustrative calibrations are provided

risk attitudes over small and large stakes recalibrated abstract in this paper i provide bounds on the marginal rate of substitution between losing x and winning y starting from wealth level w for a risk averse individual that rejects a small stake gamble for a range of initial wealth levels i then prove a theorem that can be used to identify the kinds of large stakes that would be rejected by any such individual the theorems allow us to understand how much risk aversion is embedded in anyone s rejections of certain small stakes gambles and provide tighter connections between the results in rabin 2000 and the received theory of decision making under risk

selection on observed and unobserved variables assessing the effectiveness of catholic schools in this paper we measure the effect of catholic high school attendance on educational attainment and test scores because we do not have a good instrumental variable for catholic school attendance we develop new estimation methods based on the idea that the amount of selection on the observed explanatory variables in a model provides a guide to the amount of selection on the unobservables we also propose an informal way to assess selectivity bias based on measuring the ratio of selection on unobservables to selection on observables that would be required if one is to attribute the entire effect of catholic school attendance to selection bias we use our methods to estimate the effect of attending a catholic high school on a variety of outcomes our main conclusion is that catholic high schools substantially increase the probability of graduating from high school and more tentatively attending college we find little evidence of an effect on test scores

expected utility violations implications for agricultural and natural resource economics nomic toolkit they compare the dogged defense of eu by economists to that of a monty python character playing the role of a petstore owner disputing the state of an obviously dead parrot the shop owner goes through incredible machinations to avoid replacing the bird let us consider another analogy the behavior of a caged parrot can likely tell us very little about the behavior of parrots in the wild a biologist may want to incorporate the behavior of caged parrots into the study of wild birds but would undoubtedly need to be extremely careful about understanding the underlying differences in the opportunities and constraints faced by caged versus wild birds before inferring much about wild parrot behavior to some extent experimental violations of eu present us with the same problem as the hypothetical parrot biologist subjects in these risk experiments are in a setting and are completing tasks very different from the setting and tasks they face in their everyday economic and social context what is missing relates to the power of the rationality assumption discussed in friedman that relies not only on the person s skill but also on the feedback they receive from the market friedman s expert billiards players are selected by a market because of their skill in billiards and th se are the players who fit friedman s as if description 1 risk researchers should not ignore experimental data however before we eliminate eu we should more fully understand the underlying reasons for the experimental behavior that violates eu agricultural and natural resource economists are well suited to assess

rationality of choices in subsidized crop insurance markets the u s crop insurance market has several features that set it apart from other insurance markets these include explicit government subsidies with an average premium subsidy rate of about 60 in recent years and the legislative requirement that premium rates be set at actuarially fair levels where the federal government sets rates and pays all costs related to insurance policy sales and services bearing these features in mind we examine the extent to which farmers crop insurance choices conform to economic theory a standard expected utility maximization framework is constructed to analyze trade offs between higher risk protection and larger subsidy payments we decompose the effect of coverage level on expected utility into insurance premium loading and subsidy transfer effects where the loading effect vanishes if rates are actuarially fair given an actuarially fair premium we infer that a rational farmer should choose either the coverage level with the highest premium subsidy or a higher coverage level evidence from a large insurance unit level dataset contradicts this theoretical inference and so suggests anomalous insurance decisions in a novel application of the mixed logit framework we show that the probability an insurance product is chosen declines as out of pocket premium expenditures increase even though higher values of these expenditures should reflect improved grower welfare premium expenditures appear to be more salient than the uncertain future benefits they support we apply our regression to the recent trend yield adjustment innovation in crop insurance

consistency of risk premium measures this research uses the results of a series of within sample experiments to elicit risk premium measures from agricultural producers results show that there is little consistency between measures in different contexts and using different elicitation methods suggesting that underlying risk preferences are not consistent these results highlight some of the difficulty with expected utility theory and risk measurement

how much does honesty cost small bonuses can motivate ethical behavior although people generally try to avoid lying the lure of potential monetary payoffs often leads to unethical behavior the current research investigates whether small monetary rewards for honesty help people resist the temptations of larger incentives or whether they backfire and lead to even more dishonesty four experiments address these issues experiment 1 shows that a 1 bonus led people to act more honestly when they could have lied to obtain 4 an identical bonus however did not increase dishonesty experiment 2 uses a different context and again shows that a 1 bonus led people to act more honestly it also finds no evidence that this small payoff crowded out subsequent altruistic behavior experiment 3 shows that a 1 bonus increased people s honesty even when the payoffs for lying increased to 8 12 and 16 but not when the payoff for lying increased to 20 experiment 4 finds that smaller bonuses for honesty still had an impact although it tended to be somewhat weaker in addition com

contract cheating the market in essays we conduct the first empirical economic investigation of the decision to cheat by university students we investigate student demand for essays using hypothetical discrete choice experiments in conjunction with consequential holt laury gambles to derive subjects risk preferences students stated willingness to participate in the essay market and their valuation of purchased essays vary with the characteristics of student and institutional environment risk preferring students those working in a non native language and those believing they will attain a lower grade are willing to pay more purchase likelihoods and essay valuations decline as the probability of detection and associated penalty increase

risk preferences and expected utility evidence from labor supply data i introduction why do some people enjoy bungee jumping while others do not why do some individuals hold extensive insurance portfolios it is intuitive to attribute these differences between people to their individual preferences for risk a concept that is appealing but hard to quantify arrow 1965 and pratt s 1964 coefficient of relative risk aversion rra has been the standard risk measure since the mid 1960s it relies on expected utility theory eut and the fact that the utility function is concave over wealth although eut is still widely used in economics theorists are increasingly unsatisfied with its performance this is true when applied specifically to risk aversion as well for example rabin 2000 provides a calibration argument that shows that if an expected utility maximizer is not essentially risk neutral over a modest stakes gamble he will be unrealistically risk averse over a large risk gamble he concludes that aversion to modest stakes risk has nothing to do with the diminishing marginal utility of wealth 1282 a frequent argument for continuing to use eut despite failures of its axioms is that it adequately explains behavior an empirical measure of risk aversion that explains behavior is very desirable as risk preference plays an important role in many decisions of interest to economists using a labor supply regression and information on each individual s income and hours of work i compute a measure of risk aversion gamma sub ls that is the curvature of utility over wealth and compare this measure of risk aversion to one based on the individual s willingness to accept gambles over lifetime income go both should measure an individual s preferences for large scale risk while it has been well established that an individual s risk preferences with respect to both large and small scale risk cannot be adequately explained by eut comparing gamma sub g and gamma sub ls affords an opportunity to see how eut performs over gambles of the same scale if eut is a good predictive model for behavior under uncertainty individuals who have a very concave utility function as measured by gamma sub ls should be less willing to gamble with lifetime income than those with smaller values of gamma sub ls i find no correlation between the two measures implying that eut does not explain the variation in risk preferences as measured by a hypothetical gambling frame many economists have questioned whether hypothetical choices are a good proxy for actual decisions in the context of risk and perhaps the discrepancy in the two measures stems from this from a preliminary look at how these measures vary with actual risky choices it appears that the measure of the curvature of utility over wealth does a better job of explaining actual risky choices such as smoking and binge drinking and the hypothetical gambling frame does a better job explaining people s responses to other hypothetical risky situations this is of interest for theorists who are trying to find the new direction for choices under uncertainty but also for empiricists who wish to use risk preferences to explain decision making and behavior ii measuring risk aversion with labor supply data aside from concerns as to the validity of eut risk aversion can be difficult to measure as it requires specific information on an individual s utility function chetty 2006 uses the fact that rra is directly related to the ratio of the income and compensated wage elasticities of labor supply and presents a formula that allows for the estimation of the coefficient of rra using labor supply data recall that rra is proportional to u sub cc u sub c where u sub c is the first partial derivative of the utility function with respect to consumption and u sub cc is the second derivative an agent s compensated wage elasticity is directly related to u sub c the larger the marginal utility of consumption the more benefit the agent gets from an additional dollar of income so the more willing he is to work when his wage increases

the motivating uncertainty effect uncertainty increases resource investment in the process of reward pursuit can a reward of an uncertain magnitude be more motivating than a reward of a certain magnitude this research documents the motivating uncertainty effect and specifies when this effect occurs people invest more effort time and money to qualify for an uncertain reward e g a 50 chance at 2 and a 50 chance at 1 than a certain reward of a higher expected value e g a 100 chance at 2 this effect arises only when people focus on the process of pursuing a reward not when they focus on the outcome the reward itself when the focus is on the process of reward pursuit uncertainty generates positive experience such as excitement and hence increases motivation four studies involving real rewards lend support to the motivating uncertainty effect this research carries theoretical implications for research on risk preference and motivation and practical implications for how to devise cost efficient consumer incentive systems

labor supply of politicians using data on members of the european parliament meps we examine the impact of salaries on the composition and the behavior of legislators employing a differences in differences approach we exploit the introduction of a law that equalized meps salaries which had previously differed by as much as a factor of 10 increasing salaries raises the fraction of meps who run for re election but decreases the quality of elected meps proxied by college quality salary has no discernible impact on effort or legislation output higher salaries induce more political competition

risk preferences and demand drivers of extended warranties we disentangle and study the relative importance of different risk preferences in explaining extended warranty purchases and the high premia paid for them empirical and behavioral research on insurance is at odds with whether diminishing returns curvature of the utility function or loss aversion and nonlinear probability weighting lead to observed consumer behavior this lack of consensus is primarily due to the inability of standard choice data to separate different risk preferences and the consequent need to rely on strong parametric assumptions we design two conjoint studies consistent with simultaneous and sequential decision making with choices about washing machines and extended warranties where subjects are given failure probabilities and repair costs using stated choice data from the surveys we can nonparametrically identify product and risk preferences we find that loss aversion is significantly more important than curvature and probability weights in explaining extended warranty choices importantly failure to decompose risk averse behavior into that arising from curvature loss aversion and probability weighting leads to lower washer prices and profits these findings are robust to alternate reference point assumptions we rationalize the premia paid for warranties by exploring retailer incentives to price discriminate and test the theory on complementary goods pricing finally based on counterfactual analysis forcing separate retailers to sell washers and extended warranties is not necessarily welfare enhancing as cited in the media and previous literature

returns to scale adjustment costs and the optimal investment of the mining firm abstract this paper analyses the optimal investment programme of a competitive mining firm for two different technologies and capital adjustment costs in the first part the case of a variable proportions technology with decreasing returns to scale is studied and it is concluded that under the assumption of a constant mineral price a first stage in the exploitation period of the deposit will occur in which capital stock is increasing in the second part the optimal investment programme is determined when there are constant returns to scale and hotelling s rule governs the dynamics of the mineral price

political careers or career politicians two main career paths are prevalent among politicians in modern democracies there are career politicians i e politicians who work in the political sector until retirement and political careers i e there are politicians who leave politics before retirement and work in the private sector in this paper we propose a dynamic equilibrium model of the careers of politicians in a political economy with a private sector and a political sector where individuals are heterogeneous with respect to their market ability as well as their political skills we characterize the conditions under which the two career paths emerge in equilibrium and establish a number of comparative statics results with respect to the quality of politicians and their careers

mental accounting access motives and overinsurance people exercising mental accounting have an additional motive for buying insurance they perceive a risk of having insu cient funds available to self insure in this way insurance protects the consumption value of the insured asset beyond the expenditure to acquire replace it this complements previous approaches based on probability weighting and loss aversion to explain the high pro tability of warranties and an aversion toward deductibles it helps to account for why the value of a warranty is found to be positively related to the value of the product and why there is seemingly contradictory empirical evidence on how household income a ects demand for warranties the adapted model rationalizes a strong aversion to deductibles and explains the observed sensitivity of this aversion to the insurance context finally it predicts a strong impact of how an insurer pays out bene ts on the value and cost of insurance this can explain both the evidence on strong deductible aversion for ood insurance and the lack of such evidence for long term care insurance jel classi cation d11 d14 d81 g22

cognitive imprecision and small stakes risk aversion observed choices between risky lotteries are difficult to reconcile with expected utility maximization both because subjects appear to be too risk averse with regard to small gambles for this to be explained by diminishing marginal utility of wealth as stressed by rabin 2000 and because subjects responses involve a random element we propose a unified explanation for both anomalies similar to the explanation given for related phenomena in the case of perceptual judgments they result from judgments based on imprecise and noisy mental representations of the decision situation in this model risk aversion results from a sort of perceptual bias but one that represents an optimal decision rule given the limitations of the mental representation of the situation we propose a quantitative model of the noisy mental representation of simple lotteries based on other evidence regarding numerical cognition and test its ability to explain the choice frequencies that we observe in a laboratory experiment

contextual inference in markets on the informational content of product lines context can influence decisions this malleability of choice is usually invoked as evidence that people do not maximize stable preference orderings in a market equilibrium however context conveys payoff relevant information to consumers consequently these consumers rationally violate naive formulations of standard choice theoretic principles i identify informational asymmetries under which apparently anomalous behaviors namely the compromise effect and choice overload arise as market equilibria firms respond to consumers contextual inference in case of the compromise effect a firm may introduce premium loss leaders expensive goods of overly high quality that increase the demand for other goods

adjustment costs uncertainty and the theory of investment the case of non renewable natural resources abstract this paper examines the effects of mineral price and extraction cost uncertainty on the investment program of a competitive resource extracting industry that faces convex costs of adjustment the results show that depletion of mineral reserves will slow down if the marginal adjustment cost function is concave or linear whereas the effect will be ambiguous if the function is convex

assessing consumer benefits in the ontario residential retail natural gas market ontario residential retail natural gas market why marketer entry did not help abstract when the institutions governing transactions in the energy sector changed in canada thirty years ago the changes were heralded as pro competitive for natural gas markets and subsequently authorities and some stakeholders have suggested that households would benefit from gas commodity marketer entry using an analysis of the institutions together with a model of the cost pass through regulatory process i show that households as a group would not benefit from purchasing the gas commodity from unregulated commodity marketers rather than buying it bundled with delivery from the regulated utility i next use monthly price data collected from the public web pages of these unregulated sellers to confirm the theoretical prediction depending on the time period five year natural gas contract commodity prices average more than 75 higher than the utility s regulated cost of gas on average over the sample period signing up meant paying over c 400 more for the gas commodity annually the analysis suggests that claims about the effects of policy change should be informed by a careful assessment of the specific institutional arrangements and the new incentives created by institutional evolution

pay for politicians and candidate selection an empirical analysis abstract a growing theoretical literature on the effect of politicians salaries on the average level of skills of political candidates yields ambiguous predictions in this paper we estimate the effect of pay for politicians on the level of education of parliamentary candidates we take advantage of an exceptional reform where the salaries of finnish mps were increased by 35 in the year 2000 intended to make the pay for parliamentarians more competitive a difference in differences analysis using candidates in municipal elections as a control group suggests that the higher salary increased the fraction of candidates with higher education among female candidates while we find no significant effect for male candidates

are risk preferences stable across contexts evidence from insurance data using a unique dataset we test whether households deductible choices in auto and home insurance reflect stable risk preferences our test relies on a structural model that assumes households are objective expected utility maximizers and claims are generated by household coverage specific poisson processes we find that the hypothesis of stable risk preferences is rejected by the data our analysis suggests that many households exhibit greater risk aversion in their home deductible choices than their auto deductible choices our results are robust to several alternative modeling assumptions jel d11 d83

monitoring corruptible politicians does monitoring politicians corrupt activities induce a sustained reduction in corruption we use longitudinal data on publicly released audits of municipal governments in puerto rico to answer this question we find that corruption is considerably lower in municipalities with timely audits before an election however these municipalities do not exhibit decreased levels of corruption in subsequent audits in spite of this mayors in municipalities audited preceding the previous election have higher re election rates suggesting that audits enable voters to select more competent politicians we conclude that audit programs must be timely sustained and long term commitments in order to be effective

risk aversion and wealth evidence from person to person lending portfolios we estimate risk aversion from investors financial decisions in a person to person lending platform we develop a method that obtains a risk aversion parameter from each portfolio choice since the same individuals invest repeatedly we construct a panel data set that we use to disentangle heterogeneity in attitudes toward risk across investors from the elasticity of risk aversion to changes in wealth we find that wealthier investors are more risk averse in the cross section and that investors become more risk averse after a negative housing wealth shock thus investors exhibit preferences consistent with decreasing relative risk aversion and habit formation data as supplemental material are available at http dx doi org 10 1287 mnsc 2015 2317 this paper was accepted by amit seru finance

electoral reform and trade offs in representation we examine the effect of electoral institutions on two important features of representation that are often studied separately policy responsiveness and the quality of legislators theoretically we show that while a proportional electoral system is better than a majoritarian one at representing popular preferences in some contexts this advantage can come at the price of undermining the selection of good politicians to empirically assess the relevance of this trade off we analyze an unusually controlled electoral reform in switzerland early in the twentieth century to account for endogeneity we exploit variation in the intensive margin of the reform which introduced proportional representation based on administrative constraints and data on voter preferences a difference in difference analysis finds that higher reform intensity increases the policy congruence between legislators and the electorate and reduces legislative effort contemporary evidence from the european parliament supports this conclusion

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

are commercial fishers risk lovers fishers are risk averse according to most empirical studies while expected utility theory predicts risk neutrality even for sizable stakes we test this prediction using data from a stated choice experiment with swedish commercial fishers our results show that only 48 of the fishers can be broadly characterized as risk neutral while 26 are modestly risk averse and 26 are strongly riskaverse fishers are more risk neutral the higher the fraction of their household s income comes from fishing sensitivity testing implies that modest stake decisions like a few days of fishing are not influenced by wealth level

do better paid politicians perform better disentangling incentives from selection the wage paid to politicians affects both the choice of citizens to run for office and the performance of those who are appointed first if skilled individuals shy away from politics because of higher opportunities in the private sector an increase in politicians pay may change their mind second if the re election prospects of incumbents depend on their in office deeds a higher wage may foster performance we use data on all italian municipal governments from 1993 to 2001 and test these hypotheses in a quasi experimental setup in italy the wage of mayors depends on population size and sharply rises at different thresholds we apply a regression discontinuity design to the only threshold that uniquely identifies a wage increase 5 000 inhabitants exploiting the existence of a two term limit we further disentangle the composition from the incentive component of the effect of the wage on performance our results show that a higher wage attracts more educated candidates and that better paid politicians size down the government machinery by improving efficiency importantly most of this effect is driven by the selection of competent politicians rather than by the incentive to be re elected

spending on daughters versus sons in economic recessions although parents often try not to favor one child we examine whether specific environmental factors might bias parents to favor children of one sex over the other this research draws on theory in evolutionary biology suggesting that investment in female versus male offspring depends on resource availability applying this to consumers a series of experiments show that poor economic conditions favor resource allocations to daughters over sons for example poor conditions led people to bequeath more assets to girls in their will and to choose girls to receive a us treasury bond and a beneficial extracurricular activity it is proposed that this happens because spending on children represents a reproductive investment and that boys and girls relative reproductive value varies with economic conditions supporting this account perceptions of which child will have more children statistically mediates the effect of economic conditions on preferences for girls consequently the effect is strengthened as a child approaches reproductive age and it is moderated by individual differences risk aversion and monogamy directly related to our theoretical model this research contributes to the consumer behavior literature by revealing how why and when environmental factors influence spending on girls versus boys

an index of loss aversion to a considerable extent risk aversion as it is commonly observed is caused by loss aversion several indexes of loss aversion have been proposed in the literature the one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components basic utility probability weighting and loss aversion the index is independent of the unit of payment the main theorem shows how the indexes of different decision makers can be compared through observed choices

loss aversion in politics we study how loss aversion affects the political equilibrium in a simple majority voting model first we show a status quo bias which leads to path dependence second loss aversion implies a moderating effect on the most extreme voters third in a dynamic setting the effect of loss aversion diminishes with the length of the planning horizon of voters however in the presence of a projection bias majorities are partially unable to understand how fast they will adapt to a new policy this makes changes less likely and induces time inconsistency policy changes are timid at the beginning while in later periods they are made progressively more radical fourth in a stochastic environment loss aversion yields a significant distaste for risk but also a smaller attachment to the status quo the application of these results to a model of redistribution leads to empirically plausible implications

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

the risk preferences of u s executives in this paper i elicit risk attitudes of u s executives by calibrating a subjective option valuation model for option exercising data 1996 to 2008 yielding approximately 65 000 values of relative risk aversion rra for almost 7 000 executives the observed behavior is generally consistent with moderate risk aversion and a median mean rra close to one three values are validated for chief executive officers ceos by testing theory based predictions on the influence of individual characteristics on risk preferences such as gender marital status religiosity and intelligence senior managers such as ceos presidents and chairpersons of the boards of directors are significantly less risk averse than non senior executives rra heterogeneity is strongly correlated with sector membership and firm level variables such as size performance and capital structure alternative factors influencing option exercises are tested for their influence on rra values this paper was accepted by brad barber finance

are politicians really paid like bureaucrats abstract we provide the first empirical analysis of gubernatorial pay using u s data for 1950 90 we document substantial variation in the wages of politicians both across states and over time gubernatorial wages respond to changes in state income per capita and taxes we estimate that governors receive a 1 percent pay cut for each 10 percent increase in per capita tax payments and a 4 5 percent increase in pay for each 10 percent increase in income per capita in their states there is evidence that the tax elasticity reflects a form of reward for performance the evidence for the income elasticity of pay is less conclusive but is suggestive of rent extraction motives finally we find that democratic institutions play an important role in shaping pay for example voter initiatives and the presence of political opposition significantly reduce the income elasticity of pay and increase tax elasticities of pay

first order risk aversion and the equity premium puzzle abstract this paper integrates yaari s dual theory of choice under uncertainty into a multiperiod context and examines its implications for the equity premium puzzle an important property of these preferences is that of first order risk aversion which implies in our model that the risk premium for a small gamble is proportional to the standard deviation rather than the variance since the standard deviation of the growth rate in aggregate consumption is considerably larger than its variance the model can generate both a small risk free rate and a moderate equity premium

on money pumps abstract the question of whether money pump arguments justify standard consistency assumptions about behavior has remained unresolved partly because of the absence of an appropriate analytical framework we present a new framework which fills this gap provide a formal definition of invulnerability to money pumps and formulate a requirement of maximal opportunism we show that behavior which satisfies none of the standard consistency assumptions can be both invulnerable and maximally opportunist we present two conditions which combined with maximal opportunism imply the existence of a choice function rationalized by an ordering and satisfying the sure thing principle journal of economic literature classification numbers b41 c73 d81