Publications
Narrow bracketers who are myopic in specific decisions would fail to consider preexisting risks in investment and neglect hedging opportunities. Growing evidence has demonstrated the relevance of narrow bracketing. We take a step further in empirical investigation and study individual heterogeneity in narrow bracketing. Specifically, we use a lab experiment in investment and hedging that elicits subjects’ preferences on rich occasions to uncover the individual degree of narrow bracketing without imposing distributional assumptions. Combining prospect theory and narrow bracketing can explain our findings: Subjects who invest more also insure more, and subjects insure significantly less in the loss domain than in the gain domain. More importantly, we show that the distribution of the individual degree of narrow bracketing is skewed at two extremes, yet with a substantial share of people in the middle who partially suffer from narrow bracketing. Neglecting this aspect, we would overestimate the severity of narrow bracketing and misinterpret its relation with individual characteristics.
This paper uses French data to examine how two smoking-related parental health shocks affect offspring smoking behavior depending on the timing of the health shock. A descriptive analysis restricted to individuals whose parents were diagnosed with lung cancer or another smoking-related cancer suggests different smoking behaviors depending on the age of the individual at diagnosis. We build a retrospective panel and use individual fixed effects to control for the endogeneity of the timing of the diagnosis and to neutralize the intergenerational transmission effect in smoking behaviors. Doing so, we aim at evaluating the extent to which a parental diagnosis acts as an informational shock and affects offspring behavior by bringing salient information about the health hazards of smoking. We find that receiving a parental diagnosis reduces the long-term probability of being a smoker. This effect is driven by individuals receiving the parental diagnosis at the age when the decision to smoke is about to be made. The informational shock effect associated with lung cancer appears systematically stronger than the informational shock effect associated with other smoking-related cancers.
We study optimal firm behavior under irreversible pollution risk for a general class of models with irreversible local pollution. Irreversibility comes from the decay rate of pollution dropping to zero above a pollution level featuring non-convexity. In addition, the firm can instantaneously move from a reversible to an irreversible pollution mode, following a Poisson process. First, we prove for the general class of models that for any value of the Poisson probability, the optimal emission policy leads to more pollution with the irreversibility risk than without in a neighborhood of the irreversibility threshold. It’s shown that the extent of uncertainty (as captured by the Poisson arrival rate) is second-order in this neighborhood. Next we study the robustness of the latter result at any pollution level in the case of linear-quadratic objective functions. We find that the general local result does not necessarily hold if actual pollution is far enough from the irreversibility threshold.
The different options people select from a set of non-rival alternatives are compared in terms of singularity. A criterion for ranking these choices on the basis of the number of other choices from which they differ is introduced and characterized. An axiomatic characterization of the ranking of choice profiles based on the aggregation of the singularities of the chosen alternatives is also provided.
This paper proposes a new methodological approach using high-frequency data and local projections to assess the impact of weather on agricultural production. Local projections capture both immediate and delayed effects across crop types and growth stages, while providing early warnings for food shortages. Adverse weather shocks, such as excess heat or rain, consistently lead to delayed downturns in production, with heterogeneous effects across time, crops, and seasons. We build a new index of aggregate weather shocks that accounts for the typical delay between event occurrence and economic recognition, finding that these shocks are recessionary at the macroeconomic level, reducing inflation, production, exports and exchange rates.
Firm entry and capital investment both vary over the business cycle. This paper analyzes the role of the firm entry delay option (waiting option) in the joint dynamics of firm entry and investment in a news-driven RBC model. We introduce the waiting option by restricting the number of potential firm entrants and demonstrate that the combination of news shocks and the waiting option effect yields empirically plausible joint dynamics of firm entry and investment over the business cycle. In contrast, the model without the waiting option produces excessively volatile firm entry. We rationalize our findings using an analytical real-option model of firm entry.
This paper evaluates the importance of access to justice (ATJ) for economic growth. To do so, we create a new database on the number of judges per capita by collecting data from various public institutions and academic publications. We use these data as a country-level indicator to capture the structural evolution of ATJ from 1970 to 2019 for a wide range of developed and developing countries. Using an instrumental variable approach in a dynamic panel setting to deal with endogeneity, we show that ATJ has a sizable positive effect on economic growth. The substantial aggregate effect of ATJ on growth is independent of countries’ legal origin, customary law, rule of law or level of democracy. However, we find evidence that the economic returns from ATJ are higher in poorer countries. In terms of mechanisms, our results suggest that ATJ promotes growth via higher government accountability and improved institutional quality.
When can exogenous changes in beliefs generate endogenous fluctuations in rational expectation models? We analyze this question in the canonical one-sector and two-sector models of the business cycle with increasing returns to scale. A key feature of our analysis is that we express the uniqueness/multiplicity condition of equilibirum paths in terms of restrictions on five critical and economically interpretable parameters: the Frisch elasticities of the labor supply curve with respect to the real wage and to the marginal utility of wealth, the intertemporal elasticity of substitution in consumption, the elasticity of substitution between capital and labor, and the degree of increasing returns to scale. We obtain two clear-cut conclusions: belief-driven fluctuations cannot exist in the one-sector version of the model for empirically consistent values for these five parameters. By contrast, belief-driven fluctuations are a robust property of the two-sector version of the model—with differentiated consumption and investment goods—, as they now emerge for a wide range of parameter values consistent with available empirical estimates. The key ingredients explaining these different outcomes are factor reallocation between sectors and the implied variations in the relative price of investment, affecting the expected return on capital accumulation.
