Contributions published at Department of Economics (Florian Scheuer)

During the 1990s, the social health insurance schemes of Germany, the Netherlands, Switzerland, Belgium and Israel were significantly reformed by the introduction of freedom of choice (open enrolment) of health insurer. This was introduced alongside a system of risk adjustment to compensate health insurers for enrolees with predictable high medical expenses. Despite the similarity in the health insurance reforms in these countries, we find that both the rationale behind these reforms and their impact on consumer choice vary widely. In this article we seek to explain the observed variation in switching rates by cross-country comparison of the potential determinants of health insurer choice. We conclude that differences in choice setting, and in the net benefits of switching, offer a plausible explanation for the large differences in consumer mobility. Finally, we discuss the policy implications of our cross-country comparison. We argue that the optimal switching rate crucially depends on the goals of the reforms and the quality of the risk-adjustment system. In view of this, we conclude that switching rates are currently too low in the Netherlands, and an active government policy to encourage consumer mobility seems warranted. In Germany and Switzerland, high switching rates call for an improvement of the rather poor risk-adjustment systems. Given low switching rates in Israel and Belgium, improving risk adjustment is less urgent, but still required in the long run.

In small groups norm enforcement is provided by mutual punishment and reward. In large societies we have enforcement institutions. This paper shows how such institutions can emerge as a decentralized equilibrium. In a first stage, individuals invest in a public enforcement technology. This technology generates a sanctioning system whose effectiveness depends on the aggregate amount of invested resources. In a second stage, in which individuals contribute to the provision of a public good, the sanctioning system imposes penalties and rewards on deviations from the endogenous norm contribution. It is shown that even if group size goes to infinity public norm enforcement is supported in a noncooperative equilibrium. Psychological factors are not necessary but can be favorable for the emergence of effective public norm enforcement.

Typical of the AIDS epidemics is that governments in developing countries under-invest in drugs production because of the possible appearance of a curative vaccine. We design a financialntool allowing to hedge against this event. We show that the introduction of this asset increases social welfare, as well as the number of patients treated and the provision of public good.

"This paper aims to show that the market selection hypothesis in finance is not solely driven by the competitiveness of such markets, as was originally claimed by Alchian [1] and Friedman [4]. Within a standard intertemporal General Equilibrium framework, we allow for an agentnto have enough influence on financial markets to strategically affect prices of assets traded. We then show that, as in Sandroni [15], the agent’ long-run consumption will vanish if she makes less accurate predictions than the market, and maintain her market power otherwise. We conclude thatnthe Darwinian justification to this market selection is not the only explanation for the eventualndomination of agents making the most accurate predictions. Rather, we claim that the origin of market selection, and in turn of the common prior assumption in asset pricing, is associated withnthe ability to foresee accurately market uncertainty."

"This paper extends the convergence result on Bayesian learning in Kalai and Lehrern(1993a, 1993b) to a class of games where players have a payoff function continuous for the product topology. Provided that 1) every player maximizes her expected payoff against her own beliefs, 2) every player updates her beliefs in a Bayesian manner, and 3) prior beliefs other players’ strategies have a grain of truth, we show that after some finite time the equilibrium outcome of the above game is arbitrarily close to a Nash equilibrium. Those assumptions are shown to be tight."

"We utilize Schmookler’s (1966) concept of demand-induced invention to study the rolenof income inequality in an endogenous growth model. As rich consumers can satisfy morenwants than poor consumers, both prices and market sizes for new products, as well as theirnevolution over time, are determined by the income distribution. We show how a change in the distribution of income affects the incentive to innovate and hence long-run growth. In general, less inequality tends to discourage the incentive to innovate, but this depends on the nature of the redistribution."

We examine vertical backward integration in a reducedform model of successive oligopolies. Our key findings are: (i) There may be asymmetric equilibria where some firms integrate and others remain separated, even if firms are symmetric initially; (ii) Efficient firms are more likely to integrate vertically. As a result, integrated firms also tend to have a large market share. The driving force behind these findings are demand/mark-up complementarities in the product market. We also identify countervailing forces resulting from strong vertical foreclosure, upstream sales and endogenous acquisition costs.

This paper purports to develop a simple microeconomic model designed to shed light on behavioral change induced by improved information about smoking risks. It predicts the conditions in which improved information indeed increases the demand for cigarettes. After recalling the economic rationale of an anti-tobacco policy, the article points out a few startling implications of improved information about the risks of smoking.

The idea to learn about international capital mobility from saving and investment data remains appealing. Our approach is based on VAR methods and overcomes some of the problems associated with saving–investment regressions when the data are non-stationary. We propose a new measure of long-run capital mobility that can be easily calculated as a by-product of the estimation procedure of a cointegrated VAR. In an application to historical US and British data, we find long-run capital mobility to have been remarkably stable over the century whereas variations in the mobility of capital primarily seem to have affected short-run capital flows.

"Alienation to politics weakens political competition and can undermine the acceptance and legitimacy of democracy as a political system. Governance andnrepresentation problems at the local level cause part of citizens’ lack of power andnpolitical alienation. Citizens have local power if they can process so that its outcomes are closer to their preferences and if they feel to be effective in the political sphere. In order to increase citizens’ local power, we emphasize the role of institutions of local governance. Local democratic governance is concerned about the relationship between citizens and local governmentninstitutions, political representatives and officials. This relationship is fundamentally shaped by the federal structure of a nation’s government and by the scope and depth of citizens’ participation possibilities in the political process. "

Distortions in memory impose important bounds on rationality but have been largely disregarded in economics. While it is possible to learn, it is more difficult, and sometimes impossible, to unlearn. This retention effect lowers individual utility directly or via reduced productivity, andnadds costs to principal-agent relationships. The imprinting effect states that the more one tries to forget a piece of information the more vivid it stays in memory, leading to a paradoxical outcome. The effects are based on, and are supported by, psychological experiments, and it is shown that they are relevant in many economic situations and beyond.

In dieser Arbeit werden die Auswirkungen des Frauenstimmrechts auf die Staatsausgaben in den Kantonen der Schweiz untersucht. Anhand dieser institutionell bedingten Veränderung des Elektorats studieren wir den Zusammenhang zwischen repräsentierten Bürgerpräferenzen und dem Ergebnis des politischen Prozesses. Da Frauen imnDurchschnitt einkommensärmer sind als Männer, steigt mit ihrer Beteiligung gemässnTheorien zur Grösse des Staatshaushaltes die Nachfrage nach staatlichen Leistungen.nEntgegen der Hypothese schätzen wir jedoch eine dämpfende Wirkung des Frauenstimmrechts auf die Entwicklung der Gesamtausgaben. Die zeitlich unterschiedliche Einführung des Rechts erlaubt dabei die Berücksichtigung allgemeiner Trends in Wirtschaft und Gesellschaft. Als Erklärungsversuche diskutieren wir die Möglichkeit fiskalischnkonservativer Frauen und einer Wechselwirkung des Frauenstimmrechts mit denndirektdemokratischen Institutionen.

Firms are central to many theories of the labor market. However, the actual degree to which firms shape the structure of wages is still not well understood. This paper investigates (i) the importance of firms in explaining wage differences across individuals and industries, and (ii) how the nature of interfirm mobility - job-to-job vs. job-unemployment-job - affects the relative importance of firms and workers in wage determination. Results indicate that (i) firms are much more important in explaining the variance of average wages across industries rather than across individuals, and (ii) using job-to-job transitions to identify the firm's contribution to the wage rate reduces the importance of firm wage policies in explaining wage differences by as much as 50%.

The portfolio selection problem is traditionally modelled by two different approaches. The first one is based on an axiomatic model of risk-averse preferences, where decision makers are assumed to possess an expected utility function. The second approach, first proposed by Markowitz (1952), reduces the portfolio choice to a set of two criteria, reward and risk. Usually the reward-risk model is not consistent with the first approach, even when the decision is independent from the specific form of the risk-averse expected utility function. In this paper we generalize the reward-risk model for portfolio selection. We define reward measures and risk measures by giving a set of properties these measures should satisfy. One of these properties will be the consistency with second order stochastic dominance, to obtain a link with the expected utility portfolio selection. We characterize reward and risk measures and we discuss the implication for portfolio selection.

The standard solution to adverse selection is the separating equilibrium introduced by Rothschild and Stiglitz. Usually, the Rothschild-Stiglitz argument is developed in a model that allows for two states of the world only. In this paper adverse selection is dis-cussed for continuous loss distributions. This gives rise to the new problem of finding the proper form of an insurance contract to impose partial insurance of the low risks. This paper contributes to the discussion on optimal insurance. It analyzes two basic forms of insurance contracts: A contract with a deductible and a contract imposing a positive co-insurance rate. Since high risks can always self-reveal themselves as high risks and buy the optimal insurance contract at high risks’ premiums the Pareto-superior insurance contract is the one that leaves the low risks with higher expected utility while deterring high risks from joining the contract that is designed for low risks. The deductible contract turns out to be superior if premiums contain a sufficiently high loading.

Elicitation methods in decision making under risk allow a researcher to infer thensubjective utilities of outcomes as well as the subjective weights of probabilities from observed preferences of an individual. An optimally efficient elicitation method is proposed, which takes into account the inevitable distortion of preferences by random errors and minimizesnthe effect of such errors on the inferred utility and probability weighting functions. Under mildnassumptions, the optimally efficient method for eliciting utilities (weights) of many outcomes (probabilities) is the following three-stage procedure. First, a probability is elicited whose subjective weight is one half. Second, an individual's utility function is elicited through the midpoint chaining certainty equivalent method employing the probability elicited at the first stagenas an input. Finally, an individual's probability weighting function is elicited through the probability equivalent method.

In imperfectly discriminating contests the contestants contribute effort to win a prize but the highest contributed effort does not necessarily secure a win. The contest success function (CSF) is the technology that translates an individual's effort into his or her probability of winning. This paper provides an axiomatization of CSF when there is the possibility of a draw (the sum of winning probabilities across all contestants is non-additive).

Neun Jahre Wettbewerb unter den Krankenversicherungen brachten nicht die erhofften kostendämpfenden Effekte. Schuld daran ist, wie der Autor des folgenden Beitrags darlegt, eine verfehlte Wettbewerbsregulierung, die dem sogenannten Risikoausgleich zwischen den Krankenversicherern zu wenig Beachtung schenkt.

This paper analyzes the causal relationships between marriage and subjective well-being in a longitudinal data set spanning 17 years. We find evidence that more happy singles opt more likely for marriage and that there are large differences in the benefits from marriage between couples. Potential, as well as actual, division of labor seems to contribute to spouses' well-being, especially for women and when there is a young family to raise. In contrast, large differences in the partners' educational level have a negative effect on experienced life satisfaction.

"The trends and consequences of terrorist activities are often captured by counting the number of incidents and casualties. More recently, the effects of terrorist acts on various aspects of the economy have been analyzed. These costs are surveyed and put in perspective. As economic consequences are only a part of the overall costsnof terrorism, possible approaches for estimating the utility losses of the people affected are discussed. Results using the life satisfaction approach, in which individual utility is approximated by self-reported subjective well-being, suggest that people's utility lossesnmay far exceed the purely economic consequences."