2009–2010

Measuring the Impact of Income and Wealth Shocks on Retail Buying Behavior

Jean-Pierre Dubé, Sigmond E. Edelstone Professor of Marketing
Günter Hitsch, Associate Professor of Marketing
Peter E. Rossi, Joseph T. and Bernice S. Lewis Professor of Marketing and Statistics

Summary: Broadly speaking, we seek to measure income and wealth effects on the size and composition of supermarket shopping baskets. We exploit the recent crash in the US real estate market and the rise in unemployment as exogenous shifters of the real income and wealth of US households. We study the impact of these changes in real income and wealth on households’ short-term and long-term shopping patterns. Of interest is the extent to which households adjust their spending across product categories. In particular, do households spend less or do they substitute to cheaper categories or cheaper products within a category? Similarly, do households adjust the timing of their purchases to exploit in-store price promotions such as discounts and coupons? Finally, we estimate the effect of real income shocks on demand. Several policy questions emerge from this analysis. Most notable are the implications of income-driven product substitution and the degree to which households consume healthy foods. We also look at the impact of product substitution on the short-term and long-term performance of private label products.

The Life-cycle of Firms in India, Mexico and the US

Chang-Tai Hsieh

Summary

Do Advertisements Impact the Physiological Efficacy of Branded Drugs?

Emir Kamenica, Assistant Professor of Economics

Summary: The existence of placebo effects raises the possibility that other stimuli that influence patients’ beliefs about drugs affect the efficacy of those drugs. We wish to examine whether commercial advertisements for branded drugs influence their efficacy. Pharmaceutical companies spend close to $5 billion per year on “direct to consumer” advertising, which suggests that the presence of such effects would have far‐reaching health implications. We conducted a pilot study which suggested that a competitor’s ads, perhaps specifically comparative ads, can reduce the efficacy of a branded antihistamine. We seek funds to follow up the pilot study with a full scale clinical trial that validates the effect of competitor advertising and explores its mechanisms.

Do Conflict of Interest Disclosures Work?

Christian Leuz, Joseph Sondheimer Professor of International Economics, Finance and Accounting

Summary: Disclosure requirements are increasingly used as a public policy instrument in many areas, including pollution control, food safety, and conflicts of interest in medical research and in securities markets, and in many cases in lieu of more conventional regulation. The idea is to compel disclosures, rather than to restrict or mandate certain behaviors or business practices. Despite these trends in practice, the merits of disclosure requirements are heavily debated in the academic literature. In medicine and bioethics, there is an ongoing debate as to whether conflict of interest disclosures are sufficient and yield the desired outcomes. However, there is little evidence on the effects of conflict of interest disclosures. Our research project intends to examine the effect of conflict of interest disclosures in medical research articles on demand for those articles. We deliberately pick a setting where conflicts of interest exist and are a substantial concern. In addition, our study involves a very sophisticated audience that should be able to understand and evaluate the disclosed conflicts of interest. We expect this study to make a significant contribution to the debate about conflict of interest disclosures and more generally to the issue of whether disclosure requirements are a substitute for regulation.

The Dynamics of Organizational Form and Corporate Socialism: A Structural Approach

Gregor Matvos, Assistant Professor of Finance

Summary: The paper constructs an estimatable structural model of internal capital markets. The model utilizes divisional investment behavior in a diversified firm and enables us to estimate the extent of socialism in a diversified firm. By doing so, we are able to understand how large the distortions created by socialistic behavior in the firm are and its interaction with external credit markets and firm governance. In contrast to previous work, we emphasize that understanding dynamic efficiency of organizations and their interaction with external capital markets is essential for understanding the economic forces that set the boundary of a firm.

​Fiscal Stimulus and Macroeconomic Fluctuations: Evidence from Cash for Clunkers

Atif Mian, Associate Professor of Finance
Amir Sufi, Associate Professor of Finance

Summary: We seek to estimate the economic consequences of short‐term boost in consumer spending on cars driven by the Obama Administration’s “Cash For Clunkers” program. We exploit cross-sectional variation (across counties) in the fraction of automobiles that qualify as “clunkers” to isolate the impact of boost in auto-sales on outcomes such as unemployment, housing market, consumer defaults, and household expenditure. Our research hopes to shed light on one of the most important questions facing policy makers at a time of recession: Do Keynesian policies of government stimulus work?

Foreclosures and Crime

Atif Mian, Associate Professor of Finance
Amir Sufi, Bruce Lindsay Professor of Economics and Public Policy
Francesco Trebbi, Assistant Professor of Economics

Summary: Our goal in this project is to understand the link between foreclosures of residential properties and crime. Despite the policy discussion and anecdotes, there is surprisingly little direct evidence that foreclosures have a negative externality on neighborhoods through an increase in property crime. We are in a unique position to address this question given our collection of nation‐wide city level crime statistics and detailed address level crime data for four major metropolitan areas. By using a variety of estimation strategies, we will estimate the precise effect of a foreclosure on local crime, and we will attempt to assign an exact dollar value associated with the externality.

A Distinguishing Test of Rational Versus Behavioral Theories for Value and Momentum

Tobias Moskowitz, Fama Family Professor of Finance

Summary: The two biggest CAPM anomalies, value and momentum, are at the center of the asset pricing debate both because of their magnitudes relative to standard models and their pervasiveness across assets and markets. These two styles of investing can capture a substantial fraction of the cross-sectional variation in returns, and hence have become focal points for discussions of rational and behavioral models of asset pricing. While many rational and behavioral theories for the efficacy of value and momentum strategies have been put forth, the empirical evidence on these two investment styles focuses exclusively on capital market securities, dominated mostly by US equities. I propose a new testing ground for value and momentum that helps distinguish between rational and behavioral stories for value and momentum - sports betting markets. The idea is simple. Sports betting markets, because they offer risky gambles, should be subject to the same behavioral biases that are claimed to drive value and momentum in financial security markets. On the other hand, rational stories for value and momentum that hinge on covariation with aggregate systematic risks should have no bearing for the cross-section of sports betting contracts. Using a unique database of over 150,000 betting contracts across six different sports, I test the efficacy of value and momentum strategies and compare their effectiveness with those found in financial markets.

Tobias Moskowitz, Fama Family Professor of Finance

Summary: We document significant price trends in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments that we consider. This “time‐series momentum” effect persists for 1 to 12 months and then partially reverses in the longer term, consistent with sentiment theories of initial under‐reaction and delayed overreaction. A diversified portfolio of trends across all asset classes delivers substantial abnormal returns, has little exposure to standard asset pricing factors, and is not subsumed by a cross‐sectional momentum strategy. The trend portfolio's returns are largest during extreme up and down markets and are linked to the trading activity of hedgers and speculators.

Information Technology in the Developing World

Emily Oster, Assistant Professor of Economics

Summary: Information technology has become increasingly important in the developing world. Expansion of internet, telephone and cell phone networks have significantly affected job opportunities throughout the developing world and firms that run these networks have seen rapid growth. This project pursues two sub‐projects related to this broader topic. First, using data on call center locations and school enrollment in India, I plan to study the impact of introducing new job opportunities on schooling. The goal in this project is to test whether changes in returns to schooling (either perceived or actual) impact school enrollments. Second, together with two coauthors, I plan to study how firm competition and regulatory uncertainty affect firm pricing and infrastructure investment using detailed data from the two cell phone providers in Malawi. In this case, we hope to understand better how firms function in situations with relatively limited government stability and use this to understand the broader relationship between stability and growth.

Markov Chain Factor Model Pricing of Mortgage Backed Securities

Jeffrey Russell, Professor of Econometrics and Statistics

Summary: This research proposes a new approach to pricing MBS. First, we propose using micro level, loan specific information such as FICO score and loan‐to‐value, now available through data sources such as Loan Performance or Black Box. Second, we propose modeling the state of a given loan in a security using a Markov Chain where at each point in time, each mortgage is allowed to take one of several states. A simple model would include the states “making payments”, “default”, and “prepayment”. When the loan is in the making payment state, payments are received at their scheduled times. A loan in good standing, however, will have probabilities of transitioning into default or prepayment. Given the time series of probabilities for each mortgage in a pool over the life of the mortgage, distributions and expectations of payouts for any MBS could be constructed. Several models of the dynamics of the transition probabilities are considered. A factorbased version of the dynamics can account for the mass defaults observed during the sub‐prime crisis. Candidates for this time varying factor include measures of housing prices and income, interest rates, and unemployment rates. Combined, the microstructure allows for individual security contracts to have different prices in different mortgage pools while the factors allow for market wide swings in probabilities and the mass defaults observed during the subprime crisis.

​Intra-Elite Dynamics in African Countries

Francesco Trebbi, Assistant Professor of Economics

Summary: Much of the issues related to economic development in African countries have been directly connected with inter-ethnic tensions, as triggering expropriation and conflict. This project aims at systematically collecting (for the first time) information on the ethnic composition of all executive cabinets in Sub-Saharan African countries from the 1960s onwards in order to measure appropriately the evolution to the balance of power across ethnic groups within the ruling elite. The data are available from various biographical sources and importantly include autocracies, hence providing a novel source of information to assess intra-elite bargaining and relative power across groups in absence of reliable electoral data.

Debt-equity Conflicts of Interest from the Perspective of Debt and Equity Analysts

Regina Wittenberg-Moerman

Summary: We examine the conflict of interest between debt and equity investors (conflicts hereafter) through the lens of debt and equity sell-side analysts. While in theory this conflict could be significant, existing empirical evidence is mixed and limited, particularly from the perspective of debt holders. The detailed discussion and analysis provided by debt and equity analysts in their reports allows us to analyze these conflicts with greater precision. For example, we measure the frequency, surprise, and surprise direction (favorable versus unfavorable) of conflicts. This analysis will better reveal the true wealth impact of debt-equity conflicts of interest. Our research question is made possible by a unique dataset of 15,918 sell-side debt analysts' reports for 633 US firms, combined with a matched sample of equity analysts' reports. By systematically documenting the content of debt analysts' reports, this project will also enhance our understanding of debt analysts' role in the capital markets.

​The Impact of the Crisis on Households’ Portfolio Choices

Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance

Summary: We exploit a unique dataset of bank clients who have been surveyed twice (one before the crisis and one after) and their portfolio holdings to study the cause-effect relationship between changes in risk aversion and portfolio choices.