infonet-economy

Many researchers seek factors that predict the cross-section of stock returns. The standard methodology sorts stocks according to their factor scores into quantiles and forms a corresponding long-short portfolio. Such a course of action ignores any information on the covariance matrix of stock returns. Historically, it has been difficult to estimate the covariance matrix for a large universe of stocks. We demonstrate that using the recent DCC-NL estimator of Engle et al. (2017) substantially enhances the power of tests for cross-sectional anomalies: On average, 'Student' t-statistics more than double.

The events of 9/11 released a million tons of toxic dust into lower Manhattan, an unparalleled environmental disaster. It is puzzling, then, that the literature has shown little effect of fetal exposure to the dust. However, inference is complicated by preexisting differences between the affected mothers and other NYC mothers as well as heterogeneity in effects on boys and girls. Using all births in-utero on 9/11 in NYC and comparing them to their siblings, we show that residence in the affected area increased prematurity and low birth weight, especially for boys.

This paper analyzes the developmental origins and the evolution of health, cognitive, and socio-emotional skills during early childhood, from age 0 to 5. We explicitly model the dynamic interactions of health with the child’s behavior and cognitive skills, as well as the role of parental investment. A dynamic factor model corrects for the presence of measurement error in the proxy for the latent traits. Using data from the Avon Longitudinal Study of Parents and Children (ALSPAC), we find that children’s capabilities strongly interact and build on each other: health is an important determinant of early socio-emotional development; in turn socio-emotional skills have a positive impact on the evolution of both health and cognitive functions; on the other side, the effect of cognitive abilities on health is negligible. Furthermore, all facets of human capital display a high degree of persistence. Finally, mother’s investments are an important determinant of the child’s health, cognitive, and socio-emotional development early in life.

We propose a formal way to systematically study the differential effects of exogenous shocks in economic models with heterogeneous agents. Our setting applies to models that can be rephrased as "competition for market shares" in a broad sense. We show that even in presence of any number of arbitrarily heterogeneous agents, a single recursion relation characterizes the distributional pattern of equilibrium market shares and related measures. We identify the general conditions under which the market share function rotates, thereby either causing more or less equality among the agents. Our setting highlights the exceptional rule that power functions play for the distributional effects. We apply our method across economic models, including examples from monopolistic competition, discrete choice, partial and general equilibrium theory and contest theory.

Finding ways to adapt natural tendencies and nudge collective action is central to the well-being of future generations, say Helga Fehr-Duda and Ernst Fehr.

As globalization brings people with incompatible attitudes into contact, cultural conflicts inevitably arise. Little is known about how to mitigate conflict and about how the conflicts that occur can shape the cultural evolution of the groups involved. Female genital cutting is a prominent example1, 2, 3. Governments and international agencies have promoted the abandonment of cutting for decades, but the practice remains widespread with associated health risks for millions of girls and women4, 5. In their efforts to end cutting, international agents have often adopted the view that cutting is locally pervasive and entrenched1. This implies the need to introduce values and expectations from outside the local culture. Members of the target society may view such interventions as unwelcome intrusions1, 2, 3, 6, 7, 8, 9, and campaigns promoting abandonment have sometimes led to backlash1, 7, 8, 10, 11 as they struggle to reconcile cultural tolerance with the conviction that cutting violates universal human rights1, 9. Cutting, however, is not necessarily locally pervasive and entrenched1, 3, 12. We designed experiments on cultural change that exploited the existence of conflicting attitudes within cutting societies. We produced four entertaining movies that served as experimental treatments in two experiments in Sudan, and we developed an implicit association test to unobtrusively measure attitudes about cutting. The movies depart from the view that cutting is locally pervasive by dramatizing members of an extended family as they confront each other with divergent views about whether the family should continue cutting. The movies significantly improved attitudes towards girls who remain uncut, with one in particular having a relatively persistent effect. These results show that using entertainment to dramatize locally discordant views can provide a basis for applied cultural evolution without accentuating intercultural divisions.

To assess the impact of interventions on well-being during war time, we analyze data from the birth records at the university maternity hospital of Basle in the period 1912-1920. Birth weight of children from medium SEP families decreased during the crisis years 1918 and 1919, but not for low and high SEP families. A potential explanation is access to food: while high SEP families could compensate for high prices, low SEP families received support, for which medium SEP families were not eligible.

Midbrain dopamine neurons encode reward prediction errors. In this issue of Neuron, Takahashi et al. (2016) show that the ventral striatum provides dopamine neurons with prediction information specific to the timing, but not the quantity, of reward, suggesting a surprisingly nuanced neural implementation of reward prediction errors.

Theoretical principles of information processing and empirical findings suggest that to efficiently represent all possible rewards in the natural environment, reward-sensitive neurons have to adapt their coding range dynamically to the current reward context. Adaptation ensures that the reward system is most sensitive for the most likely rewards, enabling the system to efficiently represent a potentially infinite range of reward information. A deficit in neural adaptation would prevent precise representation of rewards and could have detrimental effects for an organism’s ability to optimally engage with its environment. In schizophrenia, reward processing is known to be impaired and has been linked to different symptom dimensions. However, despite the fundamental significance of coding reward adaptively, no study has elucidated whether adaptive reward processing is impaired in schizophrenia. We therefore studied patients with schizophrenia (n=27) and healthy controls (n=25), using functional magnetic resonance imaging in combination with a variant of the monetary incentive delay task. Compared with healthy controls, patients with schizophrenia showed less efficient neural adaptation to the current reward context, which leads to imprecise neural representation of reward. Importantly, the deficit correlated with total symptom severity. Our results suggest that some of the deficits in reward processing in schizophrenia might be due to inefficient neural adaptation to the current reward context. Furthermore, because adaptive coding is a ubiquitous feature of the brain, we believe that our findings provide an avenue in defining a general impairment in neural information processing underlying this debilitating disorder.

Visual perception is strongly shaped by expectations, but it is poorly understood how such perceptual expectations are learned in our dynamic sensory environment. Here, we applied a Bayesian framework to investigate whether perceptual expectations are continuously updated from different aspects of ongoing experience. In two experiments, human observers performed an associative learning task in which rapidly changing expectations about the appearance of ambiguous stimuli were induced. We found that perception of ambiguous stimuli was biased by both learned associations and previous perceptual outcomes. Computational modeling revealed that perception was best explained by a model that continuously updated priors from associative learning and perceptual history and combined these priors with the current sensory information in a probabilistic manner. Our findings suggest that the construction of visual perception is a highly dynamic process that incorporates rapidly changing expectations from different sources in a manner consistent with Bayesian learning and inference.