This paper analyzes how asset prices in a binary market react to information when traders have heterogeneous prior beliefs. We show that the competitive equilibrium price underreacts to information when there is a bound to the amount of money traders are allowed to invest. Underreaction is more...

The payoff of actions is estimated and the resulting empirical payoff is controlled for in regression analyses to formulate a test of rational expectations in information cascade experiments. We show that the empirical payoff of actions is a function of estimates of choice probabilities and...

The data in Fehr and Tyran (FT, 2001) and Luba Petersen and Abel Winn (PW,2013) show that money illusion plays an important role in nominal price adjustment after a fully anticipated negative monetary shock. Money Illusion affects subjects' expectations, and causes pronounced nominal inertia...

A player i's actions in a game are determined by her beliefs about other players; these depend on the game's real-life context, not only its formal description. Define a game situation as a game together with such beliefs; call the beliefs— and i's resulting expectation—rational if there is...

This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity. Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity. The public signal gives...

We analyze whether mid-level managers in securitized finance were aware of a large-scale housing bubble and a looming crisis in 2004-2006 using their personal home transaction data. We find that the average person in our sample neither timed the market nor were cautious in their home...

We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. We analyze unique data from a large auto sales company serving the subprime market. Short-term liquidity appears to be a key driver of consumer behavior. Demand increases...

We analyze the impact of monetary policy on the supply of bank credit. Monetary policy affects both loan supply and demand, thus making identification a steep challenge. We therefore analyze a novel, supervisory dataset with loan applications from Spain. Accounting for time-varying firm...

This paper argues that the extent of financial contagion exhibits a form of phase transition: as long as the magnitude of negative shocks affecting financial institutions are sufficiently small, a more densely connected financial network (corresponding to a more diversified pattern of interbank...

The volume of new issuances in secondary loan markets fluctuates over time and falls when collateral values fall. We develop a model with adverse selection and reputation that is consistent with such fluctuations. Adverse selection ensures that the volume of trade falls when collateral values...