Economics Insights @ CBS

We develop a model of investment timing under uncertainty for a financially constrained firm. Facing external financing costs, the firm prefers to fund its investment through internal funds, so that the firm's optimal investment policy and value depend on both its earnings fundamentals and liquidity holdings. We show that financial constraints significantly alter the standard real options results, with the financial flexibility conferred by internal funds acting as a complement, and at times as a substitute, to the real flexibility given by the optimal timing of investment.

When people make decisions with a pre-selected choice option – a ‘default’ – they are more likely to select that option. Because defaults are easy to implement, they constitute one of the most widely employed tools in the choice architecture toolbox. However, to decide when defaults should be used instead of other choice architecture tools, policy-makers must know how effective defaults are and when and why their effectiveness varies.

We estimate the benefit of life-extending medical treatments to life insurance companies. Our main insight is that life insurance companies have a direct benefit from such treatments as they lower the insurer's liabilities by pushing the death benefit further into the future and raise future premium income. We apply this insight to immunotherapy, treatments associated with durable gains in survival rates for a growing number of cancer patients. We estimate that the life insurance sector's aggregate benefit from FDA approved immunotherapies is $9.8 billion a year.

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).

We test the hypothesis that the arrival of new medical ideas played a major role in the long-run increase in US cancer survival and decline in cancer mortality, by investigating whether the types of cancer (breast, colon, lung, etc.) subject to greater penetration of new ideas, measured using the MEDLINE/PubMED database, had larger subsequent survival gains and mortality reductions, controlling for changing incidence.