Maribeth Coller

Eliciting Individual Discount Rates

Controlled laboratory conditions using monetary incentives have been utilized in previous studies that examine individual discount rates, and researchers have found several apparently robust anomalies. We conjecture that subject behavior in these experiments may be affected by (uncontrolled) factors other than discount rates. We address some experimental design issues and report a new series of experiments designed to elicit individual discount rates. Our primary treatments include: (i) informing subjects of the annual and effective interest rates associated with alternative payment streams, and (ii) informing subjects of current market interest rates. We also test for the effect of real (vs. hypothetical) payments and for the effect of delaying both payment options (vs. offering an immediate payment option). The statistical analysis uses censored data techniques to account for the interactions between field and lab incentives. Each of the information treatments appears to reduce revealed discount rates. When both types of information are provided, annual rates in the interval of 15%–17.5% are revealed, whereas rates of 20%–25% are revealed in the control session. Each of the treatments also lowers the residual variance of subject responses.

An examination of market efficiency: Information order effects in a laboratory market

Abstract A series of laboratory double auction experiments is conducted to examine whether the order of information releases affects market prices. Behavioral research on belief revision has shown that individuals are influenced by the order in which a series of information items is presented. The experiments are designed to provide a controlled investigation of whether order effects as displayed by individuals also can influence prices in a market setting where outcomes are not a simple aggregation of individual behavior. Significant evidence is found of a recency effect in the experimental asset markets.

Evaluating the tobacco settlement damage awards: too much or not enough?

OBJECTIVES This study compared the present economic value of the 1998 tobacco settlement with the present economic value of the damages attributable to tobacco. METHODS The 1987 National Medical Expenditure Survey was used to estimate the smoking attributable fraction (SAF) of medical expenditures. SAFs were then applied to Medicaid and other expenditures. RESULTS Settlement payments covered only 40% of Medicaid treatment costs already incurred and only 30% of past and projected future Medicaid costs. Excess medical expenditures for all other payment sources were roughly comparable to those incurred by Medicaid. CONCLUSIONS Although the settlement may reduce future smoking prevalence rates by limiting the ability of tobacco companies to promote smoking and by raising cigarette prices, euphoria over the huge settlement funds should be balanced by a sober comparison with the even larger damage amounts.

Information, noise, and asset prices: An experimental study

A series of laboratory asset markets is conducted to examine the effect of noisy information releases on security prices. The price reaction to a given information release has been hypothesized to be positively related to the degree of uncertainty just prior to the release and negatively related to the degree of noise in the information itself. A series of two-period markets is conducted with noisy information provided between periods. Prior uncertainty and noise are manipulated. Using a random effects regression procedure, strong support is found for both hypotheses.

Efficient equity: Removing salary discrimination by meeting statistical legal constraints at least cost

Abstract Legal obligations embodied in statistical constraints on pay differentials represent an externally-imposed distortion on cost minimization. We argue that the competitive firm ought to meet such constraints at least cost. This argument is illustrated by reference to a major case of alleged gender discrimination in academic salaries. An alternative approach is presented that would have eliminated the discrimination finding in this case at a significant cost saving.

The acquisition of price-relevant domain knowledge by a market

Through the application of policy capturing techniques in an experimental market, we provide an initial investigation into the process whereby individual domain knowledge is combined into market domain knowledge. We conduct a series of two-phase experiments where subjects are presented with actual financial information based on 20 publicly traded companies. In the first phase, subjects make individual decisions regarding the price of each companys stock. In the second phase, they participate in a computerized double auction asset market trading shares in the same 20 companies. We then model each individuals information usage and identify individual knowledge functions as well as model the markets information usage and identify the market knowledge function. We find that the aggregate market knowledge function is well characterized by a simple averaging of the knowledge functions of the participants.

Should Tobacco Companies Pay the Present Value of Damages

The concept of present value is a standard and uncontroversial staple of business economists. While there may be some legitimate debate over the choice of interest rate to be used in any application, the idea of present value is not seriously in debate. It may come as a surprise, therefore, to learn that the use of present value calculations in legal settings is not routinely accepted. We examine this difference of opinion in the context of a major case study in which huge amounts of money hinged on the willingness of the courts to allow present value calculations. This case is the calculation of damages in the lawsuits brought by state attorney generals against tobacco companies. From the perspective of damages experts retained by the plaintiffs in many of these cases, we found ourselves convincing lawyers and judges of the need to use present value calculations. Given the long time horizon over which damages occurred, for example back to 1957 in the Oklahoma case, the use of present value could be expected to make a significant difference to the overall damages amounts. Indeed, we show that it does. For the state of Oklahoma, un-discounted excess medical expenditures due to smoking are

The Effect of Misstatements on Decisions of Financial Statement Users: An Experimental Investigation of Auditor Materiality Thresholds

1.395 billion during the forty-year period since 1957. When an appropriate risk-adjusted rate is applied, the present value of those damages nearly triples to

Latent process heterogeneity in discounting behavior

4.011 billion. This is a significant difference in damages, by virtually any metric.