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"Shleifer, Andrei"
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Informality and Development
In developing countries, informal firms account for up to half of economic activity. They provide livelihood for billions of people. Yet their role in economic development remains controversial with some viewing informality as pent-up potential and others viewing informality as a parasitic organizational form that hinders economic growth. In this paper, we assess these perspectives. We argue that the evidence is most consistent with dual models, in which informality arises out of poverty and the informal and formal sectors are very different. It seems that informal firms have low productivity and produce low-quality products; and, consequently, they do not pose a threat to the formal firms. Economic growth comes from the formal sector, that is, from firms run by educated entrepreneurs and exhibiting much higher levels of productivity. The expansion of the formal sector leads to the decline of the informal sector in relative and eventually absolute terms. A few informal firms convert to formality, but more generally they disappear because they cannot compete with the much more-productive formal firms.
Journal Article
Expectations of Returns and Expected Returns
We analyze time series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. The evidence is not consistent with rational expectations representative investor models of returns.
Journal Article
Overreaction in Macroeconomic Expectations
We study the rationality of individual and consensus forecasts of macroeconomic and financial variables using the methodology of Coibion and Gorodnichenko (2015), who examine predictability of forecast errors from forecast revisions. We find that individual forecasters typically overreact to news, while consensus forecasts underreact relative to full-information rational expectations. We reconcile these findings within a diagnostic expectations version of a dispersed information learning model. Structural estimation indicates that departures from Bayesian updating in the form of diagnostic overreaction capture important variation in forecast biases across different series, yielding a belief distortion parameter similar to estimates obtained in other settings.
Journal Article
Diagnostic Expectations and Credit Cycles
We present a model of credit cycles arising from diagnostic expectations—a belief formation mechanism based on Kahneman and Tversky's representativeness heuristic. Diagnostic expectations overweight future outcomes that become more likely in light of incoming data. The expectations formation rule is forward looking and depends on the underlying stochastic process, and thus is immune to the Lucas critique. Diagnostic expectations reconcile extrapolation and neglect of risk in a unified framework. In our model, credit spreads are excessively volatile, overreact to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility.
Journal Article
Public Procurement in Law and Practice
We examine a new dataset of public procurement laws, practice, and outcomes in 187 countries. We measure regulation as restrictions on the discretion of the procuring entities. We find that laws and practice are highly correlated with each other across countries, and better practice is correlated with better outcomes, but laws themselves are not correlated with outcomes. A closer look shows that stricter laws correlate with improved outcomes, but only in countries with low public sector capacity. We present a model of procurement in which both regulatory rules and public sector capacity determine procurement outcomes. In the model, regulation is effective in countries with low public sector capacity, but not in countries with high capacity because it inhibits the socially optimal exercise of discretion to exclude low quality bidders.
Journal Article
Beliefs about Gender
We conduct laboratory experiments that explore how gender stereotypes shape beliefs about ability of oneself and others in different categories of knowledge. The data reveal two patterns. First, men’s and women’s beliefs about both oneself and others exceed observed ability on average, particularly in difficult tasks. Second, overestimation of ability by both men and women varies across categories. To understand these patterns, we develop a model that separates gender stereotypes from misestimation of ability related to the difficulty of the task. We find that stereotypes contribute to gender gaps in self-confidence, assessments of others, and behavior in a cooperative game.
Journal Article
Money Doctors
We present a new model of investors delegating portfolio management to professionals based on trust. Trust in the manager reduces an investor's perception of the riskiness of a given investment, and allows managers to charge fees. Money managers compete for investor funds by setting fees, but because of trust, fees do not fall to costs. In equilibrium, fees are higher for assets with higher expected return, managers on average underperform the market net of fees, but investors nevertheless prefer to hire managers to investing on their own. When investors hold biased expectations, trust causes managers to pander to investor beliefs.
Journal Article
SALIENCE THEORY OF CHOICE UNDER RISK
We present a theory of choice among lotteries in which the decision maker's attention is drawn to (precisely defined) salient payoffs. This leads the decision maker to a context-dependent representation of lotteries in which true probabilities are replaced by decision weights distorted in favor of salient payoffs. By specifying decision weights as a function of payoffs, our model provides a novel and unified account of many empirical phenomena, including frequent risk-seeking behavior, invariance failures such as the Allais paradox, and preference reversals. It also yields new predictions, including some that distinguish it from prospect theory, which we test.
Journal Article