Generalized Disappointment Aversion and Asset Prices

We characterize generalized disappointment aversion (GDA) risk preferences that can overweight lower‐tail outcomes relative to expected utility. We show in an endowment economy that recursive utility with GDA risk preferences generates effective risk aversion that is countercyclical. This feature comes from endogenous variation in the probability of disappointment in the representative agent's intertemporal consumption‐saving problem that underlies the asset pricing model. The variation in effective risk aversion produces a large equity premium and a risk‐free rate that is procyclical and has low volatility in an economy with a simple autoregressive endowment‐growth process.     

Market Expectations in the Cross‐Section of Present Values

Returns and cash flow growth for the aggregate U.S. stock market are highly and robustly predictable. Using a single factor extracted from the cross‐section of book‐to‐market ratios, we find an out‐of‐sample return forecasting R² of 13% at the annual frequency (0.9% monthly). We document similar out‐of‐sample predictability for returns on value, size, momentum, and industry portfolios. We present a model linking aggregate market expectations to disaggregated valuation ratios in a latent factor system. Spreads in value portfolios’ exposures to economic shocks are key to identifying predictability and are consistent with duration‐based theories of the value premium.     

Prosecutorial Retention: Signaling by Trial

We examine how retention motives affect prosecutor behavior under different evaluation criteria. In particular, we analyze how prosecutors of differing capabilities respond in choosing which cases to take to trial and which to plea bargain. We show how different criteria distort the mix of cases chosen for trial and that the direction of the distortion depends crucially on the evaluation tool used. Optimal evaluation metrics are derived that combine multiple signals of performance and are shown to achieve the first‐best outcome.     

Commercial Bank Portfolio Behavior and Endogenous Uncertainty

This paper demonstrates how Bayesian information may be analyzed as a variable input in determining an optimal bank portfolio and investigates the impact of information in a way that is statistically satisfactory. A portfolio model is developed, and the impact of information is analyzed. Information is treated as an economic input that is used up to the point where its predicted marginal benefit is exactly equal to its marginal cost, and, from there, the optimal demand for information is derived. A comparative-static analysis demonstrates that the reaction of optimal portfolio holdings to interest rate changes under variable uncertainty is dramatically different from portfolio behavior when uncertainty is exogenous. Finally, the elasticity of reserves with respect to scale is examined under the assumption of variable uncertainty.     

WHAT ARE EMPLOYERS DOING TO CREATE A COMPETITIVE MARKET FOR HEALTH CARE IN THE TWIN CITIES?

Employers' willingness to control costs is a critical aspect of pro-competition strategies for the health-care market. Here, we present some of the first quantitative evidence of what employers do to control health-care costs. Our sample is 44 large private and public employers in Minnesota.
We develop a theoretical model in which the employer chooses cost-control "innovations"—along with wages, fringe benefits, and labor-force size—to maximize profits. The role of innovations is to reduce unit costs of offering fringe benefits.
Our data are from a 1982 survey. Eighty percent of the surveyed employers, representing nearly 200,000 employees, responded. Most respondents offer both indemnity insurance plans and health-maintenance organizations (HMOs). Many firms and individual health-insurance plans conduct cost-control activities, but less than half of the firms which offer HMOs have adopted level-dollar premium contributions for their family health-insurance policies. Few plans have increased their coinsurance and deductible requirements in the past five years.
We use probit equations to estimate the probability that a firm or a health plan will adopt cost-control activities. Our analysis suggests that many firms may soon make major plan-design changes to control health-care costs, although they have not yet done so.