Essays in decision making
Author(s)
Chang, Tom Y., 1976-
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Massachusetts Institute of Technology. Dept. of Economics.
Advisor
Glenn Ellison and Nancy Rose.
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This thesis explores the impact of individual decision making on the functioning of firms and markets. The first chapter examines how deviations from strict rationality by individuals impact the market for consumer goods. A growing body of evidence documents individual behavior that is difficult to reconcile with standard models of rational choice, and firm behavior difficult to reconcile with rational markets. In this paper I present a boundedly rational model of choice that reconciles several behavioral anomalies, and provides micro-foundational support for some puzzling empirical regularities in firm behavior. If the evaluation of an alternative is costly, individuals may find it inefficient to compare all available alternatives. Instead, when faced with an unfeasibly large choice set, some individuals may compare groups of alternatives (i.e. categories) to reduce the choice set into a more manageable set of relevant alternatives. I call these individuals categorical considerers and develop a model in which these decision makers sequentially apply a single well-behaved preference relation at different levels of aggregation. I explore the implications of this model for both individual behavior and equilibrium firm behavior in market settings. Under certain conditions, the existence of categorical considerers in a market causes firms to utilize strategies different from what would be optimal in a market of fully rational consumers. This simple model generates predictions about behavior consistent with several new field experiments, and offers possible explanations for excess spatial product differentiation, brand name premiums, and product branding. (cont.) The second chapter, written jointly with Mireille Jacobson, explores the question of what exactly not-for-profit hospitals maximize. While theories of not-for-profit hospital behavior abound, most are general statements of preferences and do not yield empirically testable (differentiable) predictions. To address this shortcoming we use a unified theoretical framework to model three popular theories of not-for profit hospital behavior: (1) "for-profits in disguise," (2) social welfare maximizers and (3) perquisite maximizers. We develop testable implications of a hospital's response to a fixed cost shock under each of these theories. We then examine the effect of a recent un-funded mandate in California that requires hospitals to retrofit or rebuild in order to comply with modern seismic safety standards. Since the majority of hospitals in the State were built between 1940 and 1970, well before a sophisticated understanding of seismic safety, a hospital's compliance cost is plausibly exogenously predetermined by its underlying geologic risk. We present evidence that within counties seismic risk is uncorrelated with a host of hospital characteristics, including ownership type. We show that hospitals with higher seismic risk experience larger increases in the category of spending that should be affected by retrofitting and that hospitals facing higher compliance costs are more likely to shut down, irrespective of ownership type. In contrast, private not-for-profits alone increase their mix of profitable services such as neonatal intensive care days and MRI minutes. (cont.) Government hospitals respond by decreasing the provision of charity care. As expected, for-profit hospitals do not change their service mix in response to this shock. These results are most consistent with the theory of not-for-profit hospitals as perquisite maximizers and allow us to reject two of the leading theories of not-for-profit hospital behavior - "for-profits in disguise" and "pure altruism." These results also imply that government owned hospitals have welfare as their maximand. More work is needed to determine the overall welfare implications of these different ownership structures. The third chapter, written jointly with Antoinette Schoar, examines the impact of individual judges on the disposition and long run success of firms seeking Chapter 11 bankruptcy protection. Using case information on Chapter 11 filings for almost 5000 private companies across five district courts in the US between 1989 and 2004, we first establish that within districts cases are assigned randomly to judges, which allows us to estimate judge specific fixed effects in their Chapter 11 rulings. We find very strong and economically significant differences across judges in the propensity to grant or deny specific motions. Specifically some judges appear to rule persistently more favorably towards creditors or debtors. Based on the judge fixed effects we created an aggregate index to measure the pro-debtor (pro-creditor) friendliness of each judge. We show that a pro-debtor bias leads to increased rates of re-filing and firm shutdown as well as lower post-bankruptcy credit ratings and lower annual sales growth up to five years after the original bankruptcy filing.
Description
Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2009. Cataloged from PDF version of thesis. Includes bibliographical references (p. 155-168).
Date issued
2009Department
Massachusetts Institute of Technology. Department of EconomicsPublisher
Massachusetts Institute of Technology
Keywords
Economics.