Working papers results

In this paper we review some recent work on public intervention in economic environments where fifirms undertake investments in research or in physical assets, and then choose appropriate business practices to extract profits from the outcomes of the investment process. Public policies may take different forms: the release of an authorization; the setting of fines and damages for liability; or the choice of legal standards in antitrust law enforcement. The business practices are privately profitable but may be welfare enhancing or socially harmful. When expectations are optimistic, public policies face a trade-off between ex-ante effects on investment, that suggest hands off, and ex-post control of practices when harmful, that requires intervention. Our general result suggests that public policies should be softer when innovation is an important source of welfare improvements.

Experimental evidence suggests that agents in social dilemmas have belief-dependent, otherregarding preferences. But in experimental games such preferences cannot be common knowledge, because subjects play with anonymous co-players. We address this issue theoretically and experimentally in the context of a trust game, assuming that the trustee's choice may be affected by a combination of guilt aversion and intention-based reciprocity. We recover trustees' belief-dependent preferences from their answers to a structured questionnaire. In the main treatment, the answers are disclosed and made common knowledge within each matched pair, while in the control treatment there is no disclosure. Our main auxiliary assumption is that such disclosure approximately implements a psychological game with complete information. To organize the data, we classify subjects according to their elicited preferences, and test predictions for the two treatments using both rationalizability and equilibrium. We find that guilt aversion is the prevalent psychological motivation, and that behavior and elicited beliefs move in the direction predicted by the theory.

 

 

An extensive literature has studied lobbying by special interest groups. We analyze a novel lobbying channel: lobbying businessmen-politicians through business proxies. When a politician controls a business, firms attempting to curry favors shift their spending towards the politician's business. The politician benefits from increased revenues, and the firms hope for favorable regulation in return. We investigate this channel in Italy where government members, including the prime minister, are not required to divest business holdings. We examine the evolution of advertising spending by firms over the period 1994 to 2009, during which Silvio Berlusconi was prime minister on and off three times, while maintaining control of Italy's major private television network, Mediaset. We predict that firms attempting to curry favor with the government shift their advertising budget towards Berlusconi's channels when Berlusconi is in power. Indeed, we document a significant pro-Mediaset bias in the allocation of advertising spending during Berlusconi's political tenure. This pattern is especially pronounced for companies operating in more regulated sectors, as predicted. Using a model of supply and demand in the advertising market, we estimate one billion euros of extra revenue to Berlusconi's group. We also estimate the expected returns in regulation to politically motivated spenders of similar magnitude, stressing the economic importance of this lobbying channel. These findings provide an additional rationale for rules on conflict of interest.

We use frequency domain techniques to estimate a medium-scale DSGE model on different frequency bands. We show that goodness of t, forecasting performance and parameter estimates vary substantially with the frequency bands over which the model is estimated. Estimates obtained using subsets of frequencies are characterized by signicantly different parameters, an indication that the model cannot match all frequencies with one set of parameters. In particular, we find that: i) the low frequency properties of the data strongly affect parameter estimates obtained in the time domain; ii) the importance of economic frictions in the model changes when different subsets of frequencies are used in estimation.
This is particularly true for the investment cost friction and habit persistence: when low
frequencies are present in the estimation, the investment cost friction and habit persistence are estimated to be higher than when low frequencies are absent.

This paper proposes a framework to evaluate the impact of longevity-linked securities on the risk-return trade-off for traditional portfolios. Generalized unexpected raise in life expectancy is a source of aggregate risk in the insurance sector balance sheets. Longevity-linked securities are a natural instrument to reallocate these risks by making them tradable in the financial market. This paper extends the strategic asset allocation model of (Campbell Viceira 2005) to include a longevity-linked investment in addition to equity and fixed income securities and describe the resulting term structure of risk-return trade-offs. The model highlights an unexpected predictability pattern of the survival probability estimates and gives an empirical valuation of the market price of longevity risk based on the LeeCarter(1992) mortality model and on the time series of prices for standardized annuities publicly offered by US insurance companies.

We evaluate the impact of timing on decision outcomes, when both the timing and the relevant decision are chosen under uncertainty. Sports betting provides the testing ground, as we exploit an original dataset containing more than one million online bets on games of the Italian Major Soccer League. We find that individuals perform systematically better when they place their bets farther away from the game day. The better performance of early bettors holds controlling for (time-invariant) unobservable ability, learning during the season, and timing of the odds. We attribute this result to the increase of noisy information on game day, which hampers the capacity of late (non-professional) bettors to use very simple prediction methods, such as team rankings or last game results. We also find that more successful bettors tend to bet in advance, focus on a smaller set of events, and prefer games associated with smaller betting odds.

This paper addresses the problem of sequentially allocating timesensitive goods, or one-period leases on a durable good, among agents who compete through time and learn about the common component of the value of the allocation through experience. I show that efficiency is unattainable, and I identify simple variations of sequential second-price or English auctions that implement the second best and the revenuemaximizing auction. When the units are divisible, I also identify the corresponding auctions that allow for double sourcing.

We establish an Ergodic Theorem for lower probabilities, a generalization of standard probabilities widely used in applications. As an application, we provide a version for lower probabilities of the Strong Law of Large Numbers.

We thoroughly study the non-standard optimal exercise policy associated with relevant capital investment options and with the prepayment option of widespread collateralized-borrowing contracts like the gold loan. Option exercise is optimally postponed not only when moneyness is insufficient but also when it is excessive. We contribute an important extension of the classical optimal exercise properties for American options. Early exercise of an American call with a negative underlying payout rate can occur if the option is moderately in the money. We fully characterize the existence, the monotonicity, the continuity, the limits and the symptotic behavior at maturity of the double free boundary that separates the exercise region from the double continuation region. We fifind that the fifinite-maturity non-standard policy conspicuously differs from the infifinite-maturity one.

We study a Mean-Risk model derived from a behavioral theory of Disappointment with multiple reference points. One distinguishing feature of the risk measure is that it is based on mutual deviations of outcomes, not deviations from a specific target. We prove necessary and sufficient conditions for strict first and second order stochastic dominance, and show that the model is, in addition, a Convex Risk Measure. The model allows for richer, and behaviorally more plausible, risk preference patterns than competing models with equal degrees of freedom, including Expected Utility (EU), Mean-Variance (MV), Mean-Gini (MG), and models based on non-additive probability weighting, such a Dual Theory (DT). For example, in asset allocation, the decision-maker can abstain from diversifying in a risky asset unless it meets a threshold performance, and gradually invest beyond this threshold, which appears more acceptable than the extreme solutions provided by either EU and MV (always diversify) or DT and MG (always plunge). In asset trading, the model allows no-trade intervals, like DT and MG, in some, but not all, situations. An illustrative application to portfolio selection is presented. The model can provide an improved criterion for Mean-Risk analysis by injecting a new level of behavioral realism and flexibility, while maintaining key normative properties.