the economics of the covid 19 pandemic an assessment the covid 19 pandemic has created both a medical crisis and an economic crisis as others have noted we face challenges just as big as those in the spanish flu pandemic and the great depression all at once the tasks facing policy makers are extraordinary many new kinds of intervention are urgently required this issue of the oxford review of economic policy has two objectives the first is to explore these new interventions evaluating their use suggesting how they might be improved and proposing alternatives the second is to show that the challenges facing us are global and will require international cooperation if they are to be dealt with effectively this short introductory essay positions the papers in the issue within an overall conceptual framework with the aim of telling an overarching story about the pandemic

does market experience eliminate market anomalies the case of exogenous market experience a vibrant literature has emerged that suggests willingness to pay and willingness to accept measures of value are quite different for inexperienced consumers but that value differences erode with market experience one potential shortcoming of this literature is that market experience is endogenous this study presents a framed field experiment that exogenously induces market experience empirical findings support the premise that market experience alone can eliminate an important market anomaly

the timing and magnitude of retail store markdowns evidence from weekends and holidays we examine daily prices of eight goods at seventeen retail stores collected in ann arbor michigan over a four month period from november 1 to february 28 we focus on weekly and seasonal price patterns and on the frequency of price markdowns or sales there were frequent markdowns in the intensive shopping period prior to christmas and a tendency for such sales to occur on weekends we interpret these findings as evidence that a significant number of markdowns are timed to occur when shopping intensity is exogenously high we complement the imperfect information based motives for sales in the literature by contributing an additional element based on the role of bulk shopping and increasing returns in the shopping technology

patterns of retail price variation we examine retail price variation across a range of goods and regions of the united states we find that the typical grocery product has a regular price and stays at that price at least 50 of the time and that most deviations from that regular price are downward temporary discounts or sales while infrequent account for 20 to 50 of the annual variation in retail prices for most product categories although existing models of retail sales yield predictions consistent with some aspects of the retail pricing distributions all of these models fail to explain other important aspects of retail pricing identified here

sales and firm entry the case of wal mart temporary price reductions or sales have become increasingly important in the evolution of the price level we present a model of repeated price competition to illustrate how entry causes incumbents to alternate between high and low prices using a six year panel of weekly observations from a grocery chain we find that individual stores employ more sales as the distance to wal mart falls moreover the increase in the frequency of sales was concentrated on the most popular products suggesting the use of a loss leader strategy

supply and demand shocks in the covid 19 pandemic an industry and occupation perspective we provide quantitative predictions of first order supply and demand shocks for the us economy associated with the coronavirus disease 2019 covid 19 pandemic at the level of individual occupations and industries to analyze the supply shock we classify industries as essential or non essential and construct a remote labor index which measures the ability of different occupations to work from home demand shocks are based on a study of the likely effect of a severe influenza epidemic developed by the us congressional budget office compared to the pre covid period these shocks would threaten around 22 per cent of the us economy s gross domestic product gdp jeopardise 24 per cent of jobs and reduce total wage income by 17 per cent at the industry level sectors such as transport are likely to have output constrained by demand shocks while sectors relating to manufacturing mining and services are more likely to be constrained by supply shocks entertainment restaurants and tourism face large supply and demand shocks at the occupation level we show that high wage occupations are relatively immune from adverse supply and demand side shocks while low wage occupations are much more vulnerable we should emphasize that our results are only first order shocks we expect them to be substantially amplified by feedback effects in the production network

loss aversion and managerial decisions evidence from major league baseball i introduction and motivation previous research indicates that management changes are important events for organizations partly because they lead to reversals of poor prior decisions 1 however this research begs the question of why it may be necessary to replace the manager in order to bring about such changes in this article we test for evidence of loss aversion and distinguish between loss aversion and agency costs as explanations for why managers hang on to poorly performing assets or employees they were instrumental in acquiring or hiring the study contributes to the literature on managerial decisions and to the sports economics literature it may be necessary to replace managers if their investment decisions are affected by loss aversion as aronson wilson and akert 2010 point out avoiding admission of mistakes is a common human trait once we have committed time or energy to a cause it seems to be nearly impossible to convince us that the cause is unworthy psychological aversion to admitting mistakes is related to loss aversion and reflects a cognitive bias the manager fails to see the problem or discounts negative experience as non representative agency costs provide an alternative explanation for why it may be necessary to replace managers to rectify prior mistakes agency costs arise when an agent e g a manager acts in his her own interest but not in the interest of the principal e g the firm owner in the presence of asymmetric information managers may have incentives to disguise or conceal poor decisions to avoid negative consequences such as reduced marketability as a manager demotion or termination this concern with career and reputation can lead to overlooking inefficiencies including asset underperformance and overpayment for the underperforming assets using three decades of data on managerial and player turnover in major league baseball mlb we 1 estimate the tendency of incumbent managers to hold on to low performing players rather than divest them 2 test the hypothesis that new managers unwind the mistakes of previous managers and 3 distinguish between loss aversion and agency costs as alternative explanations for retention of poor performing players our empirical analysis focuses on poor performing players who were hired by previous managers this is because either loss aversion or agency cost may have induced the prior manager to hang onto poor performing players new managers can be expected to move quickly to address these types of problems hence we can use new manager retention decisions to determine if the decisions are affected by whether or not the poor performer was hired by a previous manager failure of the acquiring manager to divest poor performing players could be consistent with either the manager s aversion to loss a cognitive bias or the manager s unwillingness to admit mistakes agency costs in the form of career concerns to distinguish between these we follow the career concerns literature and reason that experienced managers are less likely to suffer reputational harm if they terminate poor performers whom they hired loss aversion in contrast does not suggest a relationship between managerial experience and failure to terminate poor performers there are several advantages to using baseball data for this study the empirical design holds industry and competitive conditions constant and allows us to directly observe the performance of acquired assets players and how managers react to their performance once it is revealed we are able to identify the manager who made the acquisition decision and can measure the performance of individual players we also observe the player retention decisions of the subsequent manager the manager who did not acquire the player hence we can evaluate how the acquiring manager s behavior differs from that of the manager who inherits poor performing players some who were acquired by the prior manager and others who were hired by even earlier managers

retail price dynamics and retailer heterogeneity uk evidence we examine retailer heterogeneity in price adjustment in uk supermarkets considerable variation in the price change frequency of identically bar coded products among retail chains is found decomposition analysis suggests that price adjustment is evenly split between sales and reference prices with substantive variation across retailers

incorporating reference price effects into a theory of consumer choice although there has been a good deal of research on incorporating the effects of reference price formation into empirical models of consumer buying behavior little formal theoretical work had been undertaken to date this paper incorporates reference price effects into the traditional economic theory of consumer choice and examines the effects of reference price formation on the results of the traditional theory its marketing implications and the implications for empirical models which examine the effects of reference price formation on actual consumer behavior several implications of the theoretical model are empirically tested using weekly retail egg sales data from southern california this analysis indicates that reference price formation does have significant effects on consumer behavior furthermore these effects are asymmetric with consumers two and a half times more responsive to egg price increases that are in excess of the reference price than they are to comparable egg price decreases

the formation of expected future price a reference price for forward looking consumers among numerous possible reference prices expected future price is important a consumer s expectation of the future price of a brand plays a crucial role in the decision to buy now or later failure to characterize reference price as a forward looking concept a common practice in the reference pricing literature violates premises of neoclassical economic theory and leads to questionable modeling applications explicit measures of future price expectations were obtained and used to test various models of expectations formation providing insight into the effect of expected future price on consumers responses to price promotions and brand choice decisions

modeling loss aversion and reference dependence effects on brand choice based upon a recently developed multiattribute generalization of prospect theory s value function tversky and kahneman 1991 we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points and that consumers weigh losses from a reference point more than equivalent sized gains loss aversion we sketch implications of this model for understanding brand choice we develop a multinomial logit formulation of a reference dependent choice model calibrating it using scanner data in addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model the model s coefficients demonstrate significant loss aversion as hypothesized we also discuss the implications of a reference dependent view of consumer choice for modeling brand choice demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics and examine other implications for competitive strategy

taxes and employment subsidies in optimal redistribution programs this paper explores how to optimally set taxes and transfers when taxation authorities 1 are uninformed about individuals value of time in both market and non market activities and 2 can observe both market income and time allocated to market employment we show that optimal redistribution in this environment involves distorting market employment upwards for low wage individuals through decreasing wage contingent employment subsidies and distorting employment downwards for high wage individuals through positive and increasing marginal income tax rates in particular we show that whether a person is taxed or subsidized depends primarily on his wage with the optimal program involving a cut off wage whereby workers above the cutoff are taxed as they increase their income while workers earning a wage below the cutoff receive an income supplement as they increase their income finally we show that the optimal program transfers zero income to individuals who choose not to work

how many jobs can be done at home evaluating the economic impact of social distancing measures taken to arrest the spread of covid 19 raises a fundamental question about the modern economy how many jobs can be performed at home we classify the feasibility of working at home for all occupations and merge this classification with occupational employment counts we find that 37 of jobs in the united states can be performed entirely at home with significant variation across cities and industries these jobs typically pay more than jobs that cannot be done at home and account for 46 of all us wages applying our occupational classification to 85 other countries reveals that lower income economies have a lower share of jobs that can be done at home

variety pass through an examination of the ready to eat breakfast cereal market abstract we examine variety pass through effects that occur when multiproduct retailers adjust the length of their product lines in response to changes in wholesale prices studying variety pass through is essential to understanding how wholesale price changes transmit into retail prices when variety is endogenous using data from the ready to eat breakfast cereal category we find that retailers jointly adjust retail prices and the length of their product lines in response to changes in wholesale prices we show the importance of controlling for the endogeneity of retailers product line decisions when calculating price pass through rates

inventories markups and real rigidities in menu cost models a growing consensus in new keynesian macroeconomics is that nominal cost rigidities rather than countercyclical markups account for the bulk of the real effects of monetary policy shocks we revisit these conclusions using theory and data on inventories we study an economy with nominal rigidities in which goods are storable our theory predicts that if costs of production are sticky and markups do not vary much in response to say expansionary monetary policy firms react by excessively accumulating inventories in anticipation of future cost increases in contrast if the data inventories are fairly constant over the cycle and in response to changes in monetary policy we show that costs must increase and markups must decline sufficiently in times of a monetary expansion in order to reduce firm s incentive to hold inventories and thus bring the model s inventory predictions in line with the data versions of the model consistent with the dynamics of inventories in the data imply that countercyclical markups account for a sizable fraction of the response of real variables to monetary shocks

an empirical analysis of latitude of price acceptance in consumer package goods scanner panel data analyses for sweetened and unsweetened drink categories with four brands in each support the presence of a region of price insensitivity around a reference price the analyses also suggest that consumers with higher average reference price have a wider latitude of price acceptance consumers with a higher frequency of purchase i e shorter average interpurchase time interval are found to have a narrower latitude of price acceptance because they are more aware of the range of price distributions finally consumers with a higher average brand loyalty have a wider latitude of price acceptance demonstrating greater tolerance of price fluctuations

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

prices are sticky after all abstract economists have interpreted the evidence that prices change every four months as implying that sticky prices cannot be important for monetary transmission theory implies that this interpretation is correct if most price changes are regular but not if a large fraction are temporary as in the data since regular prices are much stickier than temporary ones our models predict that the stickiness of the aggregate price level matches that in a standard calvo model or a standard menu cost model in which micro level prices change about once a year in this sense prices are sticky after all

a comparative analysis of reference price models the effect of reference price on brand choice decisions has been well documented in the literature researchers however have differed in their conceptualizations and therefore in their modeling of reference price in this article we evaluate five alternative models of reference price of which two are stimulus based i e based on information available at the point of purchase and three that are memory based i e based on price history and or other contextual factors we calibrate the models using scanner panel data for peanut butter liquid detergent ground coffee and tissue to account for heterogeneity in model parameters we employ a latent class approach and select the best segmentation scheme for each model the best model of reference price is then selected on the basis of fit and prediction as well as on the basis of parsimony in cases where the fits of the models are not very different in all four categories we find that the best reference price model is a memory based model namely one that is based on the brand s own price history in the liquid detergent category however we find that one of the stimulus based models namely the current price of a previously chosen brand also performs fairly well we discuss the implications of these findings

the cyclicality of sales regular and effective prices business cycle and policy implications author s coibion olivier gorodnichenko yuriy hong gee hee abstract we study the cyclical properties of sales regular price changes and average prices paid by consumers effective prices using data on prices and quantities sold for numerous retailers across many us metropolitan areas inflation in the effective prices paid by consumers declines significantly with higher unemployment while little change occurs in the inflation rate of prices posted by retailers this difference reflects the reallocation of household expenditures across retailers a feature of the data which we document and quantify rather than sales we propose a simple model with household store switching and assess its implications for business cycles and policymakers jel d12 e31 e32 l25 l81

a comparison of tax bases for a personal tax tax bases for a personal tax are compared in this paper it is found that the potential welfare gains of moving from a linear affine tax on labor earnings to a linear affine tax on wage rates seem to be larger than the potential gains of moving from a head tax to an earnings tax it is also shown that for the common optimal taxation model utility levels and ability as measured by wage rates are inversely related at the first best optimum a development of the model so that a positive relationship between utility and ability results is suggested

neoclassical theory versus prospect theory evidence from the marketplace several experimental studies have provided evidence that suggest indifference curves have a kink around the current endowment level these results which clearly contradict closely held economic doctrines have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory e g prospect theory which invokes psychological effects this paper pits neoclassical theory against prospect theory by investigating data drawn from more than 375 subjects actively participating in a well functioning marketplace the pattern of results suggests that prospect theory adequately organizes behavior among inexperienced consumers but consumers with intense market experience behave largely in accordance with neoclassical predictions moreover the data are consistent with the notion that consumers learn to overcome the endowment effect in situations beyond specific problems they have previously encountered this transference of behavior across domains has important implications in both a positive and normative sense

optimal pricing with costly adjustment evidence from retail grocery prices in many theoretical models it is assumed that there are costs associated with adjusting prices in this paper the existence type and magnitude of such costs are investigated empirically a discrete choice dynamic programming model that nests fixed and variable costs is developed and econometric estimates of the adjustment cost function are obtained the data used to implement the model consist of weekly retail prices and sales of three brands of saltine crackers sold by four chains of grocery stores in a small u s town the study has several distinguishing characteristics first the data are highly disaggregate at the level of brand and store second variables are sampled at weekly intervals third the model nests fixed and variable adjustment costs and can therefore determine their relative importance finally the discrete choice model is both structural and dynamic

will covid 19 fiscal recovery packages accelerate or retard progress on climate change the covid 19 crisis is likely to have dramatic consequences for progress on climate change imminent fiscal recovery packages could entrench or partly displace the current fossil fuel intensive economic system here we survey 231 central bank officials finance ministry officials and other economic experts from g20 countries on the relative performance of 25 major fiscal recovery archetypes across four dimensions speed of implementation economic multiplier climate impact potential and overall desirability we identify five policies with high potential on both economic multiplier and climate impact metrics clean physical infrastructure building efficiency retrofits investment in education and training natural capital investment and clean r d in lower and middle income countries lmics rural support spending is of particular value while clean r d is less important these recommendations are contextualized through analysis of the short run impacts of covid 19 on greenhouse gas curtailment and plausible medium run shifts in the habits and behaviours of humans and institutions

consumer price and promotion expectations an experimental study the authors report results from a controlled experiment designed to investigate the impact of a brand s price promotion frequency and the depth of promotional price discounts on the price consumers

an empirical analysis of internal and external reference prices using scanner data single source yogurt data are used to examine whether both internal and external reference prices affect purchase decisions internal reference prices are memory resident prices based on actual fair or other price concepts external reference prices are observed stimuli such as regular prices that stores may display along with a sale price for comparability discrete choice models with variables representing the two types of reference prices are estimated and both types of variables are found to have significant effects on purchase probabilities this suggests that consumers may use multiple reference points in evaluating price in purchase decisions in addition a model using an indicator of a sale price discount explains purchase probabilities as well as one that models the actual discount which suggests that consumers may be reacting to the indication of savings rather than to the amount of the discount

reference prices costs and nominal rigidities we assess the importance of nominal rigidities using a new weekly scanner dataset we find that nominal rigidities take the form of inertia in reference prices and costst defined as the most common prices and costs within a given quarter reference prices are particularly inertial and have an average duration of roughly one year even though weekly prices change roughly once every two weeks we document the relation between prices and costs and find sharp evidence of state dependence in prices we use a simple model to argue that reference prices and costs are useful statistics for macroeconomic

wage inequality and poverty effects of lockdown and social distancing in europe social distancing and lockdown measures taken to contain the spread of covid 19 may have distributional economic costs beyond the contraction of gdp here we evaluate the capacity of individuals to work under a lockdown based on a lockdown working ability index which considers their teleworking capacity and whether their occupation is essential or closed our analysis reveals substantial and uneven potential wage losses across the distribution all around europe and we consistently find that both poverty and wage inequality rise in all european countries under four different scenarios 2 months of lockdown and 2 months of lockdown plus 6 months of partial functioning of closed occupations at 80 70 and 60 of full capacity we estimate for 29 european countries an average increase in the headcount poverty index that goes from 4 9 to 9 4 percentage points and a mean loss rate for poor workers between 10 and 16 2 the average increase in the gini coefficient ranges between 3 5 to 7 3 depending on the scenario considered decomposing overall wage inequality in europe we find that lockdown and social distance measures produce a double process of divergence both inequality within and between countries increase

are the disabled less loss averse evidence from a natural policy experiment i introduction a large literature points to differences in cognitive bias among diverse populations according to lunn and lyons 2010 lower income less educated and older populations are more prone to decision making that deviates from economic rationality also see mather et al 2012 and tymula et al 2013 however as discussed by lunn and lyons 2010 little is known about the decision making biases of other vulnerable populations notably the physically disabled or implications thereof for their economic well being in this study we examine differences in cognitive bias and behavioral heuristics among nondisabled and physically disabled populations specifically using data from a unique israeli government natural policy experiment we assess loss aversion among nondisabled and disabled populations in the decision to purchase a home our empirical tests are motivated by previous findings in physiology and psychology showing that disabled persons often develop physical and mental mechanisms to help compensate for disabilities according to bishop 2005 disabled persons utilize such coping mechanisms to minimize gaps caused by their impairments as further suggested by devins et al 1983 yoshida 1993 livneh and antonak 1997 and bishop and feist price 2002 such strategies and mechanisms allow disabled persons increased control over their health and environment specifically nirje 1972 sands and wehmeyer 1996 and wehmeyer 1998 suggest that disabled populations seek compensatory mechanisms to enhance autonomy efficacy self reliance and self management among noteworthy examples cattaneo and vecchi 2011 summarize a long series of studies indicating the development of compensatory mechanisms among visually impaired persons results of those analyses indicate enhanced nonvisual perceptual sensorial and cortical level abilities among the visually disabled e g amedi et al 2003 crawford et al 2008 hamilton pascual leone and schlaug 2004 hull and mason 1995 muchnick et al 1991 roder rosier and neville 2001 niemeyer and starlinger 1981 in other recent work keysar hayakawa and an 2012 provide evidence of compensatory cognitive mechanisms among persons with language impairments results of experimental analysis indicate diminished decision biases and reduced loss aversion among non native language speakers the authors hypothesize that use of a foreign language reduces the opportunity for spontaneous response and results in a more consciously measured and considered mode of thinking 1 as with visually or language impaired persons the compensatory mechanisms acquired by physically disabled persons may extend beyond the psychophysiological domain to include cognitive adjustments indeed as discussed by stanovich and west 2000 lower levels of cognitive bias could compensate for physical disability and provide for improved coping prospects over the past decade the israeli government sought to privatize public housing via an offer to sell rental units to tenants at a discount from the market price the algorithms utilized by the government to determine the magnitudes of the price reductions varied over time furthermore the price reductions were not forecastable among targeted program participants tenants had the opportunity to either accept or decline government sales offers extended at each successive program iteration our research employs survival analysis to specify and empirically test whether physically nondisabled and disabled tenants exhibited different degrees of loss aversion behavior in their home purchase decisions 2 as first described by kahneman and tversky 1979 loss aversion pertains to household behavior when the aggravation that one experiences in losing a sum of money appears to be greater than the pleasure associated with gaining the same amount p 279 in experimental work tversky and kahneman 1992 find that under even odds for winning and losing the gain should be at least twice as large as the loss for a prospect to be acceptable whereas putler 1992 finds for example that consumers are two and a half times more responsive to price increases that are in excess of the reference price than they are to comparable price declines

reference price and price perceptions a comparison of alternative models reference price effects on consumer price perceptions are often explained by helson s adaptation level theory in which the cognitive representation of reference price is the prototype of the relevant category however recent conceptualizations and empirical evidence suggest the possibility of an exemplar model which may be specified using volkmann s range theory or parducci s range frequency theory in two experiments these three contextual models of reference price effects are pitted against one another based on the manova and model fitting range frequency theory accounted for reference price effects that the other theories could not suggesting that consumers compare the target price against specific members of the category rather than the category prototype a third experiment demonstrated that range and frequency effects are moderated by the stimulus presentation condition suggesting that consumers place greater weight on extreme prices anchoring the range for internal reference prices than for external reference prices

reference dependent risk attitudes we use koszegi and rabin s 2006 model of reference dependent utility and an extension of it that applies to decisions with delayed consequences to study preferences over monetary risk because our theory equates the reference point with recent probabilistic beliefs about outcomes it predicts specific ways in which the environment influences attitudes toward modest scale risk it replicates classical prospect theory including the prediction of distaste for insuring losses when exposure to risk is a surprise but implies first order risk aversion when a risk and the possibility of insuring it are anticipated a prior expectation to take on risk decreases aversion to both the anticipated and additional risk for large scale risk the model allows for standard consumption utility to dominate reference dependent gain loss utility generating nearly identical risk aversion across situations

the wage rate tax an alternative to the income tax during the last decade as income tax rates have continuously climbed to new heights the deficiencies of the income tax system have become more and more conspicuous this has induced a search for alternative tax bases some aspects of whether a wage rate tax might be a good alternative to the income tax are examined in this paper through simulations with a one period optimal taxation model where individuals are free to choose both the amount of education which influences their wage rates and hours of work the optimal linear wage rate tax is compared to the optimal linear income tax special interest is paid to how the relative performance of the two tax systems depends on the elasticity of the wage rate with respect to education and the elasticity of substitution in individuals utility functions

reference dependent consumption plans we develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption because changes in wealth are news about future consumption preferences over money are reference dependent if news resonates more when about imminent consump tion than when about future consumption a decision maker might to generate pleasant surprises overconsume early relative to the optimal committed plan increase immediate consumption following surprise wealth increases and delay decreasing consumption following surprise losses since higher wealth mitigates the effect of bad news people exhibit an unambiguous first order precautionary savings motive

dynamic income taxation redistribution and the ratchet effect abstract in this paper we extend the classic optimum linear income tax model to a twice repeated game a utilitarian policy maker decides on the second period tax system on the basis of observed first period behaviour we summarise our findings as follows first the static optimal linear tax results cannot be expected to hold in a dynamic setting second more productive households are likely to mimic the behaviour of less productive households third the optimal dynamic first period tax rate might be negative then income is redistributed from low to high income households fourth if the utility function is well behaved then the optimal dynamic first period tax rate is lower than the optimal static tax rate fifth if the optimal static tax rate separates then the dynamic and the static optimal tax rates coincide sixth if a zero tax rate separates then the optimal dynamic tax rate is positive