thinking inside the box a closer look at financial inclusion and household income using national representative household finance survey data covering more than 6200 chinese households we first construct a new multidimensional indicator for financial inclusion then we examine the effect of financial inclusion on household income our results elicit several findings first financial inclusion has a strong positive effect on household income this effect can be found across all households with different levels of income second low income households are found to benefit more from financial inclusion than high and mid level income ones we argue that in this sense financial inclusion helps reduce income inequality

linking savings behavior confidence and individual feedback a field experiment in ethiopia abstract in this paper we investigate behavioral constraints to savings among smallholder farmers in rural ethiopia increasing savings by overcoming such behavioral constraints has been documented to have positive effects on various outcomes such as health education and agricultural investments we causally identify a strong increase in savings to a soft commitment device in the form of a moneybox with a regular savings plan in our randomized field experiment we also provide personalized feedback consisting of recommendations to self set saving goals these recommendations trigger increases in savings of up to 36 percent in a detailed analysis of the behavioral characteristics driving these results we find a strong and robust link between financial confidence and savings behavior in particular the savings of underconfident individuals are less than 2 3 of the savings of overconfident individuals an association stronger than other behavioral traits such as risk lovingness and present biasedness remarkably the effect of our personalized feedback is particularly strong for underconfident individuals we discuss possible underlying mechanisms rule out a set of alternative behavioral explanations and address crowding out behavior into other forms of saving 1

an analysis of the relation between the stewardship and valuation roles of earnings in this paper we seek a deeper understanding of how accounting information is used for valuation and incentive contracting purposes we explore linkages between weights on earnings in compensation contracts and in stock price formation a distinction between the valuation and incentive contracting roles of earnings in paul 1992 produces the null hypothesis that valuation earnings coefficients vecs and compensation earnings coefficients cecs are unrelated our empirical analyses of the relations between earnings and both stock prices and executive compensation data at the firm and industry levels over the period 1971 2000 rejects paul s 1992 hypothesis of no relation we also document an increasing weight over time on other public performance information captured by stock returns in the determination of cash compensation specifically we find that the incentive coefficient on returns is significantly higher in the second of two equal sample subperiods relative to the incentive coefficient on earnings

optimal design of pro conservation incentives abstract payments for environmental services pes schemes have become an increasingly accepted and popular mode for governmental and non governmental agencies to use in addressing local and regional declines in ecosystem services in pes schemes payments can either be tied to indicators of actions for service provision or to indicators of the generated service itself performance payments are synonymous for this second group i e payments are completely contingent on the procurement of an environmental good or service such a focus raises several practical issues during implementation we review and translate key aspects of the economic theory of incentives into the context of performance payment schemes with special attention paid to two practical issues risks outside the individual s control and distortion in the measurement of environmental services four different incentive payment approaches are presented and the effects of risk and distortion on optimal incentives are discussed the investigation of each payment approach is accompanied by a discussion of examples from the field

getting to the top of mind how reminders increase saving we provide evidence from field experiments with three different banks that reminder messages increase commitment attainment for clients who recently opened commitment savings accounts messages that mention both savings goals and financial incentives are particularly effective whereas other content variations such as gain versus loss framing do not have significantly different effects nor do we find evidence that receiving additional late reminders has an additive effect these empirical results do not map neatly into existing models so we provide a simple model where limited attention to exceptional expenses can generate undersaving that is in turn mitigated by reminders data as supplemental material are available at http dx doi org 10 1287 mnsc 2015 2296 this paper was accepted by teck hua ho behavioral economics

shaming tax delinquents abstract many federal and local governments rely on shaming penalties to achieve policy goals but little is known about how shaming works such penalties may be ineffective or even backfire by crowding out intrinsic motivation in this paper we study shaming in the context of the collection of tax delinquencies we sent letters to 34 334 tax delinquents who owed a total of half a billion dollars in three u s states we randomized some of the information contained in the letter to vary the salience of financial penalties shaming penalties and peer comparisons we then measured the effects of this information on subsequent payment rates we found that increasing the visibility of delinquency status increased compliance by individuals who have debts below 2500 but had no significant effect on individuals with larger debt amounts financial reminders had a positive effect on payment rates independent of the size of the debt while information about the delinquency of neighbors had no effect on payment rates

intertemporal cost allocation and managerial investment incentives a theory explaining the use of economic value added as a performance measure this paper provides a formal analysis of how managerial investment incentives are affected by alternative allocation rules when managerial compensation is based on accounting measures of income that include allocations for investment expenditures the main result is that there exists a unique allocation rule that always induces the manager to choose the efficient investment level the income measure created by this allocation rule is usually referred to as residual income or economic value added

the endowment effect as blessing we study the idea that seemingly unrelated behavioral biases can coevolve if they jointly compensate for the errors that any one of them would give rise to in isolation we pay specific attention to barter trade of the kind that was common in prehistoric societies and suggest that the endowment effect and the winner s curse could have jointly survived natural selection together we develop a new family of hybrid replicator selection dynamics and show that under such dynamics even if biases only partially compensate for each other individuals with both biases can survive in the population in the long run

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

perceiving prospects properly when an agent chooses between prospects noise in information processing generates an effect akin to the winner s curse statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal the optimal perception patterns share key features with prospect theory namely overweighting of small probability events and corresponding underweighting of high probability events status quo bias and reference dependent s shaped valuations these biases arise to correct for the winner s curse effect

banking the poor via savings accounts evidence from a field experiment abstract in a setting with low penetration of bank accounts i randomly gave access to bank accounts with zero fees at local bank branches to a large sample of female household heads in nepal the zero fees and physical proximity of the bank led to high take up and usage rates compared to similar studies in other settings however impact on income aggregate expenditures and assets are too imprecisely estimated to draw a conclusion i do find reallocation of expenditures across categories e g more spending on education and meat and fish and less on health and dowries and higher ability to cope with shocks on qualitative outcomes i find households report that their overall financial situation has improved the lack of a clear story on mechanisms yet strong result on aggregate self perception of financial wellbeing is consistent with access to quality savings accounts leading to household improvements via multiple mechanisms

deposit collecting unbundling the role of frequency salience and habit formation in generating savings abstract we report on a field experiment using several methods for collecting deposits made in formal bank accounts in rural areas in sri lanka we find that only frequent face to face collection

the short run and long run effects of behavioral interventions experimental evidence from energy conservation we document three remarkable features of the opower program in which social comparison based home energy reports are repeatedly mailed to more than six million households nationwide first initial reports cause high frequency action and backsliding but these cycles attenuate over time second if reports are discontinued after two years effects are relatively persistent decaying at 10 20 percent per year third consumers are slow to habituate they continue to respond to repeated treatment even after two years we show that the previous conservative assumptions about post intervention persistence had dramatically understated cost effectiveness and illustrate how empirical estimates can optimize program design jel d12 d83 l94 q41

an analysis of the use of accounting and market measures of performance in executive compensation contracts prior research has provided useful insights into the structure of compensation plans and their incentive effects however one important limitation of these studies is the virtual absence of any cross sectional analyses of the attributes of compensation contracts 2 this absence is related in part to the problems associated with controlling for other factors that affect compensation that is compensation contracts are

the value of precontract information about an agent s ability in the presence of moral hazard and adverse selection we analyze the expected value of information about an agent s type in the presence of moral hazard and adverse selection information about the agent s type enables the principal to sort screen agents of different types the value of the information decreases in the variability of output and the agent s risk aversion two factors that are typically associated with the severity of the moral hazard problem however the value of the information about agent type first increases but ultimately decreases in the severity of adverse selection the decrease comes about because the means available to the principal to induce effort namely the pay performance sensitivity must also be used to sort screen agents and these two goals conflict this decline in value occurs despite the monotonically increasing importance of the information in determining the principal s expected profits further we show that the peak value of information occurs at a predictable level of adverse selection these results imply that over some range the importance of the information will be increasing and the value of the information will be simultaneously decreasing in the severity of adverse selection

reminders and recidivism using administrative data to characterize nonfilers and conduct eitc outreach this project uses third party information reporting and population level administrative tax data to identify the population of nonfilers this population consists of individuals who do not file a tax return despite having income reported by third parties to the united states internal revenue service after identifying and characterizing this population we identified nonfilers who may have been eligible for earned income tax credit eitc benefits using an experimental sample drawn from this population of potentially eitc eligible nonfilers we conducted two randomized controlled trials to test multiple hypotheses regarding inattention and recency effects in these low income earners tax filing decisions

how do consumers avoid penalty fees evidence from credit cards using data from multiple card issuers we show that the most common penalty fee type incurred by credit card holders late payment fees declines sharply over the first few months of card life thi

the use of accounting and security price measures of performance in managerial compensation contracts a discussion abstract it is commonly observed that the compensation paid to senior level executives depends on both accounting and security price measures of performance the articles by kim and suh bushman and indjejikian and sloan which i have been invited to discuss examine the issue of how much weight to place on these two measures in the contract the first two papers analyze the role that earnings can play in removing the noise in stock price in a rational expectations pricing model the sloan paper analytically and empirically examines the role that earnings can play in removing macroeconomic factors from stock price

salience and consumer choice we present a theory of context dependent choice in which a consumer s attention is drawn to salient attributes of goods such as quality or price an attribute is salient for a good when it stands out among the good s attributes relative to that attribute s average level in the choice set or more broadly the choice context consumers attach disproportionately high weight to salient attributes and their choices are tilted toward goods with higher quality price ratios the model accounts for a variety of disparate evidence including decoy effects and context dependent willingness to pay it also suggests a novel theory of misleading sales

the fewer the better number of goals and savings behavior abstract this article examines the effect of the number of goals on consumers savings behavior drawing from research on implementation intention the authors show that under certain conditions presenting a single savings goal leads to greater savings intention and actual savings than presenting multiple savings goals multiple goals typically evoke trade offs among competing goals and thus increase the likelihood that people will remain in a deliberative mind set and defer actions in contrast the authors propose and demonstrate that a single goal evokes a stronger implementation intention which in turn has a greater effect on behavior change they also show that the advantage of a single goal over multiple goals on saving is attenuated when saving is easier to implement or when the multiple savings goals are integrated rather than competing among themselves theoretical and practical implications are discussed

accounting income stock price and managerial compensation abstract this paper employs an agency model where a manager has a two dimensional action choice to study how the information content of earnings affects the design of compensation contracts based on earnings and price price is modeled as an endogenous variable that reflects all available information including earnings two settings are contrasted in the first earnings and price reflect the same underlying information about firm value while in the second earnings reflect a subset of the information reflected in price it is shown that differences in information content substantially alter the characteristics of compensation contracts based on earnings and price

are incentive contracts rigged by powerful ceos we argue that some powerful ceos induce boards to shift the weight on performance measures toward the better performing measures thereby rigging incentive pay a simple model formalizes this intuition and gives an explicit structural form on the rigged incentive portion of ceo wage function using u s data we find support for the model s predictions rigging accounts for at least 10 of the compensation to performance sensitivity and it increases with ceo human capital and firm volatility moreover a firm with rigged incentive pay that is one standard deviation above the mean faces a subsequent decrease of 4 8 in firm value and 7 5 in operating return on assets

prospect theory as efficient perceptual distortion the paper proposes a theory of efficient perceptual distortions in which the statistical relation between subjective perceptions and the objective state minimizes the error of the state estimate subject to a constraint on information processing capacity the theory is shown to account for observed limits to the accuracy of visual perception and then postulated to apply to perception of options in economic choice situations as well when applied to choice between lotteries it implies reference dependent valuations and predicts both risk aversion with respect to gains and risk seeking with respect to losses as in the prospect theory of kahneman and tversky 1979

the s shaped value function as a constrained optimum almost since the expected utility hypothesis euh was first introduced evidence has accumulated that decision makers systematically violate it in various ways one early response to the evidence was to develop ad hoc alternatives the best known of which is prospect theory daniel kahneman and amos tversky 1979 1 more recent responses have relaxed the independence axiom or other axioms underlying the euh see mark machina 1987 for a very readable survey of the evidence and responses despite the high intellectual caliber of much of this work there is an important sense in which it has been retrograde theory is adjusted to the evidence by weakening not strengthening its predictive power in other areas such as the theory of the firm or the theory of money economists have followed a different research strategy more subtle constraints such as transactions costs or informational imperfections are sought to explain data that seem anomalous according to received theory when successful such a strategy more clearly delineates the realm in which the older theory is applicable and makes new testable predictions outside that realm thus theory is progressively strengthened to my knowledge only jonathan leland 1986 1988 has adopted such a progressive strategy in a theoretical investigation of euh anomalies the key assumptions of his approximate expected utility theory aeu are 1 inexperience and or cognitive limitations make the true utility function inaccessible so some approximation must be used but 2 decision makers efficiently allocate finite resources so as to minimize the resulting errors he formalizes these assumptions which he applies to probability assessments as well as to utilities in terms of a constraint on the number n of steps allowed in a step function approximation with the optimal approximation defined as that minimizing expected squared error his aeu theory is able to explain many of the major euh anomalies and reduces to ordinary euh in areas in which relevant experience accumulates for example in competitive markets as noted by peter knez vernon l smith and arlington w williams 1985 and don l coursey john l hovis and william d schultze 1987 the prevalence and magnitude of anomalies seems to decline in such settings the purpose of this note is to present a variant on leland s aeu i propose an approximate utility function or value function in which utility increments are weighted by a sensitivity function the resource constraint is that overall sensitivity is limited but prior to observable decisions it can be allocated freely along the continuum of potential wealth increments my approach has three advantages it predicts an s shaped value function when agents maximize expected sensitivity at actual choice opportunities given very plausible assumptions regarding the distribution of such opportunities recall that the assumption that decision makers maximize an s shaped value function such as that depicted in figure 1 is the centerpiece of prospect theory economics department university of california santa cruz ca 95064 i appreciate the comments of jonathan leland amos tversky and two anonymous referees on earlier drafts of this paper the usual caveat definitely applies ithe authors of prospect theory call their model descriptive as opposed to normative but do not consider it ad hoc because of its connections with the psychophysical literature however no substantial connections of prospect theory with generally accepted economic principles for example optimality have previously been demonstrated it is in this narrow economist s sense that i use the term ad hoc the more recent work of ariel rubinstein 1988 and tversky and kahneman 1986 underscores the difficulty of reconciling such a descriptive approach to the expected utility hypothesis

monetary policy for inattentive economies we offer a contribution to the analysis of optimal monetary policy we begin with a critical assessment of the existing literature arguing that most work is based on implausible models of inflation output dynamics we then suggest that this problem may be solved with some recent behavioral models which assume that price setters are slow to incorporate macroeconomic information into the prices they set a specific such model is developed and used to derive optimal policy in response to shocks to productivity and aggregate demand optimal policy is price level targeting base drift in the price level which is implicit in the inflation targeting regimes currently used in many central banks is not desirable in this model when shocks to desired markups are added optimal policy is flexible targeting of the price level that is the central bank should allow the price level to deviate from its target for a while in response to these supply shocks but it should eventually return the price level to its target path optimal policy can also be described as an elastic price standard the central bank allows the price level to deviate from its target when output is expected to deviate from its natural rate

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

nudges at the dentist abstract we implement a field experiment to study the impact of reminder messages on dental health prevention patients who are due to schedule a check up receive no reminder a neutral reminder postcard or reminders including additional information on the benefits of prevention our results document a strong impact of reminders within one month after receiving a reminder the fraction of patients who make a check up appointment more than doubles the effect declines slightly over time but remains economically and statistically significant including additional information in the reminders does not significantly increase response rates relative to the neutral reminder finally our data indicates that applying reminders repeatedly neither strengthens nor weakens their effects

alcohol and self control a field experiment in india this paper studies alcohol consumption among low income workers in india in a 3 week field experiment the majority of 229 cycle rickshaw drivers were willing to forgo substantial monetary payments in order to set incentives for themselves to remain sober thus exhibiting demand for commitment to sobriety randomly receiving sobriety incentives significantly reduced daytime drinking while leaving overall drinking unchanged i find no evidence of higher daytime sobriety significantly changing labor supply productivity or earnings in contrast increasing sobriety raised savings by 50 percent an effect that does not appear to be solely explained by changes in income net of alcohol expenditures

optimal managerial contracts and equilibrium security prices recent developments in economic theory have focused attention on efficient methods for providing incentives within a corporation especially to top management jensen meckling 12 have examined some implications of incentive or agency problems for corporate finance in this paper we combine a simple model of security market equilibrium with that of an optimal managerial incentive contract using results of harris raviv 8 and holmstrom 9 we provide a rationale for including security prices in the managerial incentive contracts of publicly held firms in this model we also show that non systematic diversifiable risks will be considered in the capital budgeting decisions of a managerial firm operated in the interests of its stockholders this is in contrast to the implication of the arbitrage pricing theory a similar result follows from the capital asset pricing model which abstracts from incentive problems and suggests that only systematic risks ought to be considered the optimal contract model of the corporation takes the following view of the firm since decision makers within a firm are not sole owners of the business but employed agents the decisions which they make depend on the incentives which the organization provides these incentives are embodied explicitly in employment contracts and implicitly through the threat of dismissal or effect on reputation the contract whether explicit or not describes the decision maker s anticipation of the consequences to him conditional on various observable outcomes these outcomes are used to provide information useful in determining whether he did his job properly in the simplest optimal contract scenario there is a single principal and a single agent whose decision concerns the level of effort he expends the level of effort affects the level of output of the firm but not unambiguously because the output is also governed by other stochastic elements as a result some information about the agent s level of effort can be inferred

a dual self model of impulse control we propose that a simple dual self model gives a unified explanation for several empirical regularities including the apparent time inconsistency that has motivated models of quasi hyperbolic discounting and rabin s paradox of risk aversion in the large and small the model also implies that self control costs imply excess delay as in the o donoghue and rabin models of quasi hyperbolic utility and it explains experimental evidence that increased cognitive load makes temptations harder to resist the base version of our model is consistent with the gul pesendorfer axioms but we argue that these axioms must be relaxed to account for the effect of cognitive load

the cost of convenience transaction costs bargaining power and savings account use in kenya individuals across the world use high transaction cost savings devices even when lower cost technologies are available high costs may help savers protect resources from the demands of others i investigate this hypothesis by randomly assigning atm cards to 1 100 newly opened bank accounts in rural kenya these cards reduced withdrawal fees by 50 percent while the cards increased overall account use the positive treatment effect is entirely driven by joint and male owned accounts i find evidence that these differences are driven by intrahousehold issues household bargaining power is a key mediator of the atm treatment effect

how basic are behavioral biases evidence from capuchin monkey trading behavior behavioral economics has demonstrated systematic decision making biases in both lab and field data do these biases extend across contexts cultures or even species we investigate this question by introducing fiat currency and trade to a colony of capuchin monkeys and recovering their preferences over a range of goods and gambles we show that capuchins react rationally to both price and wealth shocks but display several hallmark biases when faced with gambles including reference dependence and loss aversion given our capuchins inexperience with money and trade these results suggest that loss aversion extends beyond humans and may be innate rather than learned

geographic income shifting by multinational corporations in response to tax rate changes we investigate geographic income shifting by 191 u s multinational corporations in response to worldwide changes in tax rates during 1984 90 between 1984 and 1986 the united kingdom reduced corporate tax rates from a maximum of 45 to 35 and in 1985 france reduced rates from 50 to 45 following these reductions in european rates the united states reduced top corporate tax rates from 46 to 34 between 1986 and 1988 canadian rates increased between 1984 and 1986 and then decreased through 1989 beginning in 1988 numerous countries enacted tax cuts apparently in response to those that occurred earlier in other countries as discussed in section 3 differential changes in tax rates provide incentives for geographic income shifting by multinational firms we identify two subperiods during 1984 90 in which relative tax rate changes

the abcs of financial education experimental evidence on attitudes behavior and cognitive biases this paper uses a large scale field experiment in india to study attitudinal behavioral and cognitive constraints that stymie the link between financial education and financial outcomes the study complements financial education with i participant classroom motivation with pay for performance on a knowledge test ii intensity of treatment with personalized financial counseling and iii behavioral nudges with financial goal setting the analysis finds no impact of pay for performance but significant effects of both counseling and goal setting on real financial outcomes these results identify important complements to financial education that can bridge the gap between financial knowledge and financial behavior change

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

a cue theory of consumption psychological experiments demonstrate that repeated pairings of a cue and a consumption good eventually create cue based complementarities the presence of the cue raises the marginal utility derived from consumption in this paper such dynamic preferences are embedded in a rational choice model behavior that arises from this model is characterized by endogenous cue sensitivities costly cue management commitment and cue based spikes in impatience the model is used to understand addictive habit forming behaviors and marketing the model explains why preferences change rapidly from moment to moment why temptations should sometimes be avoided and how firms package and position goods

earnings and price based compensation contracts in the presence of discretionary trading and incomplete contracting abstract the paper analyzes the use of reported accounting earnings and price as a basis for compensating a manager when he trades on private information and share price is set rationally based on privately held information publicly available and contractible information and publicly available but noncontractible information in addition we analyze the comparative statics of the compensation on reported earnings and price with respect to changes in the economy

optimal ceo compensation some equivalence results i study optimal managerial contracts in two contracting environments when the investment return is contractible an optimal contract combines a base salary golden parachute and bonus when the return is not contractible two types of optimal contracts are studied a contract with restricted stock and a contract with stock options these three types of contracts are equivalent they implement the same outcome and lead to the same expected payoff for the manager implying that the choice of contractual form is irrelevant in the environment i study i suggest directions of research for the relevance of different contractual forms

heard it through the grapevine the direct and network effects of a tax enforcement field experiment on firms abstract tax enforcement may have deterrent effects that extend beyond directly treated taxpayers but evidence of such deterrent effects for major sources of revenue is limited this paper studies the effects of a large scale field experiment on employer deposits that make up most u s tax collections in person visits by revenue officers have a large direct effect on visited firms tax deposits the other clients of visited firms tax preparers also deposit more tax a network effect that suggests preparers disseminate information aggregating over all links this network effect accounts for 1 2 times as much revenue as the direct effect letters conveying the same message are found to have much smaller direct effects and no measurable network effects

a model of focusing in economic choice we present a generally applicable theory of focusing based on the hypothesis that a person focuses more on and hence overweights attributes in which her options dier more our model predicts that the decisionmaker is too prone to choose options with concentrated advantages relative to alternatives but maximizes utility when the advantages and disadvantages of alternatives are equally concentrated in intertemporal choice because the relative concentrations of an option s costs and benets can be dierent from the perspective of a single period and the perspective of the entire choice problem the decisionmaker often exhibits a form of time inconsistency she is present biased when the costs of current misbehavior are distributed over many future dates such as in harmful consumption but future biased when the benet of many

minding small change among small firms in kenya abstract many micro enterprises in kenya have low productivity we focus on one particular business decision which may indicate low productivity keeping enough change on hand to break larger bills this is a surprisingly large problem our estimates suggest that the average firm loses approximately 5 8 of total profits because they do not have enough change we conducted two experiments to shed light on why this happens surveying firms weekly about lost sales thereby increasing the salience of change and explicitly informing firms about lost sales we find that both interventions significantly altered change management and reduced lost sales this largely rules out many potential explanations such as the risk of theft or the costs of holding change being too high one explanation consistent with firms response to the survey and information on their lost sales is that firms were not perfectly attentive to change management prior to the interventions

dynamic portfolio choice and asset pricing with narrow framing and probability weighting this paper shows that the framework proposed by barberis and huang 2009 to incorporate narrow framing and loss aversion into dynamic models of portfolio choice and asset pricing can be extended to also account for probability weighting and for a value function that is convex on losses and concave on gains we show that the addition of probability weighting and a convex concave value function reinforces previous applications of narrow framing and cumulative prospect theory to understanding the stock market non participation puzzle and the equity premium puzzle moreover we show that a convex concave value function generates new wealth effects that are consistent with empirical observations on stock market participation

barriers to formal saving micro and macroeconomic effects this paper examines different barriers to formal saving considering various interventions and their possible effects at microeconomic and macroeconomic levels it presents a comprehensive review of the literature based on a detailed classification of the barriers associated with supply side factors related to access to financial products and demand side barriers related to the use and frequency of use of those products the paper concludes that this classification and analysis contributes to a fuller understanding of the question of financial inclusion and how to achieve it

nudging farmers to use fertilizer theory and experimental evidence from kenya we model farmers as facing small fixed costs of purchasing fertil izer and assume some are stochastically present biased and not fully sophisticated about this bias such farmers may procrastinate post poning fertilizer purchases until later periods when they may be too impatient to purchase fertilizer consistent with the model many farmers in western kenya fail to take advantage of apparently profit able fertilizer investments but they do invest in response to small time limited discounts on the cost of acquiring fertilizer free deliv ery just after harvest calibration suggests that this policy can yield higher welfare than either laissez faire policies or heavy subsidies

a contracting perspective on earnings quality abstract this paper analyzes the impact of signal to noise ratios and the autocorrelation of a performance measure on the principal s welfare in dynamic agencies with renegotiation we consider the impact of changes in the persistent transitory and reversible components of accounting earnings on its usefulness in valuation versus contracting increasing the persistent components and reducing the reversible components are generally desirable for valuation but not for contracting eliminating transitory components of earnings is generally desirable for valuation but not necessarily for contracting we discuss the contracting implications of differences in the autocorrelations of accounting earnings versus stock returns

price and control elasticities of demand for savings assumptions about individual demand for savings underlie workhorse models of macroeconomics intertemporal choice and intra household bargaining and policy interventions in a randomized experiment a philippine bank tested sensitivity to interest rates and account ownership requirements in 10 000 door to door solicitations for a commitment savings account the price elasticity is not significantly different than zero for both the full sample and subgroups of plausibly marginal savers and it has an upper bound that implies an elasticity of intertemporal substitution below the 0 7 emphasized by attanasio and weber 2010 nor do we find sensitivity to ownership requirements in the full sample or sub groups

dynamic corrective taxes with time varying salience abstract economies across the globe are becoming increasingly cashless and many payment systems have become automated driving a temporal wedge between consumption and payment and generally making the costs of consumption intermittently salient since this inconsistent price salience alters demand elasticities it is a particular concern for goods that generate externalities and the price based policies deployed to address them this paper derives optimal dynamic corrective taxes for suboptimal and persistent consumption decisions these taxes depend on the agent s ability to commit to a future consumption path we also characterize a second best constant tax and the excess burden from time invariant tax rates when calibrated to u s residential electricity consumption the model shows that the second best constant tax is more than twice the marginal external cost of carbon emissions

learning through noticing theory and experimental evidence in farming existing learning models attribute failures to learn to a lack of data we model a different barrier given the large number of dimensions one could focus on when using a technology people may fail to learn because they failed to notice important features of the data they possess we conduct a field experiment with seaweed farmers to test a model of learning through noticing we find evidence of a failure to notice on some dimensions farmers do not even know the value of their own input interestingly trials show that these dimensions are the ones that farmers fail to optimize furthermore consistent with the model we find that simply having access to the experimental data does not induce learning instead farmers change behavior only when presented with summaries that highlight the overlooked dimensions we also draw out the implications of learning through noticing for technology adoption agricultural extension and the meaning of human capital we thank andy newman matthew rabin and andrei shleifer for helpful comments as well as seminar participants at the behavioural decision theory conference berkeley bu and harvard mit

self control and the theory of consumption to study the behavior of agents who are susceptible to temptation in infinite horizon consumption problems under uncertainty we define and characterize dynamic self control dsc preferences dsc preferences are recursive and separable in economies with dsc agents equilibria exist but may be inefficient in such equilibria steady state consumption is independent of initial endowments and increases in self control increasing the preference for commitment while keeping self control constant increases the equity premium removing nonbinding constraints changes equilibrium allocations and prices debt contracts can be sustained even if the only feasible punishment for default is the termination of the contract

accounting earnings and top executive compensation abstract this paper investigates the role of accounting earnings in top executive compensation contracts it provides evidence in support of the hypothesis that earnings based incentives help shield executives from market wide factors in stock prices the paper demonstrates that earnings reflect firm specific changes in value but are less sensitive to market wide movements in equity values as a result the inclusion of earnings based performance measures in executive compensation contracts helps shield executives from fluctuations in firm value that are beyond their control the hypothesis is shown to explain cross sectional variation in the use of earnings based incentives

incentive efficiency of compensation based on accounting and market performance abstract this paper analyzes how earnings and price are used in executive compensation contracts risk averse shareholders collectively design a contract and individually trade in the stock market in the optimal linear contract the use of earnings and price depends critically on incentive efficiency i e how precisely the measures convey the true outcome the relative weight of price to earnings exaggerates the true relative importance of price because price impounds traders overall information while its informational value lies in the incremental information it provides the use of price allows shareholders to share trading risks with managers

limited attention and income distribution economists have long been interested in the idea that there is a direct circular relation between poverty and low productivity and not just one that is mediated by market failures usually in asset markets the nutrition based efficiency wage model partha dasgupta and debraj ray 1987 is the canonical example of models where this happens however it has been variously suggested see for example t n srinivasan 1994 that the link from nutrition to productivity and especially the link from productivity to nutrition is too weak to be any more than a small part of the story partha dasgupta himself acknowledges this when he writes nutrition productivity construct provides a metaphor for an economic environment harboring poverty traps partha dasgupta 1997 page 5 we propose an alternative approach to this question based on the idea that attention is a scarce resource that is important for productivity specifically people may not be able to fully attend to their jobs if they are also worrying about problems at home and being distracted in this way reduces productivity but not paying attention at home is also costly early symptoms of a child s sickness may go unnoticed water may run out at the end of the day kerosene for lighting lamps at home might run out and make it hard to do homework etc finally the extent to which home life distracts depends on the nature of home life specifically certain goods e g a good baby sitter a 24 hour piped water supply a connection to a power supply grid can reduce the extent of home life distraction these three assumptions generate an interesting relation between income and productivity that is at the core of our model the non poor in this model by virtue of owning distraction saving goods and services at home are able to focus more on their work hence they will be more productive at work and will be able to afford more distraction saving goods this simple two way relationship between in this abstract was borrowed from another version of this item

learning through noticing theory and evidence from a field experiment we consider a model of technological learning under which people learn through noticing they choose which input dimensions to attend to and subsequently learn about from available data using this model we show how people with a great deal of experience may persistently be off the production frontier because they fail to notice important features of the data they possess we also develop predictions on when these learning failures are likely to occur as well as on the types of interventions that can help people learn we test the model s predictions in a field experiment with seaweed farmers the survey data reveal that these farmers do not attend to pod size a particular input dimension experimental trials suggest that farmers are particularly far from optimizing this dimension furthermore consistent with the model we find that simply having access to the experimental data does not induce learning instead behavioral changes occur only after the farmers are presented with summaries that highlight previously unattended to relationships in the data jel codes d03 d83 o13 o14 o30 q16

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

managerial expertise private information and pay performance sensitivity this paper characterizes optimal pay performance sensitivities of compensation contracts for managers who have private information about their skills and those skills affect their outside employment opportunities the model presumes that the rate at which a manager s opportunity wage increases in his expertise depends on the nature of that expertise i e whether it is general or firm specific the analysis demonstrates that when managerial expertise is largely firm specific general the optimal pay performance sensitivity is lower higher than its optimal value in a benchmark setting of symmetric information furthermore when managerial skills are largely firm specific general the optimal pay performance sensitivity decreases increases as managerial skills become a more important determinant of firm performance unlike the standard agency theoretic prediction of a negative trade off between risk and pay performance sensitivity this paper identifies plausible circumstances under which risk and incentives are positively associated in addition to providing an explanation for why empirical tests of risk incentive relationships have produced mixed results the analysis generates insights that can be useful in guiding future empirical research

evolution of time preferences and attitudes toward risk this paper explores a general model of the evolution and adaption of hedonic utility it is shown that optimal utility will be increasing strongly in regions where choices have to be made often and decision mistakes have a severe impact on fitness several applications are suggested in the context of intertemporal preferences the model offers an evolutionary explanation for the existence of conflicting short and long run interests that lead to dynamic inconsistency concerning attitudes toward risk an evolutionary explanation is given for s shaped value functions that adjust to the decision maker s environment jel d81 d83 this paper is based on the hypothesis that individual decisions are guided by hedonic util ity an individual who faces several alternatives will choose the one that promises the greatest pleasure or happiness then given that the properties of a hedonic utility function determine individual behavior and individual behavior determines biological fitness evolutionary forces will have shaped our utility during the long time in which the modern human being evolved in this sense hedonic utility can be considered as a reward system that induces individuals to make optimal choices a view that is supported both by theory and evidence from neuroscience 1 as irving kupfermann eric r kandel and susan iversen 2000 express it pleasure is unques tionably a key factor in controlling the motivated behaviors of humans 1007 for the econo mist the interesting question is then about the properties of the evolutionary optimal reward system and how these properties adapt to the environment in which individuals make choices the present paper reconsiders and solves a general model of the evolution of utility suggested by arthur j robson 2001a which predicts how cardinal properties of utility functions should adapt to the decision environment it turns out that the optimal utility function will be steep in regions where decisions have to be made frequently and where wrong decisions would lead to large losses in fitness in those regions even small changes in consumption will cause large changes in happiness the evolution of context specific utility functions is then shown to be optimal whenever the decisions our ancestors had to make arrived in distinct choice situations the model can also be extended to incorporate learning about evolutionary relevant attributes of available options

dynamic salience with intermittent billing evidence from smart electricity meters abstract digital tracking and the proliferation of automated payments have made intermittent billing more commonplace and the frequency at which consumers receive price quantity or total expenditure signals may distort their choices while this category of goods has expanded from household utilities toll road access and software downloads to standard consumption goods paid by credit card or other bill me later type systems we know surprisingly little about how these payment patterns affect decisions this paper exploits hourly household electricity consumption data collected by smart electricity meters to examine dynamic consumer behavior under intermittent expenditure signals households reduce consumption by 0 6 1 following receipt of an electricity bill but the response varies considerably by household type and season our results also suggest that spending reminders can reduce peak demand particularly during summer months we discuss the implications for energy policy when intermittent billing combined with inattention induces consumption cycles

nudges that hurt those already hurting distributional and unintended effects of salience nudges abstract nudges are becoming increasingly popular policy tools yet distributional effects of nudges are largely unknown we first design an economic laboratory experiment to examine the incidence of an opportunity cost reminder nudge a salience nudge designed to curb spending while accounting for heterogeneity in emotional responses specifically the pain of paying pain of paying is optimal for unconflicted consumers but too low for spendthrifts and too high for tightwads causing sub optimal spending our empirical results imply the nudge increases pain of paying for tightwads thereby reducing spending by tightwads who already spend too little while it entirely fails to reduce the spending of those who would have benefited from a spending reduction spendthrifts overall the nudge therefore might reduce consumer welfare we next examine if the adverse impact of the opportunity cost reminder nudge is explained by a general tendency for all nudges to exacerbate peoples underlying spending preferences we specifically test whether a salience nudge designed to boost spending correspondingly adversely affects spendthrifts we unexpectedly find that subjects perceive the spending booster nudge as a spending reminder which again reduces spending by tightwads only while not affecting spending by the other consumer types our results highlight two important aspects of salience nudges given the complexity of consumer emotions and information processing salience nudges can have undesired welfare effects and the direction of their impact may be the opposite of what was intended

a memory based model of bounded rationality in order to investigate the impact of limited memory on human behavior i develop a model of memory grounded in psychological and biological research i assume that people take their memories as accurate and use them to make inferences the resulting model predicts both over and underreaction but provides enough structure to predict when each effect dominates i then use this framework to study the consumption decision the results match empirical work on consumption predictability as well as differences in the marginal propensity to consume from different income streams most importantly because it ties the extent of bias to a measurable aspect of the stochastic process being forecasted the model makes testable empirical predictions

tying odysseus to the mast evidence from a commitment savings product in the philippines we designed a commitment savings product for a philippine bank and implemented it using a randomized control methodology the savings product was intended for individuals who want to commit now to restrict access to their savings and who were sophisticated enough to engage in such a mechanism we conducted a baseline survey on 1777 existing or former clients of a bank one month later we offered the commitment product to a randomly chosen subset of 710 clients 202 28 4 percent accepted the offer and opened the account in the baseline survey we asked hypothetical time discounting questions women who exhibited a lower discount rate for future relative to current trade offs and hence potentially have a preference for commitment were indeed significantly more likely to open the commitment savings account after twelve months average savings balances increased by 81 percentage points for those clients assigned to the treatment group relative to those assigned to the control group we conclude that the savings response represents a lasting change in savings and not merely a short term response to a new product

regulation by shaming deterrence effects of publicizing violations of workplace safety and health laws publicizing firms socially undesirable actions may enhance firms incentives to avoid such actions in 2009 the occupational safety and health administration osha began issuing press releases about facilities that violated safety and health regulations using quasi random variation arising from a cutoff rule osha followed i find that publicizing a facility s violations led other facilities to substantially improve their compliance and experience fewer occupational injuries osha would need to conduct 210 additional inspections to achieve the same improvement in compliance as achieved with a single press release evidence suggests that employers improve compliance to avoid costly responses from workers

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting