Kent Smetters

Kent Smetters
  • Boettner Professor
  • Professor of Business Economics and Public Policy

Contact Information

  • office Address:

    325 Vance Hall
    3733 Spruce Street
    Philadelphia, PA 19104

Research Interests: applied theory, finance, public economics, insurance, health care

Links: CV


Kent Smetters is the Boettner Chair Professor at the University of Pennsylvania’s Wharton School and a Faculty Research Fellow at the National Bureau of Economic Research. Besides being a professor in Business Economics and Public Policy, he is also professor of Insurance and Risk Management as well as a faculty member in Applied Mathematics and Computational Science at Penn. His research focuses on applied theory, fiscal policy, risk measurement, insurance, health care, and personal finance. Previous policy positions include the Congressional Budget Office (1995 to 1998) as well as Deputy Assistant Secretary (Economic Policy) for the United States Treasury (2001-2002). He and his coauthor recently won the 2016 TIAA Paul A. Samuelson Award for their study on annuitization. He is the host of “Your Money,” a weekly personal finance radio show on SiriusXM 111 (Business Radio) as well as a monthly contributor to the Wall Street Journal. He occasionally provides support on meaningful legal cases related to medical malpractice, ERISA, insurance, financial advice and securities offerings. Kent Smetters received his PhD in Economics from Harvard University.

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  • Alex Muermann and Kent Smetters (Working), Optimal Endowment Investing.

    Abstract: Why doesn't the Modigliani-Miller theorem apply to the relationship between endowments (``firms'') and donors (``shareholders''), rendering an endowment's investment policy neutral? We show that donor altruism (even if impure) breaks neutrality. Under a condition---which quickly converges to standard DARA preferences in the number of donors---endowment risk-taking reduces donor free-riding, is Pareto improving, and required by endowment competition. Contrary to asset-liability matching, large endowments optimally take substantial risk even if donors are very averse to changes in endowment-supported spending, reversing the standard moral hazard interpretation. Total giving grows unbounded in the number of donors even with pure altruism.

  • Florian Scheuer and Kent Smetters (2014), Could a Website Really Have Doomed the Health Exchanges? Multiple Equilibria, Initial Conditions and the Construction of the Fine (American Economic Journal), American Economic Journal: Economic Policy, 10 (4), pp. 302-343.

    Abstract: We document that states that experienced website glitches in the ACA's first year faced higher average costs that persisted into future years. These dynamics are inconsistent with the standard strategic-pricing model, which requires non-localized common knowledge about market conditions but are consistent with price-taking. Initial conditions can have a permanent effect---including convergence to a Pareto-dominated, stable equilibrium---under conditions that we show are plausible in this setting. Changing the fine from a fixed amount to a fraction of equilibrium prices increases the likelihood of reaching a Pareto-efficient equilibrium without increasing the equilibrium fine collected.

  • Kent Smetters and Xingtan Zhang (Working), A Sharper Ratio.

    Abstract: While the Sharpe ratio is still the dominant measure for ranking risky investments, much effort has been made over the past three decades to find more robust measures that accommodate non- Normal risks (e.g., “fat tails”). But these measures have failed to map to the actual investor problem except under strong restrictions; numerous ad-hoc measures have arisen to fill the void. We derive a generalized ranking measure that correctly ranks risks relative to the original investor problem for a broad utility-and-probability space. Like the Sharpe ratio, the generalized measure maintains wealth separation for the broad HARA utility class. The generalized measure can also correctly rank risks following different probability distributions, making it a foundation for multi-asset class optimization. This paper also explores the theoretical foundations of risk ranking, including proving a key impossibility theorem: any ranking measure that is valid for non-Normal distributions cannot generically be free from investor preferences. Finally, we show that approximation measures, which have sometimes been used in the past, fail to closely approximate the generalized ratio, even if those approximations are extended to an infinite number of higher moments.

  • Daniel Gottlieb and Kent Smetters (Under Review), Lapse-Based Insurance (Revise and Resubmit, American Economic Review).

    Abstract: Life insurance is a large yet poorly understood industry. Most policies lapse before they expire. Insurers make money on customers that lapse their policies and lose money on those that keep their coverage. Policy loads are inverted relative to the dynamic pattern consistent with insurance against reclassification risk. As an industry, insurers lobby to ban secondary markets despite the liquidity provided. We propose and test a simple model in which consumers do not fully account for uncorrelated background risks when purchasing insurance. In equilibrium, insurers “front load” their pricing to magnify lapsing, a result that is robust to various market structures. The comparative statics from the model contrast with the ones from insurance against reclassification risk, hyperbolic discounting, or fixed costs, and are consistent with the data.

  • Daniel Gottlieb and Kent Smetters (Under Review), Grade Non-Disclosure.

    Abstract: This paper documents and explains the existence of grade non-disclosure policies in Masters in Business Administration programs, why these policies are concentrated in highly-ranked programs, and why these policies are not prevalent in most other professional degree programs. Related policies, including the existence of honors and minimum grade requirements, are also consistent with our model.

  • Julia Li and Kent Smetters (Working), Optimal Portfolio Choice with Wage-Indexed Social Security.

  • Shinichi Nishiyama and Kent Smetters (Working), Richardian Equivalence Under Asymmetric Information.

    Abstract: Several empirical studies have found that extended household units do not appear to be highly altruistically linked, thereby violating the very premise of the Ricardian Equivalence Hypothesis (REH). This finding has a very strong implication for the effectiveness of fiscal policies that change the allocation of resources between generations. We build a two-sided altruistic-linkage model in which private transfers are made in the presence of two types of shocks: an “observable” shock that is public information (for example, a public redistribution like debt or pay-as-you-go social security) and an “unobservable” shock that is private information (for example, individual wage innovations). Parents and children observe each other’s total income but not each other’s effort level. In the second-best solution, unobservable shocks are only partially shared, whereas, for any utility function satisfying a condition derived herein, observable shocks are fully shared. The model, therefore, can generate the low degree of risk sharing found in previous empirical studies, but REH still holds.


All Courses

  • AMCS5999 - Independent Study

    Independent Study allows students to pursue academic interests not available in regularly offered courses. Students must consult with their academic advisor to formulate a project directly related to the student’s research interests. All independent study courses are subject to the approval of the AMCS Graduate Group Chair.

  • AMCS9999 - Ind Study & Research

    Study under the direction of a faculty member.

  • BEPP2990 - Independent Study

  • BEPP8930 - Adv Study Project

    “This course closes the gap between the theory of business economics analytics and its actual practice, i.e., how you can really use it in your practice. Normally, this type of comprehensive problem solving would require using coding languages like Python or R. However, the instructor for this course has developed a plugin no-code toolbox for Microsoft Excel that allows for end-to-end analytics, making data analytics accessible to a much wider audience. This software plugin will be provided for free to you. You will learn how to conduct in-depth business analytics based on sensible economics reasoning within Excel. The hands-on experience does not require in-depth software coding, and your new skillset is repeatable for your future projects.”

  • ECON4999 - Independent Study

    Individual study and research under the direction of a member of the Economics Department faculty. At a minimum, the student must write a major paper summarizing, unifying, and interpreting the results of the study. This is a one semester, one c.u. course.

  • MGEC6110 - Microeconomics For Manag

    This course establishes the micro-economic foundations for understanding business decision-making. The course will cover consumer theory and market demand under full information, market equilibrium and government intervention, production theory and cost optimization, producing in perfectly competitive and monopoly markets, vertical relations, and game theory, including simultaneous, sequential, and infinitely repeated games. Students are expected to have mastered these materials before enrolling in the second quarter course: Microeconomics for Managers: Advanced Applications.

  • MGEC6120 - Microecon For Mgr - Adv.

    This course will cover the economic foundations of business strategy and decision-making in market environments with other strategic actors and less than full information, as well as advanced pricing strategies. Topics include oligopoly models of market competition, creation, and protection, sophisticated pricing strategies for consumers with different valuations or consumers who buy multiple units (e.g. price discrimination, bundling, two-part tariffs), strategies for managing risk and making decisions under uncertainty, asymmetric information and its consequences for markets, and finally moral hazard and principle-agent theory with application to incentive contacts.

  • PPE4998 - Directed Honors Research

    Student arranges with a Penn faculty member to do research and write a thesis on a suitable topic. For more information on honors visit:

Awards and Honors

  • Undergraduate Teaching Award, The Wharton School, 2008
  • Institute for Quantitative Research in Finance (“The Q-Group”) Award, 2005
  • Smith-Richardson Foundation Research Grant, 2005
  • Smith-Richardson Foundation Research Grant, 2004
  • Rodney L. White Center for Financial Research Grant, 2004
  • National Bureau of Economic Research, RRC Grants, 2003-2007
  • TIAA-CREF Paul A. Samuelson, Certificate of Excellence, 2002
  • Robert C. Witt Award for the best paper published in the Journal of Risk and Insurance, 2000
  • 2016 TIAA Paul A. Samuelson Award, 1970

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Alex Muermann and Kent Smetters (Working), Optimal Endowment Investing.
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