Published Papers

Using unique data on employee stock purchase plans (ESPPs), we examine the influence of networks on investment decisions. Comparing employees within a firm during the same election window with metro area fixed effects, we find that the choices of coworkers in the firm's ESPP exert a significant influence on employees' own decisions to participate and trade. Moreover, we find that the presence of high-information employees magnifies the effects of peer networks. Given participation in an ESPP is value-maximizing, our analysis suggests the potential of networks and targeted investor education to improve financial decision-making.

This paper studies the way that word-of-mouth communication aggregates the information of individual agents. We find that the structure of the communication process determines whether all agents end up making identical choices, with less communication making this conformity more likely. Despite the players' naive decision rules and the stochastic decision environment, word-of-mouth communication may lead all players to adopt the action that is on average superior. These socially efficient outcomes tend to occur when each agent samples only a few others.

We analyze a sequential decision model in which each decision maker looks at the decisions made by previous decision makers in taking her own decision. This is rational for her because these other decision makers may have some information that is important for her. We then show that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. We then show that the resulting equilibrium is inefficient.

An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.

This paper introduces a utility function that nests three classes of utility functions: 1) time-separable utility functions; 2) "catching up with the Joneses" utility functions that depend on the consumer's level of consumption relative to the lagged cross-sectional average level of consumption; and 3) utility functions that display habit formation. Incorporating this utility function into a Lucas (1978) asset pricing model allows calculation of closed-form solutions for the prices of stocks, bills and consols under the assumption that consumption growth is i.i.d. Then equilibrium asset prices are used to examine the equity premium puzzle.

This paper analyzes a model of social interaction in which individuals care about status as well as "intrinsic" utility (which refers to utility derived directly from consumption). Status is assumed to depend on public perceptions about an individual's predispositions rather than on the individual's actions. However, since predispositions are unobservable, actions signal predispositions and therefore affect status. When status is sufficiently important relative to intrinsic utility, many individuals conform to a single, homogeneous standard of behavior, despite heterogeneous underlying preferences. They are willing to conform because they recognize that even small departures from the social norm will seriously impair their status. The fact that society harshly censures all nonconformists is not simply assumed (indeed, status varies smoothly with perceived type); rather, it is produced endogenously. Despite this penalty, agents with sufficiently extreme preferences refuse to conform. The model provides an explanation for the fact that standards of behavior govern some activities but do not govern others. It also suggests a theory of how standards of behavior might evolve in response to changes in the distribution of intrinsic preferences. In particular, for some values of the preference parameters, norms are both persistent and widely followed; for other values, norms are transitory and confined to small groups. Thus the model produces both customs and fads. Finally, an extension of the model suggests an explanation for the development of multiple subcultures, each with its own distinct norm.

This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on connected firms and perform significantly better on these holdings relative to their nonconnected holdings. A replicating portfolio of connected stocks outperforms nonconnected stocks by up to 7.8 percent per year. Returns are concentrated around corporate news announcements, consistent with portfolio managers gaining an informational advantage through the education networks. Our results suggest that social networks may be important mechanisms for information flow into asset prices.

Using a novel data set of U.S. financial advisors that includes individuals' employment histories and misconduct records, we show that coworkers influence an individual's propensity to commit financial misconduct. We identify coworkers' effect on misconduct using changes in coworkers caused by mergers of financial advisory firms. The tests include merger-firm fixed effects to exploit the variation in changes to coworkers across branches of the same firm. The probability of an advisor committing misconduct increases if his new coworkers, encountered in the merger, have a history of misconduct. This effect is stronger between demographically similar coworkers.

Financial misconduct (FM) rates differ widely between major U.S. cities, up to a factor of 3. Although spatial differences in enforcement and firm characteristics do not account for these patterns, city-level norms appear to be very important. For example, FM rates are strongly related to other unethical behavior, involving politicians, doctors, and (potentially unfaithful) spouses, in the city.

The prevalence of shirking within a large Italian bank appears to be characterized by significant regional differentials. In particular, absenteeism and misconduct episodes are substantially more prevalent in the south. We consider a number of potential explanations for this fact: different individual backgrounds; group-interaction effects; sorting of workers across regions; differences in local attributes; different hiring policies; and discrimination against southern workers. Our analysis suggests that individual backgrounds, group-interaction effects, and sorting effects contribute to explaining the north-south shirking differential. None of the other explanations appears to be of first-order importance.

We study subjects who were asked to fill letters into envelopes with a remuneration independent of output. In the "pair" treatment, two subjects worked at the same time in the same room, and peer effects were possible. In the "single" treatment, subjects worked alone, and peer effects were ruled out. We find evidence of peer effects in the pair treatment because the standard deviations of output are smaller within pairs than between pairs. Moreover, average output is higher in the pair treatment: thus, peer effects raise productivity. Finally, low-productivity workers are the most sensitive to the behavior of peers.

We present evidence on the effect of social connections between workers and managers on productivity in the workplace. To evaluate whether the existence of social connections is beneficial to the firm's overall performance, we explore how the effects of social connections vary with the strength of managerial incentives and worker's ability. To do so, we combine panel data on individual worker's productivity from personnel records with a natural field experiment in which we engineered an exogenous change in managerial incentives, from fixed wages to bonuses based on the average productivity of the workers managed. We find that when managers are paid fixed wages, they favor workers to whom they are socially connected irrespective of the worker's ability, but when they are paid performance bonuses, they target their effort toward high ability workers irrespective of whether they are socially connected to them or not. Although social connections increase the performance of connected workers, we find that favoring connected workers is detrimental for the firm's overall performance.