Contributions published at Department of Economics (Florian Scheuer)

This paper establishes stylized facts about business cycles in the late 19th century, using spectral analysis techniques which allow an intuitive description and analysis of cyclical structure in economic fluctuations. Analysis of industrial production data for 13 countries permits the following generalizations. In the advanced North Atlantic economies, a fairly regular long cycle with a periodicity of 7–10 years is identified in all countries. This component explains a substantial fraction of overall variation in industrial production. There is some evidence of a less regular, less powerful short cycle of 3–5 years duration. In peripheral economies experience is varied, but it is more often the short cycle that exercises greater influence. The long cycle component is shown to be highly correlated among the core economies, much less so between core and peripheral economies, and least of all among peripheral economies. The long cycle is more highly correlated among countries with important trading ties and those on a metallic monetary standard throughout the period.

Long-run recursive identification schemes are very popular in the structural VAR literature. This note suggests a two-step procedure based on QR decompositions as a solution algorithm for this type of identification problem. Our procedure will always deliver the exact solution and it is much easier to implement than a Newton-type iteration algorithm. It may therefore be very useful whenever quick and precise solutions of a long-run recursive scheme are required, e.g. in bootstrapping confidence intervals for impulse responses.

We analyze a model of oligopolistic competition with ongoing investment. Special cases include incremental investment, patent races, learning by doing, and network externalities. We investigate circumstances under which a firm with low costs or high quality will extend its initial lead through investments. To this end, we derive a new comparative statics result for general games with strategic substitutes, which applies to our investment game. Finally, we highlight plausible countervailing effects that arise when investments of leaders are less effective than those of laggards, or in dynamic games when firms are sufficiently patient.

It has recently been claimed that, contrary to traditional neoclassical theory, suitably chosen environmental regulation is often beneficial for the regulated firms because it induces cost-reducing innovations. I analyze the extent to which this position is compatible with microeconomic analysis. It turns out that even in a framework in which organizational inefficiencies might lead to underinvestment, environmental policy can only increase firm profits if several very specific conditions are met. These conditions concern the type of policy, the extent of inefficiencies, the costs of potential innovation projects and their effect on productivity and abatement costs.

This paper presents a model with flexible wages in which unemployment of low-skilled labor is possible in equilibrium, whereas high-skilled workers are fully employed. Thus, the model can explain why even in countries with flexible labor markets and full employment of skilled labor an employment problem exists at the bottom of the skill spectrum. The model is used to evaluate the impact of technological change and increased skill supply on the employment of low-skilled workers. It is shown that a switch to technologies with higher skill requirements unambiguously leads to a rise in unemployment of low-skilled workers. An increase in the supply of high-skilled labor has a positive effect on the employment level of low-skilled labor.

The purpose of this paper is to explore the role of changes in the sectoral structure of world demand for the welfare implications of trade and international specialization. A two-countries two-goods model with external economies of scale is presented. Demand develops according to non-linear Engel-curves with phases of expansion and saturation. The economies of scale are exploited by international labor division where the two countries specialize on different sectors. A country which specializes on the production of the income-inelastic good may suffer losses from international labor division and trade.

With the help of a standard 2 × 2 trade model, we develop several hypotheses on the effects of cross-border sourcing on skill intensity in production. The focus is on cross-border sourcing of low-skill-intensive components of exports and import-competing products. We test the aforementioned hypotheses with panel data for manufacturing in the European Union (EU). We find that outward processing is more prevalent in import-competing industries, which are also the EU’s relatively intensive users of low-skilled labor. Outward processing in export industries is found to reduce the skill-to-low-skill ratio in EU industries, while outward processing in import-competing industries has more ambiguous effects.

Most professional economists believe that economist in general are more selfish than other persons and that this greater selfishness is due to economic education. In this paper we offer empirical evidence against this widely held belief. Using a unique data set about giving behaviour to two social funds at the University of Zurich, it is shown that economic training does not make people act more selfish. However, the 'natural experiment' supports the hypothesis that the different behaviour of economist can be explained by a selection effect.

This paper surveys recent advances in the application of random dynamical systems theory in economics. It illustrates the usefulness of this framework for modeling and analysis of economic phenomena with stochastic components, mainly focusing on stochastic dynamic models in economic growth. The paper also highlights some directions for further applications and interdisciplinary research on random dynamical systems.

This paper examines the effects of deficits spending on the Nazi recovery. Although deficits were substantial and full employment was reached within four years, their fiscal impulse was too small to account for the speed of recovery. VAR forecasts of output using fiscal and monetary policy instruments also suggest only a minor role for active policy. Nazi policies deliberately crowded out private demand to ensure high rates of rearmament. Military spending dominated civilian work-creation already in 1934. Investment in autobahn construction was minimal during the recovery and gained momentum only in 1936 when full employment was approaching. We find some effects of the Four Years Plan of late 1936, which boosted government spending further and tightened public control over the economy.

This paper presents a complete analysis of a stochastic version of the Solow growth model in which all parameters are ergodic random variables. Applying random dynamical systems theory, we prove that the dynamics and, in particular, the long-runnbehavior is uniquely determined by a globally attracting stable random fixed point. We also discuss the relation of our approach to that of ergodic Markov equilibria.

In this paper, we study the effect of financial markets on the investment of a two-good two-country economy with stochastic production in a dynamic framework. Each country produces and invests only one good and, therefore, makes decisions as a central planner in an optimal growth model. Trade between consumers of both countries, however, takes place on competitive (spot or financial) markets. Wencompare the investment-consumption decisions of both `market' models with the benchmark-case of an integrated world-equilibrium. In the log-linear case, we can uniquely characterize the state-dependent preferences of consumers that lead to dynamically efficient investment decisions. We show that the investment decisions in both `market' models are, in general, inefficient as compared with the efficient, ornintegrated world economy, case.n

Adam Smith's idea that wage differences reveal preferences for risk rests on firm theoretical foundations. This paper argues, however, that the standard approach to identify these differentials in practice may be flawed. Empirical practice usually identifies compensating wage differentials for risk by regressing individual wages on aggregate measures of risk, usually industry or occupation average risk. If jobs differ within industries or occupations, the ''aggregate approach'' may identify arbitrary compensating differentials for risk. In a dataset with precise information on job risk as well as aggregate risk, I demonstrate that using aggregate risk identifies wage differentials that are two to five times larger than wage differentials based on job riskninformation. This result is robust to controlling for time constant unobserved individual or job heterogeneity.

"In this paper we study experimentally four remedies to overcome inefficiencies that arise from the incompleteness of contracts. These remedies are reciprocity, repeated game effects, social embeddedness, and incentive contracts. In our baseline treatment we find that reciprocity is a powerful contract enforcement device. A second experiment establishes that repeated game effects interact with reciprocity in a complementary way, i.e., efficiency is increased compared to our baseline. Adding social approval incentives does not contribute significantly to efficiency. Finally, we show that explicit incentive contracts may have perverse effects in the sense that they ""crowd out"" reciprocity and therefore reduce efficiency compared to the baseline. In our concluding section we discuss the relation of our findings to the recent literature on ""intrinsic motivation""."

We consider a two-stage model of locational choice. Firms decide in which of three locations (or countries) to build plants; they then compete in all three markets. Knowledge spillovers reduce marginal costs in agglomerations; through intra-firm spillovers these cost reductions can be exported to other locations. We show that improvements in the exchange of information within firms make agglomeration more likely, because knowledge obtained in the center can be transmitted to other locations more easily. Decreases in transportation costs tend to destabilize agglomerations, since competition for peripheral locations increases, which decreases the value of knowledge obtained in agglomerations.

"This paper advances two propositions, one concerning content, the other concerning research strategy.n(1) The advent of wide-spread internet publishing reduces the stifling impact of the refereeing process on the papers accepted and submitted to journals. Economics scholars are less bound to devoting a large part of their time and effort on formalisms. They have more leeway to concentrate on matters of content. This greater freedom also improves the chances of the advice and suggestions proposed by economic methodologists being put into practice.n(2) Economic methodology is only able to influence the practice of economics if it takes into account the incentives to which scholars are subjected when they want to pursue an academic career and become prominent. Incentives are transmitted by institutions; it is therefore necessary for economic methodology to analyse how institutions work and how they may change in the future."

This paper considers the European countries' output of eminent economists, i.e. the 160 most often cited academics in the period 1993-96. The influence of the size of the population and GNP is analyzed, and a ranking of the top-20 scholars is provided. The United Kingdom outperforms: it is leading with respect to the absolute number, per capita, and GNP per capita. More surprisingly, most small countries do very well if size is accounted for. The four large Continental countries only do well according to the absolute number of eminent economists. But weighted by population and GNP they chop back dramatically.

Recently developed models of fairness can explain a wide variety of seemingly contradictory facts. The most controversial and yet unresolved issue in the modeling of fairness preferences concerns the behavioral relevance of fairness intentions. In this paper we provide clear and unambiguous experimental evidence for the behavioral relevance of fairness intentions. Our results indicate that the attribution of fairness intentions is important both in the domain of negatively reciprocal behavior and in the domain of positively reciprocal behavior. This means that reciprocal behavior cannot be fully captured by equity models that are exclusively based on preferences over the distribution of material payoffs. Models that take into account players' fairness intentions and distributional preferences are consistent with our data while models thatnfocus exclusively on intentions or on the distribution of material payoffs are not.

In this paper we show that a simple model of reciprocal preferences explains major experimental regularities of common pool resource (CPR) experiments. The evidence indicates that in standard CPR games without communication and without sanctioning possibilities inefficient excess appropriation is the rule. However, when communication or informal sanctions are available appropriation behavior is more efficient. Our analysis shows that these regularities arise naturally when a fraction of the subjects exhibits reciprocal preferences.

We study behavior within a simple principal--agent experiment. Our design allows for a large class of linear contracts. Principals can offer any feasible combination of (negative) fixed wages and incentives in the form of return sharing. This great contractual flexibility allows us to study incentive compatibility simultaneously with issues of `fair sharing' and reciprocity, which were previously found to be important. We find a high degree of incentive-compatible behavior, but also `fair sharing' and reciprocity. In contrast to other incentive devices studied in the literature, the incentives are `reciprocity-compatible'. Principals recognize the agency problem and react accordingly.