testing for asymmetric information in insurance markets the first goal of this paper is to provide a simple and general test of the presence of asymmetric information in contractual relationships within a competitive context we also argue that insurance data are particularly well suited to such empirical investigations to illustrate this claim we use data on contracts and accidents to investigate the extent of asymmetric information in the french market for automobile insurance using various parametric and nonparametric methods we find no evidence for the presence of asymmetric information in this market

marriage market divorce legislation and household labor supply this paper provides a theoretical framework for analyzing the impact of the marriage market and divorce legislation on household labor supply in our approach the sex ratio in the marriage market and the rules governing divorce are examples of distribution factors these factors are defined as variables that affect the household members bargaining position but not preferences or the joint budget set we extend the collective labor supply model developed by chiappori to allow for distribution factors we show that our model imposes new restrictions on the labor supply functions and eases the identification of individual preferences and the intrahousehold decision process the model is estimated using psid data for the year 1988 our results do not reject the restrictions imposed by the model also the sex ratio and divorce laws deemed favorable to women are found to affect labor supply behavior and the decision process in the directions predicted by the theory and to have sizable effects

using maimonides rule to estimate the effect of class size on scholastic achievement the twelfth century rabbinic scholar maimonides proposed a maximum class size of 40 this same maximum induces a nonlinear and nonmonotonic relationship between grade enrollment and class size in israeli public schools today maimonides rule of 40 is used here to construct instrumental variables estimates of effects of class size on test scores the resulting identiecation strategy can be viewed as an application of donald campbell s regression discontinuity design to the class size question the estimates show that reducing class size induces a signiecant and substantial increase in test scores for fourth and efth graders although not for third graders when asked about their views on class size in surveys parents and teachers generally report that they prefer smaller classes this may be because those involved with teaching believe that smaller classes promote student learning or simply because smaller classes offer a more pleasant environment for the pupils and teachers who are in them mueller chase and walden 1988 social scientists and school administrators also have a longstanding interest in the class size question class size is often thought to be easier to manipulate than other school inputs and it is a variable at the heart of policy debates on school quality and the allocation of school resources in many countries see e g robinson 1990 for the united states ofsted 1995 for the united kingdom and moshel ravid 1995 for israel this broad interest in the consequences of changing class size

did unilateral divorce laws raise divorce rates a reconciliation and new results application of the coase theorem to marital bargaining suggests that shifting from a consent divorce regime to no fault unilateral divorce laws should not affect divorce rates each iteration of the empirical literature examining the evolution of divorce rates across us states has yielded different conclusions about the effects of divorce law liberalization i show that these results reflect a failure to jointly consider both the political endogeneity of these divorce laws and the dynamic response of divorce rates to a shock to the political regime taking explicit account of the dynamic response of divorce rates to the policy shock i find that liberalized divorce laws caused a discernible rise in divorce rates for about a decade but that this increase was substantially reversed over the next decade that said this increase explains very little of the rise in the divorce rate over the past half century both administrative data on the flow of new divorces and measures of the stock of divorcees from the census support this conclusion these results are suggestive of spouses bargaining within marriage with an eye to their partner s divorce threat

policy watch the marriage penalty many government programs have implicit penalties or subsidies for marriage for example many couples pay higher income taxes when married than their combined tax liabilities as single filers while many other couples receive a marriage subsidy because their joint taxes fall with marriage likewise most low income couples are eligible for higher welfare benefits if they are separated rather than married this article discusses the marriage penalty with a particular focus on tax and transfer programs why does it exist who faces it to what extent does it affect marriage and labor market behavior what tradeoffs are involved in reducing it

widows waiting to wed re marriage and economic incentives in social security widow benefits in this paper we focus on an age restriction for remarriage in the social security system to determine if individuals respond to economic incentives for marriage aged widow er benefits are paid by the federal government to persons whose deceased spouses worked in social security covered employment a widow er is eligible to receive benefits if she or he is at least age 60 if a widow er remarries before age 60 he or she forfeits the benefit and therefore faces a marriage penalty under current law there is no penalty if the remarriage occurs at 60 years of age or later we investigate whether this rule affects the marriage behavior of widows specifically we examine the rates of remarriage of women around age 60 under current as well as past social security eligibility rules using data from the vital statistics our results provide compelling evidence that this group of women respond to economic incentives when considering the decision to remarry first the 1979 law change that eliminated the marriage penalty for those at least age 60 resulted in a large increase in the marriage rate for widows at

activist monetary policy under rational expectations the purpose of this paper is to argue that the pursuit of an activist monetary policy may make economic sense even when people s expectations are formed rationally the paper presents a simple model in which 1 prices are costly to adjust 2 there is uncertainty concerning the parameters affecting aggregate demand and 3 there are positive costs of gathering and processing information by reference to this model it can be shown that an activist monetary policy may or may not be useful in offsetting aggregate disturbances depending upon the extent of information costs and of parameter uncertainty

bargaining in the shadow of the law divorce laws and family distress this paper exploits the variation occurring from the different timing of divorce law reforms across the united states to evaluate how unilateral divorce changed family violence and whether the option provided by unilateral divorce reduced suicide and spousal homicide unilateral divorce both potentially increases the likelihood that a domestic violence relationship ends and acts to transfer bargaining power toward the abused thereby potentially stopping the abuse in extant relationships in states that introduced unilateral divorce we find a 8 16 percent decline in female suicide roughly a 30 percent decline in domestic violence for both men and women and a 10 percent decline in females murdered by their partners

multiple dimensions of private information evidence from the long term care insurance market we demonstrate the existence of multiple dimensions of private information in the long term care insurance market two types of people purchase insurance individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance ex post the former are higher risk than insurance companies expect while the latter are lower risk in aggregate those with more insurance are not higher risk our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence the results also suggest a general test for asymmetric information

can t buy me love a field experiment exploring the trade off between income and caste status in an indian matrimonial market i introduction the relationship between economic motive and observance of discriminatory social customs is hardly new to economists this is implicit in the writings of becker 1957 1973 1974 on discrimination and other social customs and explicit in arrow s essay 1972 on discrimination and akerlof s work 1980 on the interactive relationship between economic incentives and discriminatory social customs as scholars like becker arrow and akerlof have investigated the relationship between economic incentives and the prevalence of custom based discrimination of which status based discrimination is an example it is natural to consult the related empirical evidence on the impact of economic incentives on the extent of status based discrimination surprisingly the extant empirical literature is mostly silent on how economic incentives may directly interact with status based discrimination 1 this is atypical as one would be hard pressed to find an issue as weighty as status based discrimination yet our knowledge in this aspect remains oddly limited our study aspires to rectify this gap this study investigates whether and what magnitude of economic incentive can diminish the incidence of status based discrimination by designing a controlled field experiment in an actual marketplace a reputable arranged marriage market that is conducted via newspaper advertisements the existing literature suggests that this market might be especially prone to strong discriminatory mate selection behavior based on the social identity status of an individual where caste identity of an individual is an easily measured indicator of social status the genesis of this discrimination can be attributed to a high status female s concern for a decline in her social status if she engages in a marital relationship with a low status male against this backdrop we ask whether a low status male could attempt to weaken this enduring form of discrimination by providing systematic economic incentive in the form of high monthly groom incomes to a high status female so that the former s marriage proposal receives preliminary consideration by the latter conditional on both individuals participation in this market the marketplace that we utilize is a well functioning arranged marriage market conducted via matrimonial advertisements in a widely circulated bengali language newspaper marriageable males in this market typically advertise their caste and income information among other attributes after these advertisements appear in the newspaper interested families contact the advertiser mostly in form of detailed letters expressing their interest in that advertisement this provides a confidential and reliable measure of first intent of the interested party in this case females therefore the conjunction of an exceptionally strong status based mate selection behavior a reputed market for arranged marriages and an exclusive correspondence process furnish us with a unique opportunity to investigate the main research hypothesis of our study to the best of our knowledge this is the first field experiment that exclusively focuses on how economic incentives can influence status based discrimination in an actual market 2 to operationalize the experiment we create nine unique matrimonial advertisements each representing a fictitious groom type 3 these potential grooms belong to one of the three blocks where each block contains three grooms from a given caste group we vary the caste status across these blocks we consider three different caste groups high middle and low strictly ranked so in the study region we vary the income features of grooms within a block we consider three different monthly income levels i e high medium and low that are considered feasible for each caste group in the study region furthermore we randomly assign other characteristics relevant for this market to all the potential grooms so that these features on average do not affect the behavior of responders

match quality new information and marital dissolution this article investigates the role of surprises in marital dissolution surprises consists of changes in the predicted earning capacity of either spouse data from the national longitudinal study of the high school class of 1972 is used we find that an unexpected increase in the husband s earning capacity reduces the divorce hazard while an unexpected increase in the wife s earning capacity raises the divorce hazard couples sort into marriage according to characteristics that are likely to enhance the stability of the marriage the divorce hazard is initially increasing with the duration of marriage and the presence of children and high levels of property stabilizes the marriage

adverse selection in annuity markets evidence from the british life annuity act of 1808 abstract we study adverse selection using data from an 1808 act of british parliament that effectively opened a market for life annuities our analysis indicates significant selection effects the evidence for adverse selection is strongest for a sub sample of annuitants whose annuities were purchased by profit seeking speculators a sub sample in which advantageous selection resulting from multi dimensional heterogeneity is unlikely to have been significant these results support the view that adverse selection can be masked by advantageous selection in empirical studies of standard insurance markets

collective labor supply and welfare the paper develops a general collective model of household labor supply in which agents are characterized by their own possibly altruistic preferences and household decisions are only assumed to be pareto efficient an alternative interpretation is that there are two stages in the internal decision process agents first share nonlabor income according to some given sharing rule then each one optimally chooses his or her own labor supply and consumption this setting is shown to generate testable restrictions on labor supplies moreover the observation of labor supply behavior is sufficient for recovering individual preferences and the sharing rule up to a constant finally the traditional tools of welfare analysis can be adapted to the new setting

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

using notches to uncover optimization frictions and structural elasticities theory and evidence from pakistan we develop a framework for nonparametrically identifying optimization frictions and structural elasticities using notches discontinuities in the choice sets of agents introduced by tax and transfer policies notches create excess bunching on the low tax side and missing mass on the high tax side of a cutoff and they are often associated with a region of strictly dominated choice that would have zero mass in a frictionless world by combining excess bunching observed response attenuated by frictions with missing mass in the dominated region frictions it is possible to uncover the structural elasticity that would govern behavior in the absence of frictions and arguably capture long run behavior we apply our framework to tax notches in pakistan using rich administrative data while observed bunching is large and sharp optimization frictions are also very large as the majority of taxpayers in dominated ranges are unresponsive to tax incentives the combination of large observed bunching and large frictions implies that the frictionless behavioral response to notches is extremely large but the underlying structural elasticity driving this response is nevertheless modest this highlights the inefficiency of notches by creating extremely strong price distortions they induce large behavioral responses even when structural elasticities are small

an empirical examination of information barriers to trade in insurance this paper uses direct evidence to evaluate whether asymmetric information is a barrier to trade in the largest market for private insurance in the world life insurance we report several findings that seem difficult to reconcile with the conventional theory of insurance under asymmetric information we conjecture that sellers may know their costs of production better than consumers in this market as in those for most other products

surprise surprise measuring firm level investment innovations abstract using the ifo investment survey for the german manufacturing sector we construct a forty year panel of firm level investment innovations surprises we document the cross sectional and time series properties of this panel and our main findings are the cross sectional dispersion of investment surprises is countercyclical as is their average within firm time series volatility and both are highly correlated this justifies in part strategies in the literature to use cross sectional moments for the calibration of heteroscedasticity at the same time the cross sectional dispersion of investment is procyclical suggesting a nonsmooth capital adjustment friction at the micro level there is substantial dispersion in within firm volatility a feature consistent with a recent literature on information frictions at the firm level finally the aforementioned second moments of investment innovations are granger caused by recessions but not vice versa rendering simple exogenous uncertainty shocks less plausible as drivers of business cycles

til death or taxes do us part the effect of income taxation on divorce there is now much empirical evidence that economic incentives affect the divorce decision via their impact on the flow of benefits of divorced vs married individuals however the effect of the individual income tax on divorce has been neglected in this work the income tax in the us is structured so that tax liability often changes with marriage some couples incur a marriage penalty in the form of higher taxes when they marry while others receive a marriage subsidy because their tax burden falls with marriage in this paper the authors examine the impact of the individual income tax on the likelihood of divorce in the us using data from the panel study on income dynamics they estimate a discrete time hazard model of the probability of divorce from the first marriage to test the hypothesis that the probability of divorce rises with the marriage penalty they also examine the role of other economic factors in the divorce decision the authors find that individuals respond to tax incentives in their decision to divorce although these responses are typically small and differ for men and women authors

social insurance and the marriage market social insurance is often linked to marriage existing evidence suggests small marital responses to financial incentives and stems from settings where benefits are realized in the near future i an

the life insurance market asymmetric information revisited abstract this paper finds evidence for the presence of asymmetric information in the life insurance market a conclusion contrasting with the existing literature in particular we find a significant and positive correlation between the decision to purchase life insurance and subsequent mortality conditional on risk classification individuals who died within a 12 year time window after a base year were 19 more likely to have taken up life insurance in that base year than were those who survived the time window moreover as might be expected when individuals have residual private information we find that the earlier an individual died the more likely she was to have initially bought insurance the primary factor driving the difference between our and the prior literature s findings is that we focus on a sample of potential new buyers rather than on the entire cross section to address the sample selection problem induced by potential mortality differences between those with and those without coverage

an introduction to the theory of rational expectations under asymmetric information every good economics textbook contains the cliche that market prices provide signals which facilitate the allocation of resources to their best use in a world not subject to random shocks consumers and producers when faced with competitive prices need look no further than their own preferences or production technology to be able to make a decision they need give no thought to the tastes endowments or technology of other agents however in a world subject to random shocks this is no longer the case agents are faced with the problem of forecasting future states of nature and more importantly of forecasting the impact of these states on the actions of other agents rational expectations theories provide a model of how agents make those forecasts in a world subject to random shocks it will be the case that agents acquire or at least attempt to acquire information about the future realization of the shocks it will in general be the case that different agents have access to different information the fact that information is dispersed throughout the economy has the potential to cause a misallocation of resources relative to what would be the case if all agents knew everything an efficient allocation of resources will in general require the transfer of information from consumers who have some information about their future demands to producers who can take current actions to mitigate avoidable scarcities or surpluses though many classical and neo classical writers emphasize the informational role of prices the standard marshallian or walrasian model of competitive equilibrium does not involve prices transferring information across traders the purpose of this paper is to show that rational expectations models are radically different from walrasian models in an economy where traders have diverse information this is demonstrated by showing that unlike what occurs in a walrasian equilibrium of an economy with heterogeneous information if there is a complete set of insurance markets and utility is additively separable over time then there exists a rational expectations equilibrium which gives consumers the same allocation as if each consumer has access to all of the economy s information this implies that under the above assumptions a central planner with all the economy s information could not pareto dominate the competitive allocation achieved when traders have diverse information and rational expectations this paper makes no attempt to survey the literature on rational expectations the reader is referred to shiller 1978 barro 1981 for a survey of macroeconomics and rational expectations and radner 1980 for a survey of the microeconomics and mathematical theory of rational expectations this paper will however try to outline the evolution of the rational expectations concept from a notion of optimal forecasting to a virtually complete departure from the walrasian model of equilibrium the rest of this section is devoted to a discussion of pre rational expectations ideas

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

semi rational expectations and exchange rate dynamics abstract the rational expectations hypothesis reh asserts that on average the economic agents are accurate in predicting future economic developments the paper demonstrates however that in a world of costly information individual rationality may result in consistent and persistent forecasting biases a distinction is drawn between perfect foresight or efficient forecasting which is consistent with the reh and myopic perfect foresight which is the profit maximizing and thus the rational one from an individualistic point of view even though the latter may result in persistently biased forecasting these concepts are illustrated in a model of exchange rate dynamics which introduces myopic or semi rationality into dornbusch s familiar model

optimal defaults and active decisions defaults often have a large influence on consumer decisions we identify an overlooked but practical alternative to defaults requiring individuals to make an explicit choice for themselves we study such active decisions in the context of 401 k saving we find that compelling new hires to make active decisions about 401 k enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt in enrollment procedure producing a savings distribution three months after hire that would take 30 months to achieve under standard enrollment we also present a model of 401 k enrollment and derive conditions under which the optimal enrollment regime is automatic enrollment i e default enrollment standard enrollment i e default non enrollment or active decisions i e no default and compulsory choice active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences are highly heterogeneous financial illiteracy however favors default enrollment over active decision enrollment