Publications

2015
Hanson, Samuel, Andrei Shleifer, Jeremy C Stein, and Robert W Vishny. 2015. “Banks as patient fixed-income investors.” Journal of Financial Economics 117 (3): 449-469. Abstract

We examine the business model of traditional commercial banks when they compete with shadow banks. While both types of intermediaries create safe “money-like” claims, they go about this in different ways. Traditional banks create money-like claims by holding illiquid fixed-income assets to maturity, and they rely on deposit insurance and costly equity capital to support this strategy. This strategy allows bank depositors to remain “sleepy”: they do not have to pay attention to transient fluctuations in the market value of bank assets. In contrast, shadow banks create money-like claims by giving their investors an early exit option requiring the rapid liquidation of assets. Thus, traditional banks have a stable source of funding, while shadow banks are subject to runs and fire-sale losses. In equilibrium, traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk but are illiquid and have substantial transitory price volatility, whereas shadow banks tend to hold relatively liquid assets.

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Gennaioli, Nicola, Andrei Shleifer, and Robert Vishny. 2015. “Money Doctors.” Journal of Finance 70 (1): 91-114. Publisher's Version Abstract

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 under perform 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.

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Shleifer, Andrei. 2015. “Matthew Gentzkow, Winner of the 2014 Clark Medal.” Journal of Economic Perspectives 29 (1): 181-192. Publisher's Version Abstract

The 2014 John Bates Clark Medal of the American Economic Association was awarded to Matthew Gentzkow of the University of Chicago Booth School of Business. The citation recognized Matt’s “fundamental contributions to our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment, and the effect of media on education and civic engagement.” In addition to his work on the media, Matt has made a number of significant contributions to empirical industrial organization more broadly, as well as to applied economic theory. In this essay, I highlight some of these contributions, which are listed on Table 1. I will be referring to these papers by their number on this list.

Matt earned both his AB in 1997, and, after a brief career in the theatre, his PhD in 2004 from Harvard, where he began to work on the media. At Harvard he also met Jesse Shapiro, his close friend and collaborator. I was one of Matt’s (as well as Jesse’s) thesis advisors. From Harvard, both Matt and Jesse moved to Chicago Booth School, where their research truly thrived and they contributed to a fantastic group of applied economists.

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Bordalo, Pedro, Nicola Gennaioli, and Andrei Shleifer. 2015. “Salience Theory of Judicial Decisions.” Journal of Legal Studies 44 (S1): S7-S33. Publisher's Version Abstract

We present a model of judicial decision making in which the judge overweights the salient facts of the case. The context of the judicial decision, which is comparative by nature, shapes which aspects of the case stand out and draw the judge's attention. By focusing judicial attention on such salient aspects of the case, legally irrelevant information can aect judicial decisions. Our model accounts for a range of recent experimental evidence bearing on the psychology of judicial decisions, including anchoring eects in the setting of damages, decoy eects in choice of legal remedies, and framing eects in the decision to litigate. The model also oers a new approach to positive analysis of damage awards in torts.

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Barberis, Nicholas, Robin Greenwood, Lawrence Jin, and Andrei Shleifer. 2015. “X-CAPM: An Extrapolative Capital Asset Pricing Model.” Journal of Financial Economics 115 (1): 1-24. Publisher's Version Abstract

Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns. Such beliefs are hard to reconcile with existing models of the aggregate stock market. We study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other investors hold fully rational beliefs. We find that the model captures many features of actual prices and returns; importantly, however, it is also consistent with the survey evidence on investor expectations.

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2014
Shleifer, Andrei, and Daniel Treisman. 2014. “Normal Countries: The East 25 Years After Communism.” Foreign Affairs. Publisher's Version
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Glaeser, Edward L, and Andrei Shleifer. 2014. “Gary Becker (1930–2014).” Science 344 (6189): 1233. Publisher's Version Abstract

Gary Becker, who died on 3 May 2014 at the age of 83, redefined economics both in its methodology and scope. He radically expanded the sphere of economic analysis. As the range of issues and especially data in economics increased over the last half century, Becker's approach became more and more relevant and modern. He was awarded the 1992 Nobel Prize in Economics for “having extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including nonmarket behavior.”

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LaPorta, Rafael, and Andrei Shleifer. 2014. “Informality and Development.” Journal of Economic Perspectives 28 (3): 109-126. Publisher's Version Abstract

We establish five facts about the informal economy in developing countries.  First, it is huge, reaching about half of the total in the poorest countries.   Second, it has extremely low productivity compared to the formal economy: informal firms are typically small, inefficient, and run by poorly educated entrepreneurs.   Third, although avoidance of taxes and regulations is an important reason for informality, the productivity of informal firms is too low for them to thrive in the formal sector.   Lowering registration costs neither brings many informal firms into the formal sector, nor unleashes economic growth.  Fourth, the informal economy is largely disconnected from the formal economy.   Informal firms rarely transition to formality, and continue their existence, often for years or even decades, without much growth or improvement.   Fifth, as countries grow and develop, the informal economy eventually shrinks, and the formal economy comes to dominate economic life.  These five facts are most consistent with dual models of informality and economic development. 

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Greenwood, Robin, and Andrei Shleifer. 2014. “Expectations of Returns and Expected Returns.” Review of Financial Studies 27 (3): 714-746. Abstract

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.

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Gennaioli, Nicola, Andrei Shleifer, and Robert Vishny. 2014. “Finance and the Preservation of Wealth.” Quarterly Journal of Economics 129 (3): 1221-1254. Publisher's Version Abstract

We introduce the model of asset management developed in Gennaioli, Shleifer, and Vishny (GSV, 2014) into a Solow-style neoclassical growth model with diminishing returns to capital. Savers rely on trusted intermediaries to manage their wealth (claims on capital stock), who can charge fees above costs to trusting investors. In this model, the ratio of financial income to GDP increases with the ratio of aggregate wealth to GDP. Both rise along the convergence path to steady state growth. We examine several further implications of the model for management fees, unit costs of finance, and the consequences of shocks to trust and to the capital stock.

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Gennaioli, Nicola, Rafael LaPorta, Florencio Lopez-de-Silanes, and Andrei Shleifer. 2014. “Growth in Regions.” Journal of Economic Growth 19 (3): 259-309. Publisher's Version Abstract

We use a newly assembled sample of 1,528 regions from 83 countries to compare the speed of per capita income convergence within and across countries.  Regional growth is shaped by similar factors as national growth, such as geography and human capital.  Regional convergence rate is about 2% per year, comparable to that between countries.   Regional convergence is faster in richer countries, and countries with better capital markets.  A calibration of a neoclassical growth model suggests that significant barriers to factor mobility within countries are needed to account for the evidence. 

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Chong, Alberto, Rafael LaPorta, Florencio Lopez-de-Silanes, and Andrei Shleifer. 2014. “Letter Grading Government Efficiency.” Journal of European Economic Association 12 (2): 277-299. Abstract

We mailed letters to non-existent business addresses in 159 countries (10 per country), and measured whether they come back to the return address in the US and how long it takes. About 60% of the letters were returned, taking over 6 months, on average. The results provide new objective indicators of government efficiency across countries, based on a simple and universal service, and allow us to shed light on its determinants. The evidence suggests that both technology and management quality influence government efficiency, just as they do that of the private sector.

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2013
Bordalo, Pedro, Nicola Gennaioli, and Andrei Shleifer. 2013. “Salience and Asset Prices.” American Economic Review Papers and Proceedings 103 (3): 623-628.
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Botero, Juan, Alejandro Ponce, and Andrei Shleifer. 2013. “Education, Complaints, and Accountability.” Journal of Law and Economics 56 (4): 959-996. Abstract
Better-educated countries have better governments, an empirical regularity that holds in both dictatorships and democracies. Possible reasons for this fact are that educated people are more likely to complain about misconduct by government officials and that more frequent complaints encourage better behavior from officials. Newly assembled individual-level survey data from the World Justice Project show that, within countries, better-educated people are more likely to report official misconduct. The results are confirmed using other survey data on reporting crime and corruption. Citizens’ complaints might thus be an operative mechanism that explains the link between education and the quality of government.
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Bordalo, Pedro, Nicola Gennaioli, and Andrei Shleifer. 2013. “Salience and Consumer Choice.” Journal of Political Economy 121 (5): 803-843. Abstract
We present a theory of context-dependent choice in which a consumer’s attention is drawn to salient attributes of goods, such as quality or price. An attribute is salient for a good when it stands out among the good’s attributes relative to that attribute’s average level in the choice set ðor, more broadly, the choice contextÞ. Consumers attach disproportionately high weight to salient attributes, and their choices are tilted toward goods with higher quality/price ratios. The model accounts for a variety of disparate evidence, including decoy effects and contextdependent willingness to pay. It also suggests a novel theory of misleading sales.
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Schwartzstein, Joshua, and Andrei Shleifer. 2013. “An Activity-Generating Theory of Regulation.” Journal of Law and Economics 56 (1): 1-38. Abstract

We propose an activity-generating theory of regulation. When courts make errors, tort litigation becomes unpredictable and as such imposes risk on firms, thereby discouraging entry, innovation, and other socially desirable activity. When social returns to innovation are higher than private returns, it may pay the society to generate some information ex ante about how risky firms are, and to impose safety standards based on that information. In some situations, compliance with such standards should entirely preempt tort liability; in others, it should merely reduce penalties. By reducing litigation risk, this type of regulation can raise welfare.

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Algan, Yann, Pierre Cahuc, and Andrei Shleifer. 2013. “Teaching Practices and Social Capital.” American Economic Journal: Applied Economics 5 (3): 189-210. Abstract

We use several data sets to consider the effect of teaching practices on student beliefs, as well as on organization of firms and institutions. In student level data, teaching practices (such as teachers lecturing versus students working in groups) exert a substantial influence on student beliefs about cooperation both with each other and with teachers. In cross‐ country data, teaching practices shape both beliefs and institutional outcomes. The relationship between teaching practices and student test performance is nonlinear. The evidence supports the idea that progressive education promotes social capital.

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Gennaioli, Nicola, Rafael LaPorta, Florencio Lopez-de-Silanes, and Andrei Shleifer. 2013. “Human Capital and Regional Development.” Quarterly Journal of Economics 128 (1): 105-164. Abstract

We investigate the determinants of regional development using a newly constructed database of 1569 sub-national regions from 110 countries covering 74 percent of the world’s surface and 96 percent of its GDP. We combine the cross-regional analysis of geographic, institutional, cultural, and human capital determinants of regional development with an examination of productivity in several thousand establishments located in these regions. To organize the discussion, we present a new model of regional development that introduces into a standard migration framework elements of both the Lucas (1978) model of the allocation of talent between entrepreneurship and work, and the Lucas (1988) model of human capital externalities. The evidence points to the paramount importance of human capital in accounting for regional differences in development, but also suggests from model estimation and calibration that entrepreneurial inputs and human capital externalities are essential for understanding the data.

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Gennaioli, Nicola, Andrei Shleifer, and Robert W Vishny. 2013. “A Model of Shadow Banking.” Journal of Finance 68 (4): 1331-1363. Abstract

We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry-ups when investors neglect tail risks.

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2012
Shleifer, Andrei. 2012. “Psychologists at the Gate: Review of Daniel Kahneman’s Thinking, Fast and Slow.” Journal of Economic Literature 50 (4): 1080-1091.
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