Faculty & Research

Sendhil Mullainathan

Sendhil Mullainathan

University Professor, Professor of Computation and Behavioral Science, and George C. Tiao Faculty Fellow

Phone :
1-773-834-2353
Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Sendhil Mullainathan is a University Professor, Professor of Computation and Behavioral Science, and George C. Tiao Faculty Fellow at Chicago Booth. His current research uses machine learning to understand complex problems in human behavior, social policy, and especially medicine, where computational techniques have the potential to uncover biomedical insights from large-scale health data.

In past work he has combined insights from economics and behavioral science with causal inference tools—lab, field, and natural experiments—to study social problems such as discrimination and poverty. Papers include: the impact of poverty on mental bandwidth; how algorithms can improve on judicial decision-making; whether CEO pay is excessive; using fictitious resumes to measure discrimination; showing that higher cigarette taxes makes smokers happier; and modeling how competition affects media bias.

Mullainathan enjoys writing. He recently co-authored Scarcity: Why Having too Little Means so Much and writes regularly for the New York Times. Additionally, his research has appeared in a variety of publications including the Quarterly Journal of Economics, American Economic Review, Social Cognition, British Medical Journal, and Management Science.

Mullainathan helped co-found a non-profit to apply behavioral science (ideas42), co-founded a center to promote the use of randomized control trials in development (the Abdul Latif Jameel Poverty Action Lab), serves on the board of the MacArthur Foundation, has worked in government in various roles, is affiliated with the NBER and BREAD, and is a member of the American Academy of Arts and Sciences.

Prior to joining Booth, Mullainathan was the Robert C. Waggoner Professor of Economics in the Faculty of Arts and Sciences at Harvard University, where he taught courses about machine learning and big data. He began his academic career at the Massachusetts Institute of Technology.

Mullainathan is a recipient of the MacArthur “Genius Grant,” has been designated a “Young Global Leader” by the World Economic Forum, was labeled a “Top 100 Thinker” by Foreign Policy Magazine, and was named to the “Smart List: 50 people who will change the world” by Wired Magazine (UK). His hobbies include basketball, board games, googling, and fixing-up classic espresso machines.

 

2018 - 2019 Course Schedule

Number Name Quarter
32200 Artificial Intelligence 2019 (Winter)
32901 Applications of Machine Learning to the Empirical Sciences 2019 (Winter)

REVISION: Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines
Date Posted: Jun  04, 2018
A debt trap occurs when someone takes on a high-interest rate loan and is barely able to pay back the interest, and thus perpetually finds themselves in debt (often by re-financing). Studying such practices is important for understanding financial decision-making of households in dire circumstances, and also for setting appropriate consumer protection policies. We conduct a simple experiment in three sites in which we paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years after intervention, treatment individuals were borrowing at the same rate as control households.

REVISION: The Theory Is Predictive, but Is It Complete? An Application to Human Perception of Randomness
Date Posted: May  21, 2018
When testing a theory, we should ask not just whether its predictions match what we see in the data, but also about its “completeness”: how much of the predictable variation in the data does the theory capture? Defining completeness is conceptually challenging, but we show how methods based on machine learning can provide tractable measures of completeness. We also identify a model domain—the human perception and generation of randomness — where measures of completeness can be feasibly analyzed; from these measures we discover there is significant structure in the problem that existing theories have yet to capture.

REVISION: Do Judges Vary in Their Treatment of Race?
Date Posted: Sep  28, 2013
Are minorities treated differently by the legal system? Systematic racial differences in case characteristics, many unobservable, make this a difficult question to answer directly. In this paper, we estimate whether judges differ from each other in how they sentence minorities, avoiding potential bias from unobservable case characteristics by exploiting the random assignment of cases to judges. We measure the between-judge variation in the difference in incarceration rates and sentence lengths between African-American and White defendants. We perform a Monte Carlo simulation in order to explicitly construct the appropriate counterfactual, where race does not influence judicial sentencing. In our data set, which includes felony cases from Cook County, Illinois, we find statistically significant between-judge variation in incarceration rates, although not in sentence lengths.

New: Learning Through Noticing: Theory and Experimental Evidence in Farming
Date Posted: Sep  12, 2012
Existing learning models attribute failures to learn to a lack of data. We model a different barrier. Given the large number of dimensions one could focus on when using a technology, people may fail to learn because they failed to notice important features of the data they possess. We conduct a field experiment with seaweed farmers to test a model of “learning through noticing”. We find evidence of a failure to notice: On some dimensions, farmers do not even know the value of their own ...

REVISION: Corruption
Date Posted: Jun  19, 2012
In this paper, we provide a new framework for analyzing corruption in public bureaucracies. The standard way to model corruption is as an example of moral hazard, which then leads to a focus on better monitoring and stricter penalties with the eradication of corruption as the final goal. We propose an alternative approach which emphasizes why corruption arises in the first place. Corruption is modeled as a consequence of the interaction between the underlying task being performed by ...

Update: Corruption Chapter Full 17
Date Posted: Apr  09, 2012
In this paper, we provide a new framework for analyzing corruption in public bureaucracies. The standard way to model corruption is as an example of moral hazard, which then leads to a focus on better monitoring and stricter penalties with the eradication of corruption as the final goal. We propose an alternative approach which emphasizes why corruption arises in the first place. Corruption is modeled as a consequence of the interaction between the underlying task being performed by bureaucr
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New: Helping Consumers Know Themselves
Date Posted: Jan  18, 2011
Firms sometimes know more about a consumer's expected usage than the consumer herself. We explore the consequences of this reversal in the information asymmetry. We analyze the consequences of making consumers more informed about themselves. While making consumers more informed decreases their expenditure conditional on a given set of prices, equilibrium prices may increase, offsetting the direct benefit of information. We discuss theoretical and practical issues surrounding so-called RECAP ...

New: Getting to the Top of Mind: How Reminders Increase Saving
Date Posted: Aug  03, 2010
We develop and test a simple model of limited attention in intertemporal choice. The model posits that individuals fully attend to consumption in all periods but fail to attend to some future lumpy expenditure opportunities. This asymmetry generates some predictions that overlap with models of present-bias. Our model also generates the unique predictions that reminders may increase saving, and that reminders will be more effective when they increase the salience of a specific expenditure. We ...

New: Getting to the Top of Mind: How Reminders Increase Saving
Date Posted: Jul  12, 2010
?We develop and test a simple model of limited attention in intertemporal choice. The model posits that individuals fully attend to consumption in all periods but fail to attend to some future lumpy expenditure opportunities. This asymmetry generates some predictions that overlap with models of present-bias. Our model also generates the unique predictions that reminders may increase saving, and that reminders will be more effective when they increase the salience of a specific expenditure ...

REVISION: The Shape of Temptation: Implications for the Economic Lives of the Poor
Date Posted: May  15, 2010
This paper argues that the relation between temptations and the level of consumption plays a key role in explaining the observed behaviors of the poor. Temptation goods are defined to be the set of goods that generate positive utility for the self that consumes them, but not for any previous self that anticipates that they will be consumed in the future. We show that the assumption of declining temptations, which says that the fraction of the marginal dollar that is spent on temptation goods ...

REVISION: Getting to the Top of Mind: How Reminders Increase Saving
Date Posted: Apr  28, 2010
We develop and test a simple model of limited attention in intertemporal choice. The model posits that individuals fully attend to consumption in all periods but fail to attend to some future lumpy expenditure opportunities. This asymmetry generates some predictions that overlap with other models of present-bias. Our model also generates the unique predictions that reminders will increase saving, and that a reminder that makes a specific expenditure more salient will be especially effective ...

New: Behavioral Economics and Tax Policy
Date Posted: Sep  15, 2009
Behavioral economics is changing our understanding of how economic policy operates, including tax policy. In this paper, we consider some implications of behavioral economics for tax policy, such as how it changes our understanding of the welfare consequences of taxation, the relative desirability of using the tax system as a platform for policy implementation, and the role of taxes as an element of policy design. We do so by reviewing the logic of specific features of tax policy in light of ...

New: What's Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment
Date Posted: Jan  24, 2009
Firms spend billions of dollars each year advertising consumer products in order to influence demand. Much of these outlays are on the creative design of advertising content. Creative content often uses nuances of presentation and framing that have large effects on consumer decision making in laboratory studies. But there is little field evidence on the effect of advertising content as it compares in magnitude to the effect of price. We analyze a direct mail field experiment in South Africa ...

Are Emily and Greg More Employable than Lakisha and Jamal? A Field Experiment on Labor Market Discri...
Date Posted: Nov  06, 2008
We perform a field experiment to measure racial discrimination in the labor market. We respond with fictitious resumes to help-wanted ads in Boston and Chicago newspapers. To manipulate perception of race, each resume is randomly assigned either a very African American sounding name or a very White sounding name. The results show significant discrimination against African-American names: White names receive 50 percent more callbacks for interviews. We also find that race affects the benefits ...

Ferreting Out Tunneling: An Application to Indian Business Groups
Date Posted: Oct  17, 2008
In many countries, controlling shareholders are accused of tunneling, transferring resources from companies where they have few cash flow rights to ones where they have more cash flow rights. Quantifying the extent of such tunneling, however, has proven difficult because of its illicit nature. This paper develops a general empirical technique for quantifying tunneling. We use the responses of different firms to performance shocks to map out the flow of resources within a group of firms and ...

New: Affirmative Action in Education: Evidence from Engineering College Admissions in India
Date Posted: Apr  29, 2008
Many countries mandate affirmative action in university admissions for traditionally disadvantaged groups. Little is known about either the efficacy or costs of these programs. This paper examines affirmative action in engineering colleges in India for lower-caste groups. We find that it successfully targets the financially disadvantaged: the marginal upper-caste applicant comes from a more advantaged background than the marginal lower-caste applicant who displaces him. Despite much lower ...

New: Behaviorally Informed Home Mortgage Regulation
Date Posted: Apr  16, 2008
Choosing a mortgage is one of the biggest financial decisions an American consumer will make. Yet it can be a complicated one, especially in today`s environment where mortgages vary in dimensions and unique features. This complexity has raised regulatory issues. Should some features be regulated? Should product disclosure be regulated? And most basic of all, is there a rationale for regulation or will the market solve the problem? Current regulation of home mortgages is largely stuck in two ...

New: Why Don't People Insure Late Life Consumption: A Framing Explanation of the Under-Annuitization Puzz...
Date Posted: Feb  22, 2008
Rational models of risk-averse consumers have difficulty explaining limited annuity demand. We posit that consumers evaluate annuity products using a narrow investment frame that focuses on risk and return, rather than a consumption frame that considers the consequences for lifelong consumption. Under an investment frame, annuities are quite unattractive, exhibiting high risk without high returns. Survey evidence supports this hypothesis: whereas 72 percent of respondents prefer a life annuity ...

REVISION: Sticking With Your Vote: Cognitive Dissonance and Voting
Date Posted: Sep  24, 2007
In traditional models, votes are an expression of preferences and beliefs. Psychological theories of cognitive dissonance suggest, however, that behavior may shape preferences. In this view, the very act of voting may influence political attitudes. A vote for a candidate may lead to more favorable interpretations of his actions in the future. We test the empirical relevance of cognitive dissonance in US Presidential elections. The key problem in such a test is the endogeneity of voter choice ...

New: Coarse Thinking and Persuasion
Date Posted: May  01, 2007
We present a model of coarse thinking, in which individuals group situations into categories, and transfer the informational content of a given message from situations in a category where it is useful to those where it is not. The model explains how uninformative messages can be persuasive, particularly in low involvement situations, and how objectively informative messages can be dropped by the persuader without the audience assuming the worst. The model sheds light on product branding, the ...

New: Coarse Thinking and Persuasion
Date Posted: Nov  20, 2006
We present a model of coarse thinking, in which individuals group situations into categories, and transfer the informational content of a given message from situations in a category where it is useful to those where it is not. The model explains how uninformative messages can be persuasive, particularly in low involvement situations, and how objectively informative messages can be dropped by the persuader without the audience assuming the worst. The model sheds light on product branding, the ...

New: Does Corruption Produce Unsafe Drivers?
Date Posted: Jun  08, 2006
We follow 822 applicants through the process of obtaining a driver's license in New Delhi, India. To understand how the bureaucracy responds to individual and social needs, participants were randomly assigned to one of three groups: bonus, lesson, and comparison groups. Participants in the bonus group were offered a financial reward if they could obtain their license fast; participants in the lesson group were offered free driving lessons. To gauge driving skills, we performed a surprise ...

Do CEOs Set Their Own Pay? The Ones Without Principals Do
Date Posted: May  25, 2006
We empirically examine two competing views of CEO pay. In the contracting view, pay is used to solve an agency problem: the compensation committee optimally chooses pay contracts which give the CEO incentives to maximize shareholder wealth. In the skimming view, pay is the result of an agency problem: CEOs have managed to capture the pay process so that they set their own pay, constrained somewhat by the availability of cash or by a fear of drawing shareholders` attention. To distinguish ...

New: Does Corruption Produce Unsafe Drivers?
Date Posted: May  16, 2006
We follow 822 applicants through the process of obtaining a driver's license in New Delhi, India. To understand how the bureaucracy responds to individual and social needs, participants were randomly assigned to one of three groups: bonus, lesson, and comparison groups. Participants in the bonus group were offered a financial reward if they could obtain their license fast; participants in the lesson group were offered free driving lessons. To gauge driving skills, we performed a surprise ...

Sticking with Your Vote: Cognitive Dissonance and Voting
Date Posted: Feb  09, 2006
In traditional models, votes are an expression of preferences and beliefs. Psychological theories of cognitive dissonance suggest, however, that behavior may shape preferences. In this view, the very act of voting may influence political attitudes. A vote for a candidate may lead to more favorable interpretations of his actions in the future. We test the empirical relevance of cognitive dissonance in US Presidential elections. The key problem in such a test is the endogeneity of voter choice ...

What's Psychology Worth? A Field Experiment in the Consumer Credit Market
Date Posted: Jan  18, 2006
Numerous laboratory studies find that minor nuances of presentation and description change behavior in ways that are inconsistent with standard economic models. How much do these context effect matter in natural settings, when consumers make large, real decisions and have the opportunity to learn from experience? We report on a field experiment designed to address this question. A South African lender sent letters offering incumbent clients large, short-term loans at randomly chosen interest ...

Persuasion in Finance
Date Posted: Dec  27, 2005
Persuasion is a fundamental part of social activity, yet it is rarely studied by economists. We compare the traditional economic model, in which persuasion is communication of objectively valuable information, with a behavioral model, in which persuasion is an effort to fit the message into the audience's already held beliefs. We present a simple formalization of the behavioral model, and compare the two models using data on financial advertising in Money and Business Week magazines over the ...

Persuasion in Finance
Date Posted: Dec  06, 2005
Persuasion is a fundamental part of social activity, yet it is rarely studied by economists. We compare the traditional economic model, in which persuasion is communication of objectively valuable information, with a behavioral model, in which persuasion is an effort to fit the message into the audience's already held beliefs. We present a simple formalization of the behavioral model, and compare the two models using data on financial advertising in Money and Business Week magazines over the ...

What's Psychology Worth? A Field Experiment in the Consumer Credit Market
Date Posted: Jul  28, 2005
Numerous laboratory studies report on behaviors inconsistent with rational economic models. How much do these inconsistencies matter in natural settings, when consumers make large, real decisions and have the opportunity to learn from experiences? We report on a field experiment designed to address this question. Incumbent clients of a lender in South Africa were sent letters offering them large, short-term loans at randomly chosen interest rates. Psychological features on the letter, which ...

Profitable Investments or Dissipated Cash? Evidence on the Investment-Cash Flow Relationship From Oi...
Date Posted: Mar  10, 2005
The strong positive relationship between corporate cash flow and investment has been interpreted through the lens of both agency- and non-agency-based models. In this paper, we distinguish between these two interpretations using project-level data in the oil and gas industry. The specific projects we consider are auctioned-off leases that give mineral exploration rights to tracts of federal land. We find the standard positive relationship between investment and cash flow in this data, in that ...

Profitable Investments or Dissipated Cash?: Evidence on the Investment-Cash Flow Relationship From O
Date Posted: Feb  22, 2005
Both agency- and non-agency-based interpretations have been proposed to explain the strong positive empirical relationship between corporate cash flow and corporate investment. In this paper, we attempt to distinguish between these different interpretations using project-level data in the oil and gas industry. The specific projects we consider are mineral exploration leases on tracts of land. The standard positive relationship between investment and cash flow holds for these projects, in that ...

The Market for News
Date Posted: Jan  19, 2004
We investigate the market for news under two assumptions: that readers hold beliefs that they like to see confirmed, and that newspapers can slant stories toward these beliefs. We show that, on the topics where readers share common beliefs, one should not expect accuracy even from competitive media: competition results in lower prices, but common slanting toward reader biases. However, on topics where reader beliefs diverge (such as politically divisive issues), newspapers segment the market ...

Pyramids
Date Posted: Nov  26, 2003
Most corporate finance models of firm behavior study the typical US corporation: one firm with a large set of dispersed shareholders. In contrast, in many countries around the world, firms are often held in groups with complicated ownership structures. These groups, often referred to as pyramids, raise very distinct questions about firm behavior; these questions that are especially relevant for developing countries where these groups are most prevalent. In this paper, we first describe some ...

How Much Should We Trust Differences-in-Differences Estimates?
Date Posted: Nov  26, 2003
Most Difference-in-Difference (DD) papers rely on many years of data and focus on serially correlated outcomes. Yet almost all these papers ignore the bias in the estimated standard errors that serial correlation introduces. This is especially troubling because the independent variable of interest in DD estimation (e.g., the passage of law) is itself very serially correlated, which will exacerbate the bias in standard errors. To illustrate the severity of this issue, we randomly generate ...

Public Policy and Extended Families: Evidence from South Africa
Date Posted: Nov  26, 2003
How are resources allocated within extended families in developing countries? To investigate this question, we use a unique social experiment: the South African pension program. Under that program, the elderly receive a cash transfer that represents roughly twice the per capita African income. We ask how this transfer affects the labor supply of working-age individuals living with these elderly. We find a sharp drop in the working hours of the prime-age individuals in these households ...

A Memory Based Model of Bounded Rationality
Date Posted: Nov  26, 2003
How do memory limitations affect economic behavior? I develop a model of memory grounded in psychology and biology research to investigate this question. Using this model, I study the case where people apply Bayes rule to the history they recall as if it were the true history. The resulting beliefs exhibit over-reaction on average. They also exhibit under-reaction with the model providing enough structure to allow predictions about which effect dominates when. I then apply this general ...

Do People Mean What They Say? Implications For Subjective Survey Data
Date Posted: Nov  26, 2003
Many surveys contain a wealth of subjective questions that are at first glance rather exciting. Examples include "How important is leisure time to you?" "How satisfied are you with yourself?"; or "How satisfied are you with your work?" Yet despite easy availability, this is one data source that economists rarely use. In fact, the unwillingness to rely on such questions marks an important divide between economists and other social scientists. This neglect does not come from disinterest. Most ...

Do Firm Boundaries Matter?
Date Posted: Nov  26, 2003
In his famous article, "The Nature of the Firm," Ronald Coase (1937) raised two fundamental questions that have spawned a large body of research: Do firm boundaries affect the allocation of resources? And, what determines where firm boundaries are drawn? While the first of these questions has received some theoretical attention - notably Oliver Williamson (1975, 1985), Benjamin Klein, Robert Crawford, and Armen Alchian (1978) and Sanford Grossman and Oliver Hart, (1986) - it has largely been ...

Agents With and Without Principals
Date Posted: Nov  26, 2003
Who sets CEO pay? Our standard answer to this question has been shaped by principal agent theory: shareholders set CEO pay. They use pay to limit the moral hazard problem caused by the low ownership stakes of CEOs. Through bonuses, options, or long term contracts, shareholders can motivate the CEO to maximize firm wealth. In other words, shareholders use pay to provide incentives, a view we refer to as the contracting view. An alternative view, championed by practitioners such as ...

Behavioral Economics
Date Posted: Nov  26, 2003
Behavioral Economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications. We begin with a preliminary question about relevance. Does some combination of market forces, learning and evolution render these human qualities irrelevant? No. Because of limits of arbitrage less than perfect agents survive and influence market outcomes. We then discuss three important ways in which humans ...

Do CEOS Set Their Own Pay? The Ones Without Principals Do
Date Posted: Nov  26, 2003
We empirically examine two competing views of CEO pay. In the contracting view, pay is used to solve an agency problem: the compensation committee optimally chooses pay contracts that give the CEO incentives to maximize shareholder wealth. In the skimming view, pay is the result of an agency problem: CEOs have managed to capture the pay process so that they set their own pay, constrained somewhat by the availability of cash or by a fear of drawing shareholders' attention. To distinguish ...

Network Effects and Welfare Cultures
Date Posted: Nov  26, 2003
This paper empirically examines the role of social networks in welfare participation. Social theorists from across the political spectrum have argued that network effects have given rise to a culture of poverty. Empirical work, however, has found it difficult to distinguish the effect of networks from unobservable characteristics of individuals and areas. We use data on language spoken to better infer an individual?s network within an area. Individuals who are surrounded by others speaking ...

Executive Compensation and Incentives: The Impact of Takeover Legislation
Date Posted: Nov  26, 2003
We investigate the impact of changes in states' anti-takeover legislation on executive compensation. We find that both pay for performance sensitivities and mean pay increase for the firms affected by the legislation (relative to a control group). These findings are partially consistent with an optimal contracting allow CEOs to skim more. We compute lower bounds on the relative risk aversion coefficients implied by our findings. These lower bounds are relatively high, indicating that the ...

Is There Discretion in Wage Setting? A Test Using Takeover Legislation
Date Posted: Nov  26, 2003
Anecdotal evidence suggests that uncontrolled managers let wages rise above competitive levels. Testing this popular perception has proven difficult; however, because independent variation in the extent of managerial discretion is needed. In this paper, we use states? passage of anti-takeover legislation as a source of such independent variation. Passed in the 1980s, these laws seriously limited takeovers of firms incorporated in legislating states. Since many view hostile takeovers as an ...

Media Bias
Date Posted: Nov  26, 2003
There are two different types of media bias. One bias, which we refer to as ideology, reflects a news outlet's desire to affect reader opinions in a particular direction. The second bias, which we refer to as spin, reflects the outlet's attempt to simply create a memorable story. We examine competition among media outlets in the presence of these biases. Whereas competition can eliminate the effect of ideological bias, it actually exaggerates the incentive to spin stories.

Enjoying the Quiet Life? Corporate Governance and Managerial Preferences
Date Posted: Oct  07, 2003
Much of our understanding of corporations builds on the idea that managers, when they are not closely monitored, will pursue goals that are not in shareholders' interests. But what goals would managers pursue? This paper uses variation in corporate governance generated by state adoption of antitakeover laws to empirically map out managerial preferences. We use plant-level data and exploit a unique feature of corporate law that allows us to deal with possible biases associated with the timing ...

Are Emily and Greg More Employable than Lakisha and Jamal? A Field Experiment on Labor Market Discri...
Date Posted: Jul  29, 2003
We perform a field experiment to measure racial discrimination in the labor market. We respond with fictitious resumes to help-wanted ads in Boston and Chicago newspapers. To manipulate perception of race, each resume is assigned either a very African American sounding name or a very White sounding name. The results show significant discrimination against African-American names: White names receive 50 percent more callbacks for interviews. We also find that race affects the benefits of a ...

Media Bias
Date Posted: Oct  25, 2002
There are two different types of media bias. One bias, which we refer to as ideology, reflects a news outlet's desire to affect reader opinions in a particular direction. The second bias, which we refer to as spin, reflects the outlet's attempt to simply create a memorable story. We examine competition among media outlets in the presence of these biases. Whereas competition can eliminate the effect of ideological bias, it actually exaggerates the incentive to spin stories.

Do Cigarette Taxes Make Smokers Happier?
Date Posted: Apr  11, 2002
To measure how policy changes affect social welfare, economists typically look at how policies affect behavior, and use a formal model to infer welfare consequences from the behavioral responses. But when different models can map the same behavior to very different welfare impacts, it becomes hard to draw firm conclusions about many policies. An excellent example of this conundrum is the taxation of addictive substances such as cigarettes. Existing empirical evidence on smoking is equally ...

How Much Should We Trust Differences-in-Differences Estimates?
Date Posted: Mar  23, 2002
Most Difference-in-Difference (DD) papers rely on many years of data and focus on serially correlated outcomes. Yet almost all these papers ignore the bias in the estimated standard errors that serial correlation introduces. This is especially troubling because the independent variable of interest in DD estimation (e.g., the passage of law) is itself very serially correlated, which will exacerbate the bias in standard errors. To illustrate the severity of this issue, we randomly generate ...

Behavioral Economics
Date Posted: Oct  05, 2001
Behavioral Economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications. We begin with a preliminary question about relevance. Does some combination of market forces, learning and evolution render these human qualities irrelevant? No. Because of limits of arbitrage less than perfect agents survive and influence market outcomes. We then discuss three important ways in which humans ...

Ferreting Out Tunneling: An Application to Indian Business Groups
Date Posted: Sep  14, 2001
In many countries, controlling shareholders are accused of tunneling, transferring resources from companies where they have few cash flow rights to ones where they have more cash flow rights. Quantifying the extent of such tunneling, however, has proven difficult because of its illicit nature. This paper develops a general empirical technique for quantifying tunneling. We use the responses of different firms to performance shocks to map out the flow of resources within a group of firms and to ...

Public Policy and Extended Families: Evidence from South Africa
Date Posted: Apr  01, 2001
Tightly knit extended families, in which people often give money to and get money from relatives, characterize many developing countries. These intra-family flows mean that public policies may affect a very different group of people than the one they target. To assess the empirical importance of these effects, we study a cash pension program in South Africa that targets the elderly. Focusing on three-generation households , we use the variation in pension receipt that comes from differences ...

Agents With and Without Principals
Date Posted: Sep  11, 2000
Who sets CEO pay? Our standard answer to this question has been shaped by principal agent theory: shareholders set CEO pay. They use pay to limit the moral hazard problem caused by the low ownership stakes of CEOs. Through bonuses, options, or long term contracts, shareholders can motivate the CEO to maximize firm wealth. In other words, shareholders use pay to provide incentives, a view we refer to as the contracting view. An alternative view, championed by practitioners such as Crystal ...

Network Effects and Welfare Cultures
Date Posted: Jul  20, 2000
This paper empirically examines the role of social networks in welfare participation. Social theorists from across the political spectrum have argued that network effects have given rise to a culture of poverty. Empirical work, however, has found it difficult to distinguish the effect of networks from unobservable characteristics of individuals and areas. We use data on language spoken to better infer an individual's network within an area. Individuals who are surrounded by others speaking ...

Executive Compensation and Incentives: The Impact of Takeover Legislation
Date Posted: May  07, 2000
We investigate the impact of changes in states' anti-takeover legislation on executive compensation. We find both pay for performance sensitivities and mean pay increase for the firms affected by the legislation (relative to a control group). These findings are partially consistent with an optimal contracting model of CEO pay as well as with a skimming model in which reduced takeover fears allow CEO's to skim more. We compute lower bounds on the relative risk aversion coefficients implied ...

Is There a Discretion in Wage Setting? A Test Using Takeover Legislation
Date Posted: Oct  26, 1999
Anecdotal evidence suggests that uncontrolled managers let wages rise above competitive levels. To test this belief, we examine the wage impact of antitakeover legislation passed throughout the 1980s in many states. Since many view hostile takeovers as an important disciplining device, these laws, by reducing takeover threats, potentially raised managerial discretion. If uncontrolled managers pay higher wages, we expect wages to rise following these laws. Using firm-level data, we find that ...