Abstract: We estimate the dynamic causal effects of consumer sentiment shocks in the US. We identify autonomous changes in survey evidence on consumer confidence using fatalities in mass shootings as an instrument. We find the instrument to be significant for an aggregate index of consumer expectations and also back up the identification scheme with micro evidence that exploits the geographical variation in mass shootings. Sentiment shocks have real macroeconomic effects. A negative sentiment shock is recessionary: It sets off a persistent decline in consumer confidence and induces a contraction in industrial production, private sector consumption, and in the labor market, while having less evident nominal effects. Finally, sentiment shocks explain a non-negligible part of the cyclical fluctuations in consumer confidence and real macroeconomic aggregates.

Abstract: We introduce a portfolio friction in a two-country DSGE model where investors face a constant probability to make new portfolio decisions. The friction leads to a more gradual portfolio adjustment to shocks and a weaker portfolio response to changes in expected excess returns. We apply the model to monthly data for the US and rest of the world for equity portfolios. We show that the model is consistent with a broad set of evidence related to portfolios, equity prices and excess returns for an intermediate level of the friction. The evidence includes portfolio inertia, limited sensitivity to expected excess returns, a significant impact of financial shocks, excess return predictability, and asset price momentum and reversal.

Abstract: We study the impact of changing choice set size on the quality of choices in health insurance markets. Using novel data on enrollment and medical claims for school district employees in the state of Oregon, we document that the average employee could save $600 by switching to a lower cost plan. Structural modeling reveals large “choice inconsistencies” such as non-equalization of the dollar spent on premiums and out of pocket, and a novel form of “approximate inertia” where enrollees are excessively likely to switch to other plans that are close to the current plan on the plan design spreadsheet. Variation in the number of plan choices across districts and over time shows that enrollees make lower-cost choices when the choice set is smaller. We show that a curated restriction of choice set size improves choices more than the best available information intervention, partly because approximate inertia lowers gains from new information. We explicitly test and reject the assumption that this is because individuals choose worse from larger choice sets, or “choice overload”. Rather, we show that this feature arises from the fact that larger choice sets feature worse choices on average that are not offset by individual re-optimization.