Money doctors

We present a new model of money management, in which investors delegate portfolio management to professionals based not only on performance, but also on trust. Trust in the manager reduces an investor's perception of the riskiness of a given investment, and allows managers to charge higher fees to investors who trust them more. Money managers compete for investor funds by setting their fees, but because of trust the fees do not fall to costs. In the model, 1) managers consistently underperform the market net of fees but investors still prefer to delegate money management to taking risk on their own, 2) fees involve sharing of expected returns between managers and investors, with higher fees in riskier products, 3) managers pander to investors when investors exhibit biases in their beliefs, and do not correct misperceptions, and 4) despite long run benefits from better performance, the profits from pandering to trusting investors discourage managers from pursuing contrarian strategies relative to the case with no trust. We show how trust-mediated money management renders arbitrage less effective, and may help destabilize financial markets.

The private and fiscal returns to schooling and the effect of public policies on private incentives to invest in education: a general framework and some results for the EU

This paper develops a comprehensive framework for the quantitative analysis of the private and fiscal returns to schooling and of the effect of public policies on private incentives to invest in education. This framework is applied to 14 member states of the European Union. For each of these countries, we construct estimates of the private return to an additional year of schooling for an individual of average attainment, taking into account the effects of education on wages and employment probabilities after allowing for academic failure rates, the direct and opportunity costs of schooling, and the impact of personal taxes, social security contributions and unemployment and pension benefits on net incomes. We also construct a set of effective tax and subsidy rates that measure the effects of different public policies on the private returns to education, and measures of the fiscal returns to schooling that capture the long-term effects of a marginal increase in attainment on public finances under c

Increasing quasiconcave production and utility functions with diminishing returns to scale

In microeconomic analysis functions with diminishing returns to scale (DRS) have frequently been employed. Various properties of increasing quasiconcave aggregator functions with DRS are derived. Furthermore duality in the classical sense as well as of a new type is studied for such aggregator functions in production and consumer theory. In particular representation theorems for direct and indirect aggregator functions are obtained. These involve only small sets of generator functions. The study is carried out in the contemporary framework of abstract convexity and abstract concavity.

Not all university degrees yield the same return: private and social returns to higher education for males in Spain

In this paper we use micro data from the Spanish Family Expenditure Survey for 1990 to estimate, for the first time, the private and social rates of return of different university degrees in Spain. We compute internal rates of return and include investment on higher education financed by the public purse to estimate social rates of return. Our main finding is that, as presumed, there is large heterogeneity in rates of return amongst different university

A nonlinear threshold model for the dependence of extremes of stationary sequences

One of the main implications of the efficient market hypothesis (EMH) is that expected future returns on financial assets are not predictable if investors are risk neutral. In this paper we argue that financial time series offer more information than that this hypothesis seems to supply. In particular we postulate that runs of very large returns can be predictable for small time periods. In order to prove this we propose a TAR(3,1)-GARCH(1,1) model that is able to describe two different types of extreme events: a first type generated by large uncertainty regimes where runs of extremes are not predictable and a second type where extremes come from isolated dread/joy events. This model is new in the literature in nonlinear processes. Its novelty resides on two features of the model that make it different from previous TAR methodologies. The regimes are motivated by the occurrence of extreme values and the threshold variable is defined by the shock affecting the process in the preceding period. In this way this model is able to uncover dependence and clustering of extremes in high as well as in low volatility periods. This model is tested with data from General Motors stocks prices corresponding to two crises that had a substantial impact in financial markets worldwide; the Black Monday of October 1987 and September 11th, 2001. By analyzing the periods around these crises we find evidence of statistical significance of our model and thereby of predictability of extremes for September 11th but not for Black Monday. These findings support the hypotheses of a big negative event producing runs of negative returns in the first case, and of the burst of a worldwide stock market bubble in the second example. JEL classification: C12; C15; C22; C51 Keywords and Phrases: asymmetries, crises, extreme values, hypothesis testing, leverage effect, nonlinearities, threshold models

The Private and fiscal returns to schooling and the effect of public policies on private incentives to invest in education: a general framework and some results for the EU

This paper develops a comprehensive framework for the quantitative analysis of the private and fiscal returns to schooling and of the effect of public policies on private incentives to invest in education. This framework is applied to 14 member states of the European Union. For each of these countries, we construct estimates of the private return to an additional year of schooling for an individual of average attainment, taking into account the effects of education on wages and employment probabilities after allowing for academic failure rates, the direct and opportunity costs of schooling, and the impact of personal taxes, social security contributions and unemployment and pension benefits on net incomes. We also construct a set of effective tax and subsidy rates that measure the effects of different public policies on the private returns to education, and measures of the fiscal returns to schooling that capture the long-term effects of a marginal increase in attainment on public finances under conditions that approximate general equilibrium.

In Search of a theory of debt management

A growing literature integrates theories of debt management into models of optimal fiscal policy. One promising theory argues that the composition of government debt should be chosen so that fluctuations in the market value of debt offset changes in expected future deficits. This complete market approach to debt management is valid even when the government only issues non-contingent bonds. A number of authors conclude from this approach that governments should issue long term debt and invest in short term assets. We argue that the conclusions of this approach are too fragile to serve as a basis for policy recommendations. This is because bonds at different maturities have highly correlated returns, causing the determination of the optimal portfolio to be ill-conditioned. To make this point concrete we examine the implications of this approach to debt management in various models, both analytically and using numerical methods calibrated to the US economy. We find the complete market approach recommends asset positions which are huge multiples of GDP. Introducing persistent shocks or capital accumulation only worsens this problem. Increasing the volatility of interest rates through habits partly reduces the size of these simulations we find no presumption that governments should issue long term debt ? policy recommendations can be easily reversed through small perturbations in the specification of shocks or small variations in the maturity of bonds issued. We further extend the literature by removing the assumption that governments every period costlessly repurchase all outstanding debt. This exacerbates the size of the required positions, worsens their volatility and in some cases produces instability in debt holdings. We conclude that it is very difficult to insulate fiscal policy from shocks by using the complete markets approach to debt management. Given the limited variability of the yield curve using maturities is a poor way to substitute for state contingent debt. The result is the positions recommended by this approach conflict with a number of features that we believe are important in making bond markets incomplete e.g allowing for transaction costs, liquidity effects, etc.. Until these features are all fully incorporated we remain in search of a theory of debt management capable of providing robust policy insights.

Growth in a Cross-Section of Cities: Location, Increasing Returns or Random Growth?

This article analyzes empirically the main existing theories on income and population city growth: increasing returns to scale, locational fundamentals and random growth. To do this we implement a threshold nonlinearity test that extends standard linear growth regression models to a dataset on urban, climatological and macroeconomic variables on 1,175 U.S. cities. Our analysis reveals the existence of increasing returns when per-capita income levels are beyond $19; 264. Despite this, income growth is mostly explained by social and locational fundamentals. Population growth also exhibits two distinct equilibria determined by a threshold value of 116,300 inhabitants beyond which city population grows at a higher rate. Income and population growth do not go hand in hand, implying an optimal level of population beyond which income growth stagnates or deteriorates

Behavioural Flexibility: evolutionary past and its role in a changing world

A través de la historia de la vida, gran parte de los organismos han desarrollado estrategias para responder a un mundo en constante cambio. Hoy en día, las actividades humanas producen cambios ambientales a una velocidad sin precedentes, lo cual se traduce en grandes desafíos para la persistencia de biodiversidad. Esta investigación evalúa las respuesta de los animales a los cambios ambientales enfocándose en la flexibilidad del comportamiento como estrategia adaptativa. En una primera aproximación a una escala evolutiva, se otorgan evidencias del vínculo hasta ahora tenue entre la cognición e historias de vida, entregando un claro apoyo a la relación entre longevidad, vida reproductiva y el tamaño del cerebro en mamíferos. La longevidad es el centro de muchas hipótesis respecto a las ventajas de desarrollar un cerebro grande, como por ejemplo en la hipótesis del buffer cognitivo y las respuestas flexibles frente a nuevos ambientes. En un segundo nivel, se abordan factores extrínsecos e intrínsecos que podrían explicar las diferencias individuales en innovación, un componente clave en la flexibilidad del comportamiento. Por medio de una aproximación experimental, se evalúan potenciales escenarios que podrían conducir a consistentes diferencias individuales en uno de los principales factores subyacentes a la innovación (i.e. la motivación), y el potencial control endocrino sobre estos escenarios. Posteriormente, con el objetivo de evaluar la respuesta de los animales frente a los cambios ambientales actuales, se explora la respuesta de los animales frente a una de las actividades humanas mas disruptivas sobre los ecosistemas, la urbanización. Por medio de un analisis filogenetico comparativo a nivel global en aves se abordan los mecanismos implicados en la perdida de biodiversidad observada en ambientes urbanos. Los resultados entregan evidencias sobre la importancia de procesos de dispersión local junto con el papel clave de los rasgos de historia de vida, pero en un sentido diferente al clasicamente pensado. Finalmente por medio de una revisión bibliográfica se entregan evidencias teóricas y empíricas que respaldan el rol clave de la flexibilidad del comportamiento en confrontar los desafíos de una vida urbana. La integración de estos resultados muestra cómo el pasado evolutivo contribuye a hacer frente a los retos ambientales actuales, y pone de relieve posibles consecuencias ante un planeta más cambiante que nunca.

Behavioural Flexibility: evolutionary past and its role in a changing world

A través de la historia de la vida, gran parte de los organismos han desarrollado estrategias para responder a un mundo en constante cambio. Hoy en día, las actividades humanas producen cambios ambientales a una velocidad sin precedentes, lo cual se traduce en grandes desafíos para la persistencia de biodiversidad. Esta investigación evalúa las respuesta de los animales a los cambios ambientales enfocándose en la flexibilidad del comportamiento como estrategia adaptativa. En una primera aproximación a una escala evolutiva, se otorgan evidencias del vínculo hasta ahora tenue entre la cognición e historias de vida, entregando un claro apoyo a la relación entre longevidad, vida reproductiva y el tamaño del cerebro en mamíferos. La longevidad es el centro de muchas hipótesis respecto a las ventajas de desarrollar un cerebro grande, como por ejemplo en la hipótesis del buffer cognitivo y las respuestas flexibles frente a nuevos ambientes. En un segundo nivel, se abordan factores extrínsecos e intrínsecos que podrían explicar las diferencias individuales en innovación, un componente clave en la flexibilidad del comportamiento. Por medio de una aproximación experimental, se evalúan potenciales escenarios que podrían conducir a consistentes diferencias individuales en uno de los principales factores subyacentes a la innovación (i.e. la motivación), y el potencial control endocrino sobre estos escenarios. Posteriormente, con el objetivo de evaluar la respuesta de los animales frente a los cambios ambientales actuales, se explora la respuesta de los animales frente a una de las actividades humanas mas disruptivas sobre los ecosistemas, la urbanización. Por medio de un analisis filogenetico comparativo a nivel global en aves se abordan los mecanismos implicados en la perdida de biodiversidad observada en ambientes urbanos. Los resultados entregan evidencias sobre la importancia de procesos de dispersión local junto con el papel clave de los rasgos de historia de vida, pero en un sentido diferente al clasicamente pensado. Finalmente por medio de una revisión bibliográfica se entregan evidencias teóricas y empíricas que respaldan el rol clave de la flexibilidad del comportamiento en confrontar los desafíos de una vida urbana. La integración de estos resultados muestra cómo el pasado evolutivo contribuye a hacer frente a los retos ambientales actuales, y pone de relieve posibles consecuencias ante un planeta más cambiante que nunca.

Weak and Strong Altruism in Trait Groups: Reproductive Suicide, Personal Fitness, and Expected Value

A simple variant of trait group selection, employing predators as the mechanism underlying group selection, supports contingent reproductive suicide as altruism (i.e., behavior lowering personal fitness while augmenting that of another) without kin assortment. The contingent suicidal type may either saturate the population or be polymorphic with a type avoiding suicide, depending on parameters. In addition to contingent suicide, this randomly assorting morph may also exhibit continuously expressed strong altruism (sensu Wilson 1979) usually thought restricted to kin selection. The model will not, however, support a sterile worker caste as such, where sterility occurs before life history events associated with effective altruism; reproductive suicide must remain fundamentally contingent (facultative sensu West Eberhard 1987; Myles 1988) under random assortment. The continuously expressed strong altruism supported by the model may be reinterpreted as probability of arbitrarily committing reproductive suicide, without benefit for another; such arbitrary suicide (a "load" on "adaptive" suicide) is viable only under a more restricted parameter space relative to the necessarily concomitant adaptive contingent suicide.

Doctors without borders: The returns to an occupational license for Soviet immigrant physicians in Israel

Re-licensing requirements for professionals that move across borders arewidespread. In this paper, we measure the returns to an occupationallicense using novel data on Soviet trained physicians that immigrated toIsrael. An immigrant re-training assignment rule used by the IsraelMinistry of Health provides an exogenous source of variation inre-licensing outcomes. Instrumental variables and quantile treatmenteffects estimates of the returns to an occupational license indicate excesswages due to occupational entry restrictions and negative selectioninto licensing status. We develop a model of optimal license acquisitionwhich suggests that the wages of high-skilled immigrant physicians in thenonphysician sector outweigh the lower direct costs that these immigrantsface in acquiring a medical license. Licensing thus leads to lower averagequality of service. However, the positive earnings effect of entry restrictionsfar outweighs the lower practitioner quality earnings effect that licensinginduces.

Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility

This paper explores biases in the elicitation of utilities under risk and the contribution that generalizations of expected utility can make to the resolution of these biases. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studies, prospect theory was most consistent with our data. The main improvement of prospect theory over expected utility was in comparisons between a riskless and a risky prospect(riskless-risk methods). We observed no improvement over expected utility in comparisons between two risky prospects (risk-risk methods). An explanation why we found no improvement of prospect theory over expected utility in risk-risk methods may be that there was less overweighting of small probabilities in our study than has commonly been observed.

When to carry eccentric products? Optimal retail assortment under consumer returns

To understand whether retailers should consider consumer returns when merchandising, we study howthe optimal assortment of a price-taking retailer is influenced by its return policy. The retailer selects itsassortment from an exogenous set of horizontally differentiated products. Consumers make purchase andkeep/return decisions in nested multinomial logit fashion. Our main finding is that the optimal assortmenthas a counterintuitive structure for relatively strict return policies: It is optimal to offer a mix of the mostpopular and most eccentric products when the refund amount is sufficiently low, which can be viewed asa form of risk sharing between the retailer and consumers. In contrast, if the refund is sufficiently high, orwhen returns are disallowed, optimal assortment is composed of only the most popular products (a commonfinding in the literature). We provide preliminary empirical evidence for one of the key drivers of our results:more eccentric products have higher probability of return conditional on purchase. In light of our analyticalfindings and managerial insights, we conclude that retailers should take their return policies into accountwhen merchandising.