What characteristics of news generate over-or-underreaction? We study the asset-pricing consequences of diagnostic expectations, a model of belief formation based on the representativeness heuristic, in a setting where news events are drawn from categories with extreme distributions of fundamentals. Our model predicts greater overreaction to news belonging to categories with more extreme outliers, or tail events. We test our theory on a comprehensive database of corporate news that includes news from 24 \ different categories, including earnings announcements, product launches, M&A, business expansions, and client-related news. We find theory-consistent heterogeneity in investor reaction to news, with more overreaction in the form of greater post-announcement return reversals and trading volume for news categories with more extreme distributions of fundamentals.

How do we predict which asset-price booms go bust? We develop a model of financial markets with investor heterogeneity that yields a summary statistic for the degree to which an asset price overreacts to news: the gap in holdings of the asset by oversensitive investors versus rational investors. We use quarterly institutional holdings data to measure investors’ news sensitivity according to their tendency to purchase stocks after positive news, and compute from this measure the asset-level holdings gaps between oversensitive and rational investors. We find that investor news sensitivity is persistent over time, with the holdings gap measure able to forecast reversals or continuation of asset-price run-ups. Furthermore, the holdings gap measure serves as a powerful aggregator of different channels of overreaction, reflecting not only price extrapolation but also overreaction to various sources of non-price information, such as industry winners and fundamental growth.

We introduce new measures of macroeconomic expectations based on earnings calls of US corporate executives. Using these measures, we examine how political partisanship affects firms’ economic expectations and real investment and hiring decisions. We document partisan differences in corporate executives’ expectations beyond what can be explained by firm characteristics and regional and industry-specific demand shocks. After their party wins the presidency, more partisan executives have more positive economic outlooks and pay more attention to major tax and government policies. Firms more politically aligned with the president hire more workers and increase real investments relative to non-aligned firms. Consistent with economic expectations driving these decisions, increased investments are correlated with more positive macroeconomic sentiments and attention paid to government policies. However, these increased investment and hiring do not lead to higher corporate revenues, profits, or firm-level productivity.

Competition between jurisdictions is a central feature of many public policy problems. I examine the consequences of such competition in the US life insurance industry, where states vie to attract insurers by setting lower capital requirements, but the costs of such actions are borne by consumers in other states. I document empirical evidence of competition between state regulators and its effects on the supply of life insurance. I then develop a quantitative model of the insurance market to evaluate the effects of this competition. I find that competition leads regulators to set lower capital requirements, which increases default risks but also increases consumer surplus by lowering prices. On net, these effects decrease regulators' utility based on regulators' revealed-preference objective functions.

How do global minimum taxes affect corporate balance sheets and real activities? I study this question using the introduction of the base erosion and anti-abuse tax (BEAT) on multinational insurance companies operating in the US. I find that the BEAT implementation significantly changed the internal capital allocation of insurers, increased global risk-sharing, and increased product prices in the US. I document three main sets of findings. First, the global minimum tax significantly changed the internal capital allocation of insurance companies and decreased the amount of transfer payments of US insurers to their foreign affiliates by 59%, or $30 billion per year. The changes in allocation were primarily driven by foreign-domiciled insurance groups and insurance groups which used foreign affiliates more extensively prior to the tax reform. Second, the tax increased global risk-sharing, inducing insurers to diversify more risk with external counterparties. Revealed-preference estimates suggest that the total increase in risk-sharing is worth $1.9 billion per year for insurers, equal to 2.9% of insurers’ total net income. Third, insurance companies affected by the minimum tax increased policy prices by 1.03% relative to not-affected insurers.

We examine the drivers of variable annuity sales and the impact of a proposed regulatory change. Variable annuities are popular retirement products with over $2 trillion in assets in the United States. Insurers typically pay brokers a commission for selling variable annuities that ranges from 0% to over 10% of investors' premium payments. Brokers earn higher commissions for selling inferior annuities, in terms of higher expenses and more ex-post complaints. Our results indicate that variable annuity sales are roughly four times as sensitive to brokers' financial interests as to investors'. To help limit conflicts of interest, the Department of Labor proposed a rule in 2016 that would hold brokers to a fiduciary standard when dealing with retirement accounts. We find that after the proposed fiduciary rule, sales of high-expense variable annuities fell by 52% as sales became more sensitive to expenses and insurers increased the relative availability of low-expense products. Based on our structural model estimates, investor welfare improved as a result of the fiduciary rule under conservative assumptions.

I study the heterogeneity of credence goods provision in taxi drivers taking detours in New York City. First, I document that there is significant detouring on average by drivers. Second, there is significant heterogeneity in cheating across individuals, yet each individual’s propensity to take detours is stable: drivers who detour almost always detour, while those who do not detour almost never do. Drivers who take longer detours on each trip also take such trips more often. Third, cultural attitudes plausibly explain some of this heterogeneity in behavior across individuals.