interpreting economic time series this paper explores some of the implications for econometric practice of the principle that people s observed behavior will change when their constraints change in dynamic contexts a proper definition of people s constraints includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell changes in agents perceptions of these laws of motion or constraints will in general produce changes in the schedules that describe the choices they make as a function of the information that they possess until very recently received dynamic econometric practice ignored this principle the practice of dynamic econometrics should be changed so that it is consistent with the principle that people s rules of choice are influenced by their constraints this is a substantial undertaking and involves major adjustments in the ways that we formulate estimate and simulate econometric models

the effect of social security on the steady state distribution of consumption abstract abel has shown that the introduction of a fully funded social security ss would decrease the variances of the steady state distribution of young period and old period consumptions eckstein et al have shown that a perfect ss would increase the steady state expected utility of consumptions we intend to give a caveat on their positive results by showing that the assumptions from which the above propositions are derived have some unrealistic implications and that by replacing these assumptions with more reasonable ones we may obtain very different results the only positive conclusion we are certain of is that a marginal ss insurance in the no insurance situation can always reduce the steady state coefficient of variation of both young and old period consumption distributions

instruments randomization and learning about development there is currently much debate about the effectiveness of foreign aid and about what kind of projects can engender economic development there is skepticism about the ability of econometric analysis to resolve these issues or of development agencies to learn from their own experience in response there is increasing use in development economics of randomized controlled trials rcts to accumulate credible knowledge of what works without overreliance on questionable theory or statistical methods when rcts are not possible the proponents of these methods advocate quasirandomization through instrumental variable iv techniques or natural experiments i argue that many of these applications are unlikely to recover quantities that are useful for policy or understanding two key issues are the misunderstanding of exogeneity and the handling of heterogeneity i illustrate from the literature on aid and growth actual randomization faces similar problems as does quasi randomization notwithstanding rhetoric to the contrary i argue that experiments have no special ability to produce more credible knowledge than other methods and that actual experiments are frequently subject to practical problems that undermine any claims to statistical or epistemic superiority i illustrate using prominent experiments in development and elsewhere as with iv methods rct based evaluation of projects without guidance from an understanding of underlying mechanisms is unlikely to lead to scientific progress in the understanding of economic development i welcome recent trends in development experimentation away from the evaluation of projects and toward the evaluation of theoretical mechanisms jel c21 f35 o19

benefit estimates for landscape improvements sequential bayesian design and respondents rationality in a choice experiment a multi attribute stated preference approach is used to value low and high impact actions on four major landscape components addressed by the rural environment protection scheme in ireland several methodological issues are addressed the use of prior beliefs on the relative magnitudes of parameters standardized description of different levels of landscape improvements via image manipulation software adoption of efficiency increasing sequential experimental design and sensitivity of benefit estimates to inclusion of responses from irrational respondents results suggest that bayesian design updating delivers significant efficiency gains without loss in respondent efficiency and estimates are upward biased when irrational respondents are included

effect of distance of transportation on willingness to pay for food abstract consumers interest in locally produced foods is increasing hence there is a need to decipher and quantify consumers desire for local foods and understand the underlying causes of this demand more specifically we examine in this paper the issue of distance of transportation and its impact on consumer preferences we investigate how consumers willingness to pay wtp for food varies with the distance the food traveled results from non hypothetical second price auctions indicate that average wtp is falling in distance traveled indicating a preference for local production results also indicate that the marginal value of a mile traveled depends on the type of food studied apples vs wine socio demographic characteristics perceptions of freshness taste and food safety as well as support of local economy impact wtp for local foods

inferred and stated attribute non attendance in food choice experiments we review the current literature on attribute non attendance in stated choice and use data from beef and chicken choice experiments using both inference and the respondents own statements inference is based on panel data analysis by mixed logit models of choice with both discrete and continuous mixtures of coefficients and is conditional on the observed pattern of choice information from respondent statements on non attendance is directly embedded in the specification of the indirect utility function results show no clear winner between the inferential approaches but the inference based on constrained latent class panel models better matches the observed data

tax disturbances and real economic activity in the postwar united states abstract this paper investigates the macroeconomic effects of cyclical fluctuations in marginal tax rates it finds that systematically including tax variables in a standard real business cycle model substantially improves the model s ability to reproduce basic facts about postwar u s business cycle fluctuations in particular modeling fluctuations in personal and corporate income tax rates increases the model s predicted relative variability of hours and decreases its predicted correlation between hours and average productivity fluctuations in tax rates produce large substitution effects that alter the leisure labor supply decision

selective trials a principal agent approach to randomized controlled experiments we study the design of randomized controlled experiments when outcomes are significantly affected by experimental subjects unobserved effort expenditure while standard randomized controlled trials rcts are internally consistent the unobservability of effort compromises external validity we approach trial design as a principal agent problem and show that natural extensions of rcts which we call selective trials can help improve external validity in particular selective trials can disentangle the effects of treatment effort and the interaction of treatment and effort moreover they can help identify when treatment effects are affected by erroneous beliefs and inappropriate effort expenditure

rational expectations and the paradox of policy relevant natural experiments abstract policy experiments using large microeconomic datasets have recently gained ground in macroeconomics imposing rational expectations we examine robustness of evidence derived from ideal natural experiments applied to atomistic agents in dynamic settings paradoxically once experimental evidence is viewed as sufficiently clean to use it then becomes contaminated by ex post endogeneity measured responses depend upon priors and the objective function into which evidence is fed moreover agents policy beliefs become endogenously correlated with their causal parameters severely clouding inference e g sign reversals and non invertibility may obtain treatment control differences are contaminated for non quadratic adjustment costs constructively we illustrate how inference can be corrected accounting for feedback and highlight factors mitigating contamination

impatience incentives and obesity this paper explores the relationship between time preferences economic incentives and body mass index bmi using data from the 2006 national longitudinal survey of youth we rst show that greater impatience increases bmi and the likelihood of obesity even after controlling for demographic human capital occupational and nancial characteristics as well as risk preference next we provide evidence of an interaction

consumers valuation of sustainability labels on meat there are various sustainability certifications and claims for food products that focus on environmental or ethical benefits these claims empower consumers to make informed purchasing decisions that take environmental and ethical considerations into account this paper compares consumers preferences for four types of sustainability claims related to organic meat free range animal welfare and carbon footprint using a choice experiment on a chicken breast product our results show that nine in every ten belgian consumers favor free range claims which are also valued the most highly attracting premiums ranging from 43 to 93 our study also shows that a vast majority of consumers 87 would welcome the introduction of an eu level animal welfare label the carbon footprint labels and the organic labels are less appealing to consumers who have lower willingness to pay for these labels belgian consumers prefer the national belgian organic food logo certified by a private organization to the newly introduced eu organic food logo

healthy sustainable and plant based eating perceived mis match and involvement based consumer segments as targets for future policy abstract given the inseparable environmental and health impact of dietary habits integrating health and sustainability goals has become a highly topical issue in policy development and communication to encourage consumers to adopt healthier and more sustainable diets increasing evidence indicates that it is possible to develop diets that are both environmentally sustainable and healthy but their potential success largely depends on consumers willingness and ability to change their behavior this study investigates consumer perceptions of the match or mismatch between healthy and sustainable diets and gives insight into consumers motivation to eat healthily and sustainably as measured by involvement data were collected in spring 2014 through a cross sectional quantitative online survey with samples representative for age gender and region in four european union eu countries united kingdom germany belgium and the netherlands n 2783 the images of a healthy diet a sustainable diet and a plant based diet were found to be highly compatible based on a strongly observed match between european consumers perceptions of these concepts half of the participants were highly involved in healthy eating and one third in both healthy and sustainable eating informational food policy actions targeting both healthy and sustainable food consumption behavior are recommended to address issues relevant to the target segments taking into account their levels of involvement increasing consumers motivation and involvement in health and sustainability emerges as a key trigger for increasing healthy and sustainable eating

welfare and comparative statics implications of fair social security a steady state analysis abstract this paper examines the steady state welfare and comparative statics implications of fair social security in an overlapping generations model with uncertain lifetime the model is designed to capture the effects of lifetime uncertainty extending over the individual s entire lifespan the effects of intentional and unintentional bequests and the effects of the earning profile he shows that the welfare effects depend on the size of the benefits and the structure of the social security tax in particular even fair social security may have negative welfare implications if the underlying tax structure is ill designed some comparative statics implications are analyzed

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

testing for the lucas critique a quantitative investigation this thesis contains four essays which studies the macroeconomic effects of fiscal and monetary policy quantitatively the first essay investigates whether swedish postwar business cycles have been generated by domestic or foreign shocks and finds that they are about equally important in the second essay the effects of government budget deficits on interest rates in sweden are studied in a small open economy framework the empirical results which have high power due to very large swings in deficits and interest rates provide support that larger deficits produce higher interest rates and thus give support against the ricardian view the third essay seeks to identify optimal social insurance and redistribution levels in sweden and the u s with respect to temporary and permanent idiosyncratic productivity risks the results indicate that sweden should reduce the social security level while the u s should approximately maintain the current level in the last essay the small sample properties of a well known statistical test for the lucas critique the super exogeneity test is studied in a general equilibrium environment the results indicate that the super exogeneity test do not have sufficient power in small samples

sustainability labels on coffee consumer preferences willingness to pay and visual attention to attributes abstract sustainability labels are important tools that help consumers assess the sustainability aspects of food while past studies have focused on visual attention to nutrition information no study has investigated the visual attention paid by consumers to the sustainability information on food our study contributes to the need to better understand consumers attention to sustainability information when making food choices the objective was to explore the importance that consumers attach to sustainability attributes and investigate how this relates to the visual attention paid to these attributes during the choice decision and to willingness to pay wtp visual attention during the decision making process was measured in terms of fixation time and fixation count which were then analyzed in relation to the stated attribute importance our results suggest that consumer segments with differences in stated attribute importance visually attend differently to these attributes higher valued attributes also exhibited higher visual attention our results suggest that consumers who spend more time attending to and fixate more on sustainability attributes value them more

designing conjoint choice experiments using managers prior beliefs abstract the authors provide more efficient designs for conjoint choice experiments based on prior information elicited from managers about the parameters and their associated uncertainty the authors use a bayesian design procedure that assumes a prior distribution of likely parameter values and optimizes the design over that distribution the authors propose a way to elicit prior information from managers and show in monte carlo studies that the procedure provides more efficient designs than the current procedures the authors provide an empirical application in which they elicit prior information on the parameter values and the associated uncertainty from managers here the bayesian design provides 30 50 lower standard errors of the estimates and an expected predictive validity that is approximately 20 higher

theory general equilibrium and political economy in development economics i discuss the role of economic theory in empirical work in development economics with special emphasis on general equilibrium and political economy considerations i argue that economic theory plays should play a central role in formulating models estimates of which can be used for counterfactual and policy analysis i discuss why counterfactual analysis based on microdata that ignores general equilibrium and political economy issues may lead to misleading conclusions i illustrate the main arguments using examples from recent work in development economics and political economy

uncertain lifetimes and the welfare enhancing properties of annuity markets and social security this paper explores the implications of social security programs and annuity markets through which agents who are characterized by different distributions of length of lifetime share deathrelated risks when annuity markets operate a non discriminatory social security program affects only the intragenerational allocation of resources in the absence of private information regarding individual survival probabilities such a program will lead to a non optimal intragenerational allocation of resources however the presence of adverse selection considerations gives rise to a pareto improving role for a mandatory non discriminatory social security program

effects of cheap talk on consumer willingness to pay for golden rice a large body of literature suggests willingness to pay is overstated in hypothetical valuation questions as compared to when actual payment is required recently cheap talk has been proposed to eliminate the potential bias in hypothetical valuation questions cheap talk refers to process of explaining hypothetical bias to individuals prior to asking a valuation question this study explores the effect of cheap talk in a mass mail survey using a conventional value elicitation technique results indicate that cheap talk was effective at reducing willingness to pay for most survey participants however consistent with previous research cheap talk did not reduce willingness to pay for knowledgeable consumers

heterogeneous rates of time preference and the decision to smoke individuals with higher personal rates of time preference will be more likely to smoke although previous studies have found no evidence of a relationship between smoking and rates of time preference analysis of implicit rates of time preference associated with workers wage fatality risk trade offs indicates that smokers have higher rates of time preference with respect to years of life current smokers have an implied rate of time preference of 13 8 as compared to 8 1 for nonsmokers current smokers who are blue collar workers have rates of time preference with respect to years of life of 16 3 compared to 7 8 for nonsmoking blue collar workers jel i12 d81 d91 smoking imposes substantial health risks many of which are not immediate and will also have long term effects on smokers well being recent estimates of the lost life expectancy due to smoking are 2 4 years for women and 4 4 years for men with some studies indicating even more substantial losses 1 given the latency period before many of the most severe smoking risks are manifested people with greater individual rates of time preference will be less influenced by the discounted value of the health losses and will be more likely to be smokers this paper examines whether this relationship between rates of time preference and smoking behavior is in fact borne out by developing empirical estimates of how smokers and nonsmokers discount years of life lost due to the fatality risks that they incur on the job a variety of researchers have theorized that individuals with higher rates of time preference

on the distribution of wealth and intergenerational transfers we develop a simple behavioral model of intergenerational transfers with individuals being subject to uncertainty about their children s incomes individuals differ with respect to innate ability and to wealth transfers they receive at birth the distributions of total wealth of total income and of their components are uniquely determined from the equilibrium distribution of intergenerational transfers for which existence and uniqueness are proven for a particular utility function and provided that earned income follows a stable law we show that so do all endogenous distributions intergenerational transfers are relatively more equally distributed than earnings capital income and lifetime wealth

causal parameters and policy analysis in economics a twentieth century retrospective the major contributions of twentieth century econometrics to knowledge were the definition of causal parameters within well defined economic models in which agents are constrained by resources and markets and causes are interrelated the analysis of what is required to recover causal parameters from data the identification problem and clarification of the role of causal parameters in policy evaluation and in forecasting the effects of policies never previously experienced this paper summarizes the development of these ideas by the cowles commission the response to their work by structural econometricians and var econometricians and the response to structural and var econometrics by calibrators advocates of natural and social experiments and by nonparametric econometricians and statisticians this paper considers the definition and identification of causal parameters in economics and their role in econometric policy analysis it assesses different research programs designed to recover causal parameters from data at the beginning of this century economic theory was mainly intuitive and empirical support for it was largely anecdotal at the end of the century economics has a rich array of formal models and a high quality database empirical regularities motivate theory in many areas of economics and data are routinely used to test theory many economic theories have been developed as measurement frameworks to suggest what data should be collected and how they should be interpreted econometric theory was developed to analyze and interpret economic data most econometric theory adapts methods originally developed in statistics the major exception to this rule is the econometric analysis of the identification problem and the companion analyses of structural equations causality and economic policy evaluation although an economist did not invent the phrase correlation does not imply causation 1 economists clari

uncertain lifetime the annuity market and estate taxation abstract this paper extends traditional studies of estate taxation to allow for the possibility that taxpayers may avoid the burden of the estate tax by strategically timing bequests to their children in this model the lifespan of the individual is uncertain and bequests can be left either in the middle or at the end of the lifespan bequests are subject to the estate tax only when they are left upon death it is shown that the effects of the estate tax depend on the ability of the individual to make intra vivos gifts which in turn is affected by the existence of a competitive annuity market

judging experimental evidence on dynamic inconsistency abstract this article briefly summarizes and judges recent experimental developments exploring the predictions of dynamically inconsistent models an opinion is provided as to how the literature ma

u s soviet chinese relations routine reciprocity or rational expectations international relations theorists disagree about whether great power behaviors reflect bureaucratic routine or reciprocity recently some have suggested that these behaviors result from great powers rational expectations rather than from simple routine or reciprocity the debate is flawed in several respects the quasi experimental studies of great power behavior suffer from specification and measurement errors furthermore most studies of great power behavior focus exclusively on the superpowers without adequately appreciating china s role in world politics we present an improved analysis that recognizes the potential effects of chinese behavior and ameliorates the methodological flaws in existing work the results indicate that the behaviors of the united states the soviet union and china are a relatively stable mix of bureaucratic routine and reciprocity the results also indicate complex asymmetrical connections among u s soviet u s chinese and soviet chinese relations consistent with the notion of a strategic triangle

an exact solution for the investment and value of a firm facing uncertainty adjustment costs and irreversibility this paper derives closed form solutions for the investment and value of a competitive firm with a constant returns to scale production function and convex costs of adjustment solutions are derived for the case of irreversible investment as well as for reversible investment optimal investment is a non decreasing function of q the shadow value of capital relative to the case of reversible investment the

time preferences and food choices evidence from a choice experiment time preferences have been recognized by numerous studies as an important driver of a number of healthy and environmentally friendly behaviors in this study we first examined if healthy and environmentally friendly food labels e g usda organic carbon trust health claim and calories are relevant in driving food choices second using the consideration of future consequences cfc scale we analyzed if individuals with different time preferences have different choice behavior and valuations in relation to these labels results indicate that consumers value both healthy and environmentally friendly attributes displayed on labels results also suggest that time preferences can significantly influence consumers valuation for the usda organic label the presence of health claims and the calorie amount attribute

individual discount rates and smoking evidence from a field experiment in denmark we elicit measures of individual discount rates from a representative sample of the danish population and test two substantive hypotheses the first hypothesis is that smokers have higher individual discount rates than non smokers the second hypothesis is that smokers are more likely to have time inconsistent preferences than non smokers where time inconsistency is indicated by a hyperbolic discounting function we control for the concavity of the utility function in our estimates of individual discount rates and find that male smokers have significantly higher discount rates than male non smokers however smoking has no significant association with discount rates among women this result is robust across exponential and hyperbolic discounting functions we consider the sensitivity of our conclusions to a statistical specification that allows each observation to potentially be generated by more than one latent data generating process

precautionary saving and accidental bequests this paper presents a simple general equilibrium model of precautionary saving and accidental bequests this model is used to analyze the implications of individual lifetime uncertainty for aggregate consumption and capital accumulation a precautionary demand for saving arises because an individual consumer does not know in advance the date at which he will die and he wants to avoid low levels of consumption in the event that he lives longer than expected an implication of this precautionary saving is that when death does occur the consumer is generally holding some wealth which is then passed on to his heirs in the form of an accidental bequest even if all consumers have the same ex ante mortality probabilities there will be some intracohort variation in the date of death consequently there will be a nondegenerate distribution of bequests left by consumers in a cohort this nondegenerate distribution of bequests left by one generation induces variation in the distributions of wealth consumption and bequests of subsequent generations the importance of bequests in aggregate saving has been established by laurence kotlikoff and lawrence summers 1981 who reported that 80 percent of u s household wealth is inherited wealth one interpretation of this finding is that the simple life cycle model without bequest motives is an inadequate description of saving behavior in the united states but the model i present demonstrates that accidental bequests by selfish consumers can account for a potentially sizeable fraction of aggregate wealth although some part of bequests especially by the wealthy undoubtedly results from an explicit bequest motive accidental bequests also play a role in the intergenerational transfer of wealth as well as in the intragenerational variation in wealth in order to focus on the role of accidental bequests i purposely exclude a bequest motive from the specification of the utility function the effects of lifetime uncertainty on individual consumption behavior were first examined formally in a seminal paper by menachem yaari 1965 yaari s model provided the basic framework for virtually all subsequent work on uncertain lifetimes including well known papers by nils hakansson 1969 stanley fischer 1973 robert barro and james friedman 1977 david levhari and leonard mirman 1977 and kotlikoff and avia spivak 1981 however all of these papers focused on the consumption decision of an individual and ignored the effect of accidental bequests on the behavior of the recipients of these accidental bequests 2 as will be shown at various points in this paper changes in the economic environment can have effects on aggregate behavior which differ sharply from the effects on individual behavior because of the endogenous adjustment of bequests the effects of department of economics harvard university cambridge ma 02138 this paper is a revised version of bequests and social security with uncertain lifetimes nber working paper no 1372 june 1984 i thank olivier blanchard john burbidge christopher cavanagh robert clower stanley fischer benjamin friedman elhanan helpman mervyn king nobuhiro kiyotaki laurence kotlikoff robert mcdonald james pesando julio rotemberg lawrence summers lars svensson mark watson and jeffrey wolcowitz for valuable conversations and correspondence i also thank the participants in seminars at boston university columbia university cornell university federal reserve board harvard university university of iowa mit university of minnesota university of montreal national bureau of economic research north carolina state university the wharton school and yale university and two anonymous referees for their helpful comments i also thank the national science foundation for financial support 1 in the presence of perfect annuity and life insurance markets there may or may not be bequests depending on the presence or absence of a bequest motive but there would be no accidental bequests 2 kotlikoff and spivak focus on the role of the family in providing an incomplete annuities market but stop short of a full scale overlapping generations model in which the distribution of bequests is determined endogenously

estimating time preferences from convex budgets experimentally elicited discount rates are frequently higher than what seems reasonable for economic decision making such high rates are often attributed to present biased discounting a well known bias of standard measurements is the assumption of linear consumption utility attempting to correct this bias using measures of risk aversion to identify concavity researchers find reasonable discounting but at the cost of exceptionally high utility function curvature we present a new methodology for identifying time preferences both discounting and curvature from simple allocation decisions we find reasonable levels of both discounting and curvature and surprisingly dynamically consistent time preferences jel c91 d12 d81 understanding and estimating time preferences is obviously of great importance to economists marketers and policy makers consumers decide how much to invest in savings education real estate and life insurance how much to diet exercise and smoke whether to marry when to have children and what to leave in their wills while there has been substantial research estimating time preferences using aggregate consumption data 1 the bulk of the effort has occurred in laboratory environments 2 among the many laboratory techniques employed recent studies have favored multiple price lists mpl with monetary payments 3 with mpls individuals are asked multiple times to choose between smaller payment amounts closer to the present and larger amounts further into the future the interest rate increases monotonically in a price list such that the point where an individual switches from preferring sooner payments to later payments carries interval

present bias lessons learned and to be learned while present bias is an old idea it only took hold in economics following david laibson s 1994 dissertation over the past 20 years research has led to a much better theoretical understanding of present bias when and how to apply it and which ancillary assumptions are appropriate in different contexts empirical analyses have demonstrated how present bias can improve our understanding of behavior in various economic field contexts nonetheless there is still much to learn in this paper we give our assessment of some lessons learned and to be learned

economics food choices and nutrition abstract our goal in this paper is to examine the role and influence of economic factors defined rather broadly on consumer food choices and hence nutritional outcomes we attempt to do this in a non technical fashion we examine the role of prices especially as they relate to the affordability of food in the united states and as a policy lever income is analyzed as a driving force behind changes in eating habits in particular increasing the demand for convenience the role of time constraints as well as time preference are examined as links to healthy eating habits and as forces behind current trends in eating patterns information and knowledge are given prominent play as counter balances to economic forces driving eating habits we conclude with and examination into maternal nutrition knowledge and children s dietary quality

how sensitive is investment to cash flow when financing is frictionless i analyze the sensitivity of a rm s investment to its own cash ow in the benchmarkcase where nancing is frictionless this sensitivity has been proposed as a measure of nancing constraints in earlier studies i nd that the investment cash ow sensitivities that obtain in the frictionless benchmarkare very similar both in magnitude and in patterns they exhibit to those observed in the data in particular the sensitivity is higher for rms with high growth rates and low dividend payout ratios tobin s q is shown to be a more noisy measure of near term investment plans for these rms does a high sensitivityof a rm s investment to its own cash ow indicate that the rm is nancially constrained a large body of research starting with fazzari hubbard and petersen 1988 hereafter fhp suggests that rms facing nancing constraints should exhibit high investment cash ow sensitivities re ecting the wedge between the costs of external and internal funds empirical ndings seem to give support to this hypothesis since rms classi ed as constrained on a priori criteria such as size dividend payout or leverage do have higher cash ow sensitivities even after controlling for their investment opportunities by conditioning on tobin s q however the reliability of these results critically depends on whether q is a proper control for the investment opportunity set if q performs worse for certain classes of rms higher sensitivities may obtain for these rms simply because cash ow re ects information about investment opportunities this critique is not new in his discussion of fhp poterba 1988 was the rst to point out that measurement error in q may cloud the empirical results similar concerns have been raised in subsequent studies as well while the qualitative point is well known its quantitative impact on the investment cash ow sensitivity has not been analyzed can the linkbetween cash ow and the investment opportunity set account for the observed magnitudes of the sensitivity or are these magnitudes too large to be explained without nancing frictions