Decision Making & Negotiations

Over the past decade, data has transformed everyday life. While it has changed the way people shop and businesses operate (Goldfarb and Tucker, 2019), it has only just begun to permeate economists thinking about the aggregate economy. In the early twentieth century, economists like Schultz (1943) analyzed agrarian economies and land-use issues. As agricultural productivity improved, production shifted more to manufacturing. Modern macroeconomics adapted with models featuring capital and labor, markets for goods, and equilibrium wages (Solow, 1956).

After decades of supporting free trade, in 2018 the U.S. raised import tariffs and major trade partners retaliated. We analyze the short-run impact of this return to protectionism on the U.S. economy. Import and retaliatory tariffs caused large declines in imports and exports. Prices of imports targeted by tariffs did not fall, implying complete pass-through of tariffs to duty-inclusive prices. The resulting losses to U.S. consumers and firms who buy imports was $51 billion, or 0.27% of GDP. We embed the estimated trade elasticities in a general-equilibrium model of the U.S. economy.

Although consumer behavior theory has traditionally regarded evaluations as instrumental to consumer choice, in reality consumers often assess and express what they like and dislike even when there is no decision at stake. Why are consumers so eager to express their evaluations when there is no ostensible purpose for doing so? In this research, we advance the thesis that this is because consumers derive an inherent pleasure from assessing and expressing their likes and dislikes.

This paper considers a two-sided dynamic matching market where agents arrive at the market randomly. An arriving agent is immediately matched if there are agents waiting on the other side. Otherwise, the arriving agent has to decide whether to leave the market and take her outside option or to join a (possibly empty) queue and wait for a match. The equilibrium is characterized by a cutoff, k*, so that an agent joins the queue if, and only if, the length of the queue is less than k*. Our main result compares k* with the socially optimal queue size, K*.

The well-documented underreaction of stock prices to news exhibits substantial time variation. Higher risk-bearing capacity of financial intermediaries, lower passive ownership of stocks, and more informative news increase price responses to contemporaneous news; surprisingly, they also increase price responses to lagged news (underreaction). Our findings are not driven by short-sale constraints, serial correlation in news flow, or improved information processing capacity. We discuss possible mechanisms based on investor behavior and strategic order-splitting by institutions.

Human enhancement products allow consumers to radically enhance their mental abilities. Focusing on cognitive enhancements, we introduce and study a novel factor dehumanization (i.e., denying a person emotional ability and likening them to a robot) which plays a key role in consumers' reluctance to use enhancement products. In study 1, consumers who enhance their mental abilities beyond normal levels were dehumanized, whereas consumers who use the same products to restore lost abilities were not.

We use a labor-search model to explain why the worst employment slumps often follow expansions of household debt. We find that households protected by limited liability suffer from a household-debt-overhang problem that leads them to require high wages to work. Firms respond by posting high wages but few vacancies. This vacancy-posting effect implies that high household debt leads to high unemployment.

I show that venture capitalists' motivation to build reputation can have beneficial effects in the primary market, mitigating information frictions and helping firms go public. Because uninformed reputation-motivated venture capitalists want to appear informed, they are biased against backing firms — by not backing firms, they avoid taking low-value firms to market, which would ultimately reveal their lack of information. In equilibrium, reputation-motivated venture capitalists back relatively few bad firms, creating a certification effect that mitigates information frictions.

This paper investigates how book rate of return under GAAP relates to risk and the required return for investing. A standard view sees the book rate of return as a measure of profitability to be compared to the required return to evaluate the success of an investment. A contrasting view sees the book rate of return as indicative of the required return, consistent with the standard risk-return tradeoff. There clearly is some sorting out to do.