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 monetary policy dilemma: Will interest rates have to rise?

UK interest rates are now at their lowest level for more than two decades, and the government is hoping that interest rates can be kept at a low and sustainable level comparable to the 1960s. Indeed, some commentators are calling for still lower interest rates to offset the risk that the £12bn tax increases and cuts in government spending that will come into effect in the next financial year will lead to stagnant consumer spending and a stalled recovery. Against this must be weighed the risk that the recent very good run of inflation figures will prove temporary. Both headline and underlying inflation will be pushed up by indirect tax increases and there is the possibility that wages will follow too, as employees seek to maintain their living standards in a tightening labour market. That risk would point to a much more cautious monetary policy stance and the possibility that the government may need to raise rates from their present level if it is to achieve its inflation objective. The Chancellor faces a clear dilemma. In this Viewpoint, we assess the evidence available to guide him in his decisions and draw out the implications for the future path of interest rates.     

Reinforcement Learning and Savings Behavior

We show that individual investors over‐extrapolate from their personal experience when making savings decisions. Investors who experience particularly rewarding outcomes from 401(k) saving—a high average and/or low variance return—increase their 401(k) savings rate more than investors who have less rewarding experiences. This finding is not driven by aggregate time‐series shocks, income effects, rational learning about investing skill, investor fixed effects, or time‐varying investor‐level heterogeneity that is correlated with portfolio allocations to stock, bond, and cash asset classes. We discuss implications for the equity premium puzzle and interventions aimed at improving household financial outcomes.     

TIME CONSISTENCY AND SELLER COMMITMENT IN INTERTEMPORAL MOVIE DISTRIBUTION: AN EMPIRICAL STUDY OF THE VIDEO WINDOW*

We study the determinants of the ‘video window’ (the interval between a movie's theatrical and video releases), based on a sample of 1,157 films released on video between 1988 and 1997. For subsets of films having shorter theater run lengths (1 to 17 weeks), windows were generally longer than, and largely invariant to, measures of the time required to exhaust the theater market. One interpretation of our results is that U.S. movie distributors resolved a time consistency problem by coordinating their behavior to maintain longer windows than would have otherwise resulted, but different explanations are also plausible.     

Determinants of Mortgage Default and Consumer Credit Use: The Effects of Foreclosure Laws and Foreclosure Delays

The mortgage default decision is part of a complex household credit management problem. We examine how factors affecting mortgage default spill over to other credit markets. As home equity turns negative, homeowners default on mortgages and home equity lines of credit at higher rates, whereas they prioritize repaying credit cards and auto loans. Larger unused credit card limits intensify the preservation of credit cards over housing debt. Although mortgage nonrecourse statutes increase default on all types of housing debt, they reduce credit card defaults. Foreclosure delays increase default rates for housing and nonhousing debts. Our analysis highlights the interconnectedness of debt repayment decisions.     

How Do Firms Respond to Political Uncertainty? Evidence from U.S. Gubernatorial Elections

We examine the joint response to political uncertainty along two margins: changes in real activity and voluntary disclosure. We focus on within-firm variation in exposure to ex ante competitive U.S. gubernatorial elections using data on preelection poll margins and firms’ state exposures. Despite real activity falling in the years leading up to a close election, we find that voluntary disclosure increases both in frequency and content, including mentions of risk in filings that reference states holding elections. Our tests use a decomposition of 8-K filings into real activity and voluntary disclosure to address the endogenous complementarity between these two responses. These results hold when using alternative ex ante measures of political uncertainty based on term-limited incumbents, historically competitive offices, or state legislature gridlock. Both effects of political uncertainty are stronger for firms in highly regulated industries and weaker for those least exposed to the local market, linking the real activity and disclosure responses to uncertainty.