Essays in Macro Finance

I study the link between capital markets and sources of macroeconomic risk. In chapter 1 I show that expected inflation risk is priced in the cross section of stock returns even after controlling for cash flow growth and volatility risks. Motivated by this evidence I study a long run risk model with a built-in inflation non-neutrality channel that allows me to decompose the real stochastic discount factor into news about current and expected cash flow growth, news about expected inflation and news about volatility. The model can successfully price a broad menu of assets and provides a setting for analyzing cross sectional variation in expected inflation risk premium. For industries like retail and durable goods inflation risk can account for nearly a third of the overall risk premium while the energy industry and a broad commodity index act like inflation hedges. Nominal bonds are exposed to expected inflation risk and have inflation premiums that increase with bond maturity. The price of expected inflation risk was very high during the 70's and 80's, but has come down a lot since being very close to zero over the past decade. On average, the expected inflation price of risk is negative, consistent with the view that periods of high inflation represent a "bad" state of the world and are associated with low economic growth and poor stock market performance. In chapter 2 I look at the way capital markets react to predetermined macroeconomic announcements. I document significantly higher excess returns on the US stock market on macro release dates as compared to days when no macroeconomic news hit the market. Almost the entire equity premium since 1997 is being realized on days when macroeconomic news are released. At high frequency, there is a pattern of returns increasing in the hours prior to the pre-determined announcement time, peaking around the time of the announcement and dropping thereafter.

Public goods in networks

This paper considers incentives to provide goods that are non-excludable along social or geographic links. We find, first, that networks can lead to specialization in public good provision. In every social network there is an equilibrium where some individuals contribute and others free ride. In many networks, this extreme is the only outcome. Second, specialization can benefit society as a whole. This outcome arises when contributors are linked, collectively, to many agents. Finally, a new link increases access to public goods, but reduces individual incentives to contribute. Hence, overall welfare can be higher when there are holes in a network. © 2006 Elsevier Inc. All rights reserved.

Burning a hole in the budget: tobacco spending and its crowd-out of other goods.

Smoking is an expensive habit. Smoking households spend, on average, more than $US1000 annually on cigarettes. When a family member quits, in addition to the former smoker's improved long-term health, families benefit because savings from reduced cigarette expenditures can be allocated to other goods. For households in which some members continue to smoke, smoking expenditures crowd-out other purchases, which may affect other household members, as well as the smoker. We empirically analyse how expenditures on tobacco crowd-out consumption of other goods, estimating the patterns of substitution and complementarity between tobacco products and other categories of household expenditure. We use the Consumer Expenditure Survey data for the years 1995-2001, which we complement with regional price data and state cigarette prices. We estimate a consumer demand system that includes several main expenditure categories (cigarettes, food, alcohol, housing, apparel, transportation, medical care) and controls for socioeconomic variables and other sources of observable heterogeneity. Descriptive data indicate that, comparing smokers to nonsmokers, smokers spend less on housing. Results from the demand system indicate that as the price of cigarettes rises, households increase the quantity of food purchased, and, in some samples, reduce the quantity of apparel and housing purchased.

Gene expression signatures of radiation response are specific, durable and accurate in mice and humans.

BACKGROUND: Previous work has demonstrated the potential for peripheral blood (PB) gene expression profiling for the detection of disease or environmental exposures. METHODS AND FINDINGS: We have sought to determine the impact of several variables on the PB gene expression profile of an environmental exposure, ionizing radiation, and to determine the specificity of the PB signature of radiation versus other genotoxic stresses. Neither genotype differences nor the time of PB sampling caused any lessening of the accuracy of PB signatures to predict radiation exposure, but sex difference did influence the accuracy of the prediction of radiation exposure at the lowest level (50 cGy). A PB signature of sepsis was also generated and both the PB signature of radiation and the PB signature of sepsis were found to be 100% specific at distinguishing irradiated from septic animals. We also identified human PB signatures of radiation exposure and chemotherapy treatment which distinguished irradiated patients and chemotherapy-treated individuals within a heterogeneous population with accuracies of 90% and 81%, respectively. CONCLUSIONS: We conclude that PB gene expression profiles can be identified in mice and humans that are accurate in predicting medical conditions, are specific to each condition and remain highly accurate over time.

Public goods and procreation.

Procreation is the ultimate public goods problem. Each new child affects the welfare of many other people, and some (but not all) children produce uncompensated value that future people will enjoy. This essay addresses challenges that arise if we think of procreation and parenting as public goods. These include whether individual choices are likely to lead to a socially desirable outcome, and whether changes in laws, social norms, or access to genetic engineering and embryo selection might improve the aggregate outcome of our reproductive choices.

Essays on the Role of Government Incentives in the Private Provision of Social Goods

The economic rationale for public intervention into private markets through price mechanisms is twofold: to correct market failures and to redistribute resources. Financial incentives are one such price mechanism. In this dissertation, I specifically address the role of financial incentives in providing social goods in two separate contexts: a redistributive policy that enables low income working families to access affordable childcare in the US and an experimental pay-for-performance intervention to improve population health outcomes in rural India. In the first two papers, I investigate the effects of government incentives for providing grandchild care on grandmothers’ short- and long-term outcomes. In the third paper, coauthored with Manoj Mohanan, Grant Miller, Katherine Donato, and Marcos Vera-Hernandez, we use an experimental framework to consider the the effects of financial incentives in improving maternal and child health outcomes in the Indian state of Karnataka.

Grandmothers provide a significant amount of childcare in the US, but little is known about how this informal, and often uncompensated, time transfer impacts their economic and health outcomes. The first two chapters of this dissertation address the impact of federally funded, state-level means-tested programs that compensate grandparent-provided childcare on the retirement security of older women, an economically vulnerable group of considerable policy interest. I use the variation in the availability and generosity of childcare subsidies to model the effect of government payments for grandchild care on grandmothers’ time use, income, earnings, interfamily transfers, and health outcomes. After establishing that more generous government payments induce grandmothers to provide more hours of childcare, I find that grandmothers adjust their behavior by reducing their formal labor supply and earnings. Grandmothers make up for lost earnings by claiming Social Security earlier, increasing their reliance on Supplemental Security Income (SSI) and reducing financial transfers to their children. While the policy does not appear to negatively impact grandmothers’ immediate economic well-being, there are significant costs to the state, in terms of both up-front costs for care payments and long-term costs as a result of grandmothers’ increased reliance on social insurance.

The final paper, The Role of Non-Cognitive Traits in Response to Financial Incentives: Evidence from a Randomized Control Trial of Obstetrics Care Providers in India, is coauthored with Manoj Mohanan, Grant Miller, Katherine Donato and Marcos Vera-Hernandez. We report the results from “Improving Maternal and Child Health in India: Evaluating Demand and Supply Side Strategies” (IMACHINE), a randomized controlled experiment designed to test the effectiveness of supply-side incentives for private obstetrics care providers in rural Karnataka, India. In particular, the experimental design compares two different types of incentives: (1) those based on the quality of inputs providers offer their patients (inputs contracts) and (2) those based on the reduction of incidence of four adverse maternal and neonatal health outcomes (outcomes contracts). Along with studying the relative effectiveness of the different financial incentives, we also investigate the role of provider characteristics, preferences, expectations and non-cognitive traits in mitigating the effects of incentive contracts.

We find that both contract types input incentive contracts reduce rates of post-partum hemorrhage, the leading cause of maternal mortality in India by about 20%. We also find some evidence of multitasking as output incentive contract providers reduce the level of postnatal newborn care received by their patients. We find that patient health improvements in response to both contract types are concentrated among higher trained providers. We find improvements in patient care to be concentrated among the lower trained providers. Contrary to our expectations, we also find improvements in patient health to be concentrated among the most risk averse providers, while more patient providers respond relatively little to the incentives, and these difference are most evident in the outputs contract arm. The results are opposite for patient care outcomes; risk averse providers have significantly lower rates of patient care and more patient providers provide higher quality care in response to the outputs contract. We find evidence that overconfidence among providers about their expectations about possible improvements reduces the effectiveness of both types of incentive contracts for improving both patient outcomes and patient care. Finally, we find no heterogeneous response based on non-cognitive traits.