Macroeconomics

This study examines the accuracy of relative valuation methods in the U.S. insurance industry, using price as a proxy for intrinsic value. The approaches differ in terms of the fundamentals used, the adjustments made to the fundamentals, the use of conditioning variables, and the selection of comparables. Selected findings include the following. First, over the last decade, book value multiples have performed significantly better than earnings multiples in valuing insurance companies.

This article derives and evaluates estimates of the implied cost of equity capital of U.S. insurance companies. During most of the period December 1981 through January 2010, the monthly median implied equity risk premium ranged between 4% and 8%, with a time-series mean of 6.2%. However, during the financial crisis of 2008–2009, the equity premium reached unprecedented levels, exceeding 15% in November 2008.

It is standard in economics to assume that assets are normal goods and demand is downward sloping in price. This view has its theoretical foundation in the classic single period model of Arrow with one risky asset and one risk free asset, where both are assumed to be held long, and preferences exhibit decreasing absolute risk aversion and increasing relative risk aversion.

Actions by individuals and households to reduce carbon-based energy consumption have the potential to change the picture of U.S. energy consumption and carbon dioxide emissions in the near term. To tap this potential, however, energy policies and programs need to replace outmoded assumptions about what drives human behavior; they must integrate insights from the behavioral and social sciences with those from engineering and economics. This integrated approach has thus far only occasionally been implemented.

Motivated by recent empirical work, this paper formalizes a theory of competitive savings — an arms race in household savings for mating competition that is made more fierce by an increase in the male-to-female ratio in the pre-marital cohort. Relative to the empirical work, the theory can clarify a number of important questions: What determines the strength of the savings response by males (or households with a son)? Can women (or households with a daughter) dis-save? What are the conditions under which aggregate savings would go up in response to a higher sex ratio?

There is a conventional wisdom in economics that public debt can serve as a substitute for private credit if private borrowing is limited. The purpose of this paper is to show that, while a government could in principle use such a policy to fully relax borrowing limits, this is not generally optimal. In our economy, agents invest in a short term asset, a long term asset, and government bonds. Agents are subject to idiosyncratic liquidity shocks prior to the maturity of the long term asset. We show that a high public debt policy fully relaxes private borrowing limits and is suboptimal.

Considerable theory regarding how employers learn about worker productivity remains untested. Examining the provision of objective estimates of teacher performance to school principals, we establish several facts supporting a simple Bayesian learning model with imperfect information. First, the correlation between performance estimates and prior beliefs rises with more precise objective estimates and more precise subjective priors. Second, new information exerts greater influence on posterior beliefs when it is more precise and when priors are less precise.

We study the impact of the end of race-based busing in Charlotte-Mecklenburg schools ("CMS") on academic achievement, educational attainment, and young adult crime. In 2001, CMS was prohibited from using race in assigning students to schools. School boundaries were redrawn dramatically to reflect the surrounding neighborhoods, and half of its students received a new assignment. Using addresses measured prior to the policy change, we compare students in the same neighborhood that lived on opposite sides of a newly drawn boundary.

The rise of China in world trade has brought both benefits and anxiety to other economies. For many policy questions, it is crucial to know the extent of domestic value added (DVA) in exports, but the computation is more complicated when processing trade is pervasive. We propose a method for computing domestic and foreign contents that allows for processing trade. By our estimation, the share of domestic content in exports by the PRC was about 50% before China's WTO membership, and has risen to over 60% since then. There are also interesting variations across sectors.