Working papers
Working papers
Field evidence suggests that gradual changes are often not obvious to agents, but large and sudden changes frequently result in overreactions. I develop, apply, test, and structurally estimate a portable model of history-dependent decision making under risk that produces this phenomenon (known as the “boiling-frog effect”) as the interaction between memory and attention. If a risky prospect looks similar to the past, it does not catch attention. If it is very dissimilar, it is contrasted away from the past and receives too much attention. I provide an experimental test of the model and display evidence of four novel effects of history-dependent risk preferences: (i) assimilation, (ii) contrast, (iii) the boiling-frog effect and (iv) a recency effect. The model parsimoniously reconciles some pricing anomalies in asset and housing markets and provides a novel comparative static which I verify in US stock market data.
Asset pricing under assimilation and contrast [new draft coming soon]
Decision makers tend to under adjust to small changes in risky prospects, and over adjust to big one. I apply the model of Saponaro (2022) accounting for these puzzles to financial decisions and show how the dynamics of asset prices are consistent with puzzles documented in the literature, such as the frog-in-the-pan effect in asset prices and underreaction to absence of news. Moreover, the model predicts negative predictability of future return autocorrelation based on the size of current volatility. I find strong evidence in favor of this prediction in the cross section of individual US stock returns, which cannot be explained by persistent volatility shocks.
Memory and bidder's behavior
Several documented violations of classical predictions of auction theory have been typically explained by a combination of failure of strategic reasoning and utility from winning. I propose a model of behavior in auctions in which bidders are biased by recent and contextual memory as in Bordalo et al. (2020). Bidders submit a price that contrasts or assimilates to previously seen prices in similar contexts. The model reconciles in a unified framework facts such as context dependent anchoring (Hong et al. 2015), the bidder's curse (Malmendier and Lee, 2011), and revenue non equivalence as in Kagel and Levin (1986). I test the distinctive model's prediction of context dependent anchoring by devising a novel experimental paradigm where subjects play as auctioneers before acting as bidders. I find strong evidence of context dependent anchoring of bids to prices.
Publications
Austerity and Elections, [Economica, Volume 91, Issue 363, July 2024] with A. Alesina, G. Ciminelli, and D. Furceri
Conventional wisdom holds that voters punish governments that implement fiscal austerity. Yet, most empirical studies, which rely on ex-post yearly austerity measures, do not find supportive evidence. This paper revisits the issue using action-based, real-time, ex-ante measures of fiscal austerity as well as a new database of changes in vote shares of incumbent parties. The analysis emphasizes the importance of the ‘how’—whether austerity is done via tax hikes or expenditure cuts—and the ‘who’—whether it is carried out by left- vs. right-leaning governments. Our main finding is that tax-based austerity carries large electoral costs, while the effect of expenditure-based consolidations depends on the political-leaning of the government. An austerity package worth 1% of GDP, carried out mostly through tax hikes, reduces the vote share of the leader’s party by about 7%. In contrast, expenditure-based austerity is detrimental for left- but beneficial for right-leaning governments. We also find that the electoral cost of austerity—especially tax hikes—can be contained if it is implemented during good economic times.
Policy work
Austerity needs not be the electoral kiss of death,[VoxEU] with G. Ciminelli and D. Furceri
With high debt and high real interest rates, the electoral effects of fiscal policy will be a prominent issue for policymakers. This column discusses the political consequences of tax increases and expenditure cuts, and argues that that the electoral risks of austerity can be mitigated through strategic, ideologically consistent, and well-timed policy decisions, and in particular though consistency between a government's policy actions and its electoral promises.
Invited talks
2021
International Monetary Fund
CSEF
2023
NBER Summer Institute - Behavioral Macro
Federal Reserve Bank of New York
Renmin University of China
2024
Foundations of Utility and Risk
National Tax Association