Behavioral macroeconomics.

The NBER held a meeting on Behavioral Macroeconomics in Cambridge on December 11. George Akerlof, University of California, Berkeley, and Robert J. Shiller, NBER and Yale University, organized this program:

Lawrence Ausubel, University of Maryland, "Adverse Selection in the Credit Card Market"

Discussant: Richard J. Zeckhauser, NBER and Harvard University

Marianne Bertrand, NBER and Princeton University, and Sendhil Mullainathan, NBER and MIT, "Is There Discretion in Wage Setting? A Test Using Takeover Legislation" (NBER Working Paper No. 6807)

Discussant: Truman Bewley, Yale University

Andrew Caplin, NBER and New York University, and John V. Leahy, NBER and Boston University, "Anticipation, Uncertainty, and Time Inconsistency"

Discussant: Ted O'Donoghue, Cornell University

Carl Campbell, Dartmouth College, "An Efficiency Wage Model of the Wage Curve, the Phillips Curve, and the Natural Rate of Unemployment"

Discussant: Gil Mehrez, Georgetown University

David I. Laibson and Edward L. Glaeser, NBER and Harvard University, and Caroline Soutter, Harvard University, "What Is Social Capital?"

Discussant: Raphael Di Tella, Harvard University

John Shea, NBER and University of Maryland, "Nominal Illusion: Evidence from Major League Baseball"

Discussant: Peter A. Diamond, NBER and MIT

Ausubel examines the results of large-scale randomized trials in pre-approved credit card solicitations for direct evidence of adverse selection. He finds first that there is adverse selection on observable information: respondents to solicitations are substantially worse credit risks than non-respondents. Second, solicitations offering inferior terms (for example, a higher introductory interest rate, a shorter duration to the introductory offer, or a higher post-introductory interest rate) yield customer pools with worse observable credit-risk characteristics than solicitations offering superior terms. Third, there is evidence of adverse selection on hidden information: even after controlling for all information known by the card issuer at the time the account is opened, customers who accept inferior offers are significantly more likely to default. Fourth, recipients of credit card solicitations appear to over-respond to the introductory interest rate relative to the duration of the introductory offer and to the post-introductory interest rate. This is consistent with Ausubel's "underestimation hypothesis," that consumers may systematically underestimate the extent of...