Empirical Implications Of Models Research Articles

Public Awareness and the Behavior of Unpopular Courts

AbstractScholars have long debated the positive and negative consequences of an aware public for the quality of governance in modern liberal democracies. This article extends this debate to the context of constitutional review by exploring how public awareness can limit the effective exercise of review by courts lacking strong public support. Incorporating aspects of both the legitimacy and separation of powers theories on judicial power, the author argues that public awareness weakens the efficacy of such unpopular courts by creating an electoral incentive for governments to defy adverse rulings, even when doing so may lead to punishment from other institutional stakeholders. The article develops a simple formal model that identifies how and under what conditions public awareness can influence an unpopular court's decision making. An analysis of rulings issued by the Court of Justice of the European Union finds support for the model's empirical implications.

Information and Inequality

This paper studies wealth inequality in a Blanchard/Yaari model with idiosyncratic investment returns. Its key innovation is to assume that individuals can buy information. Information reduces uncertainty about the unknown mean investment return. Reduced estimation risk encourages investment in higher yielding risky assets. As a result, endogenous information acquisition amplifies wealth inequality. Wealthy individuals buy more information, which leads them to invest a higher share of their wealth in higher yielding assets, which then makes them even wealthier. The model's empirical implications are studied using Monte Carlo simulations and perturbation approximations. An empirically plausible decrease in information costs can explain about two-thirds of the observed increase in the top 1% wealth share.

Valence, Elections, and Legislative Institutions

AbstractTo the degree that voters care about competence, expertise, and other valence characteristics of their representatives and political parties care about winning elections, parties have an incentive to signal that their legislators have such characteristics. We construct a model of parties, motivated by both reelection and by policy, that attempt to signal individual incumbents' valences to voters through the assignment of these members to positions of authority. The model illustrates how electorally motivated party leaders will have an incentive to promote less competent incumbents than they would if voters did not make inferences from promotion decisions. We derive the model's empirical implications and test them with original data on the careers of Chilean senators serving between 1998 and 2013. In support of the model's insights, we find that promotion to a leadership position is an effective signal to voters only if the promoted incumbent has extreme views relative to the party.

A Model of Momentum and Market States: Theory and Evidence

We develop a model to connect market states and momentum profits, and test the model's empirical implications. The model analyzes the asset pricing implications of overconfidence and self-attribution bias, in a setting of multiple risky assets whose payoffs contain a common factor. A novel insight from the model is that overconfidence can vary asymmetrically between winners and losers, which leads to asymmetric return behaviors between winners and losers. The model generates a set of implications regarding the relation between market states and returns on the winner, loser, and momentum portfolios. These implications are supported by empirical analysis.

Switching Costs and Introductory Pricing in the Wireless Service Industry

In this article I analyze the effects of a recent reform intended to decrease switching costs in the cellular industry. The reform, implemented in Chile in 2012, allowed cell phone users to switch operators without any contract restriction while keeping their wireless number. Its aim was the belief that lower switching costs would force incumbent companies to charge lower prices by introducing more competition among them. I test the empirical implications of models of switching costs using individual data on customers' bills and plans. I find that average price decreased by 7.2 percent. Moreover, my results provide evidence that the operators reacted primarily by decreasing the price of on-net plans and by offering handsets with data connectivity at a discounted rate. I also find a decrease in the introductory price discounts that operators offer to new customers. I interpret this result as due to the lower ability of the firms to lock-in customers.

When are Sanctions Effective? A Bargaining and Enforcement Framework

A considerable literature identifies the conditions under which sanctions are more likely to be successful. However, few studies examine the question of when senders are willing to enforce sanctions laws against their firms. Using a game theoretic model, we argue that the imposition of sanctions creates an enforcement problem for sender states. We demonstrate that senders have disincentives to enforce their sanctions policies, given that the restriction of business transactions with target states may undermine their firms' competitiveness relative to foreign firms. Specifically, the model indicates that sanctions are more likely to succeed when the sender firms' strength in the target's market is moderately strong, that is, it is not too weak or too strong. On the flipside, it also shows that senders are less likely to impose sanctions when their firms' strength is moderate. In essence, due to both economic and political incentives, senders are less likely to impose sanctions when they are more likely to be successful. The model's empirical implications are tested using the Threat and Imposition of Sanctions (TIES) dataset.

Investment and the soft budget constraint in China

This paper examines the incentive effects of the soft budget constraint on the investment behavior of firms in general and on the investment-cash flow sensitivity in particular. To this end, we develop a simple model of moral hazard that takes the soft budget constraint into account. Within this moral hazard environment, we show that investment is positively related to the amount of internal funds. We further show that the presence of the soft budget constraint deteriorates the moral hazard problem, thereby making the investment level less sensitive to the amount of internal funds. This is the case irrespective of whether the soft budget constraint renders the firm more or less liquidity constrained. To test the model's empirical implications, we employ data of China's listed companies for the period from 1997 to 2003. We use the share of state ownership as a proxy for the severity of the soft budget constraint. We find strong evidence that firms with larger shares of state ownership exhibit lower investment-cash flow sensitivities than firms with smaller shares of state ownership.

A Unified Theory of U.S. Lawmaking: Preferences, Institutions, and Party Discipline

We develop a unified theory of lawmaking that integrates preferences, institutional features, and imperfect party discipline. This model both parsimoniously subsumes numerous extant models and allows for examination of heretofore unexplored equilibria behavior. To demonstrate this, we pinpoint what effects the kinds of changes that reformers often focus on—strengthening parties and loosening the filibuster rule—might have on the equilibrium gridlock interval and generate a number of nonintuitive results. We also find that our unified model's empirical implications are consistent with the gridlock pattern found in the data. We conclude that this model is theoretically important and empirically relevant.

Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking

This paper addresses the following question: what ties together the traditional commercial banking activities of deposit-taking and lending? We begin by observing that since banks often lend via commitments, or credit lines, their lending and deposit-taking may be two manifestations of the same primitive function: the provision of liquidity on demand. After all, once the decision to extend a line of credit has been made, it is really nothing more than a checking account with overdraft privileges. This observation leads us to argue that there will naturally be synergies between the two activities, to the extent that both require banks to hold large volumes of liquid assets (cash and securities) on their balance sheets: if deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share any deadweight costs of holding the liquid assets. We develop this idea with a simple model, and then use a variety of data to test the model's empirical implications.

Incorporating Reference Price Effects into a Theory of Consumer Choice

Although there has been a good deal of research on incorporating the effects of reference price formation into empirical models of consumer buying behavior, little formal theoretical work had been undertaken to date. This paper incorporates reference price effects into the traditional economic theory of consumer choice, and examines the effects of reference price formation on the results of the traditional theory, its marketing implications, and the implications for empirical models which examine the effects of reference price formation on actual consumer behavior. Several implications of the theoretical model are empirically tested using weekly retail egg sales data from Southern California. This analysis indicates that reference price formation does have significant effects on consumer behavior. Furthermore, these effects are asymmetric with consumers two and a half times more responsive to egg price increases that are in excess of the reference price than they are to comparable egg price decreases.