Prozac for Depressed States? Effect of Mood on Local Economic Recessions

56 Pages Posted: 19 Apr 2011 Last revised: 15 Jul 2017

See all articles by Vidhi Chhaochharia

Vidhi Chhaochharia

University of Miami - Department of Finance

George M. Korniotis

University of Miami; Miami Business School; University of Miami - Behavioral Decision Making Cluster

Alok Kumar

University of Miami - Miami Herbert Business School

Date Written: July 12, 2017

Abstract

This paper examines whether people's mood and optimism affects economic activity. We consider two sets of exogenous proxies for optimism that are unrelated to the economic environment: (i) weather (average temperature and cloud cover) and (ii) sports and political optimism. We show that economic recessions are weaker, expansions are stronger, and the economic recovery is faster in U.S. states where local individuals are more optimistic. Further, local optimism has a stronger impact on state-level business cycles of smaller states and regions with low levels of risk sharing. In contrast, the incremental effects of local optimism are weaker in states where people are younger, more educated and sophisticated, and socially more connected. States with larger concentration of minority and urban population also exhibit lower sensitivity to variations in mood and optimism. Alternative explanations based on state's industrial composition, tax environment, migration, seasonal affective disorder (SAD), oil shocks, and direct economic impact of weather cannot explain these findings.

JEL Classification: E32, R12

Suggested Citation

Chhaochharia, Vidhi and Korniotis, George M. and Kumar, Alok, Prozac for Depressed States? Effect of Mood on Local Economic Recessions (July 12, 2017). Available at SSRN: https://ssrn.com/abstract=1814083 or http://dx.doi.org/10.2139/ssrn.1814083

Vidhi Chhaochharia

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

George M. Korniotis

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-5728 (Phone)

Miami Business School ( email )

University of Miami - Behavioral Decision Making Cluster ( email )

5250 University Drive
Coral Gables, FL 33124
United States

Alok Kumar (Contact Author)

University of Miami - Miami Herbert Business School ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

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