Working papers results

We consider decision makers that know that payo relevant observations are generated by a process that belongs to a given class M, as postulated in Wald [33]. We incorporate this Waldean piece of objective information within an otherwise subjective setting a la Savage [30] and show that this leads to a two-stages subjective expected utility model that accounts for both state and model uncertainty.

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Do childhood events shape adult political views and behavior? This paper investigates the impact of Fourth of July celebrations in the US during childhood on partisanship and participation later in life. Using daily precipitation data to proxy for exogenous variation in participation on Fourth of July as a child, we examine the role of the celebrations for people born in 1920-1990. We find that days without rain on Fourth of July in childhood have lifelong effects. In particular, they shift adult views and behavior in favor of the Republicans and increase later-life political participation. Our estimates are significant: one Fourth of July without rain before age 18 raises the likelihood of identifying as a Republican by 2 percent and voting for the Republican candidate by 4 percent. It also increases voter turnout by 0.9 percent and boosts political campaign contributions by 3 percent. Taken together, the evidence suggests that important childhood events can have persistent effects on political beliefs and participation and that Fourth of July celebrations in the US affect the nation's political landscape.

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The existing empirical evidence does not yet provide a clear understanding of how leverage and expected equity returns are related. While some studies show a positive relationship between financial leverage and returns, others conclude that returns are either insensitive or decrease with leverage, after controlling for size and book-to-market. We re-examine this evidence by explicitly accounting for the dynamic nature of a firm's optimal leverage policy in the presence of frictions. Specifically, consistent with recent dynamic models of capital structure, we allow firms to temporarily deviate from their optimal capital structure due to adjustment costs. For each firm we estimate target leverage, and compute relative leverage as the difference between observed and target leverage. We find that relative leverage is positively and significantly related to expected equity returns, and has a dominant effect over size and book-to-market. The relative leverage premium shows a remarkable symmetry for over- and under-leveraged firms. Finally, the relative leverage premium is not captured by Fama and French's three-factor model, and it appears to be consistent with rational asset pricing. We conjecture that risk-averse investors require a higher expected return for over-leveraged stocks than for under-leveraged ones because the former are counter-cyclical, while the latter are cyclical.

We evaluate the effect of relaxing fiscal rules on policy outcomes applying a quasiexperimental research design. In 1999 the Italian central government introduced fiscal rules aimed at imposing fiscal discipline on municipal governments, and in 2001 relaxed the rules for municipalities below 5,000 inhabitants. This shift allows us to implement a "difference-in-discontinuities" design by combining the before/after with the discontinuous policy variation. Our estimates show that relaxing fiscal rules triggers a substantial deficit bias, captured by a shift from a balanced budget to a deficit that amounts to 2 percent of the total budget. The deficit comes primarily from reduced revenues as unconstrained municipalities show lower real estate and income tax rates. Finally, we investigate the heterogeneity in policy responses across municipalities to provide new evidence on the costs and benefits of restricting fiscal policy. The impact is larger if the mayor can run for reelection, the number of political parties in the city council is higher, voters are older, and the performance of the mayor in providing public goods is lower, consistent with models of the political economy of fiscal adjustment.

We derive envelope theorems for optimization problems in which the value function takes values in a general Banach lattice, and not necessarily in the real line. We impose no restriction whatsoever on the choice set. Our result extend therefore the ones of Milgrom and Segal (2002). We apply our results to discuss the existence of a well-defined notion of marginal utility of wealth in optimal consumption-portfolio problems in which the utility from consumption is additive but possibly state-dependent and, most importantly, the information structure is not required to be Markovian. In this general setting, the value function is itself a random variable and, if integrable, takes values in a Banach lattice so that our general results can be applied.

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The goal of an individual searching for a marriage partner is typically to form a long-term relationship. Marital search is a complicated and costly activity, where opportunities typically arrive over time at uncertain intervals, each party has to evaluate each other's characteristics, and expectations play an important role. Given these features of marital search, a seminal paper by Mortensen (1988) has shown that the matching framework can be suited for the analysis of marriage markets and also raised the possibility of a thick market externality in these markets. We contribute to this literature by empirically investigating whether marriage markets are characterized by increasing, constant, or decreasing returns to scale. We focus on three societies-late medieval and early Renaissance Tuscany, China in the 1980s, and the United States in 2000-which are different in terms of population size, economic structure, sex ratios, marriage transfers, and the social norms governing marriage markets. Our main finding is that in all three societies, there is no evidence of increasing returns to scale in marriage markets, whereas the hypothesis of constant returns to scale cannot be rejected. The remarkably similar and precise estimates suggest that the number of eligibles (and potential contacts) in a marriage market is less important than economic factors, such as wealth levels and income dispersion, in affecting the marriage rate across different societies. The key message is that where individuals live, in large cities or small towns, have a minimal effect on their marriage rates.

This paper studies the asset pricing implications of a general equilibrium model in which real investment is reversible at a cost. Firms face higher costs in contracting than in expanding their capital stock and decide to invest when their productive capital is scarce relative to the overall capital of the economy. Positive shocks to the production process of the firm increase the size of the firm and reduce the value of growth options. As a result, the firm is burdened with more unproductive capital and its value lowers with respect to the accumulated capital. The optimal consumption policy alters the optimal allocation of resources and affects firm's value, generating mean-reverting dynamics for the M/B ratios. The model (1) captures convergence of price-to-book ratios - negative for growth stocks and positive for value stocks - (firm migration), (2) generates deviations from the classic CAPM in line with the cross-sectional variation in expected stock returns and (3) generates a non-monotone relationship between Tobin's q and conditional volatility consistent with the empirical evidence.

This paper studies a model where exclusive dealing (ED) can both promote investment and foreclose a more effcient supplier. While investment promotion is usually regarded as a pro-competitive effect of ED, our paper shows that it may be the very reason why a contract that forecloses a more effcient supplier is signed. Absent the effect on investment, the contract would not be signed and foreclosure would not be a concern. For this reason, considering potential foreclosure and investment promotion in isolation and then summing them up may not be a suitable approach to assess the net effect of ED. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ED.

The family is a primal institution, whose internal organization can be transferred to collective institutions, which come to substitute the family in one of its economic roles. We study how the family structure affected the initial design of pension systems. Our theoretical framework predicts that, when pensions systems are introduced in society with weak family ties, they act as a safety net, while in societies with strong ties pensions they replicate the tight link between generations and tend to provide generous benefits. Using Todd (1983) historical classification of family ties, we show that in societies dominated by absolute nuclear families, i.e. weak family ties (f.i. Anglo-Saxon countries), pension systems emerged as a safety net; and viceversa in societies dominated by strong families. Yet, historical family types are not correlated with the size of the pension systems, which have largely changed over time. These results are robust to controlling for alternative explanations, such as legal origin, religion, urbanization and democratization, electoral rules and forms of government. Moreover, evidence on individual data confirm the cross-country results: individuals whose ancestors came to the US from countries featuring communitarian or egalitarian nuclear families prefer to rely on the government as a provider of old age security through generous retirement benefits.

We study orders of risk and model uncertainty aversion in the smooth ambiguity model proposed by Klibano, Marinacci, and Mukerji [4]. We consider a quadratic approximation of their model and we show that both risk and model uncertainty attitudes have at most a second order effect. Specifically, the order depends on the properties of the support of the decision maker's limit prior, which we fully characterize. We find that model uncertainty attitudes have a second order effect unless the support is a singleton, that is, unless model uncertainty fades away in the limit. Special attention is given to the binomial state spaces often used in mathematical finance.

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