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Monday, February 20, 2017

Battle lines

Does the Presidency Moderate the President?

Barry Edwards

Presidential Studies Quarterly, forthcoming

Abstract:
A claim so often made about the presidency that it approaches conventional wisdom is that the president sees, and therefore decides, issues differently than members of Congress do. This thesis emerged in the late 1700s in debates over ratification and has been consistently asserted by legal scholars, political scientists, and, most passionately, by U.S. presidents. I test this thesis by examining the legislative behavior of 23 men who have represented both a narrow constituency in Congress and the entire country as president. My results indicate that the presidency effectively moderated the legislative behavior of legislators who became president for roughly one and a half centuries; however, the modern presidency not only fails to moderate presidents, the presidency now appears to amplify the partisan bent of those who occupy the office.

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Blue and Red Voices: Effects of Political Ideology on Consumers’ Complaining and Disputing Behavior

Kiju Jung et al.

Journal of Consumer Research, forthcoming

Abstract:
Political ideology plays a pivotal role in shaping individuals’ attitudes, opinions, and behaviors. However, apart from a handful of studies, little is known about how consumers’ political ideology affects their marketplace behavior. The authors used three large consumer complaint databases from the Consumer Financial Protection Bureau, National Highway Traffic Safety Administration, and Federal Communication Committee in conjunction with a county-level indicator of political ideology (the 2012 US presidential election results) to demonstrate that conservative consumers are not only less likely than liberal consumers to report complaints but also less likely to dispute complaint resolutions. A survey also sheds light on the relationship between political ideology and complaint/dispute behavior. Due to stronger motivations to engage in “system justification,” conservative (as opposed to liberal) consumers are less likely to complain or dispute. The present research offers a useful means of identifying those consumers most and least likely to complain and dispute, given that political ideology is more observable than most psychological factors and more stable than most situational factors. Furthermore, this research and its theoretical framework open opportunities for future research examining the influence of political ideology on other marketplace behaviors.

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Extreme Protest Tactics Reduce Popular Support for Social Movements

Matthew Feinberg, Robb Willer & Chloe Kovacheff

University of Toronto Working Paper, February 2017

Abstract:
Social movements are critical agents of change that vary greatly in both tactics and popular support. Prior work shows that extreme protest tactics – actions that are highly counter-normative, disruptive, or harmful to others, including inflammatory rhetoric, blocking traffic, and damaging property – are effective for gaining publicity. However, we find across three experiments that extreme protest tactics decreased popular support for a given cause because they reduced feelings of identification with the movement. Though this effect obtained in tests of popular responses to extreme tactics used by animal rights, Black Lives Matter, and anti-Trump protests (Studies 1-3), we found that self-identified political activists were willing to use extreme tactics because they believed them to be effective for recruiting popular support (Studies 4a & 4b). The activist’s dilemma – wherein tactics that raise awareness also tend to reduce popular support – highlights a key challenge faced by social movements struggling to affect progressive change.

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Small-World Conservatives and Rigid Liberals: Attitudes Towards Sharing in Self-Proclaimed Left and Right

Kaj Thomsson & Alexander Vostroknutov

Journal of Economic Behavior & Organization, forthcoming

Abstract:
We experimentally explore the way political preferences shape giving behavior. We find no difference in average giving between the Left and the Right in a Dictator game environment. However, we find the reasons for giving to be different. Right-leaning individuals give according to a norm-dependent utility that takes into account the beliefs of the receiver. The behavior of left-leaning individuals is not shaped by such an interaction between norms and beliefs. We conclude that right-wingers choose in accordance with a “small world” view, where giving is shaped by social interaction, while left-wingers appear rigid in their reaction to social context.

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The Perverse Politics of Polarization

Nageeb Ali, Maximilian Mihm & Lucas Siga

Pennsylvania State University Working Paper, January 2017

Abstract:
Many policies, such as trade and immigration, bear important consequences for both the size and distribution of surplus. Oftentimes, people are asked to vote on these policies despite not being all that well-informed about the consequences. This paper studies the extent to which an electorate can aggregate information when voters anticipate that some may benefit from a policy reform at a cost borne by others. We show that information aggregation may fail: with high probability, the outcome chosen when voters are privately informed departs from the outcome when all information is public. We identify a form of "negative correlation'' --- where voters treat good news for others as bad news for themselves --- that is necessary and sufficient for this informational failure. Commitments to post-policy redistribution can mitigate this inefficiency, and lead voters to select better policies. We characterize features of economic environments that may foster or preclude negative correlation. Our results offer an understanding of how information can amplify electoral status quo bias, or generate popular support for ill-advised reforms that are ex post regretted and subsequently reversed.

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The political reference point: How geography shapes political identity

Matthew Feinberg et al.

PLoS ONE, February 2017

Abstract:
It is commonly assumed that how individuals identify on the political spectrum – whether liberal, conservative, or moderate – has a universal meaning when it comes to policy stances and voting behavior. But, does political identity mean the same thing from place to place? Using data collected from across the U.S. we find that even when people share the same political identity, those in “bluer” locations are more likely to support left-leaning policies and vote for Democratic candidates than those in “redder” locations. Because the meaning of political identity is inconsistent across locations, individuals who share the same political identity sometimes espouse opposing policy stances. Meanwhile, those with opposing identities sometimes endorse identical policy stances. Such findings suggest that researchers, campaigners, and pollsters must use caution when extrapolating policy preferences and voting behavior from political identity, and that animosity toward the other end of the political spectrum is sometimes misplaced.

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Political Orientation Predicts Credulity Regarding Putative Hazards

Daniel Fessler, Anne Pisor & Colin Holbrook

Psychological Science, forthcoming

Abstract:
To benefit from information provided by others, people must be somewhat credulous. However, credulity entails risks. The optimal level of credulity depends on the relative costs of believing misinformation versus failing to attend to accurate information. When information concerns hazards, erroneous incredulity is often more costly than erroneous credulity, as disregarding accurate warnings is more harmful than adopting unnecessary precautions. Because no equivalent asymmetry characterizes information concerning benefits, people should generally be more credulous of hazard information than of benefit information. This adaptive negatively-biased credulity is linked to negativity bias in general, and is more prominent among those who believe the world to be dangerous. Because both threat sensitivity and dangerous-world beliefs differ between conservatives and liberals, we predicted that conservatism would positively correlate with negatively-biased credulity. Two online studies of Americans support this prediction, potentially illuminating the impact of politicians’ alarmist claims on different portions of the electorate.

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Experienced Adversity in Life Is Associated With Polarized and Affirmed Political Attitudes

Daniel Randles et al.

Social Psychological and Personality Science, forthcoming

Abstract:
Many studies find that when made to feel uncertain, participants respond by affirming importantly held beliefs. However, while theories argue that these effects should persist over time for highly disruptive experiences, almost no research has been performed outside the lab. We conducted a secondary analysis of data from a national sample of U.S. adults (N = 1,613) who were followed longitudinally for 3 years. Participants reported lifetime and recent adversities experienced annually, as well as their opinions on a number of questions related to intergroup hostility and aggression toward out-groups, similar to those used in many lab studies of uncertainty. We anticipated that those who had experienced adversity would show more extreme support for their position. There was a positive relationship between adversity and the tendency to strongly affirm and polarize their positions. Results suggest that adverse life events may lead to long-lasting changes in one’s tendency to polarize one’s political attitudes.

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Cognitive ability and party affiliation: The role of the formative years of political socialization

Yoav Ganzach

Intelligence, forthcoming

Abstract:
We study the effect of time on the relationship between intelligence and party affiliation in the United States. Our results indicate that time affects this relationship, and that this effect is due to the formative years in which political preferences were developed rather than the time in which the survey was conducted. For people who were born in the 20th century, the later their formative years, the more positive the relationship between intelligence and Democratic, as opposed to Republican, affiliation. The current results shed light on recent conflicting findings about the relationship between intelligence and party affiliation in the US, and suggest that the effect of intelligence on party affiliation changes with time.

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Verbal ability drives the link between intelligence and ideology in two American community samples

Steven Ludeke, Stig Rasmussen & Colin DeYoung

Intelligence, forthcoming

Abstract:
Despite meta-analyses highlighting a nontrivial relation between intelligence and ideology, theoretical accounts of the origins of ideological differences often neglect these differences. Two potential contributors to this neglect are that (a) the true magnitude of the association may be understated by studies using imperfect cognitive ability measures, and (b) nuances on the general association between ideology and intelligence are underexplored, limiting our ability to select among several highly divergent accounts of this association. The present study uses two moderately large (Ns = 786 and 338) American community samples to explore two questions: (1) how does the link between ideology and ability differ between self-administered and more conventional ability tests, and (2) is this link common to all aspects of ability, or does it depend primarily on one domain. We found a clear dominant role for verbal rather than non-verbal ability, and support for the proposition that self-administered ability measures understate the intelligence-ideology link.

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Can Information Decrease Political Polarization? Evidence From the U.S. Taxpayer Receipt

Erik Duhaime & Evan Apfelbaum

Social Psychological and Personality Science, forthcoming

Abstract:
Scholars, politicians, and laypeople alike bemoan the high level of political polarization in the United States, but little is known about how to bring the views of liberals and conservatives closer together. Previous research finds that providing people with information regarding a contentious issue is ineffective for reducing polarization because people process such information in a biased manner. Here, we show that information can reduce political polarization below baseline levels and also that its capacity to do so is sensitive to contextual factors that make one’s relevant preferences salient. Specifically, in a nationally representative sample (Study 1) and a preregistered replication (Study 2), we find that providing a taxpayer receipt — an impartial, objective breakdown of how one’s taxes are spent that is published annually by the White House — reduces polarization regarding taxes, but not when participants are also asked to indicate how they would prefer their taxes be spent.

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Our Followers Are Lions, Theirs Are Sheep: How Social Identity Shapes Theories About Followership and Social Influence

Niklas Steffens et al.

Political Psychology, forthcoming

Abstract:
Two studies examine how self-categorization theory can be used to refine our understanding of people's implicit theories about followership and social influence. Results from Study 1 show that perceivers regard followers of a group they themselves identify strongly with (rather than not at all) to be more representative of the prototype of effective followers (displaying enthusiasm, industry, good citizenship) and to be less representative of the antiprototype of effective followers (displaying conformity, incompetence, and insubordination). Results are replicated in a second experiment in which we compare the views of those self-categorizing as either Republican or Democrat responding to followers of the Republican and Democratic Party. Results of Study 2 replicate those of Study 1 and also reveal qualitative differences in the preferred influence strategy for dealing with followers. Specifically, respondents seek to engage in persuasion when trying to change the behavior of ingroup followers, while resorting to coercion when trying to change the behavior of outgroup followers. Our results are the first to provide evidence that perceivers' theories about what followers are like and how they are influenced most effectively are structured by perceivers' identification (and dis-identification) with the particular groups that leaders are championing.

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Analytic Thought Training Promotes Liberalism on Contextualized (But Not Stable) Political Opinions

Onurcan Yilmaz & Adil Saribay

Social Psychological and Personality Science, forthcoming

Abstract:
Previous research revealed that inducing an intuitive thinking style led people to adopt more conservative social and economic attitudes. No prior study, however, has shown a causal effect of analytic cognitive style (ACS) on political conservatism. It is also not clear whether these cognitive-style manipulations influence stable or contextualized (less stable) political attitudes differentially. The current research investigated the causal effect of ACS on both stable and contextualized political opinions. In Experiment 1, we briefly trained participants to think analytically (or not) and assessed their contextualized and stable political attitudes. Those in the analytic thinking group responded more positively to liberal (but not conservative) arguments on contextualized opinions. However, no significant change occurred in stable opinions. In Experiment 2, we replicated this basic finding with a larger sample. Thus, the results demonstrate that inducing ACS causally influences contextualized liberal attitudes, but not stable ones.

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The Political Economy: Political Attitudes and Economic Behavior

Ellen Key & Kathleen Donovan

Political Behavior, forthcoming

Abstract:
It has long been recognized that voters bring their political behaviors in line with economic assessments. Recent work, however, suggests that citizens also engage in economic behaviors that align with their confidence — or lack thereof — in the political system. This alignment can happen consciously or, as we suggest, unconsciously, in the same way that positivity carries over to other behaviors on a micro-level. Using monthly time series data from 1978 to 2008, we contribute further evidence of this relationship by demonstrating that political confidence affects consumer behavior at the aggregate level over time. Our analyses employ measures more closely tied to the theoretical concepts of interest while simultaneously accounting for the complex relationships between subjective and objective economic indicators, economic behavior, political attitudes, and the media. Our results suggest that approval of the president not only increases the electorate’s willingness to spend money, but also affects the volatility of this spending. These findings suggest that the economy is influenced by politics beyond elections, and gives the “Chief Economist” another avenue by which they can affect the behavior of the electorate.

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The Correlates of Discord: Identity, Issue Alignment, and Political Hostility in Polarized America

Lori Bougher

Political Behavior, forthcoming

Abstract:
The American public remains largely moderate on many issues, but incivility and hostility are rife in American politics. In this paper, I argue that the alignment of multiple issue attitudes along the traditional ideological spectrum helps explain the asymmetrical rise in negative political affect. I introduce belief congruence theory as a supplemental theoretical framework to social identity theory. Cross-sectional data reveal a significant association between issue alignment and negative out-party affect that is neither mediated nor moderated by partisan identity. A first-difference approach using two panel studies then addresses potential heterogeneity bias by testing a change-on-change model within individuals. Both panels, which are from different time periods, covering different issues, reveal significant associations between issue alignment and outgroup dislike. In contrast, partisan identity was only significantly associated with ingroup affect. This work suggests that cross-cutting issue preferences could help attenuate political hostility and reiterate the need to reconsider the role of issue-based reasoning in polarized America.

By KEVIN LEWIS | 09:00:00 AM

Sunday, February 19, 2017

Natives

Genetic signature of natural selection in first Americans

Carlos Eduardo Amorim et al.

Proceedings of the National Academy of Sciences, forthcoming

Abstract:
When humans moved from Asia toward the Americas over 18,000 y ago and eventually peopled the New World they encountered a new environment with extreme climate conditions and distinct dietary resources. These environmental and dietary pressures may have led to instances of genetic adaptation with the potential to influence the phenotypic variation in extant Native American populations. An example of such an event is the evolution of the fatty acid desaturases (FADS) genes, which have been claimed to harbor signals of positive selection in Inuit populations due to adaptation to the cold Greenland Arctic climate and to a protein-rich diet. Because there was evidence of intercontinental variation in this genetic region, with indications of positive selection for its variants, we decided to compare the Inuit findings with other Native American data. Here, we use several lines of evidence to show that the signal of FADS-positive selection is not restricted to the Arctic but instead is broadly observed throughout the Americas. The shared signature of selection among populations living in such a diverse range of environments is likely due to a single and strong instance of local adaptation that took place in the common ancestral population before their entrance into the New World. These first Americans peopled the whole continent and spread this adaptive variant across a diverse set of environments.

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Hemorrhagic fever virus, human blood, and tissues in Iron Age mortuary vessels

Conner Wiktorowicz et al.

Journal of Archaeological Science, February 2017, Pages 29-39

Abstract:
This study identifies and interprets the proteins present on sherds from six ceramic mortuary vessels from a burial mound near the Heuneburg, an early Iron Age (750-400 BCE) hillfort in southwest Germany, using a novel adaptation of proteomic analysis that identified 166 proteins with high confidence. Surprisingly, among the identified proteins were peptides from Crimean-Congo hemorrhagic fever virus (CCHFV), a pathogen previously unknown in this geographic region and time period, as well as peptides from human blood and tissues. These results highlight the first example of a viral cause of death of at least one high-status individual from the Iron Age west-central Europe and provide the first archaeological evidence for the interment of human organs in mortuary vessels in the region. We also demonstrate the suitability and value of a proteomics approach for discovery-based residue analysis of archaeological ceramic vessels and reveal how identification of adsorbed proteins can provide insight into prehistoric mortuary practices.

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Midcontinental Native American population dynamics and late Holocene hydroclimate extremes

Broxton Bird et al.

Scientific Reports, January 2017

Abstract:
Climate’s influence on late Pre-Columbian (pre-1492 CE), maize-dependent Native American populations in the midcontinental United States (US) is poorly understood as regional paleoclimate records are sparse and/or provide conflicting perspectives. Here, we reconstruct regional changes in precipitation source and seasonality and local changes in warm-season duration and rainstorm events related to the Pacific North American pattern (PNA) using a 2100-year-long multi-proxy lake-sediment record from the midcontinental US. Wet midcontinental climate reflecting negative PNA-like conditions occurred during the Medieval Climate Anomaly (950-1250 CE) as Native American populations adopted intensive maize agriculture, facilitating population aggregation and the development of urban centers between 1000-1200 CE. Intensifying midcontinental socio-political instability and warfare between 1250-1350 CE corresponded with drier positive PNA-like conditions, culminating in the staggered abandonment of many major Native American river valley settlements and large urban centers between 1350-1450 CE during an especially severe warm-season drought. We hypothesize that this sustained drought interval rendered it difficult to support dense populations and large urban centers in the midcontinental US by destabilizing regional agricultural systems, thereby contributing to the host of socio-political factors that led to population reorganization and migration in the midcontinent and neighboring regions shortly before European contact.

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Modeling the role of voyaging in the coastal spread of the Early Neolithic in the West Mediterranean

Neus Isern et al.

Proceedings of the National Academy of Sciences, 31 January 2017, Pages 897-902

Abstract:
The earliest dates for the West Mediterranean Neolithic indicate that it expanded across 2,500 km in about 300 y. Such a fast spread is held to be mainly due to a demic process driven by dispersal along coastal routes. Here, we model the Neolithic spread in the region by focusing on the role of voyaging to understand better the core elements that produced the observed pattern of dates. We also explore the effect of cultural interaction with Mesolithic populations living along the coast. The simulation study shows that (i) sea travel is required to obtain reasonable predictions, with a minimum sea-travel range of 300 km per generation; (ii) leapfrog coastal dispersals yield the best results (quantitatively and qualitatively); and (iii) interaction with Mesolithic people can assist the spread, but long-range voyaging is still needed to explain the archaeological pattern.

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Impact of pre-Columbian “geoglyph” builders on Amazonian forests

Jennifer Watling et al.

Proceedings of the National Academy of Sciences, forthcoming

Abstract:
Over 450 pre-Columbian (pre-AD 1492) geometric ditched enclosures (“geoglyphs”) occupy ∼13,000 km2 of Acre state, Brazil, representing a key discovery of Amazonian archaeology. These huge earthworks were concealed for centuries under terra firme (upland interfluvial) rainforest, directly challenging the “pristine” status of this ecosystem and its perceived vulnerability to human impacts. We reconstruct the environmental context of geoglyph construction and the nature, extent, and legacy of associated human impacts. We show that bamboo forest dominated the region for ≥6,000 y and that only small, temporary clearings were made to build the geoglyphs; however, construction occurred within anthropogenic forest that had been actively managed for millennia. In the absence of widespread deforestation, exploitation of forest products shaped a largely forested landscape that survived intact until the late 20th century.

By KEVIN LEWIS | 09:00:00 AM

Saturday, February 18, 2017

Go with it

What's So Great About Self-Control? Examining the Importance of Effortful Self-Control and Temptation in Predicting Real-Life Depletion and Goal Attainment

Marina Milyavskaya & Michael Inzlicht

Social Psychological and Personality Science, forthcoming

Abstract:
Self-control is typically viewed as a key ingredient responsible for effective self-regulation and personal goal attainment. This study used experience sampling, daily diary, and prospective data collection to investigate the immediate and semester-long consequences of effortful self-control and temptations on depletion and goal attainment. Results showed that goal attainment was influenced by experiences of temptations rather than by actively resisting or controlling those temptations. This study also found that simply experiencing temptations led people to feel depleted. Depletion in turn mediated the link between temptations and goal attainment, such that people who experienced increased temptations felt more depleted and thus less likely to achieve their goals. Critically, results of Bayesian analyses strongly indicate that effortful self-control was consistently unrelated to goal attainment throughout all analyses.

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The relationship between intertemporal choice and following the path of least resistance across choices, preferences, and beliefs

Amitai Shenhav, David Rand & Joshua Greene

Judgment and Decision Making, January 2017, Pages 1-18

Abstract:
The degree to which individuals prefer smaller sooner versus larger delayed rewards serves as a powerful predictor of their impulsivity towards a number of different kinds of rewards. Here we test the limits of its predictive ability within a variety of cognitive and social domains. Across several large samples of subjects, individuals who prefer smaller more immediate rewards (steeper discounters) are less reflective (or more impulsive) in their choices, preferences, and beliefs. First, steeper discounters used more automatic, less controlled choice strategies, giving more intuitive but incorrect responses on the Cognitive Reflection Test (replicating previous findings); employing a suboptimal probability matching heuristic for a one-shot gamble (rather than maximizing their probability of reward); and relying less on optimal planning in a two-stage reinforcement learning task. Second, steeper discounters preferred to consume information that was less complex and multi-faceted, as suggested by their self-reported Need for Cognitive Closure, their use of short-form social media (i.e., Twitter), and their preferred news sources (in particular, whether or not they preferred National Public Radio over other news sources). Third, steeper discounters had interpersonal and religious beliefs that are associated with reduced epistemic complexity: they were more likely to believe that the behavior of others could be explained by fixed rather than dynamic factors, and they believed more strongly in God and in the afterlife. Together these findings provide evidence for a link between individual differences in temporal discounting for monetary rewards and preferences for the path of least resistance (less reflective and/or more automatic modes of processing) across a variety of domains.

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The Risky Side of Creativity: Domain Specific Risk Taking in Creative Individuals

Vaibhav Tyagi et al.

Frontiers in Psychology, February 2017

Abstract:
Risk taking is often associated with creativity, yet little evidence exists to support this association. The present article aimed to systematically explore this association. In two studies, we investigated the relationship between five different domains of risk taking (financial, health and safety, recreational, ethical and social) and five different measures of creativity. Results from the first (laboratory-based) offline study suggested that creativity is associated with high risk taking tendencies in the social domain but not the other domains. Indeed, in the second study conducted online with a larger and diverse sample, the likelihood of social risk taking was the strongest predictor of creative personality and ideation scores. These findings illustrate the necessity to treat creativity and risk taking as multi-dimensional traits and the need to have a more nuanced framework of creativity and other related cognitive functions.

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Spontaneous eye blink rate as predictor of dopamine-related cognitive function - A review

Bryant Jongkees & Lorenza Colzato

Neuroscience & Biobehavioral Reviews, December 2016, Pages 58-82

Abstract:
An extensive body of research suggests the spontaneous eye blink rate (EBR) is a non-invasive indirect marker of central dopamine (DA) function, with higher EBR predicting higher DA function. In the present review we provide a comprehensive overview of this literature. We broadly divide the available research in studies that aim to disentangle the dopaminergic underpinnings of EBR, investigate its utility in diagnosis of DA-related disorders and responsivity to drug treatment, and, lastly, investigate EBR as predictor of individual differences in DA-related cognitive performance. We conclude (i) EBR can reflect both DA receptor subtype D1 and D2 activity, although baseline EBR might be most strongly related to the latter, (ii) EBR can predict hypo- and hyperdopaminergic activity as well as normalization of this activity following treatment, and (iii) EBR can reliably predict individual differences in performance on many cognitive tasks, in particular those related to reward-driven behavior and cognitive flexibility. In sum, this review establishes EBR as a useful predictor of DA in a wide variety of contexts.

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Do Positive Spontaneous Thoughts Function as Incentive Salience?

Elise Rice & Barbara Fredrickson

Emotion, forthcoming

Abstract:
The present work explores the theoretical relationship between positive spontaneous thoughts and incentive salience - a psychological property thought to energize wanting and approach motivation by rendering cues that are associated with enjoyment more likely to stand out to the individual when subsequently encountered in the environment (Berridge, 2007). We reasoned that positive spontaneous thoughts may at least be concomitants of incentive salience, and as such, they might likewise mediate the effect of liking on wanting. In Study 1, 103 adults recruited via Amazon's Mechanical Turk reported on key aspects of 10 everyday activities. As predicted, positive spontaneous thoughts mediated the relationship between liking an activity in the past and wanting to engage in it in the future. In Study 2, 99 undergraduate students viewed amusing and humorless cartoons and completed a thought-listing task, providing experimental evidence for the causal effect of liking on positive spontaneous thoughts. In Study 3, we tested whether positive spontaneous thoughts play an active role in energizing wanting rather than merely co-occurring with (inferred) incentive salience. In that experiment involving 80 undergraduates, participants who were led to believe that their spontaneous thoughts about a target activity were especially positive planned to devote more time to that activity over the coming week than participants who received no such information about their spontaneous thoughts. Collectively, these findings suggest that positive spontaneous thoughts may play an important role in shaping approach motivation. Broader implications and future directions in the study of positive spontaneous thoughts are discussed.

By KEVIN LEWIS | 09:00:00 AM

Friday, February 17, 2017

Life support

Did Medicaid Expansion Reduce Medical Divorce?

David Slusky & Donna Ginther

NBER Working Paper, February 2017

Abstract:
Prior to the Affordable Care Act, many state Medicaid eligibility rules had maximum asset levels. This was a problem when one member of a couple was diagnosed with a degenerative disease requiring expensive care. Draining the couple’s assets so that the sick individual could qualify for Medicaid would leave no resources for the retirement of the other member; thus divorce and separating assets was often the only option. The ACA’s Medicaid expansion removed all asset tests. Using a difference-in-differences approach on states that did and did not expand Medicaid, we find that the expansion decreased the prevalence of divorce by 5.6% among those 50-64, strongly suggesting that it reduced medical divorce.

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Is American Health Care Uniquely Inefficient? Evidence from Prescription Drugs

Margaret Kyle & Heidi Williams

NBER Working Paper, January 2017

Abstract:
Alan Garber and Jonathan Skinner (2008) famously conjectured that the US health care system was “uniquely inefficient” relative to other countries. We test this idea using cross-country data on prescription drug sales newly linked with an arguably objective measure of relative therapeutic benefits, or drug quality. Specifically, we investigate how higher and lower quality drugs diffuse in the US relative to Australia, Canada, Switzerland, and the UK. Our tabulations suggest that lower quality drugs diffuse more in the US relative to high quality drugs, compared to each of our four comparison countries – consistent with Garber and Skinner’s conjecture.

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The Long-Term Impact of Price Controls in Medicare Part D

Gigi Moreno et al.

Forum for Health Economics and Policy, forthcoming

Abstract:
Price controls for prescription drugs are once again at the forefront of policy discussions in the United States. Much of the focus has been on the potential short-term savings – in terms of lower spending – although evidence suggests price controls can dampen innovation and adversely affect long-term population health. This paper applies the Health Economics Medical Innovation Simulation, a microsimulation of older Americans, to estimate the long-term impacts of government price setting in Medicare Part D, using pricing in the Federal Veterans Health Administration program as a proxy. We find that VA-style pricing policies would save between $0.1 trillion and $0.3 trillion (US$2015) in lifetime drug spending for people born in 1949–2005. However, such savings come with social costs. After accounting for innovation spillovers, we find that price setting in Part D reduces the number of new drug introductions by as much as 25% relative to the status quo. As a result, life expectancy for the cohort born in 1991–1995 is reduced by almost 2 years relative to the status quo. Overall, we find that price controls would reduce lifetime welfare by $5.7 to $13.3 trillion (US$2015) for the US population born in 1949–2005.

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Antitrust Treatment of Nonprofits: Should Hospitals Receive Special Care?

Cory Capps, Dennis Carlton & Guy David

NBER Working Paper, February 2017

Abstract:
Nonprofit hospitals receive favorable tax treatment in exchange for providing socially beneficial activities. Extending this rationale would suggest that, insofar as suppression of competition would allow nonprofits to cross-subsidize care for needy populations, nonprofit hospital mergers should be evaluated differently than mergers of for-profit hospitals. However, this rationale rests upon the premise that nonprofit hospitals with greater market power provide more care to the needy. In this paper, we develop a theoretical model showing that the welfare implications of an antitrust policy that favors nonprofit hospitals depends on the link between market power and charity care provision. To test the link, we use three measures of charity care — two dollar-denominated and one based on service volume — to study charity care provision by for-profit and non-profit hospitals under different competition conditions. Using detailed California data from 2001 to 2011, we find no evidence that nonprofit hospitals are more likely than for-profit hospitals to provide more charity care, or to offer more unprofitable services, when competition falls. Overall, while some courts have given deference to defendants’ nonprofit status, our study finds no empirical evidence that such hospitals provide greater charity care as they have greater market power.

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Less Intense Postacute Care, Better Outcomes For Enrollees In Medicare Advantage Than Those In Fee-For-Service

Peter Huckfeldt et al.

Health Affairs, January 2017, Pages 91-100

Abstract:
Traditional fee-for-service (FFS) Medicare’s prospective payment systems for postacute care provide little incentive to coordinate care or control costs. In contrast, Medicare Advantage plans pay for postacute care out of monthly capitated payments and thus have stronger incentives to use it efficiently. We compared the use of postacute care in skilled nursing and inpatient rehabilitation facilities by enrollees in Medicare Advantage and FFS Medicare after hospital discharge for three high-volume conditions: lower extremity joint replacement, stroke, and heart failure. After accounting for differences in patient characteristics at discharge, we found lower intensity of postacute care for Medicare Advantage patients compared to FFS Medicare patients discharged from the same hospital, across all three conditions. Medicare Advantage patients also exhibited better outcomes than their FFS Medicare counterparts, including lower rates of hospital readmission and higher rates of return to the community. These findings suggest that payment reforms such as bundling in FFS Medicare may reduce the intensity of postacute care without adversely affecting patient health.

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Effect of Medicaid Expansion on Workforce Participation for People With Disabilities

Jean Hall et al.

American Journal of Public Health, February 2017, Pages 262-264

Objectives: To use data from the Health Reform Monitoring Survey (HRMS) to examine differences in employment among community-living, working-age adults (aged 18–64 years) with disabilities who live in Medicaid expansion states and nonexpansion states.

Methods: Analyses used difference-in-differences to compare trends in pooled, cross-sectional estimates of employment by state expansion status for 2740 HRMS respondents reporting a disability, adjusting for individual and state characteristics.

Results: After the Affordable Care Act (ACA), respondents in expansion states were significantly more likely to be employed compared with those in nonexpansion states (38.0% vs 31.9%; P = .011).

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Malpractice Claim Fears and the Costs of Treating Medicare Patients: A New Approach to Estimating the Costs of Defensive Medicine

James Reschovsky & Cynthia Saiontz-Martinez

Health Services Research, forthcoming

Data Sources: We use a 2008 national physician survey linked to respondents’ elderly Medicare patients’ claims data.

Study Design: Using a sample of survey respondent/beneficiary dyads stratified by physician specialty, we estimated cross-sectional regressions of annual costs on patient covariates and a medical malpractice fear index formed from five validated physician survey questions. Defensive medicine costs were calculated as the difference between observed patient costs and those under hypothetical alternative levels of malpractice concern, and then aggregated to estimate average defensive medicine costs per beneficiary.

Data Collection Methods: The physician survey was conducted by mail. Patient claims were linked to survey respondents and reweighted to approximate the elderly Medicare beneficiary population.

Principal Findings: Higher levels of the malpractice fear index were associated with higher patient spending. Based on the measured associations, we estimated that defensive medicine accounted for 8 to 20 percent of total costs under alternative scenarios. The highest estimate is associated with a counterfactual of no malpractice concerns, which is unlikely to be socially optimal as some extrinsic incentives to avoid medical errors are desirable. Among specialty groups, primary care physicians contributed the most to defensive medicine spending. Higher costs resulted mostly from more hospital admissions and greater postacute care.

Conclusions: Although results are based on measured associations between malpractice fears and spending, and may not reflect the true causal effects, they suggest defensive medicine likely contributes substantial additional costs to Medicare.

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Price-Linked Subsidies and Health Insurance Markups

Sonia Jaffe & Mark Shepard

NBER Working Paper, January 2017

Abstract:
Subsidies in many health insurance programs depend on prices set by competing insurers – as prices rise, so do subsidies. We study the economics of these “price-linked” subsidies compared to “fixed” subsidies set independently of market prices. We show that price-linked subsidies weaken price competition, leading to higher markups and subsidy costs for the government. We argue that price-linked subsidies make sense only if (1) there is uncertainty about costs/prices, and (2) optimal subsidies increase as prices rise. We propose two reasons why optimal health insurance subsidies may rise with prices: doing so both insures consumers against cost risk and indirectly links subsidies to market-wide shocks affecting the cost of “charity care” used by the uninsured. We evaluate these tradeoffs empirically using a structural model estimated with data from Massachusetts’ health insurance exchange. Relative to fixed subsidies, price-linking increase prices by up to 5%, and by 5-10% when we simulate markets with fewer insurers. For levels of cost uncertainty that are reasonable in a mature market, we find that the losses from higher prices outweigh the benefits of price-linking.

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Beyond Health Effects? Examining the Social Consequences of Community Levels of Uninsurance Pre-ACA

Tara McKay & Stefan Timmermans

Journal of Health and Social Behavior, forthcoming

Abstract:
The lack of health insurance is traditionally considered a problem faced by individuals and their families. However, because of the geographically bounded organization and funding of healthcare in the United States, levels of uninsurance in a community may affect everyone living there. Health economists have examined how the effects of uninsurance spillover from the uninsured to the insured, negatively affecting healthcare access and quality for the insured. We extend research on uninsurance into the domain of sociologists by theorizing how uninsurance might exacerbate social inequalities and undermine social cohesion within communities. Using data from the Los Angeles Family and Neighborhood Survey, we show that individuals living in communities with higher levels of uninsurance report lower social cohesion net of other individual and neighborhood factors and discuss implications for implementation of the Affordable Care Act.

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Variation in the Ratio of Physician Charges to Medicare Payments by Specialty and Region

Ge Bai & Gerard Anderson

Journal of the American Medical Association, 17 January 2017, Pages 315-318

"Nearly all physicians charge more than the Medicare program actually pays (herein referred to as 'excess charges'), with complete discretion to determine the amount charged. High excess charges can impose financial burdens on uninsured patients and privately insured patients using out-of-network physicians...Physician charge-to-Medicare payment ratio ranged between 1.0 and 101.1 across individual physicians, with a median of 2.5 (interquartile range [IQR], 1.8-3.6). The ratio varied across specialties, with anesthesiology having the highest median (5.8 [IQR, 4.5-7.9]) and general practice having the lowest (1.6 [IQR, 1.3-2.2]). The ratio also varied across states (Table 2), with state median ranging between 2.0 (IQR, 1.5-3.1 for Michigan) and 3.8 (IQR, 2.9-6.5 for Wisconsin)...Physician excess charge was higher for specialties in which patients have fewer opportunities to choose a physician or be informed of the physician’s network status (eg, anesthesiology)."

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Nudging Leads Consumers In Colorado To Shop But Not Switch ACA Marketplace Plans

Keith Marzilli Ericson et al.

Health Affairs, February 2017, Pages 311-319

Abstract:
The Affordable Care Act (ACA) dramatically expanded the use of regulated marketplaces in health insurance, but consumers often fail to shop for plans during open enrollment periods. Typically these consumers are automatically reenrolled in their old plans, which potentially exposes them to unexpected increases in their insurance premiums and cost sharing. We conducted a randomized intervention to encourage enrollees in an ACA Marketplace to shop for plans. We tested the effect of letters and e-mails with personalized information about the savings on insurance premiums that they could realize from switching plans and the effect of generic communications that simply emphasized the possibility of saving. The personalized and generic messages both increased shopping on the Marketplace’s website by 23 percent, but neither type of message had a significant effect on plan switching. These findings show that simple “nudges” with even generic information can promote shopping in health insurance marketplaces, but whether they can lead to switching remains an open question.

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Causes and Consequences of Fragmented Care Delivery: Theory, Evidence, and Public Policy

Leila Agha, Brigham Frandsen & James Rebitzer

NBER Working Paper, January 2017

Abstract:
Fragmented health care occurs when care is spread out across a large number of poorly coordinated providers. We analyze care fragmentation, an important source of inefficiency in the US healthcare system, by combining an economic model of regional practice styles with an empirical study of Medicare enrollees who move across regions. Roughly sixty percent of cross-regional variation in care fragmentation is independent of patients’ clinical needs or preferences for care. A one standard deviation increase in regional fragmentation is associated with a 10% increase in utilization. Our analysis also identifies conditions under which anti-fragmentation policies can improve efficiency.

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The Extraregulatory Effect of Nurse Practitioner Scope-of-Practice Laws on Physician Malpractice Rates

Benjamin McMichael, Barbara Safriet & Peter Buerhaus

Medical Care Research and Review, forthcoming

Abstract:
Patients can hold physicians directly or vicariously liable for the malpractice of nurse practitioners under their supervision. Restrictive scope-of-practice laws governing nurse practitioners can ease patients’ legal burdens in establishing physician liability. We analyze the effect of restrictive scope-of-practice laws on the number of malpractice payments made on behalf of physicians between 1999 and 2012. Enacting less restrictive scope-of-practice laws decreases the number of payments made by physicians by as much as 31%, suggesting that restrictive scope-of-practice laws have a salient extraregulatory effect on physician malpractice rates. The effect of enacting less restrictive laws varies depending on the medical malpractice reforms that are in place, with the largest decrease in physician malpractice rates occurring in states that have enacted fewer malpractice reforms. Relaxing scope-of-practice laws could mitigate the adverse extraregulatory effect on physicians identified in this study and could also lead to improvements in access to care.

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Dermatologist-level classification of skin cancer with deep neural networks

Andre Esteva et al.

Nature, 2 February 2017, Pages 115–118

Abstract:
Skin cancer, the most common human malignancy, is primarily diagnosed visually, beginning with an initial clinical screening and followed potentially by dermoscopic analysis, a biopsy and histopathological examination. Automated classification of skin lesions using images is a challenging task owing to the fine-grained variability in the appearance of skin lesions. Deep convolutional neural networks (CNNs) show potential for general and highly variable tasks across many fine-grained object categories. Here we demonstrate classification of skin lesions using a single CNN, trained end-to-end from images directly, using only pixels and disease labels as inputs. We train a CNN using a dataset of 129,450 clinical images — two orders of magnitude larger than previous datasets — consisting of 2,032 different diseases. We test its performance against 21 board-certified dermatologists on biopsy-proven clinical images with two critical binary classification use cases: keratinocyte carcinomas versus benign seborrheic keratoses; and malignant melanomas versus benign nevi. The first case represents the identification of the most common cancers, the second represents the identification of the deadliest skin cancer. The CNN achieves performance on par with all tested experts across both tasks, demonstrating an artificial intelligence capable of classifying skin cancer with a level of competence comparable to dermatologists. Outfitted with deep neural networks, mobile devices can potentially extend the reach of dermatologists outside of the clinic. It is projected that 6.3 billion smartphone subscriptions will exist by the year 2021 and can therefore potentially provide low-cost universal access to vital diagnostic care.

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The Impact of the Affordable Care Act Young Adult Provision on Childbearing, Marriage, and Tax Filing Behavior: Evidence from Tax Data

Bradley Heim, Ithai Lurie & Kosali Simon

NBER Working Paper, January 2017

Abstract:
We use panel U.S. tax data spanning 2008-2013 to study the impact of the Affordable Care Act (ACA) young adult provision on two important demographic outcomes—childbearing and marriage. The impact on childbearing is theoretically ambiguous, as gaining insurance may increase access to contraceptive services, while also reducing the out-of-pocket costs of childbirth. The impact on marriage is also ambiguous, as marriage rates may decrease when young adults have less need for dependent health insurance through a spouse, but may increase when they are now allowed to stay on their parent’s plans even if they are married. Changes in childbearing and marriage can, in turn, lead to changes in the likelihood of filing a tax return. Since W-2 forms record access to employer-provided fringe benefits, we were able to examine the impact of the coverage expansion by focusing on young adults whose parents have access to benefits. We compare those who are slightly younger than the age threshold to those who are slightly older. Our results suggest that the ACA young adult provision led to a modest decrease in childbearing and marriage rates, though the propensity to file a tax return did not change significantly.

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How Vertical Integration Affects the Quantity and Cost of Care for Medicare Beneficiaries

Thomas Koch, Brett Wendling & Nathan Wilson

Journal of Health Economics, forthcoming

Abstract:
Health systems are employing physicians in growing numbers. The implications of this trend are poorly understood and controversial. We use rich data from the Centers for Medicare and Medicaid Services to examine the effects of a set of physician acquisitions by hospital systems on outpatient utilization and spending. We find that financial integration systematically produces economically large changes in the acquired physicians’ behavior, but has less consistent effects at the acquiring system level.

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Projected Coding Intensity In Medicare Advantage Could Increase Medicare Spending By $200 Billion Over Ten Years

Richard Kronick

Health Affairs, February 2017, Pages 320-327

Abstract:
Over the past decade, the average risk score for Medicare Advantage (MA) enrollees has risen steadily relative to that for fee-for-service Medicare beneficiaries, by approximately 1.5 percent per year. The Centers for Medicare and Medicaid Services (CMS) uses patient demographic and diagnostic information to calculate a risk score for each beneficiary, and these risk scores are used to determine payment to MA plans. The increase in relative MA risk scores is largely the result of successful efforts by MA plans to identify additional diagnoses, also known as coding intensity, and not of changes in enrollees’ true health. In this article I estimate the effects of coding intensity on Medicare spending over the next decade. Under the moderately conservative assumption that coding intensity will decelerate, Medicare expenditures are expected to increase by approximately $200 billion. CMS has implemented a variety of strategies since 2010 that lessened the impact of coding intensity on Medicare spending; it has a variety of policy responses at its disposal to mitigate the impact going forward. The problem could be largely solved if CMS adjusted for coding intensity using the principle that MA beneficiaries are no healthier and no sicker than demographically similar fee-for-service Medicare beneficiaries, returning to the budget-neutrality approach that was introduced in 2004 and later abandoned.

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The Impact of Minimum Quality Standard Regulations on Nursing Home Staffing, Quality, and Exit Decisions

John Bowblis & Andrew Ghattas

Review of Industrial Organization, February 2017, Pages 43–68

Abstract:
The regulation of nursing homes in the U.S. often includes mandates that require a minimum nurse staffing level. In this paper, we exploit new minimum nurse staffing regulations by the states of New Mexico and Vermont that were implemented in the early 2000s to determine how nursing homes responded in terms of staffing, quality, and the decision to exit the market. Our identification strategy exploits the fact that some nursing homes had pre-regulatory staffing levels near the new requirement and did not need to change staffing levels. We compare these nursing homes to a group that faced binding constraints (low-staffed) and those that were significantly over the constraint (high-staffed). Low-staffed nursing homes increase staffing levels but also use less expensive nurse types to satisfy the new standard. High-staffed nursing homes decrease staffing and use fewer contracted staff. Overall, dispersion in staffing is reduced, but we find little effect by pre-regulatory staffing level on non-staffing measures of quality and the decision to exit the market.

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Benchmarks for Reducing Emergency Department Visits and Hospitalizations Through Community Health Workers Integrated Into Primary Care: A Cost-Benefit Analysis

Sanjay Basu et al.

Medical Care, February 2017, Pages 140–147

Background: Uncertainty about the financial costs and benefits of community health worker (CHW) programs remains a barrier to their adoption.

Objectives: To determine how much CHWs would need to reduce emergency department (ED) visits and associated hospitalizations among their assigned patients to be cost-neutral from a payer’s perspective.

Research Design: Using a microsimulation of patient health care utilization, costs, and revenues, we estimated what portion of ED visits and hospitalizations for different conditions would need to be prevented by a CHW program to fully pay for the program’s expenses. The model simulated CHW programs enrolling patients with a history of at least 1 ED visit for a chronic condition in the prior year, utilizing data on utilization and cost from national sources.

Results: CHWs assigned to patients with uncontrolled hypertension and congestive heart failure, as compared with other common conditions, achieve cost-neutrality with the lowest number of averted visits to the ED. To achieve cost-neutrality, 4–5 visits to the ED would need to be averted per year by a CHW assigned a panel of 70 patients with uncontrolled hypertension or congestive heart failure — approximately 3%–4% of typical ED visits among such patients, respectively. Most other chronic conditions would require between 7% and 12% of ED visits to be averted to achieve cost-savings.

Conclusion: Offsetting costs of a CHW program is theoretically feasible for many common conditions. Yet the benchmark for reducing ED visits and associated hospitalizations varies substantially by a patient’s primary diagnosis.

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Health Care Use And Spending Patterns Vary By Wage Level In Employer-Sponsored Plans

Bruce Sherman et al.

Health Affairs, February 2017, Pages 250-257

Abstract:
Employees face an increasing financial burden for health services as health care costs increase relative to earnings. Yet little is known about health care utilization patterns relative to employee wages. To better understand this association and the resulting implications, we examined patterns of health care use and spending by wage category during 2014 among 42,936 employees of four self-insured employers enrolled in a private health insurance exchange. When demographics and other characteristics were controlled for, employees in the lowest-wage group had half the usage of preventive care (19 percent versus 38 percent), nearly twice the hospital admission rate (31 individuals per 1,000 versus 17 per 1,000), more than four times the rate of avoidable admissions (4.3 individuals per 1,000 versus 0.9 per 1,000), and more than three times the rate of emergency department visits (370 individuals per 1,000 versus 120 per 1,000) relative to top-wage-group earners. Annual total health care spending per patient was highest in both the lowest-wage ($4,835) and highest-wage ($5,074) categories relative to the middle two wage groups ($3,952 and $3,987, respectively). These findings provide new insights about wage-associated variations in health care use and spending in employer-sponsored plans. For policy makers, these findings can inform employer benefit design strategies and research priorities, to encourage effective use of health care services.

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Healthcare Spending and Utilization in Public and Private Medicare

Vilsa Curto et al.

NBER Working Paper, January 2017

Abstract:
We compare healthcare spending in public and private Medicare using newly available claims data from Medicare Advantage (MA) insurers. MA insurer revenues are 30 percent higher than their healthcare spending. Healthcare spending is 25 percent lower for MA enrollees than for enrollees in traditional Medicare (TM) in the same county with the same risk score. Spending differences between MA and TM are similar across sub-populations of enrollees and sub-categories of care, with similar reductions for "high value" and "low value" care. Spending differences primarily reflect differences in healthcare utilization; spending per encounter and hospital payments per admission are very similar in MA and TM. Geographic variation in MA spending is about 20 percent higher than in TM, but geographic variation in hospital prices is about 20 percent lower. We present evidence consistent with MA plans encouraging substitution to less expensive care, such as primary rather than specialist care, and outpatient rather than inpatient surgery, and with employing various types of utilization management. Some of the overall spending differences between MA and TM may be driven by selection on unobservables, and we report a range of estimates of this selection effect using mortality outcomes to proxy for selection.

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Internal Governance and Performance: Evidence From When External Discipline is Weak

Jonathan Kalodimos

Journal of Corporate Finance, April 2017, Pages 193–216

Abstract:
The effect of internal governance on performance is potentially economically significant but may be difficult to identify because of confounding external disciplinary mechanisms and the endogenous choice of internal governance. This study addresses those difficulties by using nonprofit hospitals as an economic environment with muted external disciplinary mechanisms and instrumenting for internal governance using governance spillovers of geographically local public firms. Using patient heart attack survival as a measure of performance, a one standard deviation increase in strength of internal governance reduces the probability of death by 0.89 percentage points after controlling for patient characteristics.

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Evaluating Measures of Hospital Quality

Joseph Doyle, John Graves & Jonathan Gruber

NBER Working Paper, February 2017

Abstract:
In response to unsustainable growth in health care spending, there is enormous interest in reforming the payment system to “pay for quality instead of quantity.” While quality measures are crucial to such reforms, they face major criticisms largely over the potential failure of risk adjustment to overcome endogeneity concerns. In this paper we implement a methodology for estimating the causal relationship between hospital quality measures and patient outcomes. To compare similar patients across hospitals in the same market, we exploit ambulance company preferences as an instrument for patient assignment. We find that a variety of measures used by insurers to measure provider quality are successful: assignment to a higher-scoring hospital results in better patient outcomes. We estimate that a two-standard deviation improvement in a composite quality measure based on existing data collected by CMS is causally associated with reductions in readmissions and mortality of roughly 15%.

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Comparison of Medicaid Payments Relative to Medicare Using Inpatient Acute Care Claims from the Medicaid Program: Fiscal Year 2010–Fiscal Year 2011

Devin Stone, Bridget Dickensheets & John Poisal

Health Services Research, forthcoming

Objective: To compare Medicaid fee-for-service (FFS) inpatient hospital payments to expected Medicare payments.

Data Sources: Medicaid and Medicare claims data, Medicare's MS-DRG grouper and inpatient prospective payment system pricer (IPPS pricer).

Principal Findings: Average inpatient hospital claim payments for Medicaid were 68.8 percent of what Medicare would have paid in fiscal year 2010, and 69.8 percent in fiscal year 2011. Including Medicaid disproportionate share hospital (DSH), graduate medical education (GME), and supplemental payments reduces a substantial proportion of the gap between Medicaid and Medicare payments.

Conclusions: Medicaid payments relative to expected Medicare payments tend to be lower and vary by state Medicaid program, length of stay, and whether payments made outside of the Medicaid claims process are included.

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ACOs Serving High Proportions Of Racial And Ethnic Minorities Lag In Quality Performance

Valerie Lewis et al.

Health Affairs, January 2017, Pages 57-66

Abstract:
Accountable care organizations (ACOs) are intended, in part, to improve health care quality. However, little is known about how ACOs may affect disparities or how providers serving disadvantaged patients perform under Medicare ACO contracts. We analyzed racial and ethnic disparities in health care outcomes among ACOs to investigate the association between the share of an ACO’s patients who are members of racial or ethnic minority groups and the ACO’s performance on quality measures. Using data from Medicare and a national survey of ACOs, we found that having a higher proportion of minority patients was associated with worse scores on twenty-five of thirty-three Medicare quality performance measures, two disease composite measures, and an overall quality composite measure. However, ACOs serving a high share of minority patients were similar to other ACOs in most observable characteristics and capabilities, including provider composition, services, and clinical capabilities. Our findings suggest that ACOs with a high share of minority patients may struggle with quality performance under ACO contracts, especially during their early years of participation — maintaining or potentially exacerbating current inequities. Policy makers must consider how to refine ACO programs to encourage the participation of providers that serve minority patients and to reward performance appropriately.

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The Effect of State Medicaid Expansions on Prescription Drug Use: Evidence from the Affordable Care Act

Ausmita Ghosh, Kosali Simon & Benjamin Sommers

NBER Working Paper, January 2017

Abstract:
This study provides a national analysis of how the 2014 Affordable Care Act (ACA) Medicaid expansions have affected aggregate prescription drug utilization. Given the prominent role of prescription medications in the management of chronic conditions, as well as the high prevalence of unmet health care needs in the population newly eligible for Medicaid, the use of prescription drugs represents an important measure of the ACA’s policy impact. Prescription drug utilization also provides insights into whether insurance expansions have increased access to physicians, since obtaining these medications requires interaction with a health care provider. We use 2013-2015 data from a large, nationally representative, all-payer pharmacy transactions database to examine effects on overall prescription medication utilization as well as effects within specific drug classes. Using a differences-in-differences (DD) regression framework, we find that within the first 15 months of expansion, Medicaid-paid prescription utilization increased by 19 percent in expansion states relative to states that did not expand; this works out to approximately seven additional prescriptions per year per newly enrolled beneficiary. The greatest increases in Medicaid prescriptions occurred among diabetes medications, which increased by 24 percent. Other classes of medication that experienced relatively large increases include contraceptives (22 percent) and cardiovascular drugs (21 percent), while several classes more consistent with acute conditions such as allergies and infections experienced significantly smaller increases. As a placebo test, we examine Medicare-paid prescriptions and find no evidence of a post-ACA effect. Both expansion and non-expansion states followed statistically similar trends in Medicaid prescription utilization in the pre-policy era, offering support for our DD approach. We did not observe reductions in uninsured or privately insured prescriptions, suggesting that increased utilization under Medicaid did not substitute for other forms of payment. Within expansion states, increases in prescription drug utilization were larger in geographical areas with higher uninsured rates prior to the ACA. Finally, we find some suggestive evidence that increases in prescription drug utilization were greater in areas with larger Hispanic and black populations.

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Spending On Care After Surgery Driven By Choice Of Care Settings Instead Of Intensity Of Services

Lena Chen et al.

Health Affairs, January 2017, Pages 83-90

Abstract:
The rising popularity of episode-based payment models for surgery underscores the need to better understand the drivers of variability in spending on postacute care. Examining postacute care spending for fee-for-service Medicare beneficiaries after three common surgical procedures in the period 2009–12, we found that it varied widely between hospitals in the lowest versus highest spending quintiles for postacute care, with differences of 129 percent for total hip replacement, 103 percent for coronary artery bypass grafting (CABG), and 82 percent for colectomy. Wide variation persisted after we adjusted for the intensity of postacute care. However, the variation diminished considerably after we adjusted instead for postacute care setting (home health care, outpatient rehabilitation, skilled nursing facility, or inpatient rehabilitation facility): It decreased to 16 percent for hip replacement, 4 percent for CABG, and 21 percent for colectomy. Health systems seeking to improve surgical episode efficiency should collaborate with patients to choose the highest-value postacute care setting.

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Lower- Versus Higher-Income Populations In The Alternative Quality Contract: Improved Quality And Similar Spending

Zirui Song et al.

Health Affairs, January 2017, Pages 74-82

Abstract:
As population-based payment models become increasingly common, it is crucial to understand how such payment models affect health disparities. We evaluated health care quality and spending among enrollees in areas with lower versus higher socioeconomic status in Massachusetts before and after providers entered into the Alternative Quality Contract, a two-sided population-based payment model with substantial incentives tied to quality. We compared changes in process measures, outcome measures, and spending between enrollees in areas with lower and higher socioeconomic status from 2006 to 2012 (outcome measures were measured after the intervention only). Quality improved for all enrollees in the Alternative Quality Contract after their provider organizations entered the contract. Process measures improved 1.2 percentage points per year more among enrollees in areas with lower socioeconomic status than among those in areas with higher socioeconomic status. Outcome measure improvement was no different between the subgroups; neither were changes in spending. Larger or comparable improvements in quality among enrollees in areas with lower socioeconomic status suggest a potential narrowing of disparities. Strong pay-for-performance incentives within a population-based payment model could encourage providers to focus on improving quality for more disadvantaged populations.

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ACO-Affiliated Hospitals Reduced Rehospitalizations From Skilled Nursing Facilities Faster Than Other Hospitals

Ulrika Winblad et al.

Health Affairs, January 2017, Pages 67-73

Abstract:
Medicare’s more than 420 accountable care organizations (ACOs) provide care for a considerable percentage of the elderly in the United States. One goal of ACOs is to improve care coordination and thereby decrease rates of rehospitalization. We examined whether ACO-affiliated hospitals were more effective than other hospitals in reducing rehospitalizations from skilled nursing facilities. We found a general reduction in rehospitalizations from 2007 to 2013, which suggests that all hospitals made efforts to reduce rehospitalizations. The ACO-affiliated hospitals, however, were able to reduce rehospitalizations more quickly than other hospitals. The reductions suggest that ACO-affiliated hospitals are either discharging to the nursing facilities more effectively compared to other hospitals or targeting at-risk patients better, or enhancing information sharing and communication between hospitals and skilled nursing facilities. Policy makers expect that reducing readmissions to hospitals will generate major savings and improve the quality of life for the frail elderly. However, further work is needed to investigate the precise mechanisms that underlie the reduction of readmissions among ACO-affiliated hospitals.

By KEVIN LEWIS | 09:00:00 AM

Thursday, February 16, 2017

Untax and spend

Baumol's Cost Disease and the Sustainability of the Welfare State

Torben Andersen & Claus Kreiner

Economica, forthcoming

Abstract:
If productivity increases more slowly for services than for manufactured goods, then services suffer from Baumol's cost disease and tend to become relatively more costly over time. Since the welfare state in all countries is an important supplier of tax financed services, this translates into a financial pressure that seems to leave policymakers with a trilemma: increase tax distortions, cut spending or redistribute less. Under the assumptions underlying Baumol's cost disease, we show that these dismal implications are not warranted. The welfare state is sustainable, and there is even scope for Pareto improvements under Baumol's cost disease.

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Do Corporate Taxes Hinder Innovation?

Abhiroop Mukherjee, Manpreet Singh & Alminas Žaldokas

Journal of Financial Economics, forthcoming

Abstract:
We exploit staggered changes in state-level corporate tax rates to show that an increase in taxes reduces future innovation. A variety of tests, including those based on policy discontinuity at contiguous counties straddling borders of politically similar states, show that local economic conditions do not drive our results. The effect we document is consistent across the innovation spectrum: taxes affect not only patenting and R&D investment but also new product introductions, which we measure using textual analysis. Our empirical results are consistent with models that highlight the role of higher corporate taxes in reducing innovator incentives and discouraging risk-taking.

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Government Size and Macroeconomic Volatility

Fabrice Collard, Harris Dellas & George Tavlas

Economica, forthcoming

Abstract:
We examine the implications of government size for macroeconomic volatility in a standard New-Keynesian model with multiple shocks. Larger government size mitigates volatility arising from technology, preference, mark-up and monetary policy shocks, but amplifies that emanating from expenditure shocks. The degree of mitigation-amplification varies with the size of government, which opens up the possibility of a non-monotone relationship between volatility and government size. When we estimate the model on US data we find that the relationship is negative around the current US size, but it could eventually turn positive as the ratio of government spending to GDP increased. The location of the turning point in this relationship depends mainly on the type of private expenditure crowded out by higher government spending and on the degree of price stickiness.

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Austerity in the Aftermath of the Great Recession

Christopher House, Christian Proebsting & Linda Tesar

NBER Working Paper, February 2017

Abstract:
We examine austerity in advanced economies since the Great Recession. Austerity shocks are reductions in government purchases that exceed reduced-form forecasts. Austerity shocks are statistically associated with lower real GDP, lower inflation and higher net exports. We estimate a cross-sectional multiplier of roughly 2. A multi-country DSGE model calibrated to 29 advanced economies generates a multiplier consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity shocks were sufficiently contractionary that debt-to-GDP ratios in some European countries increased as a consequence of endogenous reductions in GDP and tax revenue.

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Profit shifting of U.S. multinationals

Tim Dowd, Paul Landefeld & Anne Moore

Journal of Public Economics, forthcoming

Abstract:
We analyze the profit shifting behavior of U.S. multinational firms using a unique panel data set of U.S. tax returns over the period 2002-2012. Prior research has found significant effects of tax rates in affiliate and parent countries on the profit shifting behavior of multinational entities, with semi-elasticities ranging from close to zero to well above one. We build on this prior work by allowing more heterogeneity in response across the distribution of tax rates and by including affiliates located in tax havens around the world. Our findings suggest that elasticities based on a log-linear specification may severely understate the sensitivity of profits to tax in low-tax jurisdictions while simultaneously overstating this elasticity in high-tax jurisdictions. Accounting for this type of nonlinearity appears crucial in considering how the global allocation of firm profits might change in response to tax rate changes.

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The Role of Budgetary Information in the Preference for Externality-Correcting Subsidies over Taxes: A Lab Experiment on Public Support

David Heres, Steffen Kallbekken & Ibon Galarraga

Environmental and Resource Economics, January 2017, Pages 1-15

Abstract:
The potential of taxes to correct environmental externalities has long been recognized among economists. Yet, this welfare-enhancing policy commonly faces strong opposition by citizens. Conversely, externality-correcting subsidies frequently enjoy high public support. We conduct a lab experiment to explore public support for Pigouvian taxes and subsidies. In an experimental market with a negative externality, participants vote on the introduction of Pigouvian taxes and subsidies under full or reduced information concerning how the tax revenues will be spent and the subsidy paid for. Theoretically the two instruments should produce identical outcomes. However, we find substantially greater support for subsidies than for taxes. This can partially be explained by the participants' expectation that the subsidy will increase their own payoffs more than a tax, but not because it is expected to be more effective in changing behavior. Furthermore, we find that with greater uncertainty, the preference for subsidies is even stronger, a result which is consistent with loss aversion.

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Impact of income tax on happiness: Evidence from the United States

Taurean Hutchinson & Ishraq Ahmed

Applied Economics Letters, forthcoming

Abstract:
The present work considers the level of demonstrated happiness and unhappiness within groups, the latter measured by the conditional probability of suicide within groups facing an income tax rate and those without. Using US data for the year 2004, our results show that individuals have lower rates of suicide or are 'happy' when they do not pay income taxes than those who pay.

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The Effective Income Tax Experience of U.S. and Non-U.S. Multinationals

Eric Allen & Susan Morse

University of Southern California Working Paper, December 2016

Abstract:
In this paper we examine how the incorporation of a parent firm outside the United States affects the effective income tax rates of global firms with material business operations in the U.S. We find that for profit firm years, firms with a non-U.S. parent corporation have lower effective tax rates than firms with a U.S. parent. However, in loss firm years we find that these non-U.S. firms report smaller negative tax expense. We find no statistically significant difference in outcomes if the non-U.S. firm engaged in an inversion transaction. We provide evidence that earnings stripping opportunities available to non-U.S. firms and the worldwide tax law applicable to U.S. firms contribute to the better tax results of non-U.S. firms in profit years. For loss firm years, we find evidence that the U.S. worldwide tax law and differences in valuation allowance practice support better tax outcomes for U.S. firms.

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Subsidies and Stadia' Opulence

Geoffrey Propheter

Journal of Sports Economics, January 2017, Pages 3-18

Abstract:
Quirk and Fort's gold plating hypothesis stipulates that subsidies are partly capitalized into stadia' opulence. If the gold plating hypothesis is true, it would indicate that subsidies contribute to their own existence, as owners and major league executives argue subsidies are necessary to meet leagues' increasing facility design standards. This study tests the gold plating hypothesis using a pooled cross section of stadia from the five major leagues. The findings confirm that subsidies increase stadia' opulence. As evaluated at leagues' mean stadia acreage, the marginal opulence of an additional US$1 million construction subsidy ranges from US$188,490 to US$501,420 depending on the league.

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A note on economic freedom and political ideology

Ji Gu et al.

Applied Economics Letters, forthcoming

Abstract:
Within the field of public economics, there is the perception that Republicans are associated with 'small government' and Democrats with 'big government'. We test this notion by examining whether economic freedom is affected when a single party is in control of the state legislature. We find no link between party control and our main economic freedom indicator, but we do find a positive link between Republican control and the taxation component of economic freedom, suggesting a Republican legislature leads to lower taxation.

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Does The Samaritan's Dilemma Matter? Evidence From U.S. Agriculture

Tatyana Deryugina & Barrett Kirwan

NBER Working Paper, November 2016

Abstract:
The Samaritan's dilemma posits a downside to charity: recipients may rely on free aid instead of their own efforts. Anecdotally, the expectation of free assistance is thought to be important for decisions about insurance and risky behavior in numerous settings, but reliable empirical evidence is scarce. We estimate whether the Samaritan's dilemma exists in U.S. agriculture, where both private crop insurance and frequent federal disaster assistance are present. We find that bailout expectations are qualitatively and quantitatively important for the insurance decision. Furthermore, aid expectations reduce both the amount of farm inputs and subsequent crop revenue.

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The long-run effects of privatization on productivity: Evidence from Canada

Anthony Boardman, Aidan Vining & David Weimer

Journal of Policy Modeling, November-December 2016, Pages 1001-1017

Abstract:
From a public policy perspective, the social value of privatization depends on the aggregate efficiency benefits over the long term. However, most privatization studies that examine the efficiency impacts of privatization employ relatively short time frames: usually 3-years before and 3-years after the privatization. In contrast, this study examines the long run effects (up to 24 years) of privatization on productivity based on an examination of major, mostly federal, share-issue privatizations in Canada. We control for factors that might affect productivity apart from privatization by including panels of Always-SOE firms and Always-Private firms, and estimating difference-in-difference models. The major finding is that the productivity of Privatized SOEs increases relative to SOEs at a decreasing rate, peaking at 14-16 years. Despite this improvement, the productivity of privatized firms continues to lag that of Always-Private firms. We consider some of the policy implications of these findings.

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Raising the Social Security Entitlement Age: Implications for the Productive Activities of Older Adults

Julie Zissimopoulos et al.

Research on Aging, January 2017, Pages 166-189

Abstract:
An aging America presents challenges but also brings social and economic capital. We quantify public revenues from, and public expenditures on, Americans aged 65 and older, the value of their unpaid, productive activities and financial gifts to family. Using microsimulation, we project the value of these activities, and government revenues and expenditures, under different scenarios of change to the Old Age and Survivors Insurance eligibility age through 2050. We find the value of unpaid productive activities and financial gifts are US$721 billion in 2010, while net (of tax revenues) spending on the 65 years and older is US$984 billion. Five-year delay in the full retirement age decreases federal spending by 10%, while 2-year delay in the early entitlement age increases it by 1.5%. The effect of 5-year delay on unpaid activities and transfers is small: US$4 billion decrease in services and US$4.5 billion increase in bequests and monetary gifts.

By KEVIN LEWIS | 09:00:00 AM

Wednesday, February 15, 2017

To employ or not to employ

Minimum Wages and Relational Contracts

Matthias Fahn

Journal of Law, Economics, and Organization, forthcoming

Abstract:
The need to give incentives is usually absent in the literature on minimum wages. However, especially in the service sector it is important how well a job is done, and employees must be incentivized to perform accordingly. Furthermore, many aspects regarding service quality cannot be verified and relational contracts have to be used to provide incentives. The present article shows that in this case, a minimum wage increases implemented effort, as well as the efficiency of an employment relationship. Hence, it can be explained why productivity and service quality went up after the introduction of the British National Minimum Wage, and that this might actually have caused a more efficient labor market. Furthermore, if workers have low bargaining power, a higher minimum wage also increases profits and consequently employment. Therefore, the present article presents a new perspective on reasons for why minimum wages often have no or only negligible negative employment effects.

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Declining Labor and Capital Shares

Simcha Barkai

University of Chicago Working Paper, November 2016

Abstract:
This paper shows that the decline in the labor share over the last 30 years was not offset by an increase in the capital share. I calculate payments to capital as the product of the required rate of return on capital and the value of the capital stock. I document a large decline in the capital share and a large increase in the profit share in the U.S. non-financial corporate sector over the last 30 years. I show that the decline in the capital share is robust to many calculations of the required rate of return and is unlikely to be driven by unobserved capital. I interpret these results through the lens of a standard general equilibrium model, and I show that only an increase in markups can generate a simultaneous decline in the shares of both labor and capital. I provide reduced form empirical evidence that an increase in markups plays a significant role in the decline in the labor share. These results suggest that the decline in the shares of labor and capital are due to an increase in markups and call into question the conclusion that the decline in the labor share is an efficient outcome.

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Concentrating on the Fall of the Labor Share

David Autor et al.

NBER Working Paper, January 2017

Abstract:
The recent fall of labor's share of GDP in numerous countries is well-documented, but its causes are poorly understood. We sketch a "superstar firm" model where industries are increasingly characterized by "winner take most" competition, leading a small number of highly profitable (and low labor share) firms to command growing market share. Building on Autor et al. (2017), we evaluate and confirm two core claims of the superstar firm hypothesis: the concentration of sales among firms within industries has risen across much of the private sector; and industries with larger increases in concentration exhibit a larger decline in labor's share.

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Estimating the Employment Effects of Recent Minimum Wage Changes: Early Evidence, an Interpretative Framework, and a Pre-Commitment to Future Analysis

Jeffrey Clemens & Michael Strain

NBER Working Paper, January 2017

Abstract:
This paper presents early evidence on the employment effects of state minimum wage increases enacted between January 2013 and January 2015, and offers an interpretative framework to understand why it is of interest to study recent changes in isolation. Given the ongoing transitions of many states' minimum wage rates, we also set the stage for a pre-committed analysis of the minimum wage changes scheduled for coming years. Through 2015, we estimate that employment among young adults and young individuals with less than a completed high school education expanded modestly less quickly in states that enacted one-time or multi-phase statutory minimum wage increases than in states that enacted no minimum wage increases. Across the specifications we implement and the samples we analyze, many of our estimates are statistically indistinguishable from zero. Data on the longer-run effects of this period's minimum wage changes will be essential for more fully assessing these changes' effects and for drawing strong conclusions regarding how minimum wage increases affect employment in this decade's institutional and economic environment. As data become available for the full 2016 through 2019 calendar years, we will execute and report the results of analyses that follow the road map this paper develops.

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Does Manufacturing Matter for Economic Growth in the Era of Globalization?

Roshan Pandian

Social Forces, March 2017, Pages 909-940

Abstract:
This study adjudicates between two competing perspectives regarding the importance of manufacturing employment for economic growth with the onset of the most recent round of economic globalization. Established economic theories link shifts toward industrial activities to higher growth due to increases in aggregate productivity. While some scholars argue that the global restructuring of manufacturing in the era of globalization presents novel opportunities for development in the South, others suggest that the importance of manufacturing employment for economic growth in less developed countries declines during this period as competitive pressures increase and barriers to entry decline. I use difference models and a broad sample of both developed and less developed countries in the time period 1970-2010 to examine the effects of manufacturing share of employment on economic growth and how these effects have changed over time. First, I find that manufacturing employment has strong positive effects on economic growth net of neoclassical controls for all countries. Second, I find that for less developed countries, the importance of manufacturing share of employment for growth has declined through the course of the time period studied, particularly after 1990. In contrast, my results do not show a similar decline for developed countries. These findings are robust across alternative estimation strategies. I conclude by considering the theoretical implications of these results.

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Recent Flattening in the Higher Education Wage Premium: Polarization, Skill Downgrading, or Both?

Robert Valletta

NBER Working Paper, December 2016

Abstract:
Wage gaps between workers with a college or graduate degree and those with only a high school degree rose rapidly in the United States during the 1980s. Since then, the rate of growth in these wage gaps has progressively slowed, and though the gaps remain large, they were essentially unchanged between 2010 and 2015. I assess this flattening over time in higher education wage premiums with reference to two related explanations for changing U.S. employment patterns: (i) a shift away from middle-skilled occupations driven largely by technological change ("polarization"); and (ii) a general weakening in the demand for advanced cognitive skills ("skill downgrading"). Analyses of wage and employment data from the U.S. Current Population Survey suggest that both factors have contributed to the flattening of higher education wage premiums.

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Price Floors and Employer Preferences: Evidence from a Minimum Wage Experiment

John Horton

NYU Working Paper, January 2017

Abstract:
Firms posting job openings in an online labor market were randomly assigned minimum hourly wages. When facing a minimum wage, fewer firms made a hire, but those workers they did hire were paid a higher wage. However, the reduction in hiring was not large, even at the highest minimum wage imposed. In contrast, minimum wages substantially reduced hours-worked, across cells. Firms facing a higher minimum wage also hired more productive workers, which can explain, in part, the reduction in hours-worked: with more productive workers, projects were simply completed in less time. This labor-labor substitution margin of adjustment would presumably be less effective in equilibrium, if all firms sought out more productive workers. However, using the platform's imposition of a market-wide minimum wage after the experiment, I find that many of the experimental results also hold in equilibrium, including the labor-labor substitution towards more productive workers.

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Understanding the Long-Run Decline in Interstate Migration

Greg Kaplan & Sam Schulhofer-Wohl

International Economic Review, February 2017, Pages 57-94

Abstract:
We analyze the secular decline in gross interstate migration in the United States from 1991 to 2011. We argue that migration fell because of a decline in the geographic specificity of returns to occupations, together with an increase in workers' ability to learn about other locations before moving. Micro data on earnings and occupations across space provide evidence for lower geographic specificity. Other explanations do not fit the data. A calibrated model formalizes the geographic specificity and information mechanisms and is consistent with cross-sectional and time-series evidence. Our mechanisms can explain at least half of the decline in migration.

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Secular Stagnation? The Effect of Aging on Economic Growth in the Age of Automation

Daron Acemoglu & Pascual Restrepo

NBER Working Paper, January 2017

Abstract:
Several recent theories emphasize the negative effects of an aging population on economic growth, either because of the lower labor force participation and productivity of older workers or because aging will create an excess of savings over desired investment, leading to secular stagnation. We show that there is no such negative relationship in the data. If anything, countries experiencing more rapid aging have grown more in recent decades. We suggest that this counterintuitive finding might reflect the more rapid adoption of automation technologies in countries undergoing more pronounced demographic changes, and provide evidence and theoretical underpinnings for this argument.

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Labor Reallocation, Employment, and Earnings: Vector Autoregression Evidence

Henry Hyatt & Tucker McElroy

U.S. Census Bureau Working Paper, January 2017

Abstract:
An increasing number of data sources have measured the components of reallocation of jobs across employers and workers across jobs. Whether and how job reallocation across employers and excess worker "churn" affect other measures of the health of the U.S. economy remains an open question. In this paper, we present time series evidence for the U.S. 1993-2013 and consider the relationship between labor reallocation, employment, and earnings using a vector autoregression (VAR) framework. We find that labor market churn Granger-causes higher employment and lower unemployment, while job destruction does the opposite. We also find more limited evidence that churn and job destruction predict increased earnings, although this is not found for all earnings measures.

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Unemployment Insurance Generosity and Aggregate Employment

Arindrajit Dube et al.

University of Massachusetts Working Paper, December 2016

Abstract:
This paper examines the impact of unemployment insurance (UI) on aggregate employment by exploiting cross-state variation in the maximum benefit duration during the Great Recession. Comparing adjacent counties located in neighboring states, we find no statistically significant impact of increasing UI generosity on aggregate employment. Our point estimates are uniformly small in magnitude, and the most precise estimates rule out employment-to-population ratio reductions in excess of 0.5 percentage points from the UI extension. We show that a moderately sized fiscal multiplier can rationalize our findings with the small negative labor supply impact of UI typically found in the literature.

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Reference Dependent Preferences and Labor Supply in Historical Perspective

Daniel MacDonald & Philip Mellizo

Journal of Behavioral and Experimental Economics, forthcoming

Abstract:
To evaluate voluntary labor supply decisions under transitory monthly piece-rate schedules, we draw from a novel dataset on workers who originated from self-sufficient farms in New Hampshire, Vermont, and Massachusetts, and were recruited into textile mills in eastern Massachusetts in the early 19th century. Where life-cycle models of labor supply predict a positive relationship between labor supply and transitory changes in wages, we instead find negative wage-labor supply elasticities consistent with reference-dependent income targeting. Our findings contribute to the contemporary debate over the empirical validity of competing labor supply models. They also bring into question common modeling conventions in economic history that are used in the construction of historical narratives.

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Social influence in career choice: Evidence from a randomized field experiment on entrepreneurial mentorship

Charles Eesley & Yanbo Wang

Research Policy, forthcoming

Abstract:
How do different sources of social influence impact the likelihood of entrepreneurship? We examine this question in the setting of an entrepreneurship class in which students were randomly assigned to receive mentorship from either an entrepreneur or a non-entrepreneur. Using a longitudinal field experiment with a pre-test/post-test design, we find that randomization to an entrepreneur mentor increases the likelihood of entrepreneurial careers, particularly for students whose parents were not entrepreneurs. Additional analysis shows the mentor influences the decision to join an early-stage venture, but not to become a founder. Performance data suggests that entrepreneurial influence is not encouraging "worse" entrepreneurship and may have helped students in joining or founding better-performing ventures. We contribute to the literature on social influence in entrepreneurship by examining the interaction between multiple sources of social influence and by using a randomized field experiment to overcome the endogenous process of tie formation.

By KEVIN LEWIS | 09:00:00 AM

Tuesday, February 14, 2017

Gold men

Risk Targeting and Policy Illusions — Evidence from the Announcement of the Volcker Rule

Jussi Keppo & Josef Korte

Management Science, forthcoming

Abstract:
We analyze the Volcker Rule’s announcement effects on U.S. bank holding companies. In line with the rule and the banks’ public compliance announcements, we find that those banks that are affected by the Volcker Rule already reduced their trading books relative to their total assets 2.34% more than other banks. However, the announcement of the rule did not reduce the banks’ overall risk taking. To keep their risk targets, the affected banks raised the riskiness of their asset returns. We also find some evidence that the affected banks raised their trading risk and decreased the hedging of their banking business.

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Cross-Sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications

Christopher Foote, Lara Loewenstein & Paul Willen

NBER Working Paper, December 2016

Abstract:
The reallocation of mortgage debt to low-income or marginally qualified borrowers plays a central role in many explanations of the early 2000s housing boom. We show that such a reallocation never occurred, as the distribution of mortgage debt with respect to income changed little even as the aggregate stock of debt grew rapidly. Moreover, because mortgage debt varies positively with income in the cross section, equal percentage increases in debt among high- and low-income borrowers meant that wealthy borrowers accounted for most new debt in dollar terms. Previous research stressing the importance of low-income borrowing was based on the inflow of new mortgage originations alone, so it could not detect offsetting outflows in mortgage terminations that left the allocation of debt stable over time. And while defaults on subprime mortgages played an important part in the financial crisis, the data show that subprime lending did not cause a reallocation of debt toward the poor. Rather, subprime lending prevented a reallocation of debt toward the wealthy.

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Finance and Growth at the Firm Level: Evidence from SBA Loans

David Brown & John Earle

Journal of Finance, forthcoming

Abstract:
We analyze linked databases on all SBA loans and lenders and on all U.S. employers to estimate the effects of financial access on employment growth. Estimation exploits the long panels and variation in local availability of SBA-intensive lenders. The results imply an increase of 3 to 3.5 jobs for each million dollars of loans, suggesting real effects of credit constraints. Estimated impacts are stronger for younger and larger firms and when local credit conditions are weak, but we find no clear evidence of cyclical variation. We estimate taxpayer costs per job created in the range of $21,000 to $25,000.

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The effect of TARP on the propagation of real estate shocks: Evidence from geographically diversified banks

Karen Jang

Journal of Banking & Finance, forthcoming

Abstract:
This study examines the effect of TARP on the propagation of real estate shocks via geographically diversified banks in the U.S. I find that TARP money provided for banks exposed to distressed areas (i.e., “affected” banks) was positively associated with small business loan originations in “non-distressed” areas (i.e., counties with smaller real estate shocks), mitigating the shock transmission. In addition, the bailout funds facilitated “affected” banks’ faster return to their pre-crisis level of franchise value. Overall, the marginal benefit of TARP funds seems to have been greater for “affected” TARP banks. I conclude that this policy helped “affected” banks cleanse/strengthen their balance sheets and recapitalize, which paved the way for increased lending.

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Contagion effects in strategic mortgage defaults

Ryan Goodstein et al.

Journal of Financial Intermediation, forthcoming

Abstract:
Using a large sample of U.S. mortgages observed over the 2005–2009 period, we document contagion effects in strategic mortgage defaults. Strategic defaults result from borrowers choosing to exercise their in the money default option and our findings suggest this choice is influenced by the delinquency rate in surrounding zip codes (within a 5 mile radius), after controlling for other known determinants of mortgage default. These controls include a large array of borrower and loan characteristics, local demographic and economic conditions, spatial correlations, and changes in property values. Our findings that the local area delinquency rate is an important factor for strategic defaulters (borrowers that can be influenced in their decision) but not for defaults that are the result of inability to pay (borrowers that had no choice) lend support the contagion hypothesis. Our estimates suggest that a 1% increase in the local area delinquency rate may increase the probability of a strategic default by 7.25–16.5%.

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Arrested Development: Theory and Evidence of Supply-Side Speculation in the Housing Market

Charles Nathanson & Eric Zwick

NBER Working Paper, January 2017

Abstract:
This paper studies the role of disagreement in amplifying housing cycles. Speculation is easier in the land market than in the housing market due to frictions that make renting less efficient than owner-occupancy. As a result, undeveloped land both facilitates construction and intensifies the speculation that causes booms and busts in house prices. This observation reverses the standard intuition that cities where construction is easier experience smaller house price booms. It also explains why the largest house price booms in the United States between 2000 and 2006 occurred in areas with elastic housing supply.

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Does bank supervision impact bank loan growth?

Paul Kupiec, Yan Lee & Claire Rosenfeld

Journal of Financial Stability, February 2017, Pages 29–48

Abstract:
We estimate the impact of a poor bank examination rating on the growth rates of individual bank loan portfolios. We use a novel approach to control for loan demand variation and estimate a fixed-effect model using an unbalanced panel with over 381,000 bank-quarter observations from the period 1994–2011. Our estimates show that a poor examination rating has a large negative impact on bank loan growth, even after controlling for the impact of monetary policy, bank capital and liquidity conditions, and any voluntary reduction in lending triggered by weak legacy loan portfolio performance or other bank losses. This previously unidentified effect is consistent with the hypothesis that the bank supervision process successfully constrains the lending activities of banks operating in an unsafe and unsound manner.

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Measuring Foreclosure Impact Mitigation: Evidence from the Neighborhood Stabilization Program in Chicago

Xian Bak & Geoffrey Hewings

Regional Science and Urban Economics, March 2017, Pages 38–56

Abstract:
The Neighborhood Stabilization Program (NSP) is a $7 billion nationwide government program that was established to reduce the negative impacts of the housing crisis in foreclosure-concentrated neighborhoods. NSP rehabilitations aim to bring foreclosed and abandoned properties back to productive use. Very few quantitative studies have evaluated NSP and provided policy suggestions for future stabilization. Furthermore, there is some ambiguity about the channels through which foreclosures influence neighboring properties. This study fills the gap in the literature by evaluating the effects of NSP acquisition and rehabilitation in terms of the impact on elevating neighboring property values. In addition, it provides evidence that disamenity effects are a source of the negative impacts of foreclosures on their neighbors. Using a 2008–2014 repeated cross-section dataset for housing sales in the city of Chicago, the difference-in-differences estimates reveal that the average sales prices of homes within 0.1 miles of the NSP projects increased by 14.3% and these effects do not appear until the completion of the rehabilitation. Furthermore, large program effects are found for normal homes but not for foreclosure-related homes. The results vary under different contexts of NSP implementation, but the analytical approach presented in this study is reproducible for NSP studies in other regions.

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Public Investment and Housing Price Appreciation: Evidence from the Neighborhood Stabilization Program

Victor Westrupp

Stanford Working Paper, January 2017

Abstract:
This study assesses impact of the Neighborhood Stabilization Program (NSP), a federal program designed to convert foreclosed properties into renovated affordable housing through public investment. To identify the impact, I exploit a discontinuity in how neighborhoods were selected with respect to a critical threshold. The program caused non-foreclosure housing prices in targeted neighborhoods to appreciate 6.5% between 2009 and 2011. These pricing gains remained stable through the end of my sample in 2014. Furthermore, the program caused changes in neither the supply of foreclosures nor neighborhood income. This suggests quality improvement externalities were behind the price appreciation. Lastly, low market liquidity and asymmetric information in targeted neighborhoods may justify the NSP public initiative, despite foreclosure resale profitability after 2009.

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Runs versus Lemons: Information Disclosure and Fiscal Capacity

Miguel Faria-e-Castro, Joseba Martinez & Thomas Philippon

Review of Economic Studies, forthcoming

Abstract:
We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model, governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the cost of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained.

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Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default

Brian Melzer

Journal of Finance, forthcoming

Abstract:
Homeowners at risk of default face a debt overhang that reduces their incentive to invest in their property: in expectation, some value created by investments in the property will go to the lender. This agency conflict affects housing investments. Homeowners at risk of default cut back substantially on home improvements and mortgage principal payments, even when they appear financially unconstrained. Meanwhile, they do not reduce spending on assets that they may retain in default, including home appliances, furniture, and vehicles. These findings highlight an important financial friction that has stifled housing investment since the Great Recession.

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Incentives for Loan Repayments: Evidence from a Randomized Field Study

Michael Collins, Leah Gjertson & Justin Sydnor

Journal of Consumer Affairs, forthcoming

Abstract:
This field experiment tests an innovative approach for helping automobile loan borrowers make their loan payments on time. Borrowers were randomly assigned to a loan with an interest rate reduction after three on-time payments; borrowers assigned to this loan show fewer late payments compared to a control group. While the financial incentive of the interest rate reduction was small, the offer of a rate reduction appears to result in borrowers attending to due dates. This result illustrates that lenders can use simple mechanisms to encourage more positive repayment patterns among borrowers with a history of late payments.

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Is something better than nothing? The impact of foreclosed and lease-purchase properties on residential property values

Youngme Seo & Michael Craw

Urban Studies, forthcoming

Abstract:
Lease-purchase (L-P) programmes that rehabilitate foreclosed property for sale as affordable housing may provide a way to reduce foreclosure externalities on nearby property values. This paper investigates the feasibility of such a strategy by estimating the effects of foreclosed properties on nearby residential property values compared with those of an L-P programme operated by the Cleveland Housing Network, Cleveland, Ohio. The findings indicate that although both L-P and foreclosed properties have a negative effect on the value of nearby non-distressed homes, the negative effect of foreclosure is larger. At the same time, the scope of the foreclosure externality is greater in low- and moderate-income neighbourhoods, while the foreclosure externality is generally smaller in high income neighbourhoods. Such results imply that an L-P strategy is likely to be more effective in offsetting foreclosure externalities in low- and moderate-income neighbourhoods than in high income neighbourhoods.

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Borrower Selection into Credit Markets: Evidence from Peer-to-Peer Lending

Inessa Liskovich & Maya Shaton

Federal Reserve Working Paper, December 2016

Abstract:
We exploit a quasi-natural experiment in the peer-to-peer lending market to show that the mechanism determining interest rates, irrespective of their levels, influences households' decisions to participate in credit markets. A large online platform unexpectedly switched from auction pricing of loans to centralized price assignment by credit grade. After the change all borrowers in a given credit grade were assigned the same interest rate, potentially exacerbating asymmetric information between borrowers and lenders. Surprisingly, we find that the creditworthiness of borrowers listing on the platform improves. This effect is mainly driven by lower quality borrowers leaving the platform, and is most pronounced for households looking to consolidate existing debt. As a result, less credit is allocated to lower credit quality borrowers. Our findings suggest that the manner in which interest rates are set is an important determinant of households' financing decisions and of selection into credit markets.

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Assessing bankruptcy reform in a model with temptation and equilibrium default

Makoto Nakajima

Journal of Public Economics, January 2017, Pages 42–64

Abstract:
A life-cycle model with equilibrium default in which agents with and without temptation coexist is constructed to evaluate the 2005 bankruptcy law reform. The calibrated model indicates that the 2005 reform reduces bankruptcies, as seen in the data, and improves welfare, as lower default premia allows better consumption smoothing. A counterfactual reform of changing income garnishment rate is also investigated. Interesting contrasting welfare effects between two types of agents emerge. Agents with temptation prefer a lower garnishment rate as tighter borrowing constraint prevents them from over-borrowing, while those without prefer better consumption smoothing enabled by a higher garnishment rate.

By KEVIN LEWIS | 09:00:00 AM

Monday, February 13, 2017

Invisible hands

The Neural Inhibition of Learning Increases Asset Market Bubbles: Experimental Evidence

Levan Efremidze et al.

Journal of Behavioral Finance, Winter 2017, Pages 114-124

Abstract:
The authors tested a leading theory of bubble formation, insufficient learning, in a laboratory asset market using a drug, Naltrexone, which inhibits reinforcement learning. We found that asset price bubbles in Naltrexone sessions were larger compared with placebo sessions, averaging 60% higher in amplitude and 77% larger in the deviation from fundamental value in the final 12-period trading round. There was no difference between conditions in understanding of the trading rules, overconfidence, or confusion. Participants on Naltrexone appeared unable to determine appropriate trading strategies as prices changed. The findings indicate that specific neural mechanism of reinforcement learning is involved in the formation of asset market bubbles.

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In-Group Bias in Financial Markets

Sima Jannati et al.

University of Miami Working Paper, December 2016

Abstract:
This paper investigates in-group bias in financial markets. Specifically, we argue that equity analysts may have less favorable opinions about firms that are not headed by CEOs of their own "group". We define groups based on gender, ethnicity and political attitudes. Examining analysts' earnings forecasts, we find that male analysts have lower assessments of firms headed by female CEOs than of firms headed by male CEOs. Results are very similar if in-groups are defined based on ethnicity or political attitudes: Earnings forecasts of domestic analysts are lower for firms headed by foreign CEOs and earnings forecasts of Republican analysts are lower for firms headed by Democrat CEOs. As a result, earnings surprises of firms headed by female, foreign, or Democrat CEOs are systematically upward biased. Overall, our results provide robust evidence for in-group bias in financial markets.

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CEO Ethnoracial Characteristics and Analyst Forecasts

Musaib Ashraf

University of Arizona Working Paper, December 2016

Abstract:
I analyze the effect of ethnoracial differences between CEOs and analysts on analyst forecasts. I find analyst forecasts are significantly lower and analyst forecast errors are significantly larger when the race of analysts and CEOs differ, while controlling for relevant factors that may affect analyst forecasts (such as return on assets and actual earnings-per-share) and incorporating firm fixed effects. I focus on firms with minority CEOs but find the effect in other settings as well. I also find this effect is offset with selective information sharing with analysts prior to 2000 when Regulation Fair Disclosure was passed. Overall, these results indicate a systematic downwards bias in analyst forecasts for firms with minority CEOs, raising questions about public policy and market efficiency.

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Hispanic Culture, Local Return Chasing, and Momentum Returns

Jawad Addoum, Alok Kumar & Stuart Webb

University of Miami Working Paper, December 2016

Abstract:
We examine the effect of Hispanic culture on portfolio choice decisions and asset returns in the United States. We demonstrate that investors residing in predominantly Hispanic ZIP codes are significantly more likely to chase returns and overweight small, local stocks than the average U.S. investor. Importantly, we find that these results cannot be attributed to unobserved heterogeneity correlated with Hispanic population concentration. We also find evidence that Hispanic investors' preferences affect prices and returns in local asset markets. In particular, momentum in stock returns is more pronounced (nonexistent) among firms headquartered in MSAs with a high (low) proportion of Hispanics. Further, high-Hispanic MSAs experience larger housing booms and subsequent busts than low-Hispanic localities.

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Investment Professionals' Ability to Detect Deception: Accuracy, Bias and Metacognitive Realism

Maria Hartwig et al.

Journal of Behavioral Finance, Winter 2017, Pages 1-13

Abstract:
In the first empirical study on the topic, the authors examined the ability of investment professionals to distinguish between truthful and deceptive statements. A random sample of 154 investment professionals made judgments about a series of truthful and deceptive statements, some of which involved financial fraud. Investment professionals' lie detection accuracy was poor; participants performed no better than would be expected by chance. Accuracy in identifying lies about financial fraud was especially poor. Further, participants displayed poor metacognitive realism when assessing their own performance. The theoretical and practical implications for lie detection in the financial industry are discussed.

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Investor Sentiment and Economic Forces

Junyan Shen, Jianfeng Yu & Shen Zhao

Journal of Monetary Economics, April 2017, Pages 1-21

Abstract:
Economic theory suggests that pervasive factors should be priced in the cross-section of stock returns. However, our evidence shows that portfolios with higher risk exposure do not earn higher returns. More important, our evidence shows a striking two-regime pattern for all 10 macro-related factors: high-risk portfolios earn significantly higher returns than low-risk portfolios following low-sentiment periods, whereas the exact opposite occurs following high-sentiment periods. These findings are consistent with a setting in which market-wide sentiment is combined with short-sale impediments and sentiment-driven investors undermine the traditional risk-return tradeoff, especially during high-sentiment periods.

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Do Stocks Outperform Treasury Bills?

Hendrik Bessembinder

Arizona State University Working Paper, January 2017

Abstract:
Most common stocks do not outperform Treasury Bills. Fifty eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness in long-horizon returns reflects both that monthly returns are positively skewed and the fact that compounding returns over multiple periods itself induces positive skewness. The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform.

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Do Weather-Induced Moods Affect the Processing of Earnings News?

Ed Dehaan, Joshua Madsen & Joseph Piotroski

Journal of Accounting Research, forthcoming

Abstract:
We investigate whether unpleasant environmental conditions affect stock market participants' responses to information events. We draw from psychology research to develop a new prediction that weather-induced negative moods reduce market participants' activity levels. Exploiting geographic variation in equity analysts' locations, we find compelling evidence that analysts experiencing unpleasant weather are slower or less likely to respond to an earnings announcement relative to analysts responding to the same announcement but experiencing pleasant weather. Price association tests find evidence consistent with reduced activity due to weather-induced moods delaying equilibrium price adjustments following earnings announcements. We also use our analyst-based research design to re-examine an existing prediction that unpleasant weather induces investor pessimism, and find evidence of both analyst pessimism and reduced activity in the presence of unpleasant weather. Together, our study provides new evidence that both extends and reaffirms findings of a relation between unpleasant weather and market activities, and contributes to the broader psychology and economics literature on the impact of weather-induced mood on labor productivity.

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From Returns to Tweets and Back: An Investigation of the Stocks in the Dow Jones Industrial Average

Pieter de Jong, Sherif Elfayoumy & Oliver Schnusenberg

Journal of Behavioral Finance, Winter 2017, Pages 54-64

Abstract:
A sizeable percentage of investors are using social media to obtain information about companies (Cogent Research [2008]). As a consequence, social media content about firms may have an impact on stock prices (Hachman [2011]). Various studies utilize social media content to forecast stock market-related factors such as returns, volatility, or trading volume. The objective of this article is to investigate whether a bidirectional intraday relationship between stock returns and volatility and tweets exists. The study analyzed 150,180 minute-by-minute stock price and tweet data for the 30 stocks in the Dow Jones Industrial Average over a random 13-day interval from June 2 to June 18, 2014 using a BEKK-MVGARCH methodology. Findings indicate that 87% of stock returns are influenced by lagged innovations of the tweets data, but there is little evidence to support that the direction is reciprocal, with only 7% of tweets being influenced by lagged innovations of the stock returns. Results further show that the lagged innovations from 40 percent of stock returns affect the current conditional volatility of the tweets, while 73 percent of tweets affect the current conditional volatility of stock returns. Moreover, there is strong evidence to suggest that the volatility originating from the returns to the tweets persists for 33 percent of stocks; the volatility originating from the tweets to the returns persists for 73 percent of stocks. Last, 53 percent of stocks exhibit both immediate and persistent impacts from returns to tweets, while 90 percent of stocks exhibit both immediate and persistent impacts from tweets to returns. These results may help traders achieve superior returns by buying and selling individual stocks or options. Also, asset and mutual fund managers may benefit by developing a social media strategy.

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Dangerous infectious diseases: Bad news for Main Street, good news for Wall Street?

Michael Donadelli, Renatas Kizys & Max Riedel

Journal of Financial Markets, forthcoming

Abstract:
We examine whether investor mood, driven by World Health Organization (WHO) alerts and media news on dangerous infectious diseases, is priced in pharmaceutical companies' stocks in the United States. We argue that disease-related news (DRNs) should not trigger rational trading. We find that DRNs have a positive and significant sentiment effect among investors (on Wall Street). The effect is stronger (weaker) for small (large) companies, who are less (more) likely to engage in the development of new vaccines. A potential negative investor climate (on Main Street) - induced by disease-related fear - does not alter the positive sentiment effect.

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Sentiment and Stock Returns: Anticipating a Major Sporting Event

Brian Payne, Jiri Tresl & Geoffrey Friesen

Journal of Sports Economics, forthcoming

Abstract:
This study documents the effect of the Super Bowl on the stock returns of firms that are geographically associated with the competing teams. We find significant upward return drift in the 9 trading days leading up to the Super Bowl, a pattern consistent with investors trading in anticipation of the game itself. The "anticipatory behavior" among investors leads to widespread pregame returns, which is not documented in prior studies. These pre-event abnormal returns are positive and statistically and economically significant for all firms, and the size of pre-event returns varies according to each team's favored status. In addition, firms associated with the winning team exhibit significant positive return drift over the 10-day period after their win. Firms associated with the losing team exhibit moderate downward drift. Our findings are strongest among the smallest quintile of firms and are robust to various risk adjustments and using a matched sample control group. The collective findings suggest that only by standing on the sideline will investors avoid winning around the Super Bowl.

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It pays to write well

Byoung-Hyoun Hwang & Hugh Hoikwang Kim

Journal of Financial Economics, forthcoming

Abstract:
We quantify the effects of easy-to-read disclosure documents on firm value by analyzing shareholder reports of closed-end investment companies in which the company's value can be estimated separately from the value of the company's underlying assets. Using a copy-editing software application that counts the pervasiveness of the most important 'writing faults' that make a document harder to read, our analysis provides evidence that issuing financial disclosure documents with low readability causes firms to trade at significant discounts relative to the value of their fundamentals. Our estimates suggest that a one-standard-deviation decrease in readability decreases firm value by a full 2.5%. In situations in which investors are more likely to rely on annual reports, the readability effect on firm value increases to 3.3%.

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The Persistent Effect of Initial Success: Evidence from Venture Capital

Ramana Nanda, Sampsa Samila & Olav Sorenson

Harvard Working Paper, January 2017

Abstract:
We used data on individual investments in the portfolios of venture capital firms to study persistence in their performance. Each additional IPO among a VC's first five investments predicted a 13% higher IPO rate for its subsequent 50 investments. Roughly half of this performance persistence stemmed from investment "styles" ― investing in particular regions and industries. We found no evidence of performance persistence stemming from a differential ability to select or govern portfolio companies. Rather, our results suggest that early success in venture investing yields better deal flow in subsequent investments, thereby perpetuating differences in the outcomes of initial investments.

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Does the Scope of the Sell-Side Analyst Industry Matter? An Examination of Bias, Accuracy, and Information Content of Analyst Reports

Kenneth Merkley, Roni Michaely & Joseph Pacelli

Journal of Finance, forthcoming

Abstract:
We examine changes in the scope of the sell-side analyst industry and whether these changes impact information dissemination and the quality of analysts' reports. Our findings suggest that changes in the number of analysts covering an industry impact analyst competition and have significant spillover effects on other analysts' forecast accuracy, bias, report informativeness, and effort. These spillover industry effects are incremental to the effects of firm level changes in analyst coverage. Overall, a more significant sell-side analyst industry presence has positive externalities that can result in better functioning capital markets.

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Political money contributions of U.S. IPOs

Dimitrios Gounopoulos et al.

Journal of Corporate Finance, April 2017, Pages 19-38

Abstract:
We produce the first study to explore the effect of political money contributions on IPOs. Exploiting a hand-collected database, we show that both lobbying and PAC expenditure pay off on issue day as donors incur less underpricing, an effect that can be amplified by contribution size and strategic targeting of recipients. Investigating the causes in multiple channels, we also associate donor IPOs with negative offer price revisions and lower aftermarket volatility. Collectively, our results offer new empirical grounding to the information asymmetry theory.

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Information Shocks and Short-Term Market Underreaction

George Jiang & Kevin Zhu

Journal of Financial Economics, forthcoming

Abstract:
Using jumps in stock prices as a proxy for large information shocks, we provide evidence consistent with short-term underreaction in the US equity market. Strategies long (short) stocks with positive (negative) lagged jump returns earn significantly positive returns over the next one- to three-month horizons. The results based on intraday jumps, especially overnight jumps, provide further evidence consistent with underreaction. The underreaction is robust to controlling for other firm characteristics, extends stock return momentum over intermediate to short horizons, and captures market underreaction to information shocks beyond earnings surprises. We further show that limited investor attention contributes to short-term underreaction.

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Perceptions and Price: Evidence from CEO Presentations at IPO Roadshows

Elizabeth Blankespoor, Bradley Hendricks & Gregory Millee

Journal of Accounting Research, forthcoming

Abstract:
This paper examines the relation between cognitive perceptions of management and firm valuation. We develop a composite measure of investor perception using 30-second content-filtered video clips of initial public offering (IPO) roadshow presentations. We show that this measure, designed to capture viewers' overall perceptions of a CEO, is positively associated with pricing at all stages of the IPO (proposed price, offer price and end of first day of trading). The result is robust to controls for traditional determinants of firm value. We also show that firms with highly perceived management are more likely to be matched to high-quality underwriters. In further exploratory analyses, we find the impact is greater for firms with more uncertain language in their written S-1. Taken together, our results provide evidence that investors' instinctive perceptions of management are incorporated into their assessments of firm value.

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Outcomes of Investing in OTC Stocks

Joshua White

U.S. Securities & Exchange Commission Working Paper, December 2016

Abstract:
This paper analyzes three aspects of over-the-counter (OTC) stocks: (1) the recent trends in the OTC stock market structure and size; (2) the documented properties of OTC stocks; and (3) the differences in returns based on investor and stock characteristics. Approximately 10,000 OTC stocks were quoted at the end of 2013 through 2015, generating a total trading volume of over $200 billion per year. Dollar volume has grown substantially since 2012 and is now concentrated in the segment of the OTC market with no requirements of registration or reporting to the U.S. Securities and Exchange Commission (SEC). A synthesis of recent academic literature reveals troubling properties of OTC stocks. Academic studies find that OTC stocks tend to be highly illiquid; are frequent targets of alleged market manipulation; generate negative and volatile investment returns on average; and rarely grow into a large company or transition to listing on a stock exchange. Moreover, these properties tend to worsen when the OTC company has fewer disclosure-related eligibility requirements. I examine the relationship between OTC investor demographics and investment outcomes using a proprietary database of transaction-level OTC data with confidential investor information. Analysis of 1.8 million trades by over 200,000 individual investors confirms that the typical OTC investment return is severely negative. Investor outcomes worsen for OTC stocks that experience a promotional campaign or have weaker disclosure-related eligibility requirements. Demographic analysis reveals that older, retired, low-income, and less educated investors experience significantly poorer outcomes in OTC stock markets. Given that retail investors are the predominant owners of OTC stocks, and the documented trend towards less transparent OTC companies, the results of this study have important implications for investor protection.

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Uncovering Expected Returns: Information in Analyst Coverage Proxies

Charles Lee & Eric So

Journal of Financial Economics, forthcoming

Abstract:
We show that analyst coverage proxies contain information about expected returns. We decompose analyst coverage into abnormal and expected components using a simple characteristic-based model and show that firms with abnormally high analyst coverage subsequently outperform firms with abnormally low coverage by approximately 80 basis points per month. We also show abnormal coverage rises following exogenous shocks to underpricing and predicts improvements in firms' fundamental performance, suggesting that return predictability stems from analysts more heavily covering underpriced stocks. Our findings highlight the usefulness of analysts' actions in expected return estimations, and a potential inference problem when coverage proxies are used to study information asymmetry and dissemination.

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A Mind Is a Terrible Thing to Change: Confirmatory Bias in Financial Markets

Sebastien Pouget, Julien Sauvagnat & Stephane Villeneuve

Review of Financial Studies, forthcoming

Abstract:
This paper studies the impact of the confirmatory bias on financial markets. We propose a model in which some traders may ignore new evidence inconsistent with their favorite hypothesis regarding the state of the world. The confirmatory bias provides a unified rationale for several existing stylized facts, including excess volatility, excess volume, and momentum. It also delivers novel predictions for which we find empirical support using data on analysts' earnings forecasts: traders update beliefs depending on the sign of past signals and previous beliefs, and, at the stock level, differences of opinion are larger when past signals have different signs.

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Asset Managers: Institutional Performance and Smart Betas

Joseph Gerakos, Juhani Linnainmaa & Adair Morse

NBER Working Paper, December 2016

Abstract:
Using a dataset of $17 trillion of assets under management, we document that actively-managed institutional accounts outperformed strategy benchmarks by 86 (42) basis points gross (net) during 2000-2012. In return, asset managers collected $162 billion in fees per year for managing 29% of worldwide capital. Estimates from a Sharpe (1992) model imply that their outperformance comes from factor exposures ("smart beta"). If institutions had instead implemented mean-variance portfolios of institutional mutual funds, they would not have earned higher Sharpe ratios. Recent growth of the ETF market implies that asset managers are losing advantages held during our sample period.

By KEVIN LEWIS | 09:00:00 AM

Sunday, February 12, 2017

Be nice

Increasing generosity by disrupting prefrontal cortex

Leonardo Christov-Moore et al.

Social Neuroscience, March/April 2017, Pages 174-181

Abstract:
Recent research suggests that prosocial outcomes in sharing games arise from prefrontal control of self-maximizing impulses. We used continuous theta burst stimulation (cTBS) to disrupt the functioning of two prefrontal areas, the right dorsolateral prefrontal cortex (DLPFC) and the dorsomedial prefrontal cortex (DMPFC). We used cTBS in the right MT/V5, as a control area. We then tested subjects' prosocial inclinations with an unsupervised Dictator Game in which they allocated real money anonymously between themselves and low and high socioeconomic status (SES) players. cTBS over the two prefrontal sites made subjects more generous compared to MT/V5. More specifically, cTBS over DLPFC increased offers to high-SES players, while cTBS over DMPFC caused increased offers to low-SES players. These data, the first to demonstrate an effect of disruptive neuromodulation on costly sharing, suggest that DLPFC and MPFC exert inhibitory control over prosocial inclinations during costly sharing, though they may do so in different ways. DLPFC may implement contextual control, while DMPFC may implement a tonic form of control. This study demonstrates that humans' prepotent inclination is toward prosocial outcomes when cognitive control is reduced, even when prosocial decisions carry no strategic benefit and concerns for reputation are minimized.

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Empathy is a Choice: People are Empathy Misers Because They are Cognitive Misers

Daryl Cameron et al.

Pennsylvania State University Working Paper, December 2016

Abstract:
Empathy is considered a core virtue, yet fails in many situations. Understanding empathy lapses addresses a basic question about pro-sociality: to what extent do people choose to avoid empathy? Answering this question informs debates over the automaticity of empathy, and in particular, experience sharing: our tendency to resonate with the experiences of others. Experience sharing is often assumed to be effortless and automatic; here, we suggest that people perceive experience sharing to be effortful, aversive, and difficult, and avoid it for that reason. We develop a new measure of empathy regulation behavior called the Empathy Selection Task. In this task, participants make a series of binary choices, selecting into situations that instruct them to engage in empathy or an alternative course of action. Across 19 studies (N = 2,174) we find strong and replicable empathy avoidance, which is associated with perceiving empathy as effortful, aversive, and inefficacious. People avoid sharing in both negative and positive experiences of others, and empathy avoidance is not reducible to emotion avoidance. People subjectively devalue empathy, requiring higher financial compensation to empathize in an Empathy Discounting Paradigm, and empathy avoidance reduces when the alternative to empathy is comparably effortful. Finally, experimentally increasing perceived efficacy at empathizing eliminates avoidance of experience sharing, suggesting that psychological costs directly cause empathy regulation. These results qualify claims that empathy is a default, and that empathy limits are fixed rather than chosen. When given the choice to share in others' feelings, people act as if it's not worth the effort.

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Signaling Virtue: Charitable Behavior Under Consumer Elective Pricing

Minah Jung et al.

Marketing Science, forthcoming

Abstract:
Two field experiments examined generosity under consumer elective pricing. In shared social responsibility (SSR), consumers choose how much to pay, knowing that a percentage of their payment goes to support a charitable cause. Replicating past research, consumers in our experiments were sensitive to the presence of charitable giving, paying more when a portion of their payment went to charity. Notably, however, they were largely insensitive to the percentage of payment allocated to charity - customers paid little more when 99% of the payment went to charity than when only 1% went to charity. Neither self-selection nor social pressure fully explained higher payments under SSR.

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Power Distance Belief, Power, and Charitable Giving

Dahee Han, Ashok Lalwani & Adam Duhachek

Journal of Consumer Research, forthcoming

Abstract:
Three studies examined the relation between power distance belief (PDB), the tendency to accept and expect inequalities in society; power, the control one has over valued resources; and charitable giving. Results suggested that the effect of PDB depends on the power held by the donor. In low-PDB contexts, people high (vs. low) in psychological power tend to be more self-focused (vs. other-focused), and this leads them to be less charitable. In high-PDB contexts, however, people high (vs. low) in psychological power tend to be more other-focused (vs. self-focused), and this leads them to be more charitable. The authors also explore several boundary conditions for these relationships and conclude with the implications of these findings.

By KEVIN LEWIS | 09:00:00 AM

Saturday, February 11, 2017

Less is more

The tipping point of perceived change: Asymmetric thresholds in diagnosing improvement versus decline

Ed O'Brien & Nadav Klein

Journal of Personality and Social Psychology, February 2017, Pages 161-185

Abstract:
Change often emerges from a series of small doses. For example, a person may conclude that a happy relationship has eroded not from 1 obvious fight but from smaller unhappy signs that at some point "add up." Everyday fluctuations therefore create ambiguity about when they reflect substantive shifts versus mere noise. Ten studies reveal an asymmetry in this first point when people conclude "official" change: people demand less evidence to diagnose lasting decline than lasting improvement, despite similar evidential quality. This effect was pervasive and replicated across many domains and parameters. For example, a handful of poor grades, bad games, and gained pounds led participants to diagnose intellect, athleticism, and health as "officially" changed; yet corresponding positive signs were dismissed as fickle flukes (Studies 1a, 1b, and 1c). This further manifested in real-time reactions: participants interpreted the same graphs of change in the economy and public health as more meaningful if framed as depicting decline versus improvement (Study 2), and were more likely to gamble actual money on continued bad versus good luck (Study 3). Why? Effects held across self/other change, added/subtracted change, and intended/unintended change (Studies 4a, 4b, and 4c), suggesting a generalized negativity bias. Teasing this apart, we highlight a novel "entropy" component beyond standard accounts like risk aversion: good things seem more truly capable of losing their positive qualities than bad things seem capable of gaining them, rendering signs of decline to appear more immediately diagnostic (Studies 5 and 6). An asymmetric tipping point raises theoretical and practical implications for how people might inequitably react to smaller signs of change.

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The Accuracy of Less: Natural Bounds Explain Why Quantity Decreases Are Estimated More Accurately Than Quantity Increases

Pierre Chandon & Nailya Ordabayeva

Journal of Experimental Psychology: General, February 2017, Pages 250-268

Abstract:
Five studies show that people, including experts such as professional chefs, estimate quantity decreases more accurately than quantity increases. We argue that this asymmetry occurs because physical quantities cannot be negative. Consequently, there is a natural lower bound (zero) when estimating decreasing quantities but no upper bound when estimating increasing quantities, which can theoretically grow to infinity. As a result, the "accuracy of less" disappears (a) when a numerical or a natural upper bound is present when estimating quantity increases, or (b) when people are asked to estimate the (unbounded) ratio of change from one size to another for both increasing and decreasing quantities. Ruling out explanations related to loss aversion, symbolic number mapping, and the visual arrangement of the stimuli, we show that the "accuracy of less" influences choice and demonstrate its robustness in a meta-analysis that includes previously published results. Finally, we discuss how the "accuracy of less" may explain asymmetric reactions to the supersizing and downsizing of food portions, some instances of the endowment effect, and asymmetries in the perception of increases and decreases in physical and psychological distance.

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Short-Term Upper Limb Immobilization Affects Action-Word Understanding

Christel Bidet-Ildei et al.

Journal of Experimental Psychology: Learning, Memory, and Cognition, forthcoming

Abstract:
The present study aimed to investigate whether well-established associations between action and language can be altered by short-term upper limb immobilization. The dominant arm of right-handed participants was immobilized for 24 hours with a rigid splint fixed on the hand and an immobilization vest restraining the shoulder, arm, and forearm. The control group did not undergo such immobilization. In 2 experiments, participants had to judge whether a verb involved movements of the hands or feet. In Experiment 1, the response times for controls were shorter for hand-action verbs than for foot-action verbs, whereas there was no significant difference in the immobilized group. Experiment 2 confirmed these results with a pre/posttest procedure. Shorter response times were shown for hand-action verbs than for foot-action verbs in the pretests and posttests for the control group and in the pretest for the immobilized group (i.e., before immobilization). This difference was not observed for participants undergoing 24 hr of hand immobilization, who showed little progress in assessing hand-action verbs between pretest and posttest. Moreover, participants with the highest motor imagery capacities clearly demonstrated shorter response times in Experiment 2 for both hand-action and foot-action verbs, regardless of hand immobilization. Overall, these findings demonstrate for the first time that short-term sensorimotor deprivation can affect action verb processing. We discuss our results in light of the embodiment view, which considers that cognition is grounded in sensorimotor experiences.

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The Elephant in the Road: Auditory Perceptual Load Affects Driver Perception and Awareness

Gillian Murphy & Ciara Greene

Applied Cognitive Psychology, forthcoming

Abstract:
Perceptual load theory research has shown that the level of perceptual load in a task affects processing of additional information. Less certain are the cross-modal effects of perceptual load - does load in one modality affect processing in another? The current study assessed the effect of auditory perceptual load on visual attention in a driving simulator task. While driving, participants listened to traffic updates on the radio, which imposed either low or high perceptual load. Awareness for an unexpected animal as well as less novel objects (such as billboards and other vehicles) was markedly reduced under high load. Driver behaviour was also significantly affected, with impaired lateral control, longer reaction times to hazards and more collisions under high load. This study has important implications for load theory and also more general implications for road safety, as it suggests that auditory load may be an important, often overlooked factor in driver attention.

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Can observing a Necker cube make you more insightful?

Ruben Laukkonen & Jason Tangen

Consciousness and Cognition, February 2017, Pages 198-211

Abstract:
It is a compelling idea that an image as simple as a Necker cube, or a duck-rabbit illusion, can reveal something about a person's creativity. Surprisingly, there are now multiple examples showing that people who are better at discovering 'hidden' images in a picture, are also better at solving some creative problems. Although this idea goes back at least a century, little is known about how these two tasks - that seem so different on the surface - are related to each other. At least some forms of creativity (and indeed scientific discoveries) may require that we change our perspectives in order to discover a novel solution to a problem. It's possible that such problems involve a similar cognitive process, and perhaps the same cognitive capacities, as switching perspectives in an ambiguous image. We begin by replicating previous work, and also show metacognitive similarities between the sudden appearance of hidden images in consciousness, and the sudden appearance of solutions to verbal insight problems. We then show that simply observing a Necker cube can improve subsequent creative problem-solving and lead to more self-reported insights. We speculate that these results may in part be explained by Conflict Monitoring Theory.

By KEVIN LEWIS | 09:00:00 AM


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