Learning from Shocks and the Decision to Open

Two claims pervade the literature on the political economy of market reforms: that economic crises cause reforms; and that crises matter because they bring into question the validity of the economic model held to be responsible for them. Economic crises are said to spur a process of learning that is conducive to the abandonment of failing models and to the adoption of successful models. But although these claims have become the conventional wisdom, they have been hardly tested empirically due to the lack of agreement on what constitutes a crisis and to difficulties in measuring learning from them. I propose a model of rational learning from experience and apply it to the decision to open the economy. Using data from 1964 through 1990, I show that learning from the 1982 debt crisis was relevant to the first wave of adoption of an export promotion strategy, but learning was conditional on the high variability of economic outcomes in countries that opened up to trade. Learning was also symbolic in that the sheer number of other countries that liberalized was a more important driver of others’ decisions to follow suit.

Which screening strategy using BMD measurements would be most cost effective for hip fracture prevention in elderly women? A decision analysis based on a Markov model.

INTRODUCTION: Hip fractures are responsible for excessive mortality, decreasing the 5-year survival rate by about 20%. From an economic perspective, they represent a major source of expense, with direct costs in hospitalization, rehabilitation, and institutionalization. The incidence rate sharply increases after the age of 70, but it can be reduced in women aged 70-80 years by therapeutic interventions. Recent analyses suggest that the most efficient strategy is to implement such interventions in women at the age of 70 years. As several guidelines recommend bone mineral density (BMD) screening of postmenopausal women with clinical risk factors, our objective was to assess the cost-effectiveness of two screening strategies applied to elderly women aged 70 years and older. METHODS: A cost-effectiveness analysis was performed using decision-tree analysis and a Markov model. Two alternative strategies, one measuring BMD of all women, and one measuring BMD only of those having at least one risk factor, were compared with the reference strategy "no screening". Cost-effectiveness ratios were measured as cost per year gained without hip fracture. Most probabilities were based on data observed in EPIDOS, SEMOF and OFELY cohorts. RESULTS: In this model, which is mostly based on observed data, the strategy "screen all" was more cost effective than "screen women at risk." For one woman screened at the age of 70 and followed for 10 years, the incremental (additional) cost-effectiveness ratio of these two strategies compared with the reference was 4,235 euros and 8,290 euros, respectively. CONCLUSION: The results of this model, under the assumptions described in the paper, suggest that in women aged 70-80 years, screening all women with dual-energy X-ray absorptiometry (DXA) would be more effective than no screening or screening only women with at least one risk factor. Cost-effectiveness studies based on decision-analysis trees maybe useful tools for helping decision makers, and further models based on different assumptions should be performed to improve the level of evidence on cost-effectiveness ratios of the usual screening strategies for osteoporosis.

Women's decision making and experience of subsequent pregnancy following stillbirth.

INTRODUCTION: This study sought to increase understanding of women's thoughts and feelings about decision making and the experience of subsequent pregnancy following stillbirth (intrauterine death after 24 weeks' gestation). METHODS: Eleven women were interviewed, 8 of whom were pregnant at the time of the interview. Modified grounded theory was used to guide the research methodology and to analyze the data. RESULTS: A model was developed to illustrate women's experiences of decision making in relation to subsequent pregnancy and of subsequent pregnancy itself. DISCUSSION: The results of the current study have significant implications for women who have experienced stillbirth and the health professionals who work with them. Based on the model, women may find it helpful to discuss their beliefs in relation to healing and health professionals to provide support with this in mind. Women and their partners may also benefit from explanations and support about the potentially conflicting emotions they may experience during this time.

The causal relationship between Individual’s choice behavior and self-reported satisfaction: the case of residential mobility in the EU

One of the most persistent and lasting debates in economic research refers to whether the answers to subjective questions can be used to explain individuals’ economic behavior. Using panel data for twelve EU countries, in the present study we analyze the causal relationship between self-reported housing satisfaction and residential mobility. Our results indicate that: i) households unsatisfied with their current housing situation are more likely to move; ii) housing satisfaction raises after a move, and; iii) housing satisfaction increases with the transition from being a renter to becoming a homeowner. Some interesting cross-country differences are observed. Our findings provide evidence in favor of use of subjective indicators of satisfaction with certain life domains in the analysis of individuals’ economic conduct.

Individual Aspirations and Satisfaction:Quantifying the Importance of Homeownership

Residential satisfaction is often used as a barometer to assess the performance of public policy and programmes designed to raise individuals' well-being. However, the fact that responses elicited from residents might be biased by subjective, non-observable factors casts doubt on whether these responses can be taken as trustable indicators of the individuals' housing situation. Emotional factors such as aspirations or expectations might affect individuals' cognitions of their true residential situation. To disentangle this puzzle, we investigated whether identical residential attributes can be perceived differently depending on tenure status. Our results indicate that tenure status is crucial not only in determining the level of housing satisfaction, but also regarding how dwellers perceive their housing characteristics. Keywords: Housing satisfaction, subjective well-being, homeownership. JEL classification: D1, R2.

Political Risk, Economic Integration, and the Foreign Direct Investment Decision

In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. We also consider the impact of economic integration upon FDI decisions. The paper follows the real options approach, which allows investigating the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible. Across the board we find that political uncertainty can be very detrimental to FDI decisions while economic integration leads to an increasing benefit of investing abroad.

Economising, Strategising and the Decision to Outsource

We study the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialised inputs. Firms’ mode of operation decision depends on both the incentive to economize on costs and on strategic considerations. We explore the strategic incentives to outsource and show that asymmetric equilibria emerge, with firms choosing different modes of operation, even when they are ex-ante identical. With ex-ante asymmetries, higher cost firms are more likely to outsource. We apply our model to a number of different international trading setups.

A Behavioural Model of Choice in the Presence of Decision Conflict

This paper proposes a model of choice that does not assume completeness of the decision maker’s preferences. The model explains in a natural way, and within a unified framework of choice when preference-incomparable options are present, four behavioural phenomena: the attraction effect, choice deferral, the strengthening of the attraction effect when deferral is per-missible, and status quo bias. The key element in the proposed decision rule is that an individual chooses an alternative from a menu if it is worse than no other alternative in that menu and is also better than at least one. Utility-maximising behaviour is included as a special case when preferences are complete. The relevance of the partial dominance idea underlying the proposed choice procedure is illustrated with an intuitive generalisation of weakly dominated strategies and their iterated deletion in games with vector payoffs.

Age, Life-satisfaction, and Relative Income – Insights from the UK and Germany

We first confirm previous results with the German Socio-Economic Panel by Layard et al. (2010), and obtain strong negative effects of comparison income. However, when we split the sample by age, we find quite different results for reference income. The effects on lifesatisfaction are positive and significant for those under 45, consistent with Hirschman’s (1973) ‘tunnel effect’, and only negative (and larger than in the full sample) for those over 45, when relative deprivation dominates. Thus for young respondents, reference income’s signalling role, indicating potential future prospects, can outweigh relative deprivation effects. Own-income effects are also larger for the older sample, and of greater magnitude than the comparison income effect. In East Germany the reference income effects are insignificant for all. With data from the British Household Panel Survey, we confirm standard results when encompassing all ages, but reference income loses significance in both age groups, and most surprisingly, even own income becomes insignificant for those over 45, while education has significant negative effects.

Complexity and Bounded Rationality in Individual Decision Problemsing.

I develop a model of endogenous bounded rationality due to search costs, arising implicitly from the problems complexity. The decision maker is not required to know the entire structure of the problem when making choices but can think ahead, through costly search, to reveal more of it. However, the costs of search are not assumed exogenously; they are inferred from revealed preferences through her choices. Thus, bounded rationality and its extent emerge endogenously: as problems become simpler or as the benefits of deeper search become larger relative to its costs, the choices more closely resemble those of a rational agent. For a fixed decision problem, the costs of search will vary across agents. For a given decision maker, they will vary across problems. The model explains, therefore, why the disparity, between observed choices and those prescribed under rationality, varies across agents and problems. It also suggests, under reasonable assumptions, an identifying prediction: a relation between the benefits of deeper search and the depth of the search. As long as calibration of the search costs is possible, this can be tested on any agent-problem pair. My approach provides a common framework for depicting the underlying limitations that force departures from rationality in different and unrelated decision-making situations. Specifically, I show that it is consistent with violations of timing independence in temporal framing problems, dynamic inconsistency and diversification bias in sequential versus simultaneous choice problems, and with plausible but contrasting risk attitudes across small- and large-stakes gambles.

Policy Labels and Investment Decision-making

Much attention in recent years has turned to the potential of behavioural insights to improve the performance of government policy. One behavioural concept of interest is the effect of a cash transfer label on how the transfer is spent. The Winter Fuel Payment (WFP) is a labelled cash transfer to offset the costs of keeping older households warm in the winter. Previous research has shown that households spend a higher proportion of the WFP on energy expenditures due to its label (Beatty et al., 2011). If households interpret the WFP as money for their energy bills, it may reduce their willingness to undertake investments which help achieving the same goal, such as the adoption of renewable energy technologies. In this paper we show that the WFP has distortionary effects on the renewable technology market. Using the sharp eligibility criteria of the WFP in a Regression Discontinuity Design, this analysis finds a reduction in the propensity to install renewable energy technologies of around 2.7 percentage points due to the WFP. This is a considerable number. It implies that 62% of households (whose oldest member turns 60) would have invested in renewable energy but refrain to do so after receiving the WFP. This analysis suggests that the labelling effect spreads to products related to the labelled good. In this case, households use too much energy from sources which generate pollution and too little from relatively cleaner technologies.

Effects of stress on economic decision-making: Evidence from laboratory experiments

The ways in which preferences respond to the varying stress of economic environments is a key question for behavioral economics and public policy. We conducted a laboratory experiment to investigate the effects of stress on financial decision making among individuals aged 50 and older. Using the cold pressor task as a physiological stressor, and a series of intelligence tests as cognitive stressors, we find that stress increases subjective discounting rates, has no effect on the degree of risk-aversion, and substantially lowers the effort individuals make to learn about financial decisions.

Decision Errors, Legal Uncertainty and Welfare: a General Treatment

This paper provides a general treatment of the implications for welfare of legal uncertainty. We distinguish legal uncertainty from decision errors: though the former can be influenced by the latter, the latter are neither necessary nor sufficient for the existence of legal uncertainty. We show that an increase in decision errors will always reduce welfare. However, for any given level of decision errors, information structures involving more legal uncertainty can improve welfare. This holds always, even when there is complete legal uncertainty, when sanctions on socially harmful actions are set at their optimal level. This transforms radically one’s perception about the “costs” of legal uncertainty. We also provide general proofs for two results, previously established under restrictive assumptions. The first is that Effects-Based enforcement procedures may welfare dominate Per Se (or object-based) procedures and will always do so when sanctions are optimally set. The second is that optimal sanctions may well be higher under enforcement procedures involving more legal uncertainty.