Contributions published at Department of Economics (Florian Scheuer)

Education is widely recognized as structuring emerging political divides between the new left and the far right (Stubager 2009; Häusermann and Kriesi 2015; Abou-Chadi and Hix 2021; Marks et al. 2022). However, there is ongoing uncertainty about the mechanism through which the education cleavage operates, particularly in the absence of mobilizing organizations. We fielded a survey in Germany in October 2022 (to be followed by Switzerland and the UK) to explore the hypothesis that patterns of social segregation by education create social networks which foster common identities, political attitudes, and voting behavior (consolidating key aspects of an emerging cleavage). We offer descriptive evidence that individuals tend to be embedded in educationally-distinct social networks. In turn, our preliminary findings show that network composition in terms of both level and field are associated with social identities, political attitudes, and vote choice, above and beyond individual educational characteristics.

As far right views are increasingly becoming socially acceptable, it remains unclear under what conditions the media contribute to this normalisation process. Drawing on two pre-registered, placebo-controlled survey experiments that use the real-world audio of interviews with extreme right actors in Australia and Britain, we find that platforming extreme right actors on either the TV channel Sky News or the online platform Youtube fuels agreement with extreme right statements and leads participants to believe that a larger share of the population supports extreme right views. Interviewers’ strategies of engaging with extreme right actors matter: While unchallenged interviews consistently result in the radicalisation of participants’ attitudes and beliefs, interviewers who challenge the accuracy of the false statements made, mitigate attitudinal effects and lower normalisation effects. While platforming affects beliefs, we find that exposure backfires on the rating of the actor who advocates for those beliefs, especially in the critical interview condition.

Profit shifting by multinational corporations is thought to reduce tax revenue around the world. While transfer pricing regulations are meant to curtail profit shifting, there have been rising concerns that a sophisticated tax advisory industry can limit their effectiveness. This paper provides a comprehensive analysis of how firms and tax advisors respond to the introduction of standard regulations aimed at limiting profit shifting. Using administrative tax and customs data from Chile in difference-in-differences event-study designs, we find that the reform was ineffective in reducing multinationals’ transfers to lower-tax countries and did not significantly raise tax payments. At the same time, interviews with tax advisors reveal a drastic increase in tax advisory services. The qualitative interviews also allow us to identify and then quantitatively confirm a common tax planning strategy in response to the reform. These results illustrate that when enforcement can be circumvented by sophisticated tax planning, it can benefit tax consultants at the expense of tax authorities and taxpayers.

We propose a sufficient statistic to measure the ex-post welfare gains from trade in CES models featuring any productivity distribution and any pattern of selection into production and exporting. This statistic is based on a single data moment, the change in the market share of continuing domestic producers, and a single structural parameter, the elasticity of substitution between products. We apply our statistic to measure Canada's gains from the Canada-US Free Trade Agreement using data on observed firm selection. We find that welfare gains can substantially deviate from welfare estimates implied by formulas that assume a constant extensive margin trade elasticity.

The rationality of choices is one of the most fundamental assumptions of traditional economic analysis. Yet, substantial evidence has documented that choices often cannot be rationalized by utility maximization. Several measures of rationality have been introduced in the literature to quantify the size of rationality violations. However, it is not clear which of these measures should be used in applications, and many measures are computationally very demanding, which has restricted their widespread use. First, we introduce novel variations of the measures that allow us to establish connections between the different measures. Second, we develop methods to compute the most-used measures of rationality. Exploiting this computational progress, we offer simulation-based comparisons of the accuracy of the measures. These simulations show that a new type of measure that combines the size of rationality violations with the number of rationality violations outperforms other measures. Finally, we offer a method to calculate statistical significance levels for rationality violations.

We study paternalistic preferences in two large-scale experiments with participants from the general population in the United States. Spectators decide whether to intervene to prevent a stakeholder, who is mistaken about the choice set, from making a choice that is not aligned with the stakeholders’ own preferences. We find causal evidence for the nature of the intervention being of great importance for the spectators’ willingness to intervene. Only a minority of the spectators implement a hard intervention that removes the stakeholder’s freedom to choose, while a large majority implement a soft intervention that provides information without restricting the choice set. This finding holds regardless of the stakeholder’s responsibility for being mistaken about the choice set - whether the source of mistake is internal or external - and in different subgroups of the population. We introduce a theoretical framework with two paternalistic types - libertarian paternalists and welfarists - and show that the two types can account for most of the spectator behavior. We estimate that about half of the spectators are welfarists and that about a third are libertarian paternalists. Our results shed light on attitudes toward paternalistic policies and the broad support for soft interventions.

We extend the swaps index of rationality, introduced by Apesteguia and Ballester (2015) for a finite set of alternatives, to the standard consumer choice setting with infinite commodity spaces. Applications include consumer demand from competitive budget sets and the state-space approach to choice under uncertainty. We are interested in Apesteguia and Ballester’s result that the swaps index recovers the decision-maker’s true preference from choice data for a large class of boundedly rational behavioral models. We show that this result still holds in the consumer choice setting under a suitably defined monotonicity condition. This condition is satisfied for various models of interest but violated for others.

The Riemann Hypothesis (RH) is one of the major unsolved problems in pure mathematics. In this note, a parameterized family of non-cooperative games is constructed with the property that, if RH holds true, then any game in this family admits a unique Nash equilibrium. We argue that this result is not degenerate. Indeed, neither is the conclusion a tautology, nor is RH used to define the family of games.

Over the course of the past two decades, it has become a common experience for consumers authorizing an international transaction via credit card to be invited to choose the currency in which they wish the transaction to be executed. While this choice, made feasible by a technology known as dynamic currency conversion (DCC), seems to foster competition, we argue that the opposite is the case. In fact, the unique pure-strategy equilibrium in a natural fee-setting game, with uninformed and possibly inattentive consumers, turns out to be highly asymmetric, entailing fees for the service provider that persistently exceed the monopoly level. Although losses in welfare may be substantial, a regulatory solution is unlikely to come about due to a global free-rider problem.

We combine Tyler's robust estimator of the dispersion matrix with nonlinear shrinkage. This approach delivers a simple and fast estimator of the dispersion matrix in elliptical models that is robust against both heavy tails and high dimensions. We prove convergence of the iterative part of our algorithm and demonstrate the favorable performance of the estimator in a wide range of simulation scenarios. Finally, an empirical application demonstrates its state-of-the-art performance on real data.

A standard assumption in neuroscience is that low-effort model-free learning is automatic and continuously used, whereas more complex model-based strategies are only used when the rewards they generate are worth the additional effort. We present evidence refuting this assumption. First, we demonstrate flaws in previous reports of combined model-free and model-based reward prediction errors in the ventral striatum that probably led to spurious results. More appropriate analyses yield no evidence of model-free prediction errors in this region. Second, we find that task instructions generating more correct model-based behaviour reduce rather than increase mental effort. This is inconsistent with cost–benefit arbitration between model-based and model-free strategies. Together, our data indicate that model-free learning may not be automatic. Instead, humans can reduce mental effort by using a model-based strategy alone rather than arbitrating between multiple strategies. Our results call for re-evaluation of the assumptions in influential theories of learning and decision-making.

Dopamine is thought to play a crucial role in cost-benefit decision making, but so far there is no consensus on the precise role of dopamine in decision making. Here, we review the literature on dopaminergic manipulations of cost-benefit decision making in humans and evaluate how well different theoretical accounts explain the existing body of evidence. Reduced D2 stimulation tends to increase the willingness to bear delay and risk costs (i.e., wait for later rewards, take riskier options), while increased D1 and D2 receptor stimulation increases willingness to bear effort costs. We argue that the empirical findings can best be explained by combining the strengths of two theoretical accounts: in cost-benefit decision making, dopamine may play a dual role both in promoting the pursuit of psychologically close options (e.g., sooner and safer rewards) and in computing which costs are acceptable for a reward at stake. Moreover, we identify several limiting factors in the study designs of previous investigations that prevented a fuller understanding of dopamine’s role in value-based choice. Together, the proposed theoretical framework and the methodological suggestions for future studies may bring us closer to a unifying account of dopamine in healthy and impaired cost-benefit decision making.

We analyse the effect of national industry shocks on local employment. By providing a novel structural view on the Bartik framework, we show that the difference in national and regional employment growth trends can be attributed to within-region spillovers. These spillovers can be quantified in a simple regression of regional employment change predictions versus actual regional employment changes, where regional employment change predictions are based on national shocks. We find consistent evidence that a predicted change in employment by 1% is associated with a 1.3% change in actual employment in a region. We hypothesize that agglomeration plays a key role in explaining the difference between the predicted and the actual employment growth. When we allow for non-linearities in a variety of setups, we find that the main driver of agglomeration effects are regions with particularly strong growth in employment which outperform their predictions. Taking the employment weighted mean as inflection point, regions with below mean predicted employment growth show a roughly 1:1 translation of predicted job creation to actual job creation. For regions with above mean predictions this ratio increases to 1:1.7.

I investigate how the housing market in a binational agglomeration responds to a large trans-border public transport connectivity improvement. For this, I exploit the recent introduction of the Léman Express, a suburban train service in the Greater Geneva area. The new line seamlessly connects the Swiss and the French side of the agglomeration, resulting in a substantial travel time reduction. I document locally concentrated construction booms and increasing prices at locations benefiting from the new service about two years in anticipation of the opening. I study the impact of the anticipated commuting cost decrease on residential mobility flows and discuss the resulting changes in neighborhood composition. Locations near soon well-connected stations experience a shift towards affluent, home-owning cross-border workers resulting in a gentrification push for these historically predominantly poor neighborhoods. This is largely driven by inflows from adjacent areas and internal relocations whereas trans-border relocation flows remain unimportant.

There is an active debate about whether housing assistance policies distort labor market incentives. We investigate the so far neglected interaction between housing subsidy recipients’ residential mobility and their job mobility. The setting for this is a large-scale, object-targeting housing assistance program in Switzerland launched in 1975. The WEG program offered substantial rent subsidies to low-income households for a limited duration. Leveraging variation in the timing of subsidy expiration in an event study, we show that WEG tenants have reduced residential mobility as long as subsidies are paid out but increase mobility once subsidies expire. Recipients’ labor market response to subsidy expiration, however, is limited or even negative. Furthermore, we find that WEG out-movers, on average, experience an improvement in dwelling and neighborhood quality, but there is large variation in outcomes.

We introduce a demand-side trade model to shed light on the interaction between countries’ income distributions, the patterns of international trade and parallel trade policy restrictions in general equilibrium. We provide a comprehensive theoretical foundation for the role of income inequality for trade that allows distinguishing within- and between-country inequality. To bring differences in the willingness to pay of differentially rich consumers to the forefront of the analysis, we deviate from the canonical model by replacing the standard CES preferences with non-homothetic 0-1 preferences. We characterize and numerically solve the trade equilibrium for a discrete labor endowment distribution with several consumer-income groups. Our model predicts trade intensity to be increasing in the income distribution overlap, which is our preferred proxy for demand similarity. Our model, therefore, provides a theoretical foundation for the Linder hypothesis, that bilateral trade volume is increasing in the similarity of demand structure between two countries. Furthermore, our model predicts a Manhattan effect, capturing that poor consumers are badly off if they are a small minority in a predominantly rich country due to the high price level for basic products.

This paper studies the impact of carbon pricing on firms’ inflation expectations and discusses the potential implications for what constitutes the core of most central banks’ mandate: price stability. Carbon policy shocks are identified from high-frequency changes in carbon futures price around regulatory events. The shock series is combined with French firm-level survey data. We document that a change in the price of carbon increases firms’ inflation expectations. We then investigate how firms’ business conditions are affected by carbon policy shocks and we find that firms’ own expected and realized price growth respond similarly to inflation expectations. The effect on price expectations is more persistent than on actual price growth leading to positive forecast errors in the medium-/long-run. We also show that a sizable share of the increase in inflation expectations is due to indirect effects. Firms rely on their own business conditions to form expectations about the aggregate price dynamics. Therefore, the expected positive growth in their own prices significantly contributes to the observed increase in inflation expectations. Finally, we study how firms’ responses are heterogeneously influenced by the shocks based on the share of input costs devoted to energy expenditures. We find that high energy-intensive firms tend to overreact relatively more in terms of their own price expectations compared to the actual price change the shocks induce.