Contributions published at Department of Economics (Florian Scheuer)

Moral preferences pervade many aspects of our lives, dictating how we ought to behave, whom we can marry and even what we eat. Despite their relevance, one fundamental question remains unanswered: where do individual moral preferences come from? It is often thought that all types of preferences reflect properties of domain-general neural decision mechanisms that employ a common ‘neural currency’ to value choice options in many different contexts. This view, however, appears at odds with the observation that many humans consider it intuitively wrong to employ the same scale to compare moral value (e.g. of a human life) with material value (e.g. of money). In this paper, we directly test if moral subjective values are represented by similar neural processes as financial subjective values. In a study combining functional magnetic resonance imaging with a novel behavioral paradigm, we identify neural representations of the subjective values of human lives or financial payoffs by means of structurally identical computational models. Correlating isomorphic model variables from both domains with brain activity reveals specific patterns of neural activity that selectively represent values in the moral (right temporo-parietal junction) or financial (ventral-medial prefrontal cortex) domain. Intriguingly, our findings show that human lives and money are valued in (at least partially) distinct neural currencies, supporting theoretical proposals that human moral behavior is guided by processes that are distinct from those underlying behavior driven by personal material benefit.

The locus coeruleus (LC) is a brainstem structure that sends widespread efferent projections throughout the mammalian brain. The LC constitutes the major source of noradrenaline (NE), a modulatory neurotransmitter that is crucial for fundamental brain functions such as arousal, attention, and cognitive control. This role of the LC-NE is traditionally not believed to reflect functional influences on the frontoparietal network or the striatum, but recent advances in chemogenetic manipulations of the rodent brain have challenged this notion. However, demonstrations of LC-NE functional connectivity with these areas in the human brain are surprisingly sparse. Here, we close this gap. Using an established emotional stroop task, we directly compared trials requiring response conflict control with trials that did not require this, but were matched for visual stimulus properties, response modality, and controlled for pupil dilation differences across both trial types. We found that LC-NE functional coupling with the parietal cortex and regions of the striatum is substantially enhanced during trials requiring response conflict control. Crucially, the strength of this functional coupling was directly related to individual reaction time differences incurred by conflict resolution. Our data concur with recent rodent findings and highlight the importance of converging evidence between human and nonhuman neurophysiology to further understand the neural systems supporting adaptive and maladaptive behavior in health and disease.

The consensus view until the 2010s was that trade had little impact on inequality in high-income countries. This column reviews the recent evidence that challenges this view. Manufacturing employment contracted sharply in countries like the US and the UK which faced rapid net import growth from China. The resulting, persistent adverse effects on employment and incomes of low-skilled workers do not appear to have been offset by trade’s effect on prices, which seems to have benefited rich and poor households alike. Mitigating these effects is an important but difficult task for policymakers.

Who commits crime? Theoretically, risk-tolerant and impatient people are more likely to commit crime because they care less about the risks of apprehension and punishment. By linking experimental data on risk tolerance and impatience of young men to administrative crime records, we find empirical support for this hypothesis. For example, crime rates are 8 to 10 percentage points higher for the most risk-tolerant people compared to the most risk averse. A theoretical implication is that those who are most prone to commit crime are also those who are least responsive to stricter law enforcement. Risk tolerance and impatience significantly predict property crime, while self-control is a stronger predictor of crimes of passion (violent, drug, and sexual offenses).

We report the results of two pre-registered experiments designed to study the reinforcement paradox: increased incentives often fail to increase and sometimes even decrease performance in Bayesian updating tasks. We argue that, in the presence of win/loss cues, higher incentives have two countervailing effects: increased error rates for reinforcement behavior (win-stay, lose-shift) and increased performance for decisions resulting from Bayesian updating. We find some evidence that incentives increase performance when the win/loss cue is removed whereas when reinforcement is active the effects of incentives are mixed.

Ziel der Politik muss es sein, den Menschen ein Leben in Würde und Wohlstand zu ermöglichen. Wissenschaft ist unerlässlich, um dieses Ziel zu erreichen. Aber sie kann den für die Politik zuständigen Personen ihre Verantwortung nicht abnehmen, denn Politik muss neben dem wissenschaftlich Optimalen auch andere Aspekte berücksichtigen wie politische Durchsetzbarkeit, Kosten, Referendumsrisiken oder Vereinbarkeit mit internationalen Verträgen. Wissenschaft erweitert unser Wissen mittels transparenter und überprüfbarer Verfahren. Sie ist ein nie endender Prozess der Suche nach Wahrheit. Oft sind Wissenschaftler in zentralen Fragen dabei auch (noch) uneinig. Das alles eröffnet der Politik auch Missbrauchsmöglichkeiten: Bei Uneinigkeit sucht man den Experten, dessen Meinung gerade passt, man lässt Gefälligkeitsgutachten erstellen, oder man beauftragt Experten bewusst mit der Suche nach Argumenten, die die eigenen Vorurteile bestätigen, usw. Das alles ändert aber nichts daran, dass die Politik zur Bewältigung der Komplexität der modernen Welt wissenschaftsbasiertes Fachwissen benötigt. Da der Staat nicht umfassend über solches Fachwissen verfügen kann, muss er das in Wirtschaft, Hochschulen und Zivilgesellschaft reichlich vorhandene Wissen auf geeignete Weise nutzen. Politik nutzt die Wissenschaft tendenziell eher zu wenig, häufig auch wegen eines gewissen Besserwissertums. Es darf von der Wissenschaft aber auch erwartet werden, dass sie Erkenntnisse zu gewinnen sucht, die politische Probleme praktisch lösen helfen. Die Wissenschaft hat eine Bringpflicht, die Politik eine Holpflicht.

How do radical reforms of the state shape economic development over time? In 1790, France’s first Constituent Assembly overhauled the kingdom’s organization to set up new administrative entities and local capitals. In a subset of departments, new capitals were chosen quasi-randomly as the Assembly abandoned its initial plan to rotate administrative functions across multiple cities. We study how exogenous changes in local administrative presence affect the state’s coercive and productive capacity, as well as economic development in the ensuing decades. In the short run, proximity to the state increases taxation, conscription, and investments in law enforcement capacity. In the long run, the new capitals and their periphery obtain more public goods and experience faster economic development. One hundred years after the reform, capitals are 40% more populated than comparable cities in 1790. Our results shed new light on the intertemporal and redistributive impacts of state-building in the context of one of the most ambitious administrative reforms ever implemented.

We address some open issues regarding the characterization of double auctions. Our model is a two-sided commodity market with either finitely or infinitely many traders. We first unify existing formulations for both finite and infinite markets and generalize the characterization of market clearing in the presence of ties. Second, we define a mechanism that achieves market clearing in any, finite or infinite, market instance and show that it coincides with the k-double auction by Rustichini et al. (1994) in the former case. In particular, it clarifies the consequences of ties in submissions and makes common regularity assumptions obsolete. Finally, we show that the resulting generalized mechanism implements Walrasian competitive equilibrium.

Search frictions impede the labor market. Despite this indisputable fact, it is a priori unclear how job search costs affect search duration and unemployment: lower search costs make it easier to find a job, reducing search duration and unemployment, but may also increase the reservation wage, increasing search duration and unemployment. I collaborate with a recruiting company to directly test the effects of lower search costs in a field experiment among approximately 400 IT professionals in Switzerland. I find that workers are more likely to search for detailed job information, but not to file a job application, when search costs are lower. These findings are consistent with an increase in the reservation wage. Lower search costs might lead to picky workers, but fail to ultimately reduce search duration and unemployment.

Short-time work - a wage subsidy conditional on hour reductions - has become an important tool of labor market policy in many European countries. As the scope of these policies expanded, concerns about side effects due to adverse selection increased. We develop a model of job retention policies in the presence of asymmetric information to study selection into these programs. The social planner wants to prevent excessive job destruction but cannot observe which jobs are truly at risk. We do not restrict the social planner to use hour reductions a priori. Instead, we show that hour reductions of short-time work policies act as a screening mechanism to mitigate the adverse selection problem. This perspective of short-time work as a policy response to an underlying adverse selection problem provides an entirely new rationale for these policies. Our approach can be used to revisit recent empirical findings which rely on employment effects to evaluate existing short-time work schemes. In our model, however, average employment effects across groups are not sufficient to determine whether the policy is efficient. Indeed, we show that an optimal short-time work policy cannot avoid a small degree of adverse selection. This is particularly important in light of recent evidence that firms with small revenue shocks and no discernible employment effects have participated in short-time work programs at large costs to the public. In our model, these costs are information rents which are required to screen for jobs at risk. We calibrate our model to German data before the financial crisis and find that the optimal short-time work policy would have reduced separations by 1.2 - 2.4 percentage points.

Modern communication technologies enable efficient exchange of information but often sacrifice direct human interaction inherent in more traditional forms of communication. This raises the question of whether the lack of personal interaction induces individuals to exploit informational asymmetries. We conducted two experiments with a total of 848 subjects to examine how human versus machine interaction influences cheating for financial gain. We find that individuals cheat about three times more when they interact with a machine rather than a person, regardless of whether the machine is equipped with human features. When interacting with a human, individuals are particularly reluctant to report unlikely and therefore, suspicious outcomes, which is consistent with social image concerns. The second experiment shows that dishonest individuals prefer to interact with a machine when facing an opportunity to cheat. Our results suggest that human presence is key to mitigating dishonest behavior and that self-selection into communication channels can be used to screen for dishonest people.

We provide novel evidence on the impact of a child's health shock on parental labor market outcomes. To identify the causal effect, we leverage long panels of high-quality Finnish and Norwegian administrative data and exploit variation in the timing of the health shock. We do this by comparing parents across families in similar parental and child age cohorts whose children experienced a health shock at different ages. We show that these families have very similar characteristics and were following parallel trends before the event. This allows us to use a simple difference-in-differences model: we construct counterfactuals for treated households with families who experience the same shock a few years later. We find a sharp break in parents' earnings trajectories that becomes visible just after the shock. The negative effect is persistent and stronger for mothers than for fathers. We also document a substantial impact on parents' mental well-being. Our results suggest that the effect on maternal labor earnings results from the combination of the increased time needed to care for the child and the worsening of mothers' mental health.

When alternative market institutions are available, traders have to decide both where and how much to trade. We conducted an experiment where traders decided first whether to trade in an (efficient) double-auction institution or in a posted-offers one (favoring sellers), and second how much to trade. When sellers face decreasing returns to scale (increasing production costs), fast coordination on the double-auction occurs, with the posted-offers institution becoming inactive. In contrast, under constant returns to scale, both institutions remain active and coordination is slower. The reason is that sellers trade off higher efficiency in a market with dwindling profits for biased-up profits in a market with vanishing customers. Hence, efficiency alone might not be sufficient to guarantee coordination on a single market institution if the surplus distribution is asymmetric. Trading behavior approaches equilibrium predictions (market clearing) within each institution, but switching behavior across institutions is explained by simple rules of thumb, with buyers chasing low prices and sellers considering both prices and trader ratios.

Regression models for proportions are frequently encountered in applied work. The conditional expectation function is bounded between 0 and 1 and therefore must be nonlinear, requiring nonstandard panel data extensions. One possible approach is the binomial panel logit model with fixed effects (Machado in J Econom 119:73–98, 2004). We propose a new and simple implementation of this conditional maximum likelihood estimator for standard software. We investigate the properties of the estimator under misspecification and derive a new test for overdispersion. Estimator and test are applied in a study of contracted working volumes, measured as proportion of full-time work, for women in Switzerland.

We assess the predictive power of survey measures of social capital with a new behavioral data set that examines whether citizens report a lost wallet to its owner. Using data from more than 17,000 “lost” wallets across 40 countries, we find that survey measures of social capital — especially questions concerning generalized trust or generalized morality—are strongly and significantly correlated with country-level differences in wallet reporting rates. A second finding is that lost wallet reporting rates predict unique variation in the outputs of social capital, such as economic development and government effectiveness, not captured by existing measures.

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.

Milliardäre werden vom Fiskus im Vergleich zu Normalverdienern zu stark verschont, finden viele. Woher kommt dieser Eindruck?

Many econometric and data-science applications require a reliable estimate of the covariance matrix, such as Markowitz’s portfolio selection. When the number of variables is of the same magnitude as the number of observations, this constitutes a difficult estimation problem; the sample covariance matrix certainly will not do. In this article, we review our work in this area, going back 15+ years. We have promoted various shrinkage estimators, which can be classified into linear and nonlinear. Linear shrinkage is simpler to understand, to derive, and to implement. But nonlinear shrinkage can deliver another level of performance improvement, especially if overlaid with stylized facts such as time-varying co-volatility or factor models.

Background: Prejudices against minorities can be understood as habitually negative evaluations that are kept in spite of evidence to the contrary. Therefore, individuals with strong prejudices might be dominated by habitual or “automatic” reactions at the expense of more controlled reactions. Computational theories suggest individual differences in the balance between habitual/model-free and deliberative/model-based decision-making.Methods: 127 subjects performed the two Step task and completed the blatant and subtle prejudice scale.Results: By using analyses of choices and reaction times in combination with computational modeling, subjects with stronger blatant prejudices showed a shift away from model-based control. There was no association between these decision-making processes and subtle prejudices.Conclusion: These results support the idea that blatant prejudices toward minorities are related to a relative dominance of habitual decision-making. This finding has important implications for developing interventions that target to change prejudices across societies.