the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

rational inattentiveness in a forecasting experiment while standard theory assumes rational optimizing agents under full information the latter is rarely found in reality information has to be acquired and processed both involving costs in rational inattentiveness models agents update their information set only when the benefit outweighs the information cost we test the rational inattentiveness model in a controlled laboratory environment our design is a forecasting task with costly information and a clear cost benefit structure while we find numerous deviations from the model predictions on the individual level the aggregate results are consistent with rational inattentiveness and sticky information models rejecting simpler behavioral heuristics

quantifying and understanding the economics of large financial movements abstract financial market data offer the exciting possibility of quantifying and understanding the physics of a complex dynamical system and the hope that this line of thinking may give some insights into understanding collective human behavior various measures of stock market activity have been found to exhibit puzzling features that have recently attracted much research attention these features include the power law distributions of return volume number of trades assets under management of trading institutions and other power law relations linking them here we review these empirical results and show that some of these findings can be usefully interpreted within the framework of a reduced form model gabaix x gopikrishnan p plerou v stanley h e 2003 a theory of power law distributions in financial market fluctuations nature 423 267 270 and an economic model gabaix x gopikrishnan p plerou v stanley h e 2006b institutional investors and stock market volatility quarterly journal of economics 121 461 504 the features not only present a challenge to models of market fluctuations but their specific power law nature also suggests new modeling directions which include ideas from statistical physics which proved useful in understanding similar relationships that occur in the physics of critical phenomena

imperfect choice or imperfect attention understanding strategic thinking in private information games to understand the thinking process in private information games we use mousetracking to record which payoffs subjects attend to the games have three information states and vary in strategic complexity subjects consistently deviate from nash equilibrium choices and often fail to look at payoffs which they need to in order to compute an equilibrium response choices and lookups are similar when stakes are higher when cluster analysis is used to group subjects according to lookup patterns and choices three clusters appear to correspond approximately to level 3 level 2 and level 1 thinking in level k models and a fourth cluster is consistent with inferential mistakes as for example in qre or cursed equilibrium theories deviations from nash play are associated with failure to look at the necessary payoffs the time durations of looking at key payoffs can predict choices to some extent at the individual level and at the trial by trial level

monetary policy and investment dynamics evidence from disaggregate data we use disaggregated data on the components of private fixed investment pfi to estimate industry level responses of real investment and capital prices to unanticipated monetary policy the response functions derive from a restricted large scale var estimated over 1959 2007 our results point to significant cross sector heterogeneity in the behavior of pfi prices and quantities for assets belonging to the equipment category of fixed investment we find that quantities rather than prices absorb most of the fallout from a policy shock by contrast the price effects tend to be higher and the output effects lower for nonresidential structures

correlation neglect in belief formation many information structures generate correlated rather than mutually independent signals the news media being a prime example this article provides experimental evidence that many people neglect the resulting double counting problem in the updating process in consequence beliefs are too sensitive to the ubiquitous telling and re telling of stories and exhibit excessive swings we identify substantial and systematic heterogeneity in the presence of the bias and investigate the underlying mechanisms the evidence points to the paramount importance of complexity in combination with people s problems in identifying and thinking through the correlation even though most participants in principle have the computational skills that are necessary to develop rational beliefs many approach the problem in a wrong way when the environment is moderately complex thus experimentally nudging people s focus towards the correlation and the underlying independent signals has large effects on beliefs

economic insights from neuroeconomic data how and to what extent neuroeconomic data broadly interpreted as data other than standard choice data should be used in advancing economic theory is open to question several authors have attempted to make use of such nonstandard data to shed light on the process of economic decision making john w payne james r bettman and eric j johnson 1993 miguel costa gomes vincent p crawford and bruno broseta 2001 and xavier gabaix et al 2006 have used mouselab software in order to determine the manner in which people use information joseph wang michael spezio and colin camerer 2006 make use of eye tracking data for the same purpose more dramatically researchers such as paul william glimcher joseph kable and kenway louie 2007 are using brain scanning data in an attempt to constrain economic models of discounting and time preference camerer forthcoming presents an excellent review of economic research involving nonstandard data in opposition to this trend faruk gul and wolfgang pesendorfer forthcoming present a strong critique of the use of nonchoice data within economics they put forward two specific arguments that users of neuroeconomic data must refute if their work is to be taken seriously first economic models were designed only to explain choices thus nonchoice data can be used neither to confirm nor deny a particular economic model second it is by and large true that economists are interested in choice behavior any two models will either make different predictions for choice in which case they can be differentiated by standard choice data or they will not in which case an economist will not be interested in differentiating between them economic insights from neuroeconomic data

no arbitrage taylor rules with switching regimes we study the time varying nature of u s monetary policies summarized by the taylor rule based on a continuous time regime switching term structure model in this model the spot rate follows the taylor rule and government bonds at different maturities are priced by no arbitrage we allow the coefficients of the taylor rule and the dynamics of inflation and output gap to be regime dependent and estimate the model using government bond yields we find that the fed is proactive in controlling inflation in one regime and accommodative for growth in another moreover proactive monetary policies are associated with more stable inflation and output gap and therefore could have contributed to the great moderation our analysis also highlights the importance of switching regimes for term structure modeling without the regimes inflation and output can explain less than 50 of the variations of bond yields with the regimes the two variables can explain more than 80 of the variations of bond yields

thinking ahead the decision problem we propose a model of costly decision making based on time costs of deliberating current and future decisions we model an individual decision maker s thinking process as a thought experiment that takes time and let the decision maker think ahead about future decision problems in yet unrealized states of nature by formulating an intertemporal state contingent planning problem which may involve costly deliberation in every state of nature and by letting the decision maker deliberate ahead of the realization of a state we attempt to capture the basic observation that individuals generally do not think through a complete action plan instead individuals prioritize their thinking and leave deliberations on less important decisions to the time or event when they arise

information acquisition under risky conditions across real and hypothetical settings i collect data on how subjects acquire information about risky choices in both real and hypothetical settings using process tracing software called mouselab on average there are no significant differences across settings in the amount of time subjects take to make a choice or the completeness of the information they acquire subjects also acquire information in sequences consistent with an integration model of decision making such as expected utility theory or prospect theory i do not find significant differences in risk preferences across settings on average but i do find that subjects risk preferences are related to the completeness of the information that they acquire and where they start their information acquisition jel c91 d80 d83

rational inattention optimal consideration sets and stochastic choice we unite two basic approaches to modelling limited attention in choice by showing that the rational inattention model implies the formation of consideration sets only a subset of the available alternatives will be considered for choice we provide necessary and sufficient conditions for rationally inattentive behaviour which allow the identification of consideration sets in simple settings chosen options are those that are best on a stand alone basis in richer settings the consideration set can only be identified holistically in addition to payoffs prior beliefs impact consideration sets linear inequalities identify all priors consistent with each possible consideration set

guessing with negative feedback an experiment we investigate experimentally a new variant of the beauty contest game bcg in which players actions are strategic substitutes a negative feedback bcg our results show that chosen numbers are closer to the rational expectation equilibrium than in a strategic complements environment a positive feedback bcg we also find that the estimated average depth of reasoning from the cognitive hierarchy model does not differ between the two environments we show that the difference may be attributed to the fact that additional information is more valuable when players actions are strategic substitutes rather than strategic complements in line with other recent experimental findings

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

no news is news do markets underreact to nothing as illustrated in the tale of the dog that did not bark the absence of news and the passage of time often contain information we test whether markets fully incorporate this information using the empirical context of mergers during the year after merger announcement the passage of time is informative about the probability that the merger will ultimately complete we show that the variation in hazard rates of completion after announcement strongly predicts returns this pattern is consistent with a behavioral model of underreaction to the passage of time and cannot be explained by changes in risk or frictions

do consumers need more protection from small dollar lenders historical evidence and a roadmap for future research we summarize the current debate surrounding four small dollar credit products pawn loans vehicle title loans payday loans and cash installment loans from finance companies we review the contributions of scholars that inform this debate we underscore that users of these products fit the description of those whom consumer credit models predict benefit from these products many studies find that on average consumer use of small dollar credit products is at worst innocuous there are however findings of heterogeneity in borrowers experiences the disagreements surrounding these credit products and the difficulty in crafting the proper policy response stems from this heterogeneity jel d18 g23

monetary policy trend inflation and the great moderation an alternative interpretation with positive trend inflation the taylor principle does not guarantee a determinate equilibrium we provide new theoretical results on determinacy in new keynesian models with positive trend inflation and new empirical findings on the federal reserve s reaction function before and after the volcker disinflation to find that i while the fed likely satisfied the taylor principle before volcker the us economy was still subject to self fulfilling fluctuations in the 1970s ii the us economy switched to determinacy during the volcker disinflation and iii the switch reflected changes in the fed s response to macroeconomic variables and the decline in trend inflation jel e12 e23 e31 e32 e52

learning about unstable publicly unobservable payoffs neoclassical finance assumes that investors are bayesian in many realistic situations bayesian learning is challenging here we consider investment opportunities that change randomly while payoffs are observable only when invested in a stylized version of the task we wondered whether performance would be affected if one were to follow reinforcement learning principles instead the answer is a definite yes when asked to perform our task participants overwhelmingly learned in a bayesian way they stopped being bayesians though when not nudged into paying attention to contingency shifts this raises an issue for financial markets who has the incentive to nudge investors

pinocchio s pupil using eyetracking and pupil dilation to understand truth telling and deception in sender receiver games we conduct laboratory experiments on sender receiver games with an incentive for senders to exaggerate such as security analyst s painting a rosy picture about earnings prospects our results show that overcommunicati on messages are more informative of the true state than they should be in equilibri um is consistent with a level k model eyetracking shows that senders look much more on the payoff rows corresponding to the true state and much less at receiver payoffs than at their own payoffs senders pupils also dilate more when their deception is larger in magnitude together these data are consistent with the hypothesis that figuring out ho w to deceive another player is cognitively difficult as assumed in the level k mod el a combination of sender messages and lookup patterns predicts the true state about t wice as often as predicted by equilibrium using these measures would enable receiver subjects to hypothetically earn up to 16 21 percent more than they actually do

the allocation of time in decision making we study the allocation of time across decision problems if a decision maker 1 has noisy estimates of value 2 improves those estimates the longer he or she analyzes a choice problem and 3 allocates time optimally then the decision maker should spend less time choosing when the difference in value between two options is relatively large to test this prediction we ask subjects to make 27 binary incentive compatible intertemporal choices and measure response time for each decision our time allocation model explains 54 of the variance in average decision time these results support the view that decision making is a cognitively costly activity that uses time as an input allocated according to cost benefit principles

one for some or one for all taylor rules and interregional heterogeneity we document a novel empirical phenomenon the u s federal reserve appears to set interest rates partly in response to regional economic disparities this result is robust even after controlling for factors such as the central bank s forecasts and a battery of explanatory variables we argue that this likely does not reflect an explicit concern about regional differences by policymakers but instead can be explained by a model with nonlinear regional phillips curves consistent with the predictions of this model we find that the federal reserve responds disproportionately to fluctuations in low unemployment states alternative explanations cannot account for this finding

fact free learning aragones acknowledges financial support from the spanish ministry of science and technology grant sec2003 01961 and creabarcelona economics aragones gilboa and schmeidler gratefully acknowledge support from the polarization and conflict project cit 2 ct 2004 506084 funded by the european commission dg research sixth framework programme gilboa and schmeidler gratefully acknowledge support from the israel science foundation grant 790 00 and 975 03 postlewaite gratefully acknowledges support from national science foundation grant sbr 9810693

order in product customization decisions evidence from field experiments differentiated product models are predicated on the belief that a product s utility can be derived from the summation of utilities for its individual attributes in one framed field experiment and two natural field experiments we test this assumption by experimentally manipulating the order of attribute presentation in the product customization process of custom made suits and automobiles we find that order affects the design of a suit that people configure and the design and price of a car that people purchase by influencing the likelihood that they will accept the default option suggested by the firm

the effects of monetary policy using structural factor analysis the traditional vector autoregression var method is widely used to trace out the effects of monetary policy innovations on the economy however this method suffers from the curse of dimensionality so that in practice vars are estimated on a limited number of variables leading to a potential missing information problem in this article we use the method of structural factor analysis to evaluate the effects of monetary policy on key macroeconomic variables in a data rich environment this methodology allows us to extract information on monetary policy and its impact on the economy from a much larger data set than is possible with the traditional var method we propose two structural factor models one is the structural factor augmented vector autoregressive sfavar model and the other is the structural factor vector autoregressive sfvar model compared to the traditional var both models incorporate information from hundreds of data series series that can be and are monitored by the central bank in

the benefits of forced experimentation striking evidence from the london underground network we estimate that a signi cant fraction of commuters on the london underground do not travel their optimal route consequently a tube strike which forced many commuters to experiment with new routes taught commuters about the existence of superior journeys bringing about lasting changes in behavior this eect is stronger for commuters who live in areas where the tube map is more distorted thereby pointing towards the importance of informational imperfections we argue that the information produced by the strike improved network e ciency search costs are unlikely to explain the suboptimal behavior instead individuals seem to under experiment in normal times as a result of which constraints can be welfare improving jel classi cation d83 l91 r41

u s monetary policy surprises identification with shifts and rotations in the term structure we develop a model to extract measures of monetary policy surprises from the maturity structure of the yield curve the model endogenously allows for the fact that the yield curve may either shift or rotate in response to monetary policy shocks a latent factor model approach with identification through heteroskedasticity harnesses the term structure to extract monetary policy shocks the approach offers informational advantages over event studies results from the u s term structure from 1994 strongly support the hypothesis that differing term structure responses are reactions to different types of monetary policy shock rather than differing reactions to the same policy shock

limited horizon forecast in repeated alternate games abstract in two player infinite horizon alternating move games a limited forecast n 1 n 2 equilibrium is such that 1 player i chooses actions according to his n i length forecasts so as to maximise the average payoff over the forthcoming n i periods and 2 players equilibrium forecasts are correct with finite action spaces n 1 n 2 solutions always exist and are cyclical and the memory capacity of the players has no influence on the set of solutions a solution is hyperstable if it is an n 1 n 2 solution for all n 1 n 2 sufficiently large hyperstable solutions are shown to exist and are characterized for generic repeated alternate move 2 2 games journal of economic literature classification numbers c72 d81

a sparsity based model of bounded rationality this article defines and analyzes a sparse max operator which is a less than fully attentive and rational version of the traditional max operator the agent builds as economists do a simplified model of the world which is sparse considering only the variables of first order importance his stylized model and his resulting choices both derive from constrained optimization still the sparse max remains tractable to compute moreover the induced outcomes reflect basic psychological forces governing limited attention the sparse max yields a behavioral version of basic chapters of the microeconomics textbook consumer demand and competitive equilibrium i obtain a behavioral version of marshallian and hicksian demand arrow debreu competitive equilibrium the slutsky matrix the edgeworth box roy s identity and so on the slutsky matrix is no longer symmetric nonsalient prices are associated with anomalously small demand elasticities because the consumer exhibits nominal illusion in the edgeworth box the offer curve is a two dimensional surface rather than a one dimensional curve as a result different aggregate price levels correspond to materially distinct competitive equilibria in a similar spirit to a phillips curve the arrow debreu welfare theorems typically do not hold this framework provides a way to assess which parts of basic microeconomics are robust and which are not to the assumption of perfect maximization jel codes d01 d03 d11 d51

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

decision time consideration time and status quo bias economists increasingly appreciate the value of studying the time taken to make decisions in order to provide insights into decision makers choices this article shows that studying how time is allocated among individual options is also valuable in helping researchers to understand the impact default options have on decision makers attention allocation as approximated by how the time is allocated the study of this impact generates new insights into the well known choice phenomenon of status quo bias which typically refers to decision makers tendency to stick to a default option by designing a series of novel experiments i find that this bias arises even when the choice is among prizes of fixed monetary value expressed in arithmetic form i also find asymmetric attention i e more time devoted to default options and strikingly asymmetric choice errors specifically decision makers fail to select an alternative better than the default 28 of the time while they incorrectly select an alternative worse than the default only 11 of the time and provide evidence supporting a causal relationship between asymmetric attention and asymmetric errors jel d03 d12 d83

policy regime changes judgment and taylor rules in the greenspan era this paper investigates policy deviations from linear taylor rules motivated by the risk management approach followed by the fed during the greenspan era we estimate a nonlinear monetary policy rule via a logistic smoothing transition regression model where policy makers judgment proxied by economically meaningful variables drives the transition across policy regimes we find that ignoring judgment induced nonlinearities while estimating taylor rules has remarkable costs in terms of fit above 250 bps in 10 quarters although linear taylor rules describe well the broad contours of monetary policy they fail to detect relevant policy decisions driven by policy makers judgment

federal reserve information and the behavior of interest rates this paper tests for the existence of asymmetric information between the federal reserve and the public by examining federal reserve and commercial inflation forecasts it demonstrates that the federal reserve has considerable information about inflation beyond what is known to commercial forecasters it also shows that monetary policy actions provide signals of the federal reserve s information and that commercial forecasters modify their forecasts in response to those signals these findings may explain why long term interest rates typically rise in response to shifts to tighter monetary policy jel e52 e43 d82 asymmetric information between the federal reserve and the public is a phenomenon that is often posited but rarely tested numerous models of central bank behavior for example show that the existence of asymmetric information has important implications for the effectiveness of policy and the consequences of dynamic inconsistency yet there

search costs and adaptive consumers short time delays do not affect choice quality using online price comparison and shopping platforms makes experiencing slow connections lags and waiting times for information an unfortunate reality however little attention has been paid to analyzing the effects of such delayed display of information on product choice behavior this article explores the effect of time delays in a multi attribute choice laboratory experiment by not providing information immediately when requested but after short time delays increasing these waiting times reduced the amount of information looked up but did not affect choice quality higher time delays made decision makers use more deliberate search processes whereas low time delays induced inefficient over searching

the conquest of south american inflation we infer determinants of latin american hyperinflations and stabilizations by using the method of maximum likelihood to estimate a hidden markov model that assigns roles both to fundamentals in the form of government deficits that are financed by money creation and to destabilizing expectations dynamics that can occasionally divorce inflation from fundamentals levels and conditional volatilities of monetized deficits drove most hyperinflations and stabilizations with a notable exception in peru where a cosmetic reform of the type emphasized by marcet and nicolini occurred

costly information acquisition experimental analysis of a boundedly rational model the directed cognition model assumes that agents use partially myopic option value calculations to select their next cognitive operation the current paper tests this model by studying information acquisition in two experiments in the first experiment information acquisition has an explicit financial cost in the second experiment information acquisition is costly because time is scarce the directed cognition model successfully predicts aggregate information acquisition patterns in these experiments when the directed cognition model and the fully rational model make demonstrably different predictions the directed cognition model better matches the laboratory evidence jel d83

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

learning from experience simply there is substantial academic interest in modeling consumer experiential learning however approximately optimal solutions to forward looking experiential learning problems are complex limiting their behavioral plausibility and empirical feasibility we propose that consumers use cognitively simple heuristic strategies we explore one viable heuristic index strategies and demonstrate that they are intuitive tractable and plausible index strategies are much simpler for consumers to use but provide close to optimal utility they also avoid exponential growth in computational complexity enabling researchers to study learning models in more complex situations well defined index strategies depend on a structural property called indexability we prove the indexability of a canonical forward looking experiential learning model in which consumers learn brand quality while facing random utility shocks following an index strategy consumers develop an index for each brand separately and choose the brand with the highest index using synthetic data we demonstrate that an index strategy achieves nearly optimal utility at substantially lower computational costs using iri data for diapers we find that an index strategy performs as well as an approximately optimal solution and better than myopic learning we extend the analysis to incorporate risk aversion other cognitively simple heuristics heterogeneous foresight and an alternative specification of brands

public sector performance measurement and stakeholder support abstract over the past several decades there has been dramatically increased attention paid to measuring the performance of public sector and nonprofit organizations in the united states and elsewhere recent research has indicated that public sector and nonprofit organizations are responsive to performance measurement in both productive and unproductive ways however it is not yet known how stakeholders respond to this measurement this paper makes use of a unique panel survey dataset of the population of elementary and middle schools in the state of florida to directly investigate this question we exploit the fact that florida changed its school grading system in 2002 and study the degree to which private contributions to schools are responsive to the information contained in school grades we find evidence that school grades can have substantial effects on a school s ability to obtain private contributions we also observe that schools serving different clienteles are treated differently in response to changes in school grades

on the role of heuristics experimental evidence on inflation dynamics we run an experiment where groups of six subjects must set prices in a non stationary macroeconomic environment where prices are complements the exogenous variable a business indicator is common knowledge and prices are flexible disregarding sticky prices or sticky information in a first treatment subjects insignificantly corrected for past errors which implies that history plays a role for determining current prices by reporting the business indicator in a simpler form the second treatment tacitly offered a heuristic for setting prices this option was widely taken bringing about an excess response to the business indicator and a significant deviation from equilibrium even in the long run in a third treatment with staggered pricing we observe that subjects look only one round into the future but not further ahead contrary to theoretical predictions our findings suggest that monetary transmission may be impaired due to what we label sticky reasoning the failure or unwillingness to iteratively delete dominated strategies 2013 elsevier b v all rights reserved

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

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

on the use of heuristics to approximate competitors private information abstract firms often lack knowledge of the nature of the uncertainty they or their opponents face and use heuristics or approximations to determine their strategy we define and analyze one type of heuristic strategy in which firms choose strategies based on the expectation of their opponents private information rather than the full information about the distribution of that private information we find that in equilibrium the degree to which the heuristic strategy differs from the bayesian strategy depends on 1 the convexity of a firm s marginal profits with respect to their opponents private information and 2 whether firm strategies are complementary or substitutable under certain conditions firms equilibrium profits are greater when all firms use heuristics than when all firms use the full information our results provide insight into incentives firms may have to either facilitate or impede access to industry information

the effects of experience on preferences theory and empirics for environmental public goods this article develops a choice model for environmental public goods which allows for consumers to learn about their preferences through consumption experiences we develop a theoretical model of bayesian updating perform comparative statics over the model and show how the theoretical model can be consistently incorporated into a reduced form econometric model our main findings are that in a random utility model rum discrete choice model a subject s scale should increase and the variability of scale should decrease with experience if subjects are bayesians we then estimate the model using field data regarding preferences for one particular public good water quality we find strong evidence that additional experience increases scale thereby making consumer preferences more predictable from the econometrician s perspective we find supportive but less convincing evidence that experience decreases the variability of scale across subjects

signaling with costly acquisition of signals in this paper we investigate the consequences of introducing a cost to observe the signal in an otherwise standard signaling game beyond identifying equilibria which we contrast with those of a standard signaling game we study their robustness to two important classes of refinements acting through restrictions on out of equilibrium beliefs and through trembles our results suggest that more prominence should be given to the pooling outcome on the minimum signal

monetary policy in a data rich environment abstract most empirical analyses of monetary policy have been confined to frameworks in which the federal reserve is implicitly assumed to exploit only a limited amount of information despite the fact that the fed actively monitors literally thousands of economic time series this article explores the feasibility of incorporating richer information sets into the analysis both positive and normative of fed policymaking we employ a factor model approach developed by stock j h watson m w diffusion indices journal of business economic statistics 2002 20 2 147 forecasting inflation 1999 journal of monetary economics 44 2 293 that permits the systematic information in large data sets to be summarized by relatively few estimated factors with this framework we reconfirm stock and watson s result that the use of large data sets can improve forecast accuracy and we show that this result does not seem to depend on the use of finally revised as opposed to real time data we estimate policy reaction functions for the fed that take into account its data rich environment and provide a test of the hypothesis that fed actions are explained solely by its forecasts of inflation and real activity finally we explore the possibility of developing an expert system that could aggregate diverse information and provide benchmark policy settings

has u s monetary policy changed evidence from drifting coefficients and real time data despite the large amount of empirical research on monetary policy rules there is surprisingly little consensus on the nature or even the existence of changes in the conduct of u s monetary policy three issues appear central to this disagreement 1 the specific type of changes in the policy coefficients 2 the treatment of heteroskedasticity and 3 the real time nature of the data used this paper addresses these issues in the context of forwardlooking taylor rules with drifting coefficients the estimation is based on real time data and accounts for the presence of heteroskedasticity in the policy shock the findings suggest important but gradual changes in the rule coefficients not adequately captured by the usual split sample estimation in contrast to orphanides 2002 2003 i find that the fed s response to the real time forecast of inflation was weak in the second half of the 1970s perhaps not satisfying taylor s principle as suggested by clarida gali and gertler 2000 however the response to inflation was strong before 1973 and gradually regained strength from the early 1980s onward moreover as in orphanides 2003 the fed s response to real activity fell substantially and lastingly during the 1970s

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

consumer inertia choice dependence and learning from experience in a repeated decision problem abstract understanding when and how individuals think about real life problems is a central question in economics this paper studies the role of inertia inattention state dependence and learning the empirical setting is a tariff experiment when optional measured tariffs for local telephone calls were introduced unanticipatedly we find that consumers tend to align their choices of tariff and telephone use levels correctly despite low potential savings mistakes are not permanent as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone service ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results

limited attention as a scarce resource in information rich economies this article uses basic facts from the psychology of attention to show how the limited attention of consumers affects economic competition the article determines endogenously whether an economy is information rich or information poor a conventional economic equilibrium results if subjects have spare attention capacity at the positive level the respective impacts of advances in information technology international integration and the media on equilibrium diversity and level of attention seeking activities are shown at the normative level the issues of welfare efficiency and optimal policy interventions are addressed

electoral competition with rationally inattentive voters how do voters allocate costly attention to alternative political issues and how does selective ignorance of voters interact with policy design by politicians we address these questions by developing a model of electoral competition with rationally inattentive voters rational inattention amplies the eects of preference intensity because voters pay more attention where stakes are higher the model has many potential applications and those that we discuss in more detail imply that extremist voters are more attentive and inuential public goods are under provided divisive issues receive more attention and less transparent candidates choose more extreme policies endogenous attention can also lead to multiple equilibria explaining how poor voters in developing countries can be politically empowered by welfare programs

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

appropriating value from computerized reservation system ownership in the airline industry it is difficult for the firm competing through information technology resources to gain a sustainable advantage because systems are easy to imitate and substitute resources are often available to competitors the innovator may be unable to appropriate all of the benefits from information technology investments airlines have installed computerized reservations systems in travel agencies to appropriate the returns from their investments in information technology the airlines expected to obtain a number of benefits from this strategy including increased efficiency possible bias in favor of the computerized reservations systems owner on the part of the travel agent and fees from other airlines for making reservations for them the purpose of this paper is to evaluate the appropriation of value by computerized reservations systems owners from deploying systems in travel agencies these benefits beyond fees from travel agents should be seen in the vendor airline s market share between cities and in the overall performance of the airline at an industry level this paper models airline performance as a function of computerized reservations systems ownership at two levels for selected city pairs and at the overall level of the firm the city pair analysis employs a multinomial logit market share model that analyzes five years of data on 72 city pair routes the industry model uses longitudinal data for a panel of 10 airlines for 12 years the results of both analyses support hypotheses that computerized reservations systems ownership is positively related to airline performance it appears that strong airlines have appropriated the benefits of their computerized reservations systems turning them into highly specialized assets for further travel related innovation this work offers useful theoretical extensions and methodological approaches for the study of similar kinds of network technology innovations that are currently being deployed in association with electronic commerce on the internet

consumer search behavior and sunk costs abstract this paper presents the results of four economic experiments involving 41 undergraduate students who were assigned the task of searching for the lowest price from a known distribution of prices economic theory predicts that individuals should continue to draw until the expected gain of another search is less than the marginal search cost additionally once individuals have made a draw and then continued they should never return to a price drawn earlier exercise recall both of these predictions are tested in the paper and the results show that behavior is not always consistent with them it appears that individuals are making decisions based on the total return from searching rather than simply the marginal return from another draw

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

strategic pricing with rational inattention to quality this paper studies both theoretically and experimentally the pricing strategy of a rm that faces a consumer who is rationally inattentive to product quality sims 2003 in a standard sequential pricing game rational inattention to quality produces two types of mixed strategy perfect bayesian equilibria one where sellers pool at a low price and buyers are fully inattentive to quality and one where there is semi pooling at a high price and buyers are selectively attentive to quality i characterize these

search and satisficing many everyday decisions are made without full examination of all available options and as a result the best available option may be missed we develop a search theoretic choice experiment to study the impact of incomplete consideration on the quality of choices we find that many decisions can be understood using the satisficing model of herbert simon 1955 most subjects search sequentially stopping when a satisficing level of reservation utility is realized we find that reservation utilities and search order respond systematically to changes in the decision making environment jel d03 d12 d83

attention discrimination theory and field experiments with monitoring information acquisition we link two important ideas attention is scarce and lack of information about an individual drives discrimination in selection decisions our model of allocation of costly attention implies that applicants from negatively stereotyped groups face attention discrimination less attention in highly selective cherry picking markets where more attention helps applicants and more attention in lemon dropping markets where it harms them to test the prediction we integrate tools to monitor information acquisition into correspondence field experiments in both countries we study we find that unfavorable signals minority names or unemployment systematically reduce employers efforts to inspect resumes also consistent with the model in the rental housing market which is much less selective than labor markets we find landlords acquire more information about minority relative to majority applicants we discuss implications of endogenous attention for magnitude and persistence of discrimination in selection decisions returns to human capital and potentially for policy