Abstract not found

This essay reviews progress in empirical economics since Leamer’s (1983) critique. Leamer highlighted the benefits of sensitivity analysis, a procedure in which researchers show how their results change with changes in specification or functional form. Sensitivity analysis has had a salutary but not a revolutionary effect on econometric practice. As we see it, the credibility revolution in empirical work can be traced to the rise of a design-based approach that emphasizes the identification of causal effects. Design-based studies typically feature either real or natural experiments and are distinguished by their prima facie credibility and by the attention investigators devote to making the case for a causal interpretation of the findings their designs generate. Design-based studies are most often found in the microeconomic fields of Development, Education, Environment, Labor, Health, and Public Finance, but are still rare in Industrial Organization and Macroeconomics. We explain why IO and Macro would do well to embrace a design-based approach. Finally, we respond to the charge that the design-based revolution has overreached.

We provide a graphical illustration of how standard consumer and producer theory can be used to quantify the welfare loss associated with inefficient pricing in insurance markets with selection. We then show how this welfare loss can be estimated empirically using identifying variation in the price of insurance. Such variation, together with quantity data, allows us to estimate the demand for insurance. The same variation, together with cost data, allows us to estimate how insurers ’ costs vary as market participants endogenously respond to price. The slope of this estimated cost curve provides a direct test for both the existence and the nature of selection, and the combination of demand and cost curves can be used to estimate welfare. We illustrate our approach by applying it to data on employerprovided health insurance from one specific company. We detect adverse selection but estimate that the quantitative welfare implications associated with inefficient pricing in our particular application are small, in both absolute and relative terms.

Abstract. We present new evidence on consumer liquidity constraints and the credit market conditions that might give rise to them. Our analysis is based on unique data from a large auto sales company that serves the subprime market. We …rst document the role of short-term liquidity in driving purchasing behavior, including sharp increases in demand during tax rebate season and a high sensitivity to minimum down payment requirements. We then explore the informational problems facing subprime lenders. We …nd that default rates rise signi…cantly with loan size, providing a rationale for lenders to impose loan caps because of moral hazard. We also …nd that borrowers at the highest risk of default demand the largest loans, but the degree of adverse selection is mitigated substantially by e¤ective risk-based pricing.

grateful to David Card, Stefano DellaVigna, and Richard Thaler for many helpful comments. The views expressed are those of the authors and do not necessarily represent those of the Federal Reserve System or the Federal Reserve Bank of New York. We thank the Lender for generously providing us with the data from their experiment. Numerous laboratory studies report on behaviors inconsistent with rational economic models. How much do these inconsistencies matter in natural settings, when consumers make large, real decisions and have the opportunity to learn from experiences? We report on a field experiment designed to address this question. Incumbent clients of a lender in South Africa were sent letters offering them large, short-term loans at randomly chosen interest rates. Psychological “features ” on the letter, which did not affect offer terms or economic content, were also independently randomized. Consistent with standard economics, the interest rate significantly affected loan take-up. Inconsistent with standard economics, the psychological features also significantly affected take-up. The two independent randomizations allow us to quantify the relative importance of psychological features and prices. Our core finding is the sheer magnitude of the psychological effects. On average, any one psychological manipulation has the same effect as a

Expanding access to financial services holds the promise to help reduce poverty and spur economic development. But, as a practical matter, commercial banks have faced challenges expanding access to poor and low-income households in developing economies, and nonprofits have had limited reach. We review recent innovations that are improving the quantity and quality of financial access. They are taking possibilities well beyond early models centered on providing “microcredit ” for small business investment. We focus on new credit mechanisms and devices that help households manage cash flows, save, and cope with risk. Our eye is on contract designs, product innovations, regulatory policy, and ultimately economic and social impacts. We relate the innovations and empirical evidence to theoretical ideas, drawing links in particular to new work in behavioral economics and to randomized evaluation methods.

Insurance induces a tradeoff between the welfare gains from risk protection and the welfare losses from moral hazard. Empirical work traditionally estimates each side of the tradeoff separately, potentially yielding mutually inconsistent results. I develop a nonlinear budget set model of health insurance that allows for both simultaneously. Nonlinearities in the budget set arise from deductibles, coinsurance rates, and stoplosses that alter moral hazard as well as risk protection. I illustrate the properties of my model by estimating it using data on employer sponsored health insurance from a large firm. Within my empirical context, the average deadweight losses from moral hazard substantially outweigh the average welfare gains from risk protection. However, the welfare impact of moral hazard and risk protection are both small relative to transfers from the government through the tax preference for employer sponsored health insurance and transfers from some agents to other agents through a common

We utilize a unique pair of experiments to isolate the ways in which reductions in asymmetric information alter credit market outcomes. A Guatemalan microfinance lender gradually started using a credit bureau across its branches without letting borrowers know about it. One year later, we ran a large randomized credit information course that described the existence and workings of the bureau to the clients of this lender. This pairing of natural and randomized experiments allows us to separately identify how new information enters on the supply and the demand sides of the market. Our results indicate that the credit bureau generated large efficiency gains for the lender, and that these gains were augmented when borrowers understood the rules of the game. The credit bureau rewarded good borrowers but penalized weaker ones, increasing economic differentiation.

This paper uses a principal-agent model to study the design of randomized controlled experiments when outcomes depend significantly on the subjects ’ (agents) unobserved effort decisions. In this environment we show that selective trials, which explicitly allow agents to select themselves in and out of the treatment group, can generate greater information than standard randomized controlled trials. This information comes at the cost of oversampling agents with high valuation for the treatment and undersampling agents with low valuation. These sampling costs disappear if the sample size is large, or agents are very responsive to incentives. The nature of the information generated by selective trials depends on the choice problems offered to the agents. Selective open trials essentially allow us to recover the marginal treatment effects (MTEs) studied by Heckman and Vytlacil (2005). We show that in addition, selective blind trials or selective incentivized trials can be used to identify the agents ’ objective and subjective returns to effort. This additional information is valuable in circumstances where MTEs are not sufficient statistics for policy simulations, in particular when the beliefs of agents can change.

Evidence from the Home Equity Credit Market We analyze more than 108,000 home equity loans and lines of credit applications to study the role of soft and hard information during underwriting. Credit underwriting is a dynamic process involving multiple interactions between borrower and lender. During this process, lenders have the opportunity to obtain hard and soft information from the borrower. Our analysis suggests that the use of soft information during the underwriting