Speculators often advertise arbitrage opportunities in order to persuade other investors and thus accelerate the correction of mispricing. This induces under-diversification: a risk-averse arbitrageur will optimally advertise only one of several mispriced assets, and overweigh it in his...

We investigate, using the 2002 US Health and Retirement Study, the factors influencing individuals’ insecurity and expectations about terrorism, and study the effects these last have on households’ portfolio choices and spending patterns. We find that females, the religiously devout, those...

This paper studies first-order approximate solutions to near-rational dynamic stochastic models. Under near-rationality, subjective beliefs are distorted away from rational expectations via a change of measure process which fulfils some regularity conditions. As a main result, we show that...

This note warns against the use of noncausal VARs as a reliable test for indeterminacy. By means of a simple example, we show that determinate models may well entail nonfundamental ARMA equilibrium reduced forms - which only (and uniquely) depend on the fundamental structural shocks -, whereas...

According to the permanent income hypothesis with quadratic preferences, savings should react only to transitory income shocks, but not to permanent shocks. The problem is that income shock components are not separately observable. I show how the combination of income realizations with...

This paper studies how incentives are affected by intention-based reciprocity preferences when the principal hires many agents. Our results describe the agents' psychological attitudes required to sustain a given strategy profile. We also show that hiring reciprocal agents to implement a first...

Through a field experiment in Sri Lanka I analyze the role of experimentally-induced memories of 2004 tsunami on behavior in a trust game in which personal notions of cheating are elicited. Microfinance borrowers were randomly assigned to a treatment (control) group consisting in watching a...

This paper studies the impact of intention-based reciprocity preferences on the free-riding problem arising in partnerships. Our results suggest a tendency of efficient partnerships to consist of members whose sensitivity to reciprocity is -- individually or jointly -- sufficiently high....

This paper introduces time inconsistent preferences into a moral hazard setting where the agent is risk-averse. We derive a necessary optimality condition on the consumption allocation that is different from the so-called Inverse Euler Equation of Rogerson (1985). Specifically, inverse marginal...

Natural disasters have been shown to produce effects on social capital, risk and time preferences of victims. We run experiments on altruistic preferences on a sample of Sri Lankan microfinance borrowers affected/unaffected by the tsunami shock in 2004 at a 7-year distance from the event (a...