employer matching and 401 k saving evidence from the health and retirement study abstract employer matching of employee 401 k contributions is often touted as a powerful incentive to save for retirement and is a key component in pension plan design in the united states using detailed administrative contribution earnings and pension plan data from the health and retirement study this analysis formulates a life cycle consistent econometric specification of 401 k saving and estimates the determinants of saving accounting for non linearities in the household budget set induced by matching the participation estimates indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401 k participation by 5 percentage points the parametric and semi parametric estimates for saving indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401 k saving by 365 in 1991 dollars overall the analysis reveals that the 401 k saving response to matching is quite inelastic and hence matching is a rather poor policy instrument with which to raise retirement saving

forecasting hourly electricity prices using armax garch models an application to miso hubs abstract the recent deregulation of the electricity industry and reliance on competitive wholesale markets has generated significant volatility in wholesale electricity prices given the importance of short term price forecasts in this new environment this paper estimates and evaluates the forecasting performance of four armax garch models for five miso pricing hubs cinergy first energy illinois michigan and minnesota using hourly data from june 1 2006 to october 6 2007 our empirical results reveal three important patterns a electricity price volatility is regional and the optimum volatility model depends in part on the hub location the forecast horizon and regulated versus unregulated status of the market b the aparch model performs well in hubs in deregulated states and c volatility dynamics in regulated states are better captured by a simple garch model and thus are less complex

answering the skeptics yes standard volatility models do provide accurate forecasts a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using arch and stochastic volatility models while most of these studies have documented highly significant in sample parameter estimates and pronounced intertemporal volatility persistence traditional ex post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts contrary to this contention we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications new methods for improved ex post interdaily volatility measurements based on high frequency intradaily data are also discussed

thomas schelling s contributions to game theory thomas schelling brings game theory to life and does so in two senses first instead of the abstract and austere beauty of mathematical theorems that we find in most of game theory going back to von neumann morgenstern and nash he gives us lively and memorable examples to explain and illustrate his ideas schelling s 1960a p 21 pictures of bargaining when two dynamite trucks meet on a road wide enough for one who backs up and of tacit coordination can two people who are told to meet each other in new york city on a specified day but are not told the place or time and are unable to contact each other successfully meet 1960a pp 55 56 are among the best known but my personal favorite is schelling s 1965 pp 66 67 example of the strategy of salami tactics for defeating threats by incremental escalation

public good differentiation and the intensity of tax competition we show that in a setting where tax competition promotes efficiency variation in the extent to which firms can use public goods to reduce costs brings about a reduction in the intensity of tax competition this in turn brings about a loss of efficiency in this environment a minimum tax counters the reduction in the intensity of tax competition thereby enhancing efficiency split the difference tax harmonization also potentially enhances efficiency but would not be agreed upon by governments because it lowers the payoff to at least one of them this paper also presents an explanation for how traditionally high tax countries have continued to set taxes at a relatively high rate even as markets have become more integrated

do tax incentives for saving in pension accounts cause debt accumulation evidence from danish register data abstract this paper applies a quasi experimental research design on a danish 2010 policy that reduced tax incentives for saving in annuity pension schemes to show significant substitution of savings from retirement accounts to gross debt repayments we find that for every 1 danish currency unit reduction in retirement savings 31 cents goes to debt repayments taking into account all types of savings we find full crowding out consistent with previous findings we document that the effect is driven by a minority about 23 percent who actively rebalance their savings

structural estimation of stock market participation costs abstract this paper develops and estimates a dynamic model of stock market participation where consumers decisions regarding stock market participation are influenced by participation costs the practical significance of the participation costs is considered as being a channel through which financial education programs can affect consumers investment decisions using household data from the panel study of income dynamics i estimate the magnitude of the participation cost allowing for individual heterogeneity in it the results show the average stock market participation cost is about 4 6 of labor income however it varies substantially over consumers life the model successfully predicts the level of the observed participation rate and the increasing pattern of stock market participation over the consumers life cycle

a theory of interregional tax competition a general equilibrium model is constructed to study tax competition where local governments compete for capital by holding down property tax rates and public expenditure levels an exact definition of tax competition is provided and both the existence and nonexistence of tax competition are shown to be theoretically possible it is argued however that tax competition must occur under empirically reasonable conditions inefficiency in public production is also explicitly modeled the amount of capital used to produce a given level of public service output is shown to be greater than that which is required to minimize costs evaluated at the prices facing private firms

economics coursework and long term behavior and experiences of college graduates in labor markets and personal finance i introduction if economics is a unique way of thinking as many economists like to claim some level of coursework in economics may provide enough specific knowledge and skills to lead students to make different choices in their adult roles as consumers workers and voters citizens of course the same could be claimed for training in business and other areas even though or perhaps because it could be argued that most content and training in business courses is more applied and pragmatic than what is presented in economics courses some empirical evidence though not really a great deal suggests that training in economics and business is associated with different adult behaviors and outcomes for example golec 1996 finds that mutual funds perform better if mutual fund managers have an mba and chevalier and ellison 1999 also report a positive correlation between mutual fund performance and the educational background of mutual fund managers black sanders and taylor 2003 found that economics majors earn almost 20 more than graduates in other social science majors and about 10 more than those who major in business administration in fields with large numbers of graduates they find that only engineering majors earn more than economics majors similarly hecker 1995 reported that males majoring in economics had median earnings 3 higher than all majors for the age cohort of 25 34 and 53 more than average for the cohort aged 35 44 craft and baker 2003 find that lawyers with an undergraduate major in economics earn 13 more than otherwise comparable lawyers with other undergraduate majors and economics is the only major with a statistically significant effect on earnings 1 hamermesh and donald 2008 however find that higher earnings by economics majors are partly due to economics majors working more hours than others the relationship between financial literacy knowledge and adult behavior and outcomes in financial markets has been addressed in several recent studies many sponsored by federal reserve banks hilgert hogarth and beverly 2003 and braunstein and welch 2002 find that knowledge about credit saving and investment is significantly related to recommended financial practices in cash flow management credit management saving and investment unfortunately there is also evidence of widespread financial illiteracy in u s households and particularly among elderly women see lusardi and mitchell 2007 2008 employee education programs have been found to affect workers savings retirement and investment behaviors bayer bernheim and scholz 2009 bernheim and garret 2003 state mandates for precollege education in personal finance appear to succeed in at least exposing students to more information and sources on financial education and students from states with such mandates report higher levels of savings and net worth as adults bernheim garrett and maki 2001 tennyson and nguyen 2001 much less research exists linking college coursework or majoring in economics to personal finance outcomes 2 but christiansen joensen and rangvid 2008 find that those trained in economics in college courses or employee education programs are more likely to invest in stocks than those who receive training in other areas guiso and jappelli 2005 report that among college graduates having a degree in economics is positively associated with knowledge about financial assets chert and volpe 1998 107 concluded that business majors had better knowledge about personal financial literacy than other students but that in general college students were not knowledgeable about personal finance 3 in this paper we use a large and unique data set to investigate the relationships between taking college coursework in economics or majoring in economics with long term labor market and personal finance behaviors and outcomes our information on long term behaviors and outcomes is drawn from a detailed questionnaire we mailed in january 2003 to over 25 000 graduates who attended four public universities in 1976 1986 or 1996

financial literacy and mortgage equity withdrawals abstract mortgage equity withdrawals mew are correlated with covariates consistent with a permanent income framework augmented for credit constraints we assess linkages between mew and financial literacy education using the health and retirement study hrs and panel study of income dynamics psid we find that the financially literate are 3 5 percentage points less likely to withdraw housing equity via non home equity loan mortgages using the hrs while college graduates are 5 percentage points less likely than those without a high school degree in the psid among those withdrawing housing equity in the psid college graduates extract significantly less equity and are less likely to have high levels of housing leverage after doing so

asymmetric competition among nation states a differential game approach abstract this paper analyzes the impact of foreign investments on a small country s economy in the context of international competition to that end we model tax and public input competition within a differential game framework between two unequally sized countries the model accounts for the widely recognized characteristic that small states are more flexible in their political decision making than larger countries however we also acknowledge that small size is associated with limited institutional capacity in the provision of public services the model shows that the long term outcome of international competition crucially depends on the degree of capital mobility in particular we show that flexibility mitigates against but does not eliminate the likelihood of collapse in a small economy finally we note that the beneficial effect of flexibility in a small state increases with its inefficiency in providing public services and with the degree of international openness

discrete time volatility forecasting with persistent leverage effect and the link with continuous time volatility modeling we first propose a reduced form model in discrete time for s p 500 volatility showing that the forecasting performance can be significantly improved by introducing a persistent leverage effect with a long range dependence similar to that of volatility itself we also find a strongly significant positive impact of lagged jumps on volatility which however is absorbed more quickly we then estimate continuous time stochastic volatility models that are able to reproduce the statistical features captured by the discrete time model we show that a single factor model driven by a fractional brownian motion is unable to reproduce the volatility dynamics observed in the data while a multifactor markovian model fully replicates the persistence of both volatility and leverage effect the impact of jumps can be associated with a common jump component in price and volatility this article has online supplementary materials

roughing it up including jump components in the measurement modeling and forecasting of return volatility a rapidly growing literature has documented important improvements in financial return volatility measurement and forecasting via use of realized variation measures constructed from high frequency returns coupled with simple modeling procedures building on recent theoretical results in barndorff nielsen and shephard 2004a 2005 for related bi power variation measures the present paper provides a practical and robust framework for non parametrically measuring the jump component in asset return volatility in an application to the dm exchange rate the s p500 market index and the 30 year u s treasury bond yield we find that jumps are both highly prevalent and distinctly less persistent than the continuous sample path variation process moreover many jumps appear directly associated with specific macroeconomic news announcements separating jump from non jump movements in a simple but sophisticated volatility forecasting model we find that almost all of the predictability in daily weekly and monthly return volatilities comes from the non jump component our results thus set the stage for a number of interesting future econometric developments and important financial applications by separately modeling forecasting and pricing the continuous and jump components of the total return variation process

home field advantage location decisions of portuguese entrepreneurs an investor s home bias in industrial location decisions may stem from personal factors social capital other non transferable assets and imperfect information about the urban and regional environment this paper explores the distinction between home base and non home location decisions in portugal we reach two important conclusions first the introduction of a variable accounting for prior base of economic activity significantly improves the statistical results second we find that the weighting of distinct location attributes differs between home and non home locations notably non home location choices are strongly governed by agglomeration economies and proximity to major urban centers possibly replicating prior location decisions to economize on search costs the results also enable us to quantify the investor s willingness to opt for a possible home field advantage for example entrepreneurs accept over three times higher labor costs to compete in their resident area of business 2002 elsevier science usa all rights reserved

stock index realized volatility forecasting in the presence of heterogeneous leverage effects and long range dependence in the volatility of realized volatility in this article we account for the presence of heterogeneous leverage effects and the persistence in the volatility of stock index realized volatility the heterogeneous autoregressive har realized volatility rv model is extended in order to account for asymmetric responses to negative and positive shocks occurring at distinct frequencies as well as for the long range dependence in the heteroscedastic variance of the residuals compared with established har and autoregressive fractionally integrated moving average arfima realized volatility models the proposed model exhibits superior in sample fitting as well as out of sample volatility forecasting performance the latter is further improved when the realized power variation rpv is used as a regressor while we show that our analysis is also robust against microstructure noise

realized volatility and the influence of market measures on predictability analysis of nord pool forward electricity data abstract this is the first paper to utilize intra daily high frequency data and to apply known market measures for the prediction of volatility in the nord pool electricity forward market the work is based on recent methods of separating realized volatility into two components continuous and jump volatilities in addition the link between future price volatility and current observable economic variables is examined the measures trading volume time to maturity asymmetric effect from negative shocks and intra week seasonality are assessed to identify improvements in day ahead predictions the model where the total variation is separated into its continuous and jump components is compared with the simpler heterogeneous autoregressive model of realized variation both in and out of sample the results show a strong degree of persistence in realized volatility and significant impacts from the mentioned market measures when predicting nord pool forward price volatility hence there is a clear preference for models accounting for the systematic impact of market measures to improve volatility assessment for tomorrow moreover separating the total variation into continuous and jump components seems potentially useful when predicting day ahead volatility

income taxes and the destination of movers to multistate msas abstract we examine how differences in state income tax rates as well as other state and local taxes and public service expenditures influence the choice of state of residence for households federal tax filers moving into multistate metropolitan areas msas using data from the irs on the migration of taxpayers msas that are on borders provide a spatial discontinuity discrete differences in state tax rates within a single labor market these msas allow residents to live in one state and work in another state we find that differences in state income tax rates have a significant impact on the relative rate of migration to the states within an msa however contrary to what would be expected this impact is only significant in msas in which the filing state is based on employment states without reciprocity and not for those states in which the filing state is the state of residence states with reciprocity in msas where states do not have reciprocity agreements a difference of ten percent in tax rates leads to a 4 1 percent difference in the relative rate of incoming taxpayers analogously we find that a ten percent difference in state tax rates in these msas results in a 3 3 percent difference in the rate of tax base inflow agi our results suggest that one reason that differences in state income taxes appear to have more impact in multistate msas without reciprocity is that only relatively large differences in state income tax rates have any impact on migration and these differences are much more pronounced in msas without reciprocity

cognitive abilities and portfolio choice we study the relation between cognitive abilities and stockholding using the recent survey of health ageing and retirement in europe share which has detailed data on wealth and portfolio composition of individuals aged 50 in 11 european countries and three indicators of cognitive abilities mathematical verbal fluency and recall skills we find that the propensity to invest in stocks is strongly associated with cognitive abilities for both direct stock market participation and indirect participation through mutual funds and retirement accounts since the decision to invest in less information intensive assets such as bonds is less strongly related to cognitive abilities we conclude that the association between cognitive abilities and stockholding is driven by information constraints rather than by features of preferences or psychological traits

five steps to planning success experimental evidence from us households while financial knowledge has been linked to improved financial behaviour there is lit tle consensus on the value of financial education in part because rigorous evaluation of various programmes has yielded mixed results however given the heterogeneity of financial education pro grammes in the literature focusing on generic financial education can be inappropriate and even mis leading lusardi 2009 and others argue that pedagogy and delivery matter significantly in this paper we design and field a low cost easily replicable financial education programme called five steps covering five basic financial planning concepts that relate to retirement we conduct a field experiment to evaluate the overall impact of five steps on a probability sample of the american population in different treatment arms we quantify the relative impact of delivering the programme through video and narrative formats our results show that short videos and narratives each takes about 3 minutes have sizeable short run effects on objective measures of respondent knowledge moreover keeping informational content relatively constant format has significant effects on other psychological levers of behavioural change effects on self efficacy are significantly higher when videos are used which ultimately influences knowledge acquisition follow up tests of respondents knowledge approximately 8 months after the interventions suggest that between one quarter and one third of the knowledge gain and about one fifth of the self efficacy gain persist thus this simple programme has effects both in the short run and medium run

do 401 k contributions crowd out other personal saving during the late 1980s contributions to 401 k plans eclipsed contributions to individual retirement accounts iras as the leading form of tax deferred individual retirement saving in the united states in this paper we describe patterns of participation in 401 k plans contrast these patterns with ira participation and evaluate the net impact of 401 k contributions on personal saving we find that 401 k participation conditional on eligibility exceeds 60 at all income levels in contrast ira participation at the height of that program rose sharply with income we use two methods to evaluate the net saving effect of 401 k contributions on personal saving we compare the financial assets of families who are eligible for 401 k saving with the assets of those who are not eligible and we consider the change over time in the assets of like groups of savers we find little evidence that 401 k contributions substitute for other forms of personal saving including ira contributions

education and saving the long term effects of high school financial curriculum mandates abstract over the last 40 years a majority of states have adopted consumer education policies and a sizable minority have mandated that high school students receive instruction on topics related to household financial decision making in this paper we attempt to determine whether these mandates have had any effect on subsequent decisions we exploit the variation in requirements both across states and over time to identify the effects of interest the evidence indicates that mandates have raised both exposure to financial curricula and subsequent asset accumulation once exposed students reached adulthood the estimated effects are gradual probably due to implementation lags

an extension of the home attachment criteria under dynamic tax competition in this short note we extend the home attachment setting of mansoorian and myers 1993 and ogura 2006 to allow the study of tax competition in a dynamic framework when international business relocation occurs over successive periods the dynamic framework we propose also helps to understand why tax rates may change over time our modified home attachment rule is illustrated by a simple model of dynamic tax competition in discrete time

participation in and contributions to 401 k pension plans evidence om plan data k plans differ from traditional employer sponsored pension plans in that employees are permitted to make voluntary pre tax contributions hence the sensitivity of participation and contributions to plan charac teristics notably the employer matching rate may play a critical role in retirement saving using plan level data from form 5500s filed annu ally with the internal revenue service ifind that substantial increases occur when an employer moves from a zero to a small or moderately sized match but that at higher match rates employee contributions fall

planning and financial literacy how do women fare many older us households have done little or no planning for retirement and there is a substantial population that seems to undersave for retirement of particular concern is the relative position of older women who are more vulnerable to old age poverty due to their longer longevity this paper uses data from a special module we devised on planning and financial literacy in the 2004 health and retirement study it shows that women display much lower levels of financial literacy than the older population as a whole in addition women who are less financially literate are also less likely to plan for retirement and be successful planners these findings have important implications for policy and for programs aimed at fostering financial security at older ages

who is more rational we report on the results of a large scale field experiment that enables us to test for consistency with utility maximizing behavior and to investigate the correlation between individual behavior and demographic and economic characteristics we conducted the experiment with the centerpanel a representative sample of over 2 000 dutch households using procedures similar to those used by choi et al 2007b in a setting with risk we find a high level of consistency in the individual level decisions there is also considerable heterogeneity in subjects consistency scores high income and high education subjects display greater levels of consistency men are more consistent than women and young subjects are more consistent than those who

a note on tax competition attachment to home and underprovision of public goods abstract this paper analyzes efficiency in the provision of public goods when there is tax competition but investors have attachment to home i e a biased preference for investing in the region where they live investors are assumed to be heterogeneous in the costs to invest outside the home region as a result in comparison with the no attachment case the capital outflow response to an increase in the tax rate is reduced because only investors facing small mobility costs will move capital out in a symmetric equilibrium tax rates are increased and the extent of the underprovision of public goods caused by tax competition is lessened

financial literacy and its consequences evidence from russia during the financial crisis the ability of consumers to make informed financial decisions improves their ability to develop sound personal finance this paper uses a panel data set from russia an economy in which household debt has grown at an astounding rate to examine the importance of financial literacy and its effects on behavior the paper studies both the financial and real consequences of financial illiteracy even though consumer borrowing increased very rapidly in russia only 41 of respondents demonstrate an understanding of interest compounding and only 46 can answer a simple question about inflation financial literacy is positively related to participation in financial markets and negatively related to the use of informal sources of borrowing moreover individuals with higher financial literacy are significantly less likely to report experiencing a negative income shock during 2009 and have greater availability of unspent income and higher spending capacity the relationship between financial literacy and availability of unspent income is higher in 2009 suggesting that financial literacy may better equip individuals to deal with macroeconomic shocks

on pareto improving commodity tax changes under fiscal competition this paper shows that when a noncooperative fiscal equilibrium of the mintz tulkens 1986 model of tax competition is inefficient pareto improving changes are positive for the taxes of both regions under concavity of the regions welfare functions it also identifies a class of such equilibria that are always efficient

forecasting spot price volatility using the short term forward curve abstract we use high frequency real time spot prices and day ahead forward prices from the pennsylvania new jersey maryland wholesale electricity market to calculate describe and forecast spot price volatility we introduce the concept of forward realized volatility calculated from day ahead forward prices forward realized volatility improves forecasts of spot price volatility in the sense of higher r 2 s and significantly lower forecast errors when compared with forecasts based solely upon historical volatility the largest forecast improvements obtained when the change in forward realized volatility is large in magnitude splitting total volatility into its continuous and jump components is crucial for forecasting volatility at weekly and monthly horizons

the effects of financial education in the workplace evidence from a survey of households abstract we use a novel household survey to investigate the effects of employer based financial education on personal saving we explore cross sectional relations between the availability of employer based financial education and various measures of asset accumulation and we interpret these patterns in light of various potentially confounding factors our findings favor the hypothesis that employer based financial education stimulates saving both in general and for retirement

the economic importance of financial literacy theory and evidence this paper undertakes an assessment of a rapidly growing body of economic research on financial literacy we start with an overview of theoretical research which casts financial knowledge as a form of investment in human capital endogenizing financial knowledge has important implications for welfare as well as policies intended to enhance levels of financial knowledge in the larger population next we draw on recent surveys to establish how much or how little people know and identify the least financially savvy population subgroups this is followed by an examination of the impact of financial literacy on economic decision making in the united states and elsewhere while the literature is still young conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps a final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy jel a20 d14 g11 i20 j26

employee financial literacy and retirement plan behavior a case study this article uses administrative data on all active employees of the federal reserve fr system to examine participation in and contributions to the thrift saving plan the system s defined contribution dc plan we link to administrative records a unique employee survey of economic demographic factors including a set of financial literacy questions not surprisingly fr employees are substantially more financially literate than the population at large most importantly financially savvy employees are also most likely to participate in their dc plan sophisticated workers contribute three percentage points more of their earnings to the dc plan than do the less knowledgeable and they hold more equity in their pension accounts we examine changes in employee plan behavior 1 year after employees completed a learning module about retirement planning and we compare it to baseline patterns we find that those employees who completed the learning module were more likely to start contributing and less likely to have stopped contributing to the dc plan postsurvey in sum employer provided learning programs are shown to significantly impact employee retirement saving decisions and consistent with a lot of other research higher levels of financial literacy are found to have a beneficial impact on retirement saving patterns jel j3 h7

international tax coordination regionalism versus globalism tax competition for mobile capital can undermine the attempts of governments to redistribute income from rich to poor i study whether international tax coordination can alleviate this problem using a general equilibrium model synthesizing recent contributions to the tax competition literature the model highlights the crucial distinction between global tax coordination and regional coordination with high capital mobility between the tax union and the rest of the world the welfare gain from regional capital income tax coordination is only a small fraction of the gain from global coordination even if the tax union is large relative to the world economy

does compulsory school attendance affect schooling and earnings we establish that season of birth is related to educational attainment because of school start age policy and compulsory school attendance laws individuals born in the beginning of the year start school at an older age and can therefore drop out after completing less schooling than individuals born near the end of the year roughly 25 percent of potential dropouts remain in school because of compulsory schooling laws we estimate the impact of compulsory schooling on earnings by using quarter of birth as an instrument for education the instrumental variables estimate of the return to education is close to the ordinary least squares estimate suggesting that there is little bias in conventional estimates every developed country in the world has a compulsory schooling requirement yet little is known about the effect these laws have on educational attainment and earnings 1 this paper exploits an unusual natural experiment to estimate the impact of compulsory schooling laws in the united states the experiment stems from the fact that children born in different months of the year start school at different ages while compulsory schooling laws generally require students to remain in school until their sixteenth or seventeenth birthday in effect the interaction of school entry requirements and compulsory schooling laws compel students born

financial literacy and financial behaviour experimental evidence from rural rwanda we organise a field experiment with smallholder farmers in rwanda to measure the impact of financial literacy training on financial knowledge and behaviour the training increased financial literacy of participants changed their savings and borrowing behaviour and had a positive effect on the new business start up however it failed to have a significant short term impact on income using a two stage regression framework we identify enhanced financial literacy as one of the important factors explaining behavioural changes we also test whether financial knowledge spillovers from trained farmers to their peers in local village banks but find no evidence for that

to own or not to own your life insurance policy abstract life insurance proceeds are generally subject to the estate tax an exception is when the policy is owned by the beneficiaries and the insured gives up ownership and control including the ability to change beneficiaries should the insured strategically own the policy contract and potentially subject proceeds to estate and inheritance taxes or relinquish control with the beneficiaries owning the policy and escape such transfer taxes this paper addresses how the estate tax influences the choice of life insurance ownership using samples of estate tax returns the empirical evidence suggests that those facing high estate tax rates are more likely to forgo ownership and have proceeds excluded from their estates and provides further evidence on the incentive effect of taxes and in support of the strategic bequest motive

the role of financial literacy in determining retirement plans nber working paper seriesthe role of financial literacy in determining retirement plansrobert clarkmelinda sandler morrillsteven g allenworking paper 16612http www nber org papers w16612national bureau of economic research1050 massachusetts avenuecambridge ma 02138december 2010this research is funded in part by a grant from finra investor education foundation we wouldlike to thank jennifer maki mehtab randhawa and evan rogers for their research assistance theresearch could not have been accomplished without the cooperation of the companies that partneredwith us we would also like to thank nicholas horsewood annamaria lusardi olivia mitchell andtwo anonymous referees for useful comments all remaining errors are our own the views expressedherein are those of the authors and do not necessarily reflect the views of the national bureau of economicresearch finra investor education foundation or any of its affiliated companies 2010 by robert clark melinda sandler morrill and steven g allen all rights reserved shortsections of text not to exceed two paragraphs may be quoted without explicit permission providedthat full credit including notice is given to the source

social interactions in asset allocation decisions evidence from 401 k pension plan investors abstract this paper investigates social interaction effects on individual asset allocation decisions using a rich dataset of 159 329 individuals enrolled in 401 k plans we find that individuals are likely to increase decrease their risk shares when their coworkers have higher lower risk exposures over the last quarter the social interaction effects are especially strong among individuals with extreme asset allocations and low equity investment performance we also divide the workplaces into subgroups to examine how social interaction effects vary among coworkers with different backgrounds results from additional tests indicate that estimated social interaction effects are not primarily driven by common preferences common environments or reverse causality

taxing an independent scotland if scotland were to become independent it would gain considerably more control over its tax system than it currently enjoys in this paper we consider the consequences of independence for the optimal design of a new scottish tax system an analysis which would also be of some relevance for considering the consequences for tax design of independence of other smaller nations scotland is different from the rest of the uk in some ways that are important for tax system design incomes are more equally distributed for example that is one reason why the progressive income tax currently raises less per head in scotland than in the rest of the uk it also suggests that there is less to be gained in terms of redistribution from sharply progressive taxation independence would create additional complexity for individuals and firms working or trading across borders it could also put downward pressure on tax rates and our analysis suggests that optimal tax rates in an independent scotland are likely to be lower than optimal rates in the uk as a whole at the same time the context of a substan tial budget deficit will continue to put upward pressure on tax rates

the impact of financial literacy training for migrants remittances are a major source of external financing for many developing countries but the cost of sending them remains high in many migration corridors despite efforts to lower these costs by offering new products and developing cost comparison information sources many new and promising inexpensive remittance methods have relatively low adoption rates the lack of financial literacy among migrants has been identified as one potentially important barrier to competition and new product adoption this paper presents the results of a randomized experiment designed to measure the impact of providing financial literacy training to migrants training appears to increase financial knowledge and information seeking behavior and reduces the risk of switching to costlier remittance products but it does not result in significant changes in the frequency of remitting or in the remitted amount

short term forecasting of electricity prices for miso hubs evidence from arima egarch models this study estimates three time series models arima arima egarch and arima egarch m for hourly real time electricity prices for each of the five hubs of the midwest independent system operator miso and examines the in and out of sample forecasting performance of the respective models the results from the arima models reveal the presence of autoregressive conditional heteroskedasticity recognizing the possibility of asymmetric time varying volatility the egarch specification for the variance equation demonstrates the presence of an inverse leverage effect in electricity prices for each hub with respect to forecasts no one model clearly dominates the others in terms of in sample forecasting performance based on four forecast evaluation statistics however the arima egarch m model outperforms the other models michigan hub is the exception in terms of the out of sample forecasting performance

realized volatility and price spikes in electricity markets the importance of observation frequency abstract this paper uses high frequency spot price data from eight wholesale electricity markets in australia canada and the united states to estimate realized volatility and the frequency of price spikes i find similar levels of realized volatility in australia and north america with estimates ranging from 1500 to 2700 much greater than estimates reported previously in the literature in hourly data the frequency of price spikes ranges from approximately 35 to 40 in seven of eight markets i present evidence that increasing the lag length in the calculation of bipower variation improves jump detection in electricity prices

nature or nurture what determines investor behavior abstract using data on identical and fraternal twins complete financial portfolios we decompose the cross sectional variation in investor behavior we find that a genetic factor explains about one third of the variance in stock market participation and asset allocation family environment has an effect on the behavior of young individuals but this effect is not long lasting and disappears as an individual gains experience frequent contact among twins results in similar investment behavior beyond a genetic factor twins who grew up in different environments still display similar investment behavior our interpretation of a genetic component of the decision to invest in the stock market is that there are innate differences in factors affecting effective stock market participation costs we attribute the genetic component of asset allocation the relative amount invested in equities and the portfolio volatility to genetic variation in risk preferences

what you don t know can t help you pension knowledge and retirement decision making abstract this paper provides an answer to an important empirical puzzle in the retirement literature while most people know little about their own pension plans retirement behavior is strongly affected by pension incentives we combine administrative and self reported pension data to measure the retirement response to actual and perceived financial incentives and document an important role for self reported pension data in determining retirement behavior well informed individuals are far more responsive to pension incentives than the average individual ill informed individuals seem to respond systematically to their own misperceptions of pension incentives

forecasting realized volatility in electricity markets using logistic smooth transition heterogeneous autoregressive models we apply the non parametric realized volatility technique and the associated jump detection test to measure volatility and jumps in electricity prices then we propose a group of logistic smooth transition heterogeneous autoregressive lsthar models of realized volatility the models can simultaneously approximate long memory behavior and describe sign and size asymmetries they differ in the underlying heterogeneous autoregressive structure and the transition variable specification the out of sample forecast accuracy of the lsthar models is evaluated through the diebold mariano test and the superior predictive ability test in terms of the mean square error and the mean absolute error using high frequency prices from the australian new south wales nsw electricity market as empirical data we draw the following conclusions 1 introducing the logistic smooth transition structure with appropriate transition variable specification to the heterogeneous autoregressive models improves volatility forecasts 2 overall the lsthar model that uses the sum of beta function weighted past returns as the transition variable and includes past daily jumps as a predictor is the superior model for predicting volatility in the nsw market this model significantly outperforms the others

financial literacy financial education and downstream financial behaviors policy makers have embraced financial education as a necessary antidote to the increasing complexity of consumers financial decisions over the last generation we conduct a meta analysis of the relationship of financial literacy and of financial education to financial behaviors in 168 papers covering 201 prior studies we find that interventions to improve financial literacy explain only 0 1 of the variance in financial behaviors studied with weaker effects in low income samples like other education financial education decays over time even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention correlational studies that measure financial literacy find stronger associations with financial behaviors we conduct three empirical studies and we find that the partial effects of financial literacy diminish dramatically when one controls for psychological traits that have been omitted in prior research or when one uses an instrument for financial literacy to control for omitted variables financial education as studied to date has serious limitations that have been masked by the apparently larger effects in correlational studies we envisage a reduced role for financial education that is not elaborated or acted upon soon afterward we suggest a real but narrower role for just in time financial education tied to specific behaviors it intends to help we conclude with a discussion of the characteristics of behaviors that might affect the policy maker s mix of financial education choice architecture and regulation as tools to help consumer financial behavior this paper was accepted by uri gneezy behavioral economics

nash equilibrium tariffs for the united states and canada the roles of country size scale economies and capital mobility a theoretical analysis of optimal nash equilibrium tariff rates is presented a numerical general equilibrium model is then used to find nash equilibrium tariff rates for the united states and canada the nash equilibrium tariffs are small relative to partial equilibrium estimates 18 percent for the united states and 6 percent for canada the united states is essentially indifferent between the nash equilibrium and free trade while canada is better off at the latter by 4 billion empirical results support theoretical predictions that the optimal tariff is smaller when the country is smaller there are scale economies and free entry and capital is internationally mobile

attachment to home and efficient purchases of population in a fiscal externality economy abstract this paper examines the efficiency properties of an economy characterized by strategically competing regions and individuals with varying degrees of attachment to home in an otherwise standard fiscal externality setting regional authorities may make interregional transfers in purchasing preferred populations however there is a range of distributions of resources over which neither region makes transfers nevertheless all equilibrium allocations resulting from the nash behavior of regional authorities including those that involve no transfers are efficient therefore in contrast to the standard conclusions of the fiscal externality literature there is no efficiency role for a central authority

who benefits from partial tax coordination in this paper we investigate whether partial tax coordination is beneficial to countries within and outside a tax union in which countries are supposed to compete in taxes and infrastructure our results demonstrate that a subgroup of countries agreeing on a common tax rate can harm both member and nonmember states this is in contrast to the classical findings that partial tax harmonisation is pareto improving when a minimum tax rate is imposed within a tax union we demonstrate that it does not necessarily improve the welfare of the member countries moreover both the high tax and low tax countries can be worse off this conclusion is at odds with the classical result that a high tax country benefits from the imposition of a lower tax bound

endogenous timing in the presence of non monotonicities the aim of this paper is to generalize the endogenous timing game proposed by hamilton and slutsky games and economic behavior 1990 2 pp 29 46 by allowing the payoff or the marginal payoff of a player to become non monotonic with respect to the strategy of the opponent we propose a taxonomy of the subgame perfect nash equilibria based on the characteristics of the payoff functions proposed by eaton canadian journal of economics 2004 37 pp 805 29 we determine under which conditions of the initial payoff functions commitment has a social value and when the simultaneous move nash equilibrium is commitment robust and discuss its pareto efficiency

financial education and behavioral finance new insights into the role of information in financial decisions recent empirical evidence based on surveys and experimental activities within the fields of behavioral finance and financial education has offered economists new empirically based insights into how individuals use information in making financial decisions specifically the importance of information in financial decisions may be reduced or eliminated by psychological aspects of the individual such as a state of overconfidence that is individual or shared with a group or by the individual s limited ability to process complex and abundant information this paper aims to complement this emerging body of literature by studying how individuals perceive and process information when making financial decisions we review these contributions and suggest a number of broad guidelines that can provide a framework for future discussion of this topic within financial decision theory

the spatial incidence of local retail taxation this paper examines the effects of local retail taxation in two simple models of spatial competition suppose that a suburb or central city imposes an excise tax or subsidy on a particular commodity such as gasoline liquor restaurant meals or groceries or imposes a general sales tax that affects many commodities simultaneously to what extent does this lead to higher prices within the jurisdiction and in neighboring jurisdictions section ii presents the basic model of spatial competition that forms a component of the fixed locations model of section iii and the entry model of section iv infinitely many stores are located along an infinite line and demand density is completely inelastic and uniform along the line the main endogenous variables of interest are the prices charged by the different stores throughout the paper a nash equilibrium in prices is assumed section iii presents the fixed locations model in which the tax is imposed after stores have already established themselves store locations are fixed due to location specific sunk costs if a suburb containing a single store imposes an excise tax on a commodity the store that is taxed and its first second and third nearest neighbors on each side increase their prices by 57 7 percent 15 5 percent 4 2 percent and 1 1 percent of the tax respectively this result is independent of the spacing of the stores and independent of whether or not they are evenly spaced if a suburb containing several stores imposes an excise tax the changes in price follow directly by adding the effects of taxes on several adjacent stores if a central city taxes all stores on the right half line the results are given by 12 the taxed and untaxed stores closest to the boundary

jeux sans frontieres tax competition and tax coordination when countries differ in size closer international integration is putting increasing pressure on existing national tax structures this paper uses a simple two country model to address a range of consequent policy concerns focusing particularly on the role of country size differences in size exacerbate the inefficiency from noncooperative behavior harming both countries the smaller country loses from harmonization to any tax rate between those set in the noncooperative equilibrium but both countries gain from the imposition of a minimum tax anywhere in that range the fully optimal response to freer cross border trade however may be to do nothing jel h20 h77

eu regional policy and tax competition the european union eu provides coordination and financing of trans european transport infrastructures i e roads and railways which link the eu member states and reduce the cost of transport and mobility this raises the question of whether eu involvement in this area is justified by inefficiencies of national infrastructure policies moreover an often expressed concern is that policies enhancing mobility may boost tax competition we analyze these questions using a model where countries compete for the location of profitable firms we show that a coordination of investment in transport cost reducing infrastructures within union countries enhances welfare and mitigates tax competition in contrast with regard to union periphery infrastructure the union has an interest in a coordinated reduction of investment expenditures here the effects on tax competition are ambiguous our results provide a rationale for eu level regional policy that supports the development of intra union infrastructure

stock market aversion political preferences and stock market participation abstract we find that left wing voters and politicians are less likely to invest in stocks controlling for income wealth education and other relevant factors this finding from unique data sets in finland is robust both at the zip code and at the individual level a moderate left voter is 17 20 less likely to own stocks than a moderate right voter the results are consistent with the idea that personal values are a factor in important investment decisions in this case leading to stock market aversion the results are inconsistent with alternative explanations such as wealth effects risk aversion reverse causality return expectations or social capital

a three input model of the spatial effects of a central city wage tax abstract this paper considers the short run and long run spatial effects on wages employment and business capital as functions of location of a localized increase in wage tax rates the model is most applicable to a central city that has a higher wage tax rate than the surrounding suburbs the inclusion of land as a third input in production significantly reduces the long run effects of a central city wage tax on employment near the central city boundary as compared with a model in which labor and capital are the only two inputs the short run effects are significantly less than the long run effects

applying arma garch approaches to forecasting short term electricity prices abstract accurately modeling and predicting the mean and volatility of electricity prices can be of great importance to value electricity bid or hedge against the volatility of electricity prices and manage risk the paper applies various autoregressive moving average arma models with generalized autoregressive conditional heteroskedasticity garch processes namely arma garch models along with their modified forms arma garch in mean arma garch m to model and forecast hourly ahead electricity prices in total 10 different model structures are adopted and this paper thus conducts a comprehensive investigation on the arma garch based time series forecasting of electricity prices multiple statistical measures are employed to evaluate the modeling sufficiency and predication accuracy of the arma garch m methods the results show that the arma garch m models are in general an effective tool for modeling and forecasting the mean and volatility of electricity prices while arma sgarch m models are simple and robust and the arma gjrgarch m model is very competitive in addition we observe that hourly electricity prices exhibit apparent daily weekly and monthly periodicities and have the nonlinear and asymmetric time varying volatility together with an inverse leverage effect

the effects of financial education in the workplace evidence from a survey of employers we examine the effects of education on financial decision making skills by identifying an interesting source of variation in pertinent training during the 1990s an increasing number of individuals were exposed to programs of financial education provided by their employers if as some have argued low saving frequently results from a failure to appreciate economic vulnerabilities then education of this form could prove to have a powerful effect on behavior the current paper undertakes an analysis of these programs using a previously unexploited survey of employers we find that both participation in and contributions to voluntary savings plans are significantly higher when employers offer retirement seminars the effect is typically much stronger for non highly compensated employees than for highly compensated employees the frequency of seminars emerges as a particularly important correlate of behavior we are unable to detect any effects of written materials such as newsletters and summary plan descriptions regardless of frequency we also present evidence on other determinants of plan activity