This paper estimates the response of investment to changes in uncertainty using data on oil drilling in Texas and the expected volatility of the future price of oil. Using a dynamic model of firms' investment problem, I find that: (1) the response of drilling activity to changes in price...

Many subjects in lab experiments exhibit small-stakes risk aversion, consistent with loss aversion. Those with greater math skills are less likely to show small-stakes risk aversion. We argue that departures from expected utility maximization may help explain why many firms in developing...

This paper focuses on the importance of equity markets in facilitating the exit of entrepreneurs investing in technology. Entrepreneurs' willingness to invest and aggregate output is affected in two opposite ways. First, uncertainty about equity price or lack of market liquidity discourages...

Several impatient investors with private costs <em>C_i</em> face an indivisible irreversible investment opportunity whose value <em>V</em> is governed by geometric Brownian motion. The first investor <em>i</em> to seize the opportunity receives the entire payoff, <em>V-C_i</em>. We characterize the symmetric Bayesian Nash...

I study a dynamic economy featuring adverse selection in asset markets. Borrowing-constrained entrepreneurs sell past projects to finance new investment, but asymmetric information creates a lemons problem. I show that this friction is equivalent to a tax on financial transactions. The implicit...

Agents face a coordination problem akin to the adoption of a network technology. A principal announces investment subsidies that, at minimal cost, attain a given likelihood of successful coordination. Optimal subsidies target agents who impose high externalities on others and on whom others...

We consider a moral hazard problem where the principal is uncertain as to what the agent can and cannot do: she knows some actions available to the agent, but other, unknown actions may also exist. The principal demands robustness, evaluating possible contracts by their worst-case performance,...

We offer a theory of polarization as an optimal response to ambiguity. Suppose individual A's beliefs first-order stochastically dominate individual B's. They observe a common signal. They exhibit polarization if A's posterior dominates her prior and B's prior dominates her posterior. Given...

We augment a standard monetary dynamic general equilibrium model to include a Bernanke-Gertler-Gilchrist financial accelerator mechanism. We fit the model to US data, allowing the volatility of cross-sectional idiosyncratic uncertainty to fluctuate over time. We refer to this measure of...

The newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact. Signals that are more likely to be observed after unusual events may increase both uncertainty and disagreement among agents. In a simple business...