Contributions published at Department of Economics (Florian Scheuer)

This paper studies how changes in the two key parameters of unemployment insurance-the benefit replacement rate (RR) and the potential benefit duration (PBD)-affect the duration of unemployment. To identify such an effect we exploit a policy change introduced in 1989 by the Austrian government, which affected various unemployed workers differently: a first group experienced an increase in RR; a second group experienced an extension of PBD; a third group experienced both a higher RR and a longer PBD; and a fourth group experienced no change in the policy parameters. We find that unemployed workers react to the disincentives by an increase in unemployment duration, and our empirical results are consistent with the predictions of job search theory. We use our parameter estimates to split up the total costs to unemployment insurance funds into costs due to changes in the unemployment insurance system with unchanged behaviour and costs due to behavioural responses of unemployed workers. Our results indicate that costs due to behavioural responses are substantial.

Objectives - Preferences of both Alzheimer patients and their spouse caregivers are related to a willingness-to-pay (WTP) measure which is used to test for the presence of mutual (rather than the conventional one-way) altruism. Methods - Identical contingent valuation interviews were conducted in 2000 - 2002 for 126 Alzheimer patients and their caregiving spouses living in the Zurich metropolitan area (Switzerland). We elicit WTP three hypothetical treatments of the demented patient. The treatment Stabilization prevents the worsening of the disease, bringing dementia to a standstill. Cure restores patient health to its original level. In No burden, dementia takes its normal course while caregiver’s burden is reduced to its level before the disease. Results - Different characteristics of therapies are reflected in differences in WTP values. Accepting WTP values as expression of preferences, one finds that patients do not rank Cure higher than No burden; implying that their WTP is entirely altruistic. Caregiving spouses rank Cure before Burden, some 40 percent of their WTP reflecting an altruistic motive again. Discussion - The evidence suggests that WTP values are reliable measures of subjective preferences even in Alzheimer patients. Using this indicator, it is found that only caregivers have extra WTP for Cure, implying that curing dementia has value exclusively to them.

The paper analyzes the infinite-horizon alternating-offers bargaining game between agents with inequity-averse preferences. Without prior investments,nthe model predicts a shift of the outcome towards equal division. Asymmetricninvestments affect the ex-post bargaining outcome, giving an advantage to the party that contributed more. Under suitable circumstances, this effectnmay significantly mitigate the hold-up problem. In fact, in a symmetric setup, if production is sufficiently profitable, and parties are sufficiently patient, then the first-best investment levels can be approximated without a con

Ein Blick in die Literatur zeigt: Der Einfluss der Selbstdispensation(SD) auf die Medikamentenkosten ist äusserst umstritten. Die vorliegende Arbeit unterzieht diesen Zusammenhang einer erneuten Prüfung.

This paper argues that openness to goods trade in combination with an unequal distribution of political power has been a major determinant of the comparatively slow development of resource- or land-abundant regions like South America and the Caribbean in the nineteenth century. We develop a two-sector general equilibrium model with a tax-financed public sector, and show that in a feudal society (dominated by landed elites) productivity-enhancing public investments like the provision of schooling are typically lower in an open than in a closed economy. Moreover, we find that, under openness to trade, development is faster in a democratic system. We also endogenize the trade regime and demonstrate that, in political equilibrium, a land-abundant and landowner-dominated economy supports openness to trade. Finally, we discuss empirical evidence which strongly supports our basic hypotheses.

This paper investigates the design of incentives in a dynamic adverse selection framework when agents’ production technologies display learning effects and agents’ rate of learning is private knowledge. In a simple two-period model with full commitment available to the principal, we show that whether learning effects are over- or under-exploited crucially depends on whether learning effects increase or decrease the principal’s uncertainty about agents’ costs of production. Hence, what drives the over- or under-exploitation of learning effects is whether more efficient agents also learn faster (so costs diverge through learning effects) or whether it is the less efficient agents who learn faster (so costs converge). Furthermore, we show that if divergence in costs through learning effects is strong enough, learning effects will not be exploited at all, in a sense to be made precise.

"The optimal contest architecture for symmetric imperfectly discriminating contests isnshown to be generically the two-stage tournament (rather than the one-stage contest). In the first stage the contestants compete in several parallel divisions for the right to participate in the secondnstage. In the second stage the short-listed finalists compete for the prize. Given a sufficient number of contestants, the two-stage tournament is either strictly better or at least as good as the one-stage contest for maximizing an individual’s effort, for maximizing the aggregate effort andnfor minimizing the standard deviation of effort. For maximizing an individual’s effort it is generally optimal to have only two finalists in the second stage. For maximizing the aggregate effort or minimizing the standard deviation of effort the optimal number of finalists in the second stage depends on the discriminating power of the contest success function."

People spend more and more time commuting and often find it a burden.nAccording to economics, the burden of commuting is chosen when compensated eithernon the labor or on the housing market so that individuals' utility is equalized. However, inna direct test of this strong notion of equilibrium, we find that people with longerncommuting time report systematically lower subjective well-being. Additional empiricalnanalyses rule out institutional explanations of the empirical finding that commutersnsystematically incur losses. We discuss several possibilities of an extended model ofnhuman behavior able to explain this 'commuting paradox'.

"This paper derives a central bank’s optimal liquidity supply towards a money market with an unrestricted lending facility. We show that when the effect ofnliquidity on market rates is not too small, and the monetary authority cares for both interest rates and liquidity conditions, then the optimal allotment policy may entail a discontinuous reaction to initial conditions. In particular, the model predicts a threshold level of liquidity below which the central banknwill not bail out the banking system. An estimation of the liquidity effect for the euro area suggests that the discontinuity might have contributed to the Eurosystem’s tight response to occurrences of underbidding during the period June 2000 through March 2004."

The goal of this paper is to assess, for the first time, the empirical impact of "Keynes’ beauty contest", or "higher order beliefs", on asset price volatility. The paper shows that heterogeneous expectations induce higher order beliefs and that heterogeneous expectation asset pricing models theoretically generate more volatility than rational expectation models. The paper also explains how, with some assumptions on the distribution of public and private information, a model with higher order beliefs can be empirically estimated. The model is then applied to annual data of the American stock market. The results show that a model with higher order beliefs generates a level of volatility in line with the price volatility observed on the market.

The present paper shows that a sufficient condition for the existence of a stable solution to an autoregressive neural network model is the continuity and boundedness of the activation function of the hidden units in the multi layer perceptron (MLP). In addition, uniqueness of a stable solution is ensured by global lipschitzness and some conditions on the parameters of the system. In this case, the stable value is globally stable and convergence of the learning process occurs at exponential rate.

A natural conjecture is that speculative trade disappears when individual beliefs become correct through learning. Sandroni in [22] gives a counterexample in an economy with sunspots. We generalizenSandroni's result by showing that the conjecture holds for economies with complete markets only. We consider a standard finite-horizon General Equilibrium model with complete markets, where uncertaintynis represented by fluctuations in individual endowments. Individual beliefs are formed through arbitrary learning processes, and become eventually correct. We show that along every path of events, equilibrium prices of traded assets converge to rational expectations for the sup-norm. We also give a set of sufficient conditions on beliefs andnaggregate endowment leading to market crashes, as in Sandroni [22].nWe show that such situations are generically continuous perturbations of rational expectations behaviors when beliefs satisfy a requirementnintroduced here.

This paper investigates simultaneous learning about both nature and others' actions in repeated games, and identifies a set of sufficient conditions assuring that equilibrium actions converge to a Nash equilibrium.nPlayers have each an utility function over infinite histories continuous for the product topology. Nature' drawing after any history can depend on any past actions, or can be independent of them.nProvided that 1) every player maximizes her expected payoff against her own beliefs, 2) every player updates her beliefs in a Bayesian manner, 3) prior beliefs about both nature and other players' strategies have a grain of truth, and 4) beliefs about nature are independent of actions chosen during the game, we show that after some finite time the equilibrium outcome of the above game is arbitrarily close to a Nash equilibrium.nThose assumptions are shown to be tight.

"We analyze the dynamics of neighbourhood watch programs in a local interaction framework. Agents can watch their neighbours' houses and thus deter burglars from breaking in.nAt the same time, agents also try to recruit their neighbours to join the neighbourhood watchnprogram. The probability of an agent joining the neighbourhood watch program depends on the success of the program, i.e., whether burglaries continue to occur. We show that the punishment of burglars plays a dual role in this context. On the one hand, punishmentndeters burglaries if the level of punishment is sufficiently high. On the other hand, it alsonaffects the probability of an agent joining the neighbourhood watch program. In particular,nwe show that if recruitment is harder when burglaries do not occur, a legal policy attemptingnto improve deterrence using more severe punishment is suboptimal. In a second part, we extend our model to the study of norm enforcement in public goods dilemmas and show that our results remain valid if agents can punish each other (instead of burglars) for not contributing to the public good. Our paper thus provides a first analysis of the evolution of ""altruistic punishment"" in large populations with local interaction."

There are at least two reasons why multiple prizes can be optimal in symmetric imperfectly discriminating contests. First, the introduction of multiple prizes reduces the standard deviation of contestants' effort in asymmetric equilibria, when the majority of contestants actively participate in competition. Second, the introduction of multiple prizes may increase the aggregate (average) effort contributed in the contest. When more of a total prize fund is shifted away from the first prize, on the one hand, the active contestants obtain an incentive to reduce their individual effort, but, on the other hand, the number of active contestants may increase. Therefore, the aggregate (average) effort may increase when the number of active contestants in equilibrium increases.

We analyze a Bayesian merger game under two-sided asymmetric information about firm types. We show that the standard prediction of the lemons market model–if any, only low-type firms are traded–is likely to be misleading: Merger returns, i.e. the difference between pre- and post-merger profits, are not necessarily higher for low-type firms. This has two implications. First, under very general conditions, equilibria exist where mergers take place, and there is no presumption that there is ineffciently low trade. Second, in these equilibria it is typically not the case that only low-type firms enter an agreement.

This paper intends to provide an evaluation of where the economic research on happiness stands and in which interesting directions it might develop. First, the current state of the research on happiness in economics is briefly discussed. We emphasize the potential of happiness research in testing competing theories of individual behavior. Second, the crucial issue of causality is taken up illustrating it for a particular case, namely whether marriagenmakes people happy or whether happy people get married. Third, happiness research is takennup as a new approach to measuring utility in the context of cost-benefit analysis.

"People not only obtain utility from actual outcomes but also from the conditions which lead to these outcomes. The paper proposes an economic concept of this notion of procedural utility. Preferences beyond outcome can be manifold. We distinguish proceduralnutility people get from institutions as such, i.e. from how allocative and redistributive decisions are taken, procedural utility from activities towards which people have an intrinsic attitude and procedural utility from the way being treated in interaction with other people. In an empirical application, it is studied whether people gain procedural utility fromnparticipating in the political decision-making process itself, irrespective of the outcome.nUtility is measured by individuals’ reported subjective well-being. We find that participation rights provide procedural utility in terms of a feeling of self-determination and influence. In contrast, actual participation and use of participation rights does not."

This paper reports on a two-task principal-agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece rate contracts. Many principals reward high efforts on both tasks with substantial bonuses. Agents anticipate this and provide high efforts on both tasks. In contrast, almost all agents with a piece rate contract focus on the first task and disregard the second.nPrincipals understand this and predominantly offer bonus contracts. This behavior contradicts the self-interest theory but is consistent with theories of fairness.

Empirical studies on the relationship between income and happiness commonly use standard ordered response models, the most well-known representatives being the ordered logit and the ordered probit. However, these models restrict the marginal probability effects by design, and therefore limit the analysis of distributional aspects of a change in income, that is, the study of whether the income effect depend on a person’s happiness. In this paper we pinpoint the shortcomings of standard models and propose two alternatives, namely generalized threshold and sequential models. With data of two waves of the German Socio-Economic Panel, 1984 and 1997, we show that the more general models yield different marginal probability effects than standard models.