Contributions published at Department of Economics (Florian Scheuer)

Existing literature has argued that firms benefit from confusing consumers of homogeneous goods. This paper shows that this insight generally breaks down with differentiated goods and heterogeneous preferences: with polarised taste distributions, firms fully educate consumers. In cases where firms nevertheless confuse consumers, the welfare consequences are worse than for homogeneous goods, as consumers choose dominated options. Similar insights are also obtained for political contests, in which candidates compete for voters with heterogeneous preferences: parties choose ambiguous platforms only when preferences are ‘indecisive’, featuring a concentration of indifferent voters.

How can quality be improved in markets in developing countries, which are known to be plagued by substandard and counterfeit (“fake”, in short) products? We study the market for antimalarial drugs in Uganda, where we randomly assign entry of a retailer (non-governmental organization (NGO)) providing a superior product - an authentic drug priced below the market - and investigate how incumbent firms and consumers respond. We find that the presence of the NGO had economically important effects. Approximately one year after the new market actor entered, the share of incumbent firms selling fake drugs dropped by more than 50% in the intervention villages, with higher quality drugs sold at significantly lower prices. Household survey evidence further shows that the quality improvements were accompanied by consumers expecting fewer fake drugs sold by drug stores. The intervention increased use of the antimalarial drugs overall. The results are consistent with a simple model where the presence of a seller committed to high quality, as opposed to an average firm, strengthens reputational incentives for competing firms to improve quality in order to not be forced out of the market, leading to “good driving out bad”.

Following the line of classification-based two-sample testing, tests based on the Random Forest classifier are proposed. The developed tests are easy to use, require almost no tuning, and are applicable for any distribution on R^d. Furthermore, the built-in variable importance measure of the Random Forest gives potential insights into which variables make out the difference in distribution. An asymptotic power analysis for the proposed tests is conducted. Finally, two real-world applications illustrate the usefulness of the introduced methodology. To simplify the use of the method, the R-package “hypoRF” is provided.

We investigate the implications of Salience Theory for the classical preference reversal phenomenon, where monetary valuations contradict risky choices. It has been stated that one factor behind reversals is that monetary valuations of lotteries are inflated when elicited in isolation, and that they should be reduced if an alternative lottery is present and draws attention. We conducted two preregistered experiments, an online choice study (N=256) and an eye-tracking study (N=64), in which we investigated salience and attention in preference reversals, manipulating salience through the presence or absence of an alternative lottery during evaluations. We find that the alternative lottery draws attention, and that fixations on that lottery influence the evaluation of the target lottery as predicted by Salience Theory. The effect, however, is of a modest magnitude and fails to translate into an effect on preference reversal rates in either experiment. We also use transitions (eye movements) across outcomes of different lotteries to study attention on the states of the world underlying Salience Theory, but we find no evidence that larger salience results in more transitions.

Influential economic approaches as random utility models assume a monotonic relation between choice frequencies and “strength of preference,” in line with widespread evidence from the cognitive sciences, which also document an inverse relation to response times. However, for economic decisions under risk, these effects are largely untested, because models used to fit data assume them. Further, the dimension underlying strength of preference remains unclear in economics, with candidates including payoff-irrelevant numerical magnitudes. We provide a systematic, out-of-sample empirical validation of these relations (both for choices and response times) relying on both a new experimental design and simulations.

There is substantial evidence that women tend to support different policies and political candidates than men. Many studies also document gender differences in a variety of important preference dimensions, such as risk-taking, competition and pro-sociality. However, the degree to which differential voting by men and women is related to these gaps in more basic preferences requires an improved understanding. We conduct an experiment in which individuals in small laboratory “societies” repeatedly vote for redistribution policies and engage in production. We find that women vote for more egalitarian redistribution and that this difference persists with experience and in environments with varying degrees of risk. This gender voting gap is accounted for partly by both gender gaps in preferences and by expectations regarding economic circumstances. However, including both these controls in a regression analysis indicates that the latter is the primary driving force. We also observe policy differences between male- and female-controlled groups, though these are substantially smaller than the mean individual differences - a natural consequence of the aggregation of individual preferences into collective outcomes.

How do parents plan to and effectively share resources with their children over time? In a lab-in-the-field experiment in Malawi, we show that, for many parents, plans become more generous the further in the future consumption is. These parents are, however, way more likely to reverse past plans, reallocating away from children’s consumption as it gets closer, even when consumption is still in the future. Reallocating from children’s future consumption towards one’s own - what we call parent-bias - cannot be explained by present-bias. Commitment devices designed for present-bias do not mitigate parent-bias. Our findings provide a new explanation for underinvestment in children and inform the design of new interventions to address it.

Profit shifting by multinational corporations is thought to reduce tax revenue around the world. We analyze 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.

Socioeconomic status (SES) correlates with brain structure, a relation of interest given the long-observed relations of SES to cognitive abilities and health. Yet, major questions remain open, in particular, the pattern of causality that underlies this relation. In an unprecedently large study, here, we assess genetic and environmental contributions to SES differences in neuroanatomy. We first establish robust SES–gray matter relations across a number of brain regions, cortical and subcortical. These regional correlates are parsed into predominantly genetic factors and those potentially due to the environment. We show that genetic effects are stronger in some areas (prefrontal cortex, insula) than others. In areas showing less genetic effect (cerebellum, lateral temporal), environmental factors are likely to be influential. Our results imply a complex interplay of genetic and environmental factors that influence the SES-brain relation and may eventually provide insights relevant to policy.

We establish a sizable shift in the individual labor shares of Danish firms since 1999. Whereas the mean and median labor shares have increased by around 5 points, the labor share of the largest firms is much lower today, in particular the labor share of manual workers. A substantial part of this is driven by the top 1 per cent of firms that have grown substantially bigger. The main driver of this is an increase in markups, though large firms have become more capital intensive during the period. We show that investments in capital and R&D predict declines in the labor share. Though offshoring activities have impacted the labor share it is not a strong quantitative driver of the results. We show that these changes tie strongly to the firms' export behavior: Large firms with lower labor share scale up value of exports, though not number of destinations nor product category. The increase in value comes predominantly from increases in quantity.

Economic research on gender largely focuses on biological sex, the binary classification as either a “man” or “woman.” We investigate the value of incorporating a measure of continuous gender identity (CGI) into economics by exploring whether it explains variation in economic preferences and behavior beyond the explanatory power of binary sex. First, we validate a novel single-item CGI measure in a survey study, showing that it correlates with measures used in gender research. Second, we use our single-item CGI measure in an incentivized laboratory experiment to assess CGI's power in explaining previously documented gender gaps in four important economic preferences.

Previous brain imaging studies with chronic cocaine users (CU) using diffusion tensor imaging (DTI) mostly focused on fractional anisotropy to investigate white matter (WM) integrity. However, a quantitative interpretation of fractional anisotropy (FA) alterations is often impeded by the inherent limitations of the underlying tensor model. A more fine-grained measure of WM alterations could be achieved by measuring fibre density (FD). This study investigates this novel DTI metric comparing 23 chronic CU and 32 healthy subjects. Quantitative hair analysis was used to determine intensity of cocaine and levamisole exposure-a cocaine adulterant with putative WM neurotoxicity. We first assessed the impact of cocaine use, levamisole exposure and alcohol use on group differences in WM integrity. Compared with healthy controls, all models revealed cortical reductions of FA and FD in CU. At the within-patient group level, we found that alcohol use and levamisole exposure exhibited regionally different FA and FD alterations than cocaine use. We found mostly negative correlations of tract-based WM associated with levamisole and weekly alcohol use. Specifically, levamisole exposure was linked with stronger WM reductions in the corpus callosum than alcohol use. Cocaine use duration correlated negatively with FA and FD in some regions. Yet, most of these correlations did not survive a correction for multiple testing. Our results suggest that chronic cocaine use, levamisole exposure and alcohol use were all linked to significant WM impairments in CU. We conclude that FD could be a sensitive marker to detect the impact of the use of multiple substances on WM integrity in cocaine but also other substance use disorders.

Previous evidence shows that better insurance coverage increases medical expenditure. However, formal studies on the effect of spending on health outcomes, and especially mental health, are lacking. To fill this gap, we reanalyze data from the Rand Health Insurance Experiment and estimate a joint non-linear model of spending and mental health. We address the endogeneity of spending in a flexible copula regression model with Bernoulli and Tweedie margins and discuss its implementation in the freely available GJRM R package. Results confirm the importance of accounting for endogeneity: in the joint model, a $1000 spending in mental care is estimated to reduce the probability of low mental health by 1.3 percentage points, but this effect is not statistically significant. Ignoring endogeneity leads to a spurious (upwardly biased) estimate.

This paper studies the problem of endogenous coalition formation in contests: how players organize themselves in groups when faced with the common objective of securing a prize by exerting costly effort. The model presented adopts an axiomatic approach by assuming certain properties for the winning probability that imply efficiency gains from cooperation in contest settings. Efficiency gains are said to be generated if any coalition experiences increasing marginal returns with aggregate effort until a threshold. These properties identify a wide class of generalised Tullock contest success functions. We analyse a sequential coalition formation game for an arbitrary number of symmetric players and exogenous effort. If coalitions generate sufficient efficiency gains, then any equilibrium always consists of two or more coalitions where at least two coalitions are of unequal size. This result extends to endogenous efforts if the cost functions are sufficiently convex.

We study the effect of exposure to colonial public primary education on contemporary education outcomes in Tunisia. We assemble a new data set on the location of schools with the number of pupils by origin, along with population data during the French protectorate (1881–1956). We match those with contemporary data on education at both district and individual level. We find that the exposure of local population to colonial public primary education has a long-lasting effect on educational outcomes, even when controlling for colonial investments in education. A one per cent increase in Tunisian enrolment rate in 1931 is associated with a 1.69 percentage points increase in literacy rate in 2014. Our results are driven by older generations, namely individuals who attended primary schools before the 1989/91 education reform. We suggest that the efforts undertaken by the Tunisian government after independence to promote schooling finally paid off after 40 years and overturned the effects of history.

We show experimentally and theoretically that trust and contract enforcement can be complements, and identify the key mechanisms that drive this complementarity. In our experiments, the effect of improvements in contract enforcement is trust-dependent, and the effect of increases in trust is shaped by the strength of contract enforcement. We identify three key mechanisms underlying this complementarity: (1) heterogeneity in trustworthiness; (2) strength of contract enforcement affecting the ability to elicit reciprocal behavior from trustworthy types, and screen out untrustworthy types; (3) trust beliefs determining willingness to try such strategies.

Do the people around us influence our personality? To answer this question, we conduct an experiment with 543 university students who we randomly assign to study groups. Our results show that students become more similar to their peers along several dimensions. Students with more competitive peers become more competitive, students with more open-minded peers become more open-minded, and students with more conscientious peers become more conscientious. We see no significant effects of peers’ extraversion, agreeableness, or neuroticism. To explain these results, we propose a simple model of personality development under the influence of peers. Consistent with the model’s prediction, personality spillovers are concentrated in traits predictive of performance. Students adopt personality traits that are productive in the university context from their peers. Our findings highlight that socialization with peers can influence personality development.

The present paper combines nonlinear shrinkage with the Multivariate Generalized Hyperbolic (MGHyp) distribution to account for heavy tails in estimating the first and second moments in high dimensions. An Expectation-Maximization (EM) algorithm is developed that is fast, stable, and applicable in high dimensions. Theoretical arguments for the monotonicity of the proposed algorithm are provided and it is shown in simulations that it is able to accurately retrieve parameter estimates. Finally, in an extensive Markowitz portfolio optimization analysis, the approach is compared to state-of-the-art benchmark models. The proposed model excels with a strong out-of-sample portfolio performance combined with a comparably low turnover.

This paper investigates how exposure to higher-achieving male and female peers in university affects students’ major choices and labor market outcomes. For identification of causal effects, we exploit the random assignment of students to university sections in compulsory first-year courses. We present two main results. First, studying with higher-achieving peers has no statistically significant or economically meaningful effects on educational choices. Second, we find suggestive evidence that women who have been exposed to higher- achieving male peers end up in jobs in which they are more satisfied.

This paper contributes to quantifying the biological implications of short-run climatic shocks and economic fluctuations in developing countries. Relying on a unique economic, climatic and anthropometric Japanese data covering the period from 1872 to 1917 (corresponding to the early phase of Japanese industrialization), we estimate the impact of yearly and monthly regional climate anomalies and yearly nationwide business cycle reversals on the average height of Japanese conscripts and its dispersion. Our estimations detect that climate anomalies during gestation and early infancy induced a decrease in average height observed at adulthood, as well as an increase in height dispersion, indicating greater welfare inequalities. These results indicate that pre-Anthropocene climate shocks had irremediable welfare implications for the poorest segments of the population in lower income countries.