Uncovering the Risk–Return Relation in the Stock Market

There is ongoing debate about the apparent weak or negative relation between risk (conditional variance) and expected returns in the aggregate stock market. We develop and estimate an empirical model based on the intertemporal capital asset pricing model (ICAPM) that separately identifies the two components of expected returns, namely, the risk component and the component due to the desire to hedge changes in investment opportunities. The estimated coefficient of relative risk aversion is positive, statistically significant, and reasonable in magnitude. However, expected returns are driven primarily by the hedge component. The omission of this component is partly responsible for the existing contradictory results.     

THE DETERMINANTS OF ILLEGAL DRUG USE

An extensive set of self-reported survey data exists on illegal drug use. The survey data show that drug use is quite frequent among the younger adult population, relatively infrequent among those of high-school age, and rare among middle-aged and older adults. Drug use varies by occupational category in ways that are difficult to rationalize. This study utilizes a model in which an individual's time is allocated among labor, non-drug consumption, leisure, and drug use, where the individual is cognizant of the effect of drug use on his wages. The study analyzes comparative static results and then uses data from the National Longitudinal Survey of Youth to estimate a probit model of the individual decision to use drugs. The findings of the study are that non-economic factors dominate the decision for both harder drugs and drugs more broadly defined. One must consider this finding tentative, however, since usable drug price data were not available.     

THE VALUE OF CLEANER AIR: AN INTEGRATED APPROACH

Policymakers in the legislative and regulatory arenas face increasing public expectations that authorities will both promulgate and implement strict environmental programs. At the same time, the aggregate cost of such programs is rising and is impacting economic sectors previously untouched. In this context, a major study used an integrated interdisciplinary perspective to determine what economic benefits would result from air pollution controls. Specifically, the study developed estimates for the health benefits of reducing ozone and fine particulate matter concentrations in the nation's most polluted region—the South Coast Air Basin centering on Los Angeles. This paper presents the economic methodologies and results of that study. It also discusses how health and atmospheric sciences informed the economic assessment.     

Raise Rates to Raise Inflation? Neo‐Fisherianism in the New Keynesian Model

Increasing the inflation target in a New Keynesian (NK) model may require increasing, rather than decreasing, the nominal interest rate in the short run. We refer to this positive short‐run comovement between the nominal rates and inflation conditional on a nominal shock as Neo‐Fisherianism. We show that the NK model is more likely to be Neo‐Fisherian the more persistent is the change in the inflation target and the more flexible are prices. Neo‐Fisherianism is driven by the forward‐looking nature of the model. Modifications that make the framework less forward‐looking make it less likely for the model to exhibit Neo‐Fisherianism.     

ARE DISAGREEMENTS AMONG MALE AND FEMALE ECONOMISTS MARGINAL AT BEST?: A SURVEY OF AEA MEMBERS AND THEIR VIEWS ON ECONOMICS AND ECONOMIC POLICY

The authors survey economists in the United States holding membership in the American Economic Association (AEA) to determine if there are significant differences in views between male and female economists on important policy issues. Controlling for place of current employment (academic institution with graduate program, academic institution—undergraduate only, government, for‐profit institution) and decade of PhD, the authors find many areas in which economists agree. However, important differences exist in the views of male and female economists on issues including the minimum wage, views on labor standards, health insurance, and especially on explanations for the gender wage gap and issues of equal opportunity in the labor market and the economics profession itself. These results lend support to the notion that gender diversity in policy‐making circles may be an important aspect in broadening the menu of public policy choices. (JEL A11, J78, A14)     

When Does Information Asymmetry Affect the Cost of Capital?

This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.     

Trading Against the Random Expiration of Private Information: A Natural Experiment

For years, the Securities and Exchange Commission (SEC) accidentally distributed securities disclosures to some investors before the public. We exploit this setting, which is unique because the delay until public disclosure was exogenous and the private information window was well defined, to study informed trading with a random stopping time. Trading intensity and the pace at which prices incorporate information decrease with the expected delay until public release, but the relation between trading intensity and time elapsed varies with traders' learning process. Noise trading and relative information advantage play similar roles as in standard microstructure theories assuming a fixed time window.     

Do People Always Pay Less Than They Say? Testbed Laboratory Experiments with IV and HG Values

Hypothetical bias is a long‐standing issue in stated preference and contingent valuation studies—people tend to overstate their preferences when they do not experience the real monetary consequences of their decision. This view, however, has been challenged by recent evidence based on the elicitation of induced values (IV) in the lab and homegrown (HG) demand function from different countries. This paper uses an experimental design to assess the extent and relevance of hypothetical bias in demand elicitation exercises for both induced (IV) and homegrown (HG) values. For testbed purpose, we use a classic second‐price auction to elicit preferences. Comparing the demand curve we elicit in both, hypothetical bias unambiguously (i) vanishes in an IV, private good context and (ii) persists in HG values elicitation context. This suggests hypothetical bias in preference elicitation appears to be driven by “preference formation” rather than “preference elicitation.” In addition, companion treatments highlight two sources of the discrepancy observed in the HG setting: the hypothetical context leads bidders to underestimate the constraints imposed by their budget limitations, whereas the real context creates pressure leading them to bid “zero” to opt out from the elicitation mechanism. As a result, there is a need for a demand elicitation procedure that helps subjects take the valuation exercise sincerely, but without putting extra pressure on them.