supply chain information in analyst reports on publicly traded companies abstract analyst reports are an important source of secondary data on companies for understanding a company s performance in the recent past and for getting guidance on its future performance we therefore analyzed the text of 1028 equity analyst reports of 145 fortune 500 global companies not including services sectors like it or banking published between 2009 and 2011 for supply chain related information we found that nearly three fifths of these reports contained supply chain information pertaining to inbound process or outbound aspects of the supply chain of the company at the report level there are significant industry effects for supply chain related content in analyst reports on the other hand aggregating information at the company level it appears that analysts focus on a particular supply chain aspect for a company as well as its sector furthermore logistic regression analysis suggests a link between the supply chain information provided when this is positive in orientation and the buy sell hold recommendation of the analyst regarding the company s stock

commodity price shocks and civil conflict evidence from colombia how do income shocks aect armed con ict theory suggests two op posite eects if labor is used to appropriate resources violently higher wages may lower con ict by reducing labor supplied to appropriation this is the opportunity cost eect alternatively a rise in contestable income may increase violence by raising gains from appropriation this is the rapacity eect our paper exploits exogenous price shocks in inter national commodity markets and a rich dataset on civil war in colombia to assess how dierent income shocks aect con ict we examine changes in the price of agricultural goods which are labor intensive and natural resources which are capital intensive we focus on coee and oil the two largest exports we nd that a sharp fall in coee prices in the 1990s increased violence dierentially in regions growing more coee by lower ing wages and the opportunity cost of joining armed groups in contrast a rise in oil prices increased violence dierentially in the oil region by in creasing municipal revenue siphoned through rapacity this pattern holds in several other agricultural and natural resource sectors providing robust evidence that price shocks aect con ict in opposite directions depending on the factor intensity of the commodity

measuring the financial sophistication of households many households invest in ways that are hard to reconcile with standard financial theory and that have been labelled as investment mistakes campbell 2006 calvet campbell and sodini henceforth ccs 2007 there is increasing interest among household finance research ers in the concept of financial sophistication defined as the ability of a household to avoid making such mistakes a growing empirical lit erature documents a cross sectional correlation between household characteristics and invest ment mistakes richer better educated house holds tend to be better diversified marshall blume and irwin friend 1975 ccs 2007 william goetzmann and alok kumar 2008 annette vissing jorgensen 2003 display less inertia julie agnew pierluigi balduzzi and annika sunden 2003 yannis bilias dimitris georgarakos and michael haliassos 2008 campbell 2006 ccs 2009 vissing jorgensen 2002 and have a weaker disposition to hold losing and sell winning stocks ccs 2009 ravi dhar and ning zhu 2006 than other house holds one feature of these earlier papers is that mistakes are investigated one at a time often

a two person dynamic equilibrium under ambiguity this paper describes a pure exchange continuous time economy with two heterogeneous agents and complete markets a novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to frank knight the equilibrium is described completely in closed form after identifying agents as countries the model is applied to address the consumption home bias and equity home bias puzzles 2002 elsevier science b v all rights reserved jel classi cation d81 g11 g12 g15

crime rates and local labor market opportunities in the united states 1979 1997 the labor market prospects of young unskilled men fell dramatically in the 1980s and improved in the 1990s crime rates show a reverse pattern increasing during the 1980s and falling in the 1990s because young unskilled men commit most crime this paper seeks to establish a causal relationship between the two trends previous work on the relationship between labor markets and crime focused mainly on the relationship between the unemployment rate and crime and found inconclusive results in contrast this paper examines the impact of both wages and unemployment on crime and uses instrumental variables to establish causality we conclude that both wages and unemployment are significantly related to crime but that wages played a larger role in the crime trends over the last few decades these results are robust to the inclusion of deterrence variables controls for simultaneity and controlling for individual and family characteristics

small worlds modeling attitudes toward sources of uncertainty abstract we introduce the concept of a conditional small world event domain an extension of savage s the foundations of statistics wiley new york 1954 notion of a small world as a self contained collection of comparable events under weak behavioral conditions we demonstrate probabilistic sophistication in any small world event domain without relying on monotonicity or continuity probabilistic sophistication within though not necessarily across small worlds provides a foundation for modeling a decision maker that has source dependent risk attitudes this also helps formalize the idea of source preference and suggests an interpretation of ambiguity aversion often associated with ellsberg type behavior in terms of comparative risk aversion across small worlds

rainfall and conflict a cautionary tale abstract there is evidence that in some contexts income shocks cause conflict the literature demonstrating this relationship uses rainfall shocks to instrument for income shocks arguing that in agriculturally dependent regions negative rain shocks lower income which incites violence this identification strategy relies on the assumption that rainfall shocks affect conflict only through their impacts on income this paper evaluates this exclusion restriction in the context of religious conflict in india using data on dam construction i identify districts that are downstream from irrigation dams and show that income in these areas is much less sensitive to rainfall fluctuations however rain shocks remain equally strong predictors of riot incidence in these districts i explore other channels through which rainfall might affect conflict

strategic group formation and performance the case of the u s pharmaceutical industry 1963 1982 the focus of this paper is on three major questions 1 what is the theoretical rationale for the strategic group concept 2 does strategic group membership have performance implications and 3 are strategic groups and membership in strategic groups stable characteristics of industries a statistical procedure is proposed to longitudinally identify strategic groups the empirical setting is the u s pharmaceutical industry over the period 1963 82 while performance differences are found in terms of market share profitability differences between groups are not observed neither are differences found in terms of risk and risk adjusted performance these results are attributed to the existence of performance variation within each strategic group a dynamic model of competitive repositioning is proposed which helps integrate the findings from the study

economic determinants of land invasions this study estimates the effect of economic conditions on redistributive conflict we examine land invasions in brazil using a panel data set with over 50 000 municipality year observations adverse eco nomic shocks instrumented by rainfall cause the rural poor to invade and occupy large landholdings this effect exhibits substantial heterogeneity by land inequality and land tenure systems but not by other observable variables in highly unequal municipalities negative income shocks cause twice as many land invasions as in municipalities with average land inequality cross sectional estimates using fine within region variation also suggest the importance of land inequality in explaining redistributive conflict i introduction c onflict over land is endemic to many rural econo mies in environments marked by a highly skewed distribution of property incomplete land and credit markets poorly or unevenly enforced property rights and weak political institutions agents often resort to extralegal means to improve their economic positions the poor frequently invade private properties and occupy them until either forcibly expelled or granted official titles land conflict which is prevalent in many countries such as brazil south africa uganda and venezuela may distort the allocation of resources in the agricultural sector away from productive uses and thereby contribute to the persistence of rural poverty how do economic conditions affect this redistrib utive conflict this paper explores this question using a rich municipal level data set of 5 299 land invasions from 1988 to 2004 in brazil we follow miguel satyanath and sergenti 2004 by using rainfall as a source of exogenous variation to study the relationship between income and conflict and we find that adverse economic shocks cause the rural poor to invade large landholdings this effect exhibits considerable het erogeneity by land inequality and land tenure systems in highly unequal municipalities negative income shocks cause twice as many land invasions as in municipalities with average land inequality the effect of income shocks is even stronger in highly polarized municipalities as measured by the degree of bimodality in the land distribution cross sectional estimates using fine within region variation also suggest the importance of land inequality in explaining redistributive conflict we also find that income shocks cause significantly more land invasions in municipalities with a greater proportion of land under fixed rent contracts by contrast we find no evidence of heterogeneity on a range of other political and socioeconomic variables including political competition sharecropping police expenditures and social welfare spending recent microeconometric studies have examined two

climate shocks and exports this paper uses international trade data to examine the effects of climate shocks on economic activity we examine panel models relating the annual growth rate of a country s exports in a particular product category to the country s weather in that year we find that a poor country being 1 degree celsius warmer in a given year reduces the growth rate of that country s exports by between 2 0 and 5 7 percentage points with no detectable effects in rich countries we find negative effects of temperature on exports of both agricultural products and light manufacturing products with little apparent effects on heavy industry or raw materials the results confirm large negative effects of temperature on poor countries economies and suggest that temperature affects a much wider range of economic activity than conventionally thought this abstract was borrowed from another version of this item

the economic impacts of climate change evidence from agricultural output and random fluctuations in weather fisher et al 2012 hereafter fhrs have uncovered coding and data errors in our paper deschenes and greenstone 2007 hereafter dg we acknowledge and are embarrassed by these mistakes we are grateful to fhrs for uncovering them we hope that this reply will also contribute to advancing the literature on the vital question of the impact of climate change on the us agricultural sector fhrs main critiques of dg are as follows i there are errors in the weather data and climate change projections used by dg ii the climate change projections are based on the hadley 2 model and scenarios rather than the more recent hadley 3 model and scenarios iii standard errors are biased due to spatial correlation iv the inclusion of state by year fixed effects does not leave enough weather variation to obtain meaningful estimates of the relationship between agriculture profits and weather v storage and inventory adjustment in response to yield shocks invalidate the use of annual profit data and vi fhrs argue that a better specified hedonic model produces robust estimates unlike the results reported in dg four of these critiques have little basis and we respond to them here in the introduction specifically with respect to ii the more recent daily climate predictions were not available when we wrote dg nevertheless the most important issue is providing the reliable estimates of climate change and in this note we report estimates based on the climate model we used in dg and a more recent one that we gained access to in the meantime iii in the primary table on agricultural profits dg reports two sets of standard errors with the first clustered at the county level and the second based on a variance covariance matrix that accounts for spatial correlation using the method proposed in conley 1999 thus the claim of fhrs 2012 seems overblown nevertheless to ease comparisons of papers in this literature this note will adopt the fhrs convention of reporting estimated standard errors clustered at the county and state levels we find that inference is largely unaffected by the choice between these different assumptions about the variance covariance matrix

weather shocks agriculture and crime evidence from india we use detailed crime agriculture and weather data from india during the years 1971 2000 to conduct a systematic analysis of the relationship between weather shocks and multiple categories of crime we find that drought and heat exert a strong impact on virtually all types of crimes that the impact on property crimes is larger than for violent crimes and that this relationship has been relatively stable over three decades of economic development we then use seasonal and geographical disaggregations of weather and agricultural cultivation to examine the prevailing hypothesis that agricultural income shocks drive the weather crime relationship in developing countries the patterns we find are consistent with this hypothesis in the case of rainfall shocks but suggest additional mechanisms may play an important role in driving the heat crime relationship consistent with evidence from industrialized countries

way down in the hole adaptation to long term water loss in rural india worsening environmental conditions threaten to undermine progress in reducing rural poverty little is known however about the prospects for farmer adaptations to mitigate this threat in particular through opportunities for income diversification presented by recent non agricultural growth we study the effects of increasing water scarcity in india using quasi random geologically determined differences in access to groundwater the drying up of wells results in a precipitous and persistent decline in farm income and wealth with little evidence of agricultural adaptation however labor reallocation to off farm employment appears successful in maintaining overall income particularly in locations with a more developed manufacturing sector

history institutions and economic performance the legacy of colonial land tenure systems in india we analyze the colonial land revenue institutions set up by the british in india and show that differences in historical property rights institutions lead to sustained differences in economic outcomes areas in which proprietary rights in land were historically given to landlords have significantly lower agricultural investments and productivity in the post independence period than areas in which these rights were given to the cultivators these areas also have significantly lower investments in health and education these differences are not driven by omitted variables or endogeneity problems they probably arise because differences in historical institutions lead to very different policy choices

what do we learn from the weather the new climate economy literature a rapidly growing body of research applies panel methods to examine how temperature precipitation and windstorms influence economic outcomes these studies focus on changes in weather realizations over time within a given spatial area and demonstrate impacts on agricultural output industrial output labor productivity energy demand health conflict and economic growth among other outcomes by harnessing exogenous variation over time within a given spatial unit these studies help credibly identify i the breadth of channels linking weather and the economy ii heterogeneous treatment effects across different types of locations and iii nonlinear effects of weather variables this paper reviews the new literature with two purposes first we summarize recent work providing a guide to its methodologies datasets and findings second we consider applications of the new literature including insights for the damage function within models that seek to assess the potential economic effects of future climate change jel c51 d72 o13 q51 q54

participation constraints in the stock market evidence from unexpected inheritance due to sudden death we use a natural experiment to investigate the impact of participation constraints on individuals decisions to invest in the stock market unexpected inheritance due to sudden deaths results in exogenous variation in financial wealth and allows us to examine whether fixed entry and ongoing participation costs cause non participation we have three key findings first windfall wealth has a positive effect on participation second the majority of households do not react to sizeable windfalls by entering the stock market but hold on to substantial safe assets even over longer horizons third the majority of households inheriting stock holdings actively sell the entire portfolio overall these findings suggest that participation by many individuals is unlikely to be constrained by financial participation costs

poverty and witch killing many observers have noted that poverty and violence go hand in hand there is a strong negative relationship between economic growth and crime across countries as well as across districts in india and a link between low income and the occurrence of civil war 1 yet existing studies are typically unable to resolve the key econometric identification issues of omitted variable bias and endogeneity to illustrate the unobserved quality of local government institutions may affect both income growth and crime rates and poverty could lead to violence if desperate people with nothing to lose commit more crimes but violence itself may in turn affect economic productivity this paper uses local rainfall variation to identify the impact of income shocks on murder in a rural tanzanian district 2 extreme rainfall resulting in drought or floods is exogenous and is associated with poor harvests and near famine conditions in the region and a large increase in the murder of witches there are twice as many witch murders in years of extreme rainfall as in other years the victims are nearly all elderly women typically killed by relatives these econometric results across 11 years in 67 villages provide novel evidence on the role of income shocks in causing violent crime and religious violence in particular and also provide insights into witchcraft an important social phenomenon in africa rarely studied by economists the view that economic conditions are a driving force behind witch murders is bolstered by the fact that most witch killing in tanzania takes place in poor rural areas largely dependent on rain fed agriculture and that most victims in our sample are from poor households however it is difficult to definitively disentangle this income shock theory from alternative socio cultural explanations the concentration of tanzanian witch murders in a region dominated by one particular ethnic group the sukuma and the especially high number of witch murders in villages where indigenous religious beliefs are strong both point to the important role of non economic factors economic theories and cultural theories are perhaps best viewed as complements the empirical findings demonstrate the power of economics to rationalize a phenomenon that has previously been understood almost solely through a socio cultural lens 3

a framework for analyzing changes in strategic performance in this paper we present a framework for analyzing changes in strategic performance traditional measures for comparing the strategic performance across firms or over time have been return on investment roi and its component ratio return on sales ros we decompose the ros ratio into four separate ratios that capture the impact of changes in a firm s productivity price recovery product mix and capacity utilization on its profitability these ratios help to highlight the micro sources of strategic success or failure they can be used to assess changes in the performance of a firm compared to itself over time or to other firms in its industry group this framework can also be used to evaluate changes in the dynamic performance of an industry as a whole we illustrate the use of these ratios with a 4 year analysis of the performance of a large manufacturing company we also demonstrate how the technique can be applied to an industry with an evaluation of the performance of u s telecommunications firms between 1975 and 1987 a period during which the industry experienced a progressive increase in competitive pressure

the dynamics of criminal behavior evidence from weather shocks while the persistence of criminal activity is well documented this may be due to persistence in the unobserved determinants of crime there are good reasons to believe however that there may actually be a negative relationship between crime rates in a particular area due to temporal displacement we exploit the correlation between weather and crime to examine the short run dynamics of crime using variation in lagged crime rates due to weather shocks we find that the positive serial correlation is reversed these findings suggest that the long run impact of temporary crime prevention efforts may be smaller than the short run effects

the rich domain of uncertainty source functions and their experimental implementation we often deal with uncertain events for which no probabilities are known several normative models have been proposed descriptive studies have usually been qualitative or they estimated ambiguity aversion through one single number this paper introduces the source method a tractable method for quantitatively analyzing uncertainty empirically the theoretical key is the distinction between different sources of uncertainty within which subjective choice based probabilities can still be defined source functions convert those subjective probabilities into willingness to bet we apply our method in an experiment where we do not commit to particular ambiguity attitudes but let the data speak

household portfolio diversification a case for rank dependent preferences the proliferation of novel preference theories in financial economics is hampered by a lack of non experimental evidence and by the theories additional complexity which has not been shown to be critical in applications in this article i present arguments in support of preferences with rank dependency using the survey of consumer finances data i document two widespread patterns inconsistent with expected utility i many households simultaneously invest in well deversified funds and in poorly diversified portfolios of stocks and ii some households with substantial savings do not invest anything in equities i show that portfolio choice models with rank dependent preferences plausibly parameterized and under fully rational assumptions are quantitatively consistent with the observed diversification these results call for further efforts to integrate the models of rank dependent preferences in portfolio theory and asset pricing the decision theoretic literature has long acknowledged the shortcomings of the expected utility theory of von neumann and morgenstern 1944 several generalizations of the theory are inspired by the experimental evidence and aimed at improving its descriptive accuracy however there are few applications of new models of preferences in finance and expected utility continues to dominate the field 1 two principal hurdles slow the proliferation of novel preferences in financial economics first the lack of empirical non experimental or field data confirming that the behavior motivating non expected utilities is widespread outside the laboratory settings second the additional and often significant complexity of the alternative preferences which has not been shown to be critical in applications where the models based on expected utility fall short of reasonable predictions this article presents empirical and theoretical this paper was previously circulated under the title household portfolio diversification the paper has benefited from the comments of shlomo benartzi luca benzoni markus brunnermeier john dickhaut maria perozek raj singh hersh shefrin and workshop participants at minnesota finance bag lunch 2003 wharton conference household financial decision making and portfolio choice and 2003 summer meetings of econometric society i would like to thank cam harvey the editor and an anonymous referee for many helpful comments and suggestions a special thanks to jack kareken for comments and editorial help on an earlier draft i am grateful to donna zerwitz for editorial assistance the views expressed herein are those of the author and not necessarily of the federal reserve bank of minneapolis or the federal reserve system all errors and omissions are the sole responsibility of the author address correspondence to valery polkovnichenko finance 3 122 csom 319 19 th

keynes meets markowitz the trade off between familiarity and diversification we develop a model of portfolio choice to nest the views of keynes who advocates concentration in a few familiar assets and markowitz who advocates diversification we use the concepts of ambiguity and ambiguity aversion to formalize the idea of an investor s familiarity toward assets the model shows that for any given level of expected returns the optimal portfolio depends on two quantities relative ambiguity across assets and the standard deviation of the expected return estimate for each asset if both quantities are low then the optimal portfolio consists of a mix of familiar and unfamiliar assets moreover an increase in correlation between assets causes an investor to increase concentration in familiar assets flight to familiarity alternatively if both quantities are high then the optimal portfolio contains only the familiar asset s as keynes would have advocated in the extreme case in which both quantities are very high no risky asset is held nonparticipation this paper was accepted by brad barber teck ho and terrance odean special issue editors

crime and economic incentives we explore the role that economic incentives particularly changes in wages at the bottom end of the wage distribution play in determining crime rates we use data on the police force areas of england and wales between 1975 and 1996 and find relative falls in the wages of low wage workers lead to increases in crime we carry out a number of experiments with different wage measures including a wage measure that accounts for the effects of changes in the composition of employment these reinforce the picture of a strong association between the low wage labor market and crime the result that incentives play a central role is reinforced further by the strong impact on crime of deterrence measures and of a measure of the returns to crime

persistent commodity shocks and transitory crime effects abstract this paper studies the dynamic response of crime to a positive income shock we estimate the short and medium run effects that an increase in copper price had on the local economy and on criminal activity in chile which is the world s leading copper producer after a decade of high prices mining municipalities did not exhibit lower crime rates compared to non mining municipalities to explain this counterintuitive result we investigated heterogeneous dynamic effects and observed that property crimes decreased only at the beginning of the boom as the dynamics of unskilled employment are consistent with the crime cycle we argue that crime evolves due to temporary labor market adjustments

why do so few hold stocks the authors investigate why 75 percent of u s households do not hold stocks despite the equity premium and predictions of expected utility models the question is relevant for privatization asset pricing and tax progressivity issues they show that risk aversion per se heterogeneity of beliefs habit persistence time nonseparability and quantity constraints on borrowing do not account for the phenomenon a wedge between borrowing and lending rates and minimum investment requirements are plausible but empirically weak factors more promising explanations are inertia and departures from expected utility maximization there is also qualified support for nondiversifiable income risk as a contributing factor copyright 1995 by royal economic society

market wages and youth crime to study the problem of widespread youth crime i analyze a timeallocation model in which consumers face parametric wages and diminishing marginal returns to crime the theory motivates an econometric model that i estimate using data from the national longitudinal survey of youth my estimates suggest that youth behavior is responsive to price incentives and that falling real wages may have been an important determinant of rising youth crime during the 1970s and 1980s moreover wage differentials explain a substantial component of both the racial differential in criminal participation and the age distribution of crime

ambiguity aversion and household portfolio choice puzzles empirical evidence we test the relation between ambiguity aversion and five household portfolio choice puzzles nonparticipation in equities low allocations to equity home bias own company stock ownership and portfolio under diversification in a representative us household survey we measure ambiguity preferences using custom designed questions based on ellsberg urns as theory predicts ambiguity aversion is negatively associated with stock market participation the fraction of financial assets in stocks and foreign stock ownership but it is positively related to own company stock ownership conditional on stock ownership ambiguity aversion is related to portfolio under diversification and during the financial crisis ambiguity averse respondents were more likely to sell stocks

ambiguity attitudes in a large representative sample using a theorem showing that matching probabilities of ambiguous events can capture ambiguity attitudes we introduce a tractable method for measuring ambiguity attitudes and apply it in a large representative sample in addition to ambiguity aversion we confirm an ambiguity component recently found in laboratory studies a insensitivity the tendency to treat subjective likelihoods as 50 50 thus overweighting extreme events our ambiguity measurements are associated with real economic decisions specifically a insensitivity is negatively related to stock market participation ambiguity aversion is also negatively related to stock market participation but only for subjects who perceive stock returns as highly ambiguous this paper was accepted by james smith decision analysis

selling labor low wage responses to productivity shocks in developing countries productivity risk is pervasive in underdeveloped countries this paper highlights a way in which underdevelopment exacerbates productivity risk productivity shocks cause larger changes in the wage when workers are poorer less able to migrate and more credit constrained because of such workers inelastic labor supply this equilibrium wage effect hurts workers in contrast it acts as insurance for landowners agricultural wage data for 257 districts in india for 1956 87 are used to test the predictions with rainfall as an instrument for agricultural productivity in districts with fewer banks or higher migration costs the wage is much more responsive to fluctuations in productivity

manufacturing strategy and competitiveness the importance of manufacturing strategy ms has never been questioned and has been emphasized in many theoretical concepts frameworks and models there are only a few empirical studies however which examine whether these theories work in practice in this paper the hypothesis that the existence of ms contributes to company level competitiveness ros inventory turnover is tested the study is based on international data which were collected in the second round of the international manufacturing strategy survey the database contains more than 700 companies from the machinery industry isic 381 385 from 23 countries the results partially support the hypothesis the existence of ms seems to have a positive effect on ros however it does not have any relation to inventory turnover r 2002 elsevier science b v all rights reserved

does emergency financial assistance reduce crime abstract does emergency financial assistance reduce criminal behavior among those experiencing negative shocks to address this question we exploit quasi random variation in the allocation of temporary financial assistance to eligible individuals and families that have experienced an economic shock chicago s homelessness prevention call center hpcc connects such families and individuals with assistance but the availability of funding varies unpredictably consequently we can determine the impact of temporary assistance on crime by comparing outcomes for those who call when funds are available to those who call when no funds are available linking this call center information to arrest records from the chicago police department we find some evidence that total arrests fall between 1 and 2 years after the call for violent crime police arrest those for whom funds were available 51 less often than those who were eligible but for whom no funds were available single individuals drive this decrease the decline in crime appears to be related in part to greater housing stability being referred to assistance significantly decreases arrests for homelessness related outdoor crimes such as trespassing however we also find that financial assistance leads to an increase in property crime arrests this increase is evident for family heads but not single individuals the increase is mostly due to shoplifting and the timing of this increase suggests that financial assistance enables some families to take on financial obligations that they are subsequently unable to meet overall the change in the mix of crime induced by financial assistance generates considerable social benefits due to the greater social cost of violence

poverty and crime in 19th century germany we estimate the impact of poverty on crime in 19th century bavaria germany rainfall is used as an instrumental variable for grain rye prices to address econometric identification problems in the existing literature the rye price was a major determinant of living standards during this period the rye price has a positive effect on property crime a one standard deviation increased property crime by 8 ols estimates are twice as large as instrumental variable estimates highlighting the value of our empirical approach higher rye prices lead to significantly less violent crime though and we argue that higher beer prices caused by the higher rye prices are a likely explanation

ambiguity and nonparticipation the role of regulation we investigate the implications of ambiguity aversion for performance and regulation of markets in our model agents decision making may incorporate both risk and ambiguity and we demonstrate that nonparticipation arises from the rational decision by some traders to avoid ambiguity in equilibrium these participation decisions affect the equilibrium risk premium and distort market performance when viewed from the perspective of traditional asset pricing models we demonstrate how regulation particularly regulation of unlikely events can moderate the effects of ambiguity thereby increasing participation and generating welfare gains our analysis demonstrates how legal systems affect participation in financial markets through their influence on ambiguity the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press