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    Bordalo, Pedro, Nicola Gennaioli, Andrei Shleifer, and Stephen J. Terry. Working Paper. “Real Credit Cycles”. Abstract
    Recent empirical work has revived the Minsky hypothesis of boom-bust credit cycles driven by uctuations in investor optimism. To quantitatively assess this hypothesis, we incorporate diagnostic expectations into an otherwise standard business cycle model with heterogeneous firms and risky debt. Diagnostic expectations are a psychologically founded, forward-looking model of belief formation that captures over-reaction to news. We calibrate the diagnosticity parameter using microdata on the forecast errors of managers of listed firms in the US. The model generates countercyclical credit spreads and default rates, while the rational expectations version generates the opposite pattern. Diagnostic expectations also offer a good fit of three patterns that have been empirically documented: systematic reversals of credit spreads, systematic reversals of aggregate investment, and predictability of future bond returns. Crucially, diagnostic expectations also generate a strong fragility or sensitivity to small bad news after steady expansions. The rational expectations version of the model can account for the rst pattern but not the others. Diagnostic expectations offer a parsimonious account of major credit cycles facts, underscoring the promise of realistic expectation formation for applied business cycle modeling.
    Bordalo, Pedro, Nicola Gennaioli, Rafael LaPorta, and Andrei Shleifer. Working Paper. “Expectations of Fundamentals and Stock Market Puzzles”. Abstract

    We revisit several leading puzzles about the aggregate stock market by incorporating into a standard dividend discount model survey expectations of earnings of S&P 500 firms. Using survey expectations, while keeping discount rates constant, explains a significant part of “excess” stock price volatility, price-earnings ratio variation, and return predictability. The evidence is consistent with a mechanism in which good news about fundamentals leads to excessively optimistic forecasts of earnings, especially at long horizons, which inflate stock prices and lead to subsequent low returns. Relaxing rational expectations of fundamentals in a standard asset pricing model accounts for stock market anomalies in a parsimonious way.

    Bosio, Erica, Simeon Djankov, Edward L. Glaeser, and Andrei Shleifer. Working Paper. “Public Procurement in Law and Practice”. Abstract

    We examine a new data set of laws and practices governing public procurement, as well as procurement outcomes, in 187 countries.  We measure regulation as restrictions on discretion of the procuring agents.  We find that laws and practices are highly correlated with each other across countries, better practices are correlated with better outcomes, but laws themselves are not correlated with outcomes.  To shed light on this puzzle, we present a model of procurement in which both regulation and public sector capacity determine the efficiency of procurement. In the model, regulation is effective in countries with low public sector capacity, and detrimental in countries with high public sector capacity because it inhibits the socially optimal exercise of discretion.  We find evidence broadly consistent with this prediction: regulation of procurement improves outcomes, but only in countries with low public sector capacity.

    Behrer, A. Patrick, Edward L. Glaeser, Giacomo A. M. Ponzetto, and Andrei Shleifer. Forthcoming. “Securing Property Rights.” Journal of Political Economy. Abstract

    A central challenge in securing property rights is the subversion of justice through legal skill, bribery, or physical force by the strong—the state or its powerful citizens—against the weak. We present evidence that undue influence on judges is a common concern in many countries, especially among the poor. We then present a model of a water polluter whose discharges contaminate adjacent land. If this polluter can subvert the assessment of damages caused by his activity, there is an efficiency case for granting the landowner the right to an injunction that stops the polluter, rather than the right to compensation for the harm. If the polluter can subvert even the determination of his responsibility for harm, there is an efficiency case for regulation that restricts pollution regardless of its effects. We then conduct an empirical analysis of water quality in the U.S. before and after the Clean Water Act, and show how regulation brought about cleaner water, particularly in states with higher corruption.

    Biography

    Andrei Shleifer is John L. Loeb Professor of Economics at Harvard University. He holds an undergraduate degree from Harvard and a Ph.D. from MIT. Before coming to Harvard in 1991, he has taught at Princeton and the Chicago Business School. Shleifer has worked in the areas of comparative corporate governance, law and finance, behavioral finance, as well as institutional economics. He has published seven books, including The Grabbing Hand (with Robert Vishny), Inefficient Markets: An Introduction to Behavioral Finance, and A Crisis of Beliefs: Investor Psychology...

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    Bordalo, Pedro, Katherine Coffman, Nicola Gennaioli, Frederik Schwerter, and Andrei Shleifer. 2020. “Memory and Representativeness.” Psychological Review. Abstract

    We explore the idea that judgment by representativeness reflects the workings of episodic memory, especially interference. In a new laboratory experiment on cued recall, participants are shown two groups of images with different distributions of colors. We find that i) decreasing the frequency of a given color in one group significantly increases the recalled frequency of that color in the other group, ii) for a fixed set of images, different cues for the same objective distribution entail different interference patterns and different probabilistic assessments. Selective retrieval and interference may offer a foundation for the representativeness heuristic, but more generally for understanding the formation of probability judgments from experienced statistical associations.

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