lecture28 - Economics 101A (Lecture 28 and last) Stefano...

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Economics 101A (Lecture 28 and last) Stefano DellaVigna May 7, 2009
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Outline 1. Hidden Type and Hidden Action II 2. Empirical Economics: Intro 3. Empirical Economics: Home Insurance 4. Empirical Economics: Retirement Savings 5. Some Advice 6. Course Evaluation
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1 Hidden Type and Action II Summary of how to separate moral hazard and ad- versese lect ionincred itca rdbo rrow ing Adverse Selection. Compare two groups O f ered rate r HI and gets r LO O f ered rate r LO and gets r LO This holds constant f nal o f er ( r LO )andva r ies initial o f er — > Adverse Selection Moral Hazard. Compare two groups O f ered rate r and gets r LO O f ered rate r and gets r This holds constant initial o f er ( r )andvar f nal o f er — > Moral hazard
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2 Empirical Economics: Intro So far we have focused on economic theory What have we learnt? Power of models Consumers . We tried to capture: savings decisions (consumer today/consumer in future) work-leisure trade-o f (how much to work?) attitudes toward risk (insurance, investment) self-control problems (health club, retirement sav- ing) altruism (charitable contribution, volunteer work)
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Producers. Beauty of competitive markets: price equals marginal costs zero pro f t with entry into market welfare optimality (no deadweight loss) Market power, the realistic scenario: choice of price to maximize pro f ts single price or price discrimination interaction between oligopolists
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But this is only half of economics! The other half is empirical economics Creative and careful use of data Get empirical answers to questions above (and other questions) Di f erent methodologies — > Econometrics 140-141 to get started Applied Econometrics 142
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3 Empirical Economics: Home In- surance Methodology I. Consumers choose in a menu of options Choice among options reveals preferences Ex.: Health club paper (DellaVigna and Mal- mendier, 2006) Ex. Choice of deductibles (Sydnor, 2006) Fields: Consumption decisions IO Finance
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Choice of deductibles in home insurance (Sydnor, 2006) Risk Aversion — > Take insurance to limit risks However: Limit *large* risks, not small risks (Local risk-neutrality) Insure house at all (large) vs. deductible at $250 or $500 (small) Invest in stock market (large) vs. telephone wire insurance (small)
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Dataset ±
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lecture28 - Economics 101A (Lecture 28 and last) Stefano...

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