Research Insights: Does Merit Pay among Public School Teachers Affect the Mobility of Teachers Out of Teaching or within the School System?

This paper analyzes the effect on teacher mobility of a program that rewards excellence in teaching practices in Chile. Successful applicants receive a 6 percent annual wage increase for up to 10 years and an award that publicly recognizes their excellence. The paper uses a regression discontinuity design to identify the causal effect of the public merit award. The program does not alter transitions out of teaching. The program does, however, increase the mobility of awardees within the school system. This is consistent with the program providing a credible public signal of teacher quality.

Does the Freedom of Information Act Foil the Securities and Exchange Commission’s Intent to Keep Investigations Confidential?

The Securities and Exchange Commission (SEC) has a long-standing policy to keep formal investigations confidential. In this study, we examine the extent to which compliance with the Freedom of Information Act (FOIA) provides investors with information about ongoing SEC investigations. We exploit a unique empirical setting whereby the SEC denies FOIA requests because of ongoing enforcement proceedings (hereafter, exemption denials). We find that exemption denials predict a substantial number of ongoing and future SEC investigations. Exemption denials are also associated with significant negative future abnormal returns, which is consistent with exemption denials providing a noisy public signal that allows certain sophisticated investors to earn future abnormal returns. Overall, our findings suggest that information transparency laws such as FOIA have the potential to limit the SEC’s ability to maintain effective and confidential investigations. This paper was accepted by Brian Bushee, accounting.

Does the Disclosure of PCAOB Inspection Findings Increase Audit Firms' Litigation Exposure?

We examine whether PCAOB inspection reports increase auditors' litigation risk. We find that inspection reports with audit deficiencies are positively associated with the number of lawsuits subsequently filed against the inspected auditor. These results are strongest when client-level lawsuit triggering events have already occurred and when PCAOB inspection content is arguably more persuasive. Importantly, these results pertain exclusively to triennially inspected audit firms for which the set of other publicly available signals of audit quality is limited. Furthermore, we do not argue that inspection reports in isolation trigger lawsuits. Instead, once events such as restatement announcements or bankruptcies create the potential for legal action against the auditor, inspection reports provide a public signal about past noncompliance with auditing standards. This signal likely increases lawyers' perceived strength of case against the auditor before the lawsuit is filed and before lawyers have access to the audit workpapers.

Market Order and Market Failure

This chapter presents and discusses the most influential argument in favor of a capitalist economy characterized by widespread economic freedom as opposed to central government planning. Capitalist ecnonomies, on this traditional view, are better than planning because they are efficient. Normatively this is important since human welfare is important. Capitalism delivers the goods better than the alternative in terms of both the goods that are produced and the welfare that it generates. This is argument relies on the importance markets and trade to produce price signals disperse private, often implicit knowledge through a public signal. Capitlist markets are, in this sense, spontaneous orders that work best when left alone. The chapter then examines some counterarguments that emphasize the limits of price signaling and other alleged cases of “market failure.”

Trust, Collaboration, and Economic Growth

We propose a macroeconomic model in which variation in the level of trust leads to higher innovation, investment, and productivity growth. The key feature in the model is a hold-up friction in the creation of new capital. Innovators generate ideas but are inefficient at implementing them into productive capital on their own. Firms can help innovators implement their ideas efficiently but cannot ex ante commit to compensating them appropriately. Rather, firms are disciplined only by the value of their reputations—the present value of their future partnerships. We model trust as a public signal and construct a correlated equilibrium. When trust is high, firms anticipate fruitful collaborations and thus can credibly commit to not expropriating inventors, leading to the more efficient production of new capital. Our model can be used to qualitatively replicate the empirical relation between measures of trust and investment, innovation, and productivity growth—at both the micro and macro level. This paper was accepted by Tomasz Piskorski, finance.

Fiat Money as a Public Signal, Medium of Exchange, and Punishment

This paper studies different welfare-enhancing roles that fiat money can have. To do so, we consider an indivisible monetary framework where agents are randomly and bilaterally matched, while the government has weak enforcement powers. Within this environment, we analyze state contingent monetary policies and characterize the resulting equilibria under different government record-keeping technologies. We show that a threat of injecting fiat money, conditional on private actions, can improve allocations and achieve efficiency. This type of state contingent policy is effective even when the government cannot observe any private trades and agents can only communicate with the government through cheap talk. In all these equilibria fiat money and self-enforcing credit are complements in the off equilibrium. Finally, this type of equilibria can also emerge even when the injection of fiat money is not a public signal.

Pretrial Beliefs and Verdict Accuracy: Costly Juror Effort and Free Riding

If jurors care about reaching the correct verdict, but also experience costs to paying attention during the trial, even a small effort cost generates interesting interactions between pretrial beliefs and verdict accuracy. I demonstrate the existence of a strong free riding effect; jurors respond to a more informative prior by reducing their probabilities of paying attention, to the extent that over a non-empty range, a more informative prior will be associated with poorer verdicts. Pretrial beliefs can depend on several factors: I consider two – the extent of discovery during the pre-plea bargaining process, and the efficiency of the police. My results imply that more liberal discovery rules, which result in a less noisy plea bargaining process, will actually be complemented by greater juror effort over a range, resulting in more accurate verdicts. In contrast, greater police efficiency will, over a range, elicit a sufficient drop in juror effort such that verdicts are less accurate. Thus, improving discovery has added benefits over a range, while the benefits of exogenous improvements in policing may be dampened. I briefly extend the model to cases where attentive jurors receive an imperfect public signal instead of a perfect one, and to cases where jurors’ utilities from convicting a guilty defendant differ from their utilities from acquitting an innocent one.

Persuading policy-makers

Interest groups persuade policy-makers by publicly providing information about policies—for example, through commissioning scientific studies or piloting programs—or about constituents’ views—for example, through opinion polls or organizing manifestations. By understanding these public lobbying activities as public signals whose informational content can be strategically manipulated, this paper studies the strategic use of these tools in order to persuade a policy-maker. A game between a policy-oriented interest group who can design a public signal and a self-interested executive who can implement a policy is used to analyze the equilibrium public signal and policy, the underlying persuasion mechanism, and the consequences for voters. This paper finds that, even when an interest group always wants the same policy regardless of the state of the world, voters can sometimes benefit from the group’s activity. Furthermore, voters may be best served by a worse (less able or more cynical) policy-maker. This is because a-priori a worse policy-maker will tend to herd on the prior relatively more than a better policy-maker; this will force interest groups to release greater amounts of information in order to change the policy-maker’s mind, which increases the probability that the voters’ best policy is implemented. Ideologically biased policy-makers are not totally undesirable either, for they induce similar incentives to interest groups of opposite ideology.

Capital Gains Taxes and the Market Response to Earnings Announcements

ABSTRACT We investigate the stock price and trading volume effects of differential capital gains taxes applied to short- and long-term capital gains when firms disclose public information. We extend the theoretical framework developed in Shackelford and Verrecchia (2002) linking differential capital gains taxes to price and volume, allowing for positive and negative news and incorporating exogenous non-taxable, uninformed traders. Our model, like Shackelford and Verrecchia (2002), indicates that price responses to public information are magnified, and volume inhibited, when short-term capital gains attract a higher tax rate than long-term capital gains. However, the effects are more nuanced than those in Shackelford and Verrecchia (2002). Specifically, the degree of magnification/inhibition for price reaction and trading volume differs across well-defined regions of public signal and supply change realizations. We use actual stock price and trading data to empirically investigate these predictions. Our results provide strong support for the price response predictions.

Renegotiation‐proof mechanism design with imperfect type verification

I consider the interaction between an agent and a principal who is unable to commit not to renegotiate. The agent's type affects only the principal's utility. The principal has access to a public signal, correlated with the agent's type, that can be used to (imperfectly) verify the agent's report. I define renegotiation‐proof mechanisms and characterize the optimal one. The main finding of this paper is that the optimal renegotiation‐proof mechanism induces pooling at the top, i.e., types above a certain threshold report to be the largest type, while types below the threshold report truthfully.