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E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
A N D P E N S I O N L A W
Vol. 3, No. 6: March 28, 2002
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Publisher: LSN Subject Matter Journals
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Topic of This Issue:
Investing and Outcomes
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T A B L E of C O N T E N T S
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WORKING PAPERS
"Psychological Foundations of Incentives"
ERNST FEHR
University of Zurich
Institute for Empirical Economic Research
CESifo (Center for Economic Studies and Ifo
Institute for Economic Research)
Centre for Economic Policy Research (CEPR)
ARMIN FALK
University of Zurich
Institute for Empirical Economic Research
Centre for Economic Policy Research (CEPR)
CESifo (Center for Economic Studies and Ifo
Institute for Economic Research)
"Defined Contribution Pensions: Plan Rules, Participant
Decisions, and the Path of Least Resistance"
JAMES J. CHOI
Harvard University
Department of Economics
DAVID I. LAIBSON
Harvard University
Department of Economics
National Bureau of Economic Research (NBER)
BRIGITTE MADRIAN
University of Chicago
National Bureau of Economic Research (NBER)
ANDREW METRICK
University of Pennsylvania
The Wharton School
National Bureau of Economic Research (NBER)
"Regulating Securities Professionals: Emotional and Moral Aspects
of Fiduciary Investing"
PETER H. HUANG
University of Pennsylvania Law School
University of Chicago Law School
"Conditional Performance Measurement Using Portfolio Weights:
Evidence for Pension Funds"
WAYNE E. FERSON
Boston College
Carroll School of Management
National Bureau of Economic Research (NBER)
KENNETH KHANG
University of Wisconsin at Milwaukee
School of Business Administration
"Making Economic Sense Out of Unisex Life Insurance (Or the
Difference Between Cost and Value and Why It Matters to Real
People)"
RICHARD A. BOOTH
University of Maryland School of Law
"Guaranteeing Defined Contribution Pensions: The Option to
Buy-Back a Defined Benefit Promise"
MARIE-EVE LACHANCE
University of Pennsylvania
The Wharton School
OLIVIA S. MITCHELL
University of Pennsylvania, Wharton School
National Bureau of Economic Research (NBER)
S S R N I N F O R M A T I O N
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EDITORIAL POLICIES
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W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Psychological Foundations of Incentives"
BY: ERNST FEHR
University of Zurich
Institute for Empirical Economic Research
CESifo (Center for Economic Studies and Ifo
Institute for Economic Research)
Centre for Economic Policy Research (CEPR)
ARMIN FALK
University of Zurich
Institute for Empirical Economic Research
Centre for Economic Policy Research (CEPR)
CESifo (Center for Economic Studies and Ifo
Institute for Economic Research)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=294287
Paper ID: University of Zurich Working Paper No. 95
Date: November 2001
Contact: ERNST FEHR
Email: Mailto:efehr@iew.unizh.ch
Postal: University of Zurich
Institute for Empirical Economic Research
Bluemlisalpstrasse 10
CH-8006 Zurich, SWITZERLAND
Phone: +41 1 634 3709
Fax: +41 1 634 4907
Co-Auth: ARMIN FALK
Email: Mailto:falk@iew.unizh.ch
Postal: University of Zurich
Institute for Empirical Economic Research
Bluemlisalpstrasse 10
CH-8006 Zurich, SWITZERLAND
ABSTRACT:
During the last two decades economists have made much progress
in understanding incentives, contracts and organizations. Yet,
they constrained their attention to a very narrow and
empirically questionable view of human motivation. The purpose
of this paper is to show that this narrow view of human
motivation may severely limit understanding the determinants and
effects of incentives. Economists may fail to understand the
levels and the changes in behavior if they neglect motives like
the desire to reciprocate or the desire to avoid social
disapproval. We show that monetary incentives may backfire and
reduce the performance of agents or their compliance with rules.
In addition, these motives may generate very powerful incentives
themselves.
Keywords: Incentives, contracts, reciprocity, social approval,
social norms, intrinsic motivation
JEL Classification: J41, C91, D64
______________________________
"Defined Contribution Pensions: Plan Rules, Participant
Decisions, and the Path of Least Resistance"
BY: JAMES J. CHOI
Harvard University
Department of Economics
DAVID I. LAIBSON
Harvard University
Department of Economics
National Bureau of Economic Research (NBER)
BRIGITTE MADRIAN
University of Chicago
National Bureau of Economic Research (NBER)
ANDREW METRICK
University of Pennsylvania
The Wharton School
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=294093
Paper ID: NBER Working Paper No. W8655
Date: December 2001
Contact: DAVID I. LAIBSON
Email: Mailto:dlaibson@harvard.edu
Postal: Harvard University
Department of Economics
Room M-14
Littauer Center
Cambridge, MA 02138 UNITED STATES
Phone: 617-496-3402
Fax: 617-495-8570
Co-Auth: JAMES J. CHOI
Email: Mailto:james_choi@post.harvard.edu
Postal: Harvard University
Department of Economics
Room M-14
Littauer Center
Cambridge, MA 02138 UNITED STATES
Co-Auth: BRIGITTE MADRIAN
Email: Mailto:brigitte.madrian@gsb.uchicago.edu
Postal: University of Chicago
Graduate School of Business
1101 East 58th Street
Chicago, IL 60637 UNITED STATES
Co-Auth: ANDREW METRICK
Email: Mailto:metrick@wharton.upenn.edu
Postal: University of Pennsylvania
The Wharton School
Philadelphia, PA 19104-6367 UNITED STATES
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
We assess the impact on savings behavior of several different
401(k) plan features, including automatic enrollment, automatic
cash distributions, employer matching provisions, eligibility
requirements, investment options, and financial education. We
also present new survey evidence on individual savings adequacy.
Many of our conclusions are based on an analysis of micro-level
administrative data on the 401(k) savings behavior of employees
in several large corporations that implemented changes in their
401(k) plan design. Our analysis identifies a key behavioral
principle that should partially guide the design of 401(k)
plans: employees often follow 'the path of least resistance.'
For better or for worse, plan administrators can manipulate the
path of least resistance to powerfully influence the savings and
investment choices of their employees.
JEL Classification: J320, H550, G110, D910
______________________________
"Regulating Securities Professionals: Emotional and Moral Aspects
of Fiduciary Investing"
BY: PETER H. HUANG
University of Pennsylvania Law School
University of Chicago Law School
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=276119
Paper ID: USC CLEO Research Paper No. C01-6; and U of Penn, Inst
for Law & Econ Research Paper 01-19
Date: 2001
Contact: PETER H. HUANG
Email: Mailto:phuang@law.upenn.edu
Postal: University of Pennsylvania Law School
3400 Chestnut Street
Philadelphia, PA 19104-6204 UNITED STATES
Phone: 215-573-6018
Fax: 215-573-2025
Note: Previously titled "Emotions in Fiduciary Organizations
and Regulating Securities Professionals"
Paper Requests:
Contact Katie Waitman Mailto:kwaitman@law.usc.edu Postal:
University of Southern California Law School, University Park,
Los Angeles, CA 90089-0071. Phone:(213) 740-2551. Fax:(213)
740-5502.
ABSTRACT:
Individuals invest in securities markets via such financial
intermediaries as brokers and dealers. Federal securities laws
regulate the behavior of securities professionals towards their
customers. The relationship between investors and securities
professionals is an example of a principal-agent relationship.
Such relationships suffer from well-known incentive and
informational problems. This Article focuses on some novel
emotional and psychological consequences of such relationships
for investment decisions. This Article considers how
expectations about securities investment behavior can interact
with guilt on the part of securities professionals from
breaching their clients' trust. This Article explains how
imposing a fiduciary duty of loyalty can alter expectations
about investment behavior, emotions that depend on those
investment expectations, and investment behavior itself. This
Article also discusses the applicability of such models to other
fiduciary relationships.
______________________________
"Conditional Performance Measurement Using Portfolio Weights:
Evidence for Pension Funds"
BY: WAYNE E. FERSON
Boston College
Carroll School of Management
National Bureau of Economic Research (NBER)
KENNETH KHANG
University of Wisconsin at Milwaukee
School of Business Administration
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=300752
Paper ID: NBER Working Paper No. W8790
Date: February 2002
Contact: WAYNE E. FERSON
Email: Mailto:wayne.ferson@bc.edu
Postal: Boston College
Carroll School of Management
Fulton Hall 330B
140 Commonwealth Avenue
Chestnut Hill, MA 02467 UNITED STATES
Co-Auth: KENNETH KHANG
Email: Mailto:kkhang@uwm.edu
Postal: University of Wisconsin at Milwaukee
School of Business Administration
P.O. Box 742
Milwaukee, WI 53201-0742 UNITED STATES
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
This paper combines the use of portfolio holdings data and
conditioning information to create a new performance measure.
Our conditional weight-based measure has several advantages.
Using conditioning information avoids biases in weight-based
measures as discussed by Grinblatt and Titman (1993). When
conditioning information is used, returns-based measures face a
bias if managers can trade between observation dates. The new
measures avoid this interim trading bias. We use the new
measures to provide fresh insights about performance in a sample
of U.S. equity pension fund managers.
JEL Classification: G12, G14, G23
______________________________
"Making Economic Sense Out of Unisex Life Insurance (Or the
Difference Between Cost and Value and Why It Matters to Real
People)"
BY: RICHARD A. BOOTH
University of Maryland School of Law
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=296782
Date: 2002
Contact: RICHARD A. BOOTH
Email: Mailto:rbooth@law.umaryland.edu
Postal: University of Maryland School of Law
515 W. Lombard St.
Baltimore, MD 21201-1786 UNITED STATES
Phone: 410-706-4269
Fax: 410-706-2184
ABSTRACT:
In this piece, I take issue with one of the fundamental tenets
of law and economics as it has been used to justify gender
discrimination in the pricing of life insurance and annuities,
namely, that individuals should bear their own identifiable
costs so as to avoid misallocation of society's resources. Most
scholars of the law and economics persuasion have argued that
unisex pricing of life insurance products is a bad idea because
on the average women live longer than men. They argue that it
costs more to insure the life of a man because the payoff comes
sooner and the present value is greater. Thus, to charge men and
women the same price for life insurance would constitute a
subsidy running from women (who would pay too much) to men (who
would pay too little). As a result, men would buy too much
insurance and women would buy too little.
Using a simple example, I show here that gender-based pricing
results in radically different outcomes for male and female
consumers if one focuses on income rather than present value.
Gender-based pricing means that a man must set aside more from
his pay during life in order to secure the same insurance
benefits as a woman. And a woman who uses the proceeds to buy an
annuity must suffer lower benefits for a longer time than a man.
In short, if one looks either at the periodic outlay by the
insured or at the income available to the beneficiary under an
annuity, gender-based pricing appears to be quite at odds with
the reasons why people buy insurance and how much they buy.
Perhaps more important, in the absence of market failure, men
and women would bargain around gender-based rates (and in many
cases they effectively do so), which suggests that it is
gender-based rates that result in the misallocation of
resources.
The problem with gender-based rates lies in two unstated
premises: (1) that the present value of lump sum insurance
benefits is an accurate measure of value to a consumer, and (2)
that unisex pricing will cause consumers to buy more or less
insurance or annuities than under gender-based pricing. Most
people buy insurance with a view to the income it will generate
for the beneficiary. Clearly, people buy annuities to provide
themselves income. In both cases, the value of the product
inheres in the periodic income it generates and not the length
of time over which that income will be received. Indeed, the
very existence of annuities proves the point. Annuities exist
only because many people are willing to trade a lump sum for an
assured income. In other words, the essential idea behind an
annuity is that people care more about income than about lump
sum values. Thus, even though the present value of a man's death
benefit is higher than a woman's death benefit because it will
likely be paid sooner, what matters most to the consumer is the
income it will generate for the beneficiary. This difference in
perspectives is critical. Insurance companies live forever.
People do not. Hence, although the cost of writing insurance and
annuities quite rightly concerns the insurance company, it has
nothing to do with the value perceived by the insured. Thus,
because it is value and not cost that motivates someone to buy
something, the idea that there is a subsidy implicit in unisex
insurance rates is mistaken. For the consumer, the purpose of
life insurance and annuities is to hedge against the risk that
one will die early or late. The present value of the benefits is
irrelevant. In addition, the most important factor that
determines the amount of insurance one will buy is the amount
one can spend up to the point of adequate coverage. Thereafter,
it is unlikely that cheaper insurance will induce people to buy
more. Insurance is a hedge, not a bet. And it makes no sense to
hedge more risk than you have.
Keywords: Unisex, life insurance, annuity, cost, value, gender
discrimination, present value, income,hedge, risk, subsidy,
misallocation, market failure, bargain around
JEL Classification: G22, K12
______________________________
"Guaranteeing Defined Contribution Pensions: The Option to
Buy-Back a Defined Benefit Promise"
BY: MARIE-EVE LACHANCE
University of Pennsylvania
The Wharton School
OLIVIA S. MITCHELL
University of Pennsylvania, Wharton School
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=299807
Paper ID: NBER Working Paper No. W8731
Date: January 2002
Contact: OLIVIA S. MITCHELL
Email: Mailto:mitchelo@wharton.upenn.edu
Postal: University of Pennsylvania, Wharton School
Wharton Financial Institutions Center
3641 Locust Walk
Philadelphia, PA 19104-6367 UNITED STATES
Phone: 215-746-5706
Fax: 215-898-0310
Co-Auth: MARIE-EVE LACHANCE
Email: Mailto:malachan@wharton.upenn.edu
Postal: University of Pennsylvania
The Wharton School
Department of Insurance and Risk Management
3641 Locust Walk
Philadelphia, PA 19104-6367 UNITED STATES
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
After a long commitment to defined benefit (DB) pension plans
for US public sector employees, many state legislatures have
introduced defined contribution (DC) plans for their public
employees. In this process, investment risk which was previously
borne by state DB plans has now devolved to employees covered by
the new DC plans. In light of this trend, some states have
proposed a guarantee mechanism to help protect DC plan
participants. One such guarantee takes the form of an option
permitting DC plan participants to buy back their DB benefit for
a price. This paper develops a theoretical framework to analyze
the option design and illustrate how employee characteristics
influence the option's cost. We illustrate the potential
magnitude of a buy-back option value enacted recently by the
State of Florida for its public employees. If employees were to
exercise the buy-back option optimally, the market value of this
option could represent up to 100 percent of the DC contributions
over the worklife.
JEL Classification: G2, H