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Essays on Genetic Variation and Economic Behavior by David Alexander Cesarini M.Sc., London School of Economics and Political Science (2004) M.Sc., Stockholm School of Economics (2003) Submitted to the Department of Economics ARCHIVES in partial fulfillment of the requirements for the degree of Doctor of Philosophy MASSACHUSETTS INSTITUTE OF TECHNOLOGY at the JUN 0 8 2010 MASSACHUSETTS INSTITUTE OF TECHNOLOGY LIBRARIES June 2010 © 2010 David Alexander Cesarini. All rights reserved. The author hereby grants to Massachusetts Institute of Technology permission to reproduce and to distribute copies of this thesis document in whole or in part. Signature of Author .... .. -.... ....... ................. ................ Department of Economics T7 N 15 May 2010 C ertified by ................................................. ............ David Laibson Robert I. Goldman Professor of Economics and Harvard College Professor, Department of Economics, Harvard University. Thesis Supervisor Certified by .. ... Drazen Prelec Professor, Department of Economics Thesis Supervisor Accepted by. .. ................... Esther Duflo Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics Chairperson, Departmental Committee on Graduate Studies Essays on Genetic Variation and Economic Behavior by David Alexander Cesarini Submitted to the Department of Economics on 15 May 2010, in partial fulfillment of the requirements for the degree of Doctor of Philosophy Abstract This thesis is a collection of papers in which behavior genetic methods are used to shed light on individual differences in economic preferences, behaviors and outcomes. Chapter one uses the classical twin design to provide estimates of genetic and environmental influences on experimentally elicited preferences for risk and giving. The paper reports evidence that these preferences are broadly heritable, with estimates suggesting that genetic differences explain approximately twenty percent of individual variation. The results thus point to genes as an important source of individual variation in preferences, a source which has hitherto been largely neglected in the economics literature. The chapter is written with Christopher T. Dawes, Magnus Johannesson, Paul Lichtenstein and Bjorn Wallace. Chapter two shows that these findings also extend to the field. Following a major pension reform in the late 1990s, all Swedish adults had to form a portfolio from a large menu of funds. Matching individual investment decisions to the Swedish Twin Registry, the paper finds that approximately 25% of individual variation in portfolio risk is due to genetic variation. The results, which are complementary to those reported in chapter one, also hold for several other aspects of financial decision-making. The chapter is written with Magnus Johannesson, Paul Lichtenstein, Orjan Sandewall and Bjorn Wallace. Chapter three uses two complementary Swedish datasets to examine the importance of family environment in explaining variation in income, educational attainment, and measures of cognitive and non-cognitive skills. Using seven different sibling types who differ in their degree of genetic relatedness and rearing status, I find moderate family effects on educational attainment, cognitive skills and non-cognitive skills. This contrasts with the effects of family on income, which are low. Additional analyses, based on a sample of idenitical (MZ) and fraternal (DZ) twins for which more comprehensive income data is available, reveal large and persistent separation of the MZ and DZ correlations over the entire lifecycle, except at very early ages. One interpretation of this finding is that there are strong family effects on the timing of labor market entry. I discuss the relevance of these results for efforts to understand the causes of income inequality. Thesis Supervisor: David Laibson Title: Robert I. Goldman Professor of Economics and Harvard College Professor, Department of Economics, Harvard University. Thesis Supervisor: Drazen Prelec Title: Professor, Department of Economics Acknowledgments This thesis builds on a long and fruitful collaboration -with Magnus Johannesson, Paul Licht- enstein and Bjorn Wallace. Bjorn originally came up with the ingenious idea of using behavior genetic methods to understand individual heterogeneity in economic preference parameters. He is a person of remarkable creativity. Magnus has shown me extraordinary kindness and gen- erosity during graduate school. I owe him a lot for his unwavering support. Paul has been our team's main point of contact at the Swedish Twin Registry and I thank him not only granting us access to the gold mine that is the Swedish Twin Registry, but also for his intellectual input on our numerous projects. I will always treasure the friendship of my peers at MIT, especially Laura Feiveson, Matt No- towidigdo and Jeremy Shapiro. At Harvard, I have a good collaborator and friend in Jonathan Beauchamp. Orjan Sandewall is a person with a brilliant mind and a big heart. I don't think he will ever fully appreciate how grateful I am for his help during this journey. Tino Sanandaji had faith in this research agenda from the very start and always answered calls for help and support. Coren Apicella not only opened up new intellectual horizons to me, but also stood by me in good times and bad. Terry Burnham, James Fowler and Chris Dawes were always there for me when I sought their counsel. I would like to thank Ernst Fehr, David Laibson and Drazen Prelec for agreeing to serve on my committee and for providing encouragement and support. David Laibson introduced me to his genoeconomics research team, with whom I have had a number of stimulating conversations. Dan Benjamin in particular offered some crucial words of support at an important juncture. I have also had a number of productive conversations with David Autor, Michael Greenstone, Jon Gruber and, in particular, Sandy Jencks. I would also like to acknowledge financial support of MIT's Department of Economics, as well as the Hedelius Wallander Foundation and the Sweden-America Foundation. Part of this thesis was written whilst I visited the Institute of Industrial Economics in Stockholm and I thank Magnus Henrekson for making that visit possible. Most of all, I am indebted to my parents, whose love and support I have always taken for granted. Thank you all very much. Contents 1 Genetic Variation in Preferences for Giving and Risk-Taking 8 1.1 Introduction .. ....... ....... ....... ....... ........ 8 1.2 Data -... ............. ..... ....... ........... 10 1.2.1 Subject Recruitment ..... ........ ......... 10 1.2.2 Experimental Procedures . ......... ......... 11 1.2.3 G iving . ...... ..... ..... ..... ...... ..... ..... 12 1.2.4 Risk-Taking.. .............. ............. 13 1.3 Twin M ethodology .... ......... .......... ......... ... 14 1.4 R esults .. ......... ......... .......... ......... 19 1.4.1 Equal Environment Assumption . ......... ......... .... 21 1.4.2 Measurement Error ......... ......... ......... .... 22 1.4.3 Representativeness .. ...... ....... ....... ...... ... 23 1.4.4 Genetic Non-Additivity............... ............. 25 1.5 D iscussion .......... .............. .............. .. 27 1.6 Conclusion. ...................... .... .. 29 1.7 R eferences ........... ............................ 30 1.8 Tables and Figures ............ ....................... 39 Appendix A: Estimation Details...... ............ ............ 46 2 Genetic Variation in Financial Decision Making 57 2.1 Data .. .. ..... .. 60 2.1.1 The Swedish Pension Reform ......................... 60 2.1.2 Portfolio Data ....... ....... 2.1.3 Data from Administrative Records ... 2.1.4 The Swedish Twin Registry . ..... 2.2 M ethod ....... ............... 2.3 R esults ....... ........ ........ 2.4 Robustness and Generalizability ....... 2.4.1 Representativeness and Generalizability 2.4.2 Equal Environment Assumption . ... 2.4.3 Reciprocal Influences .... ....... 2.4.4 Misclassification and Measurement Error 2.4.5 Assortative Mating ....... ..... 2.5 Discussion ... ................ .. 2.6 Conclusion .................... 2.7 References ................ ..... 2.8 Tables and Figures ................ Appendix A: Variable Definitions ........... 3 The Effect of Family Environment on Productive Skills, Human Capital and Lifecycle Income 100 3.1 Introduction ............ 100 3.2 Data ... ..... .... ... .. 103 3.2.1 The Brothers Sample ... 103 3.2.2 The Twin Sample .. .. 105 3.2.3 National Service Administr n .... 105 3.2.4 Statistics Sweden ..... 106 3.2.5 Final Sample ....... 107 3.3 Empirical Framework ...... 108 3.3.1 The ACE Decomposition 108 3.3.2 Variance Components over Lifecycle 113 3.4 Basic Results from Brothers Sample 114 3.4.1 Lifecycle Analysis ..... .. .. .. 115 3.5 Robustness .. .. .... .. .. .. ..... .. .. ... 116 3.5.1 Characterizing the Rearing Conditions of Different Sibling Types ..... 116 3.5.2 Omitting Sibling Types ............................ 117 3.5.3 Testing Further Restrictions... ..................... 117 3.5.4 Further Sample Selection Criteria ....................... 118 3.6 D iscussion ................................... ...... 119 3.7 Conclusion..... ................ .................. 124 3.8 References.. ..................................... 124 3.9 Tables and Figures ....................... ............ 130 Chapter 1 Genetic Variation in Preferences for Giving and Risk-Taking 1.1 Introduction Writing in 1875, the prolific Francis Galton concluded the first scientific inquiry into