Kent Smetters

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

Contact Information

  • office Address:

    1358 Steinberg Hall-Dietrich Hall
    3620 Locust Walk
    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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  • Florian Scheuer and Kent Smetters (Under Review), Could a Website Really Have Doomed the Health Exchanges? Multiple Equilibria, Initial Conditions and the Construction of the Fine (Revise and Resubmit, American Economic Journal).

    Abstract: Public attention has focused on how the launch of the national health exchanges could impact the types of risks who initially enroll and thereby affect future premiums and enrollment. We introduce simple dynamics into a standard model of insurance under adverse selection to show that such “initial conditions” can indeed matter. When firms are price-takers, the market can converge to a Pareto-inferior “bad” equilibrium if there are at least three equilibria, which we suggest has empirical support. Strategic pricing eliminates Pareto dominated equilibria but requires common knowledge of preference and risk distributions. Changing the fine on non-participants from a fixed amount to a fraction of equilibrium prices increases the range of initial conditions consistent with reaching the “good” equilibrium while reducing the “badness” of the bad equilibrium — all without increasing the fine value in the good equilibrium. Allowing insurers to quickly change prices can encourage them to experiment with strategic pricing if market fundamentals are not perfectly known, increasing the chance of reaching the good equilibrium independently from initial conditions.

  • 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.


Past Courses


    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 equiolibrium 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 repreated games. Finally, we will wrapup game theory with an application to auctionsn. Students are expected to have mastered these materials before enrolling in the second quarter course: Microechomics for Managers: Advanced Applications.


    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.

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

In the News

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Latest Research

Florian Scheuer and Kent Smetters (Under Review), Could a Website Really Have Doomed the Health Exchanges? Multiple Equilibria, Initial Conditions and the Construction of the Fine (Revise and Resubmit, American Economic Journal).
All Research

In the News

The White House Budget: What’s the Reality?

White House budgets usually amount to nothing more than "vision statements" -- and the latest one suffers from undue optimism about economic growth and a troubling expansion of the deficit, experts say.

Knowledge @ Wharton - 2018/02/16
All News

Awards and Honors

Undergraduate Teaching Award, The Wharton School 2008
All Awards