Ernst Fehr, Lorenz Goette, Robustness and Real Consequences of Nominal Wage Rigidity, In: Working paper series / Institute for Empirical Research in Economics, No. No. 44, 2003. (Working Paper)
"Recent studies found evidence for nominal wage rigidity during periods of relatively high nominal GDP growth. It has been argued, however, that in an environment with low nominal GDP growth, when nominal wage cuts become customary, workers cuts would erode and, hence, firms would no longer hesitate to reduce nominal pay. If this argument is valid nominal wage rigidity is largely irrelevant because in a high-growth environment there is little need to cut nominal pay while in a low-growth environment the necessary cuts would occur. To examine this argument we use data from Switzerland where nominal GDP growth has been very low for many years in the 1990s. We find that the rigidity of nominal wages is a robust phenomenon that does not vanish in a low growth environment. In addition, it constitutes a considerable obstacle to real wage adjustments. In the absence of downward nominal rigidity, real wages would indeed be quite responsive to unemployment." |
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Reto Foellmi, Josef Zweimüller, Inequality, Market Power, and Product Diversity, In: Working paper series / Institute for Empirical Research in Economics, No. No. 145, 2003. (Working Paper)
We analyze a macroeconomic model of monopolistic competition in which consumersnearn unequal incomes. When preferences are non-homothetic, the distribution of incomenaffects equilibrium mark-ups and equilibrium product diversity. |
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Armin Falk, Michael Kosfeld, It's all about Connections: Evidence on Network Formation, In: Working paper series / Institute for Empirical Research in Economics, No. No. 146, 2003. (Working Paper)
We present an economic experiment on network formation, in which subjects can decide to form links to one another. Direct links are costly but being connected is valuable. The game-theoretic basis for our experiment is the model of Bala and Goyal (2000). They distinguish between two scenarios regarding the flow of benefits through a network, the so-called 1-way and 2-way flow model. Our main results show that the prediction based on Nash and strict Nash equilibrium works well in the 1-way flow model but fails largely in the 2-way flow model. We observe a strong learning dynamic in the 1-way flow model but less so in the 2-way flow model. Finally, costs of a direct link have a positive impact on the occurrence of (strict) Nash networks in the 1-way flow model but a negative impact in the 2-way flow model. In our discussionnon possible explanations for these results we focus on strategic asymmetry and asymmetry with respect to payoffs. We find that the latter asymmetry, i.e., payoff inequity, plays an importantnrole in the network formation process. |
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Alois Stutzer, The Role of Income Aspirations in Individual Happiness, In: Working paper series / Institute for Empirical Research in Economics, No. No. 124, 2003. (Working Paper)
Does individual well-being depend on the absolute level of income and consumption or is it relative to one's aspirations? In a direct empirical test, it is found that higher income aspirations reduce people's utility, ceteris paribus. Individual data on reported satisfaction with life are used as a proxy measure for utility, and income evaluation measures are applied as proxies for people's aspiration levels. Consistent with processes of adaptation and social comparison, income aspirations increase with people's income as well as with the average income in the community they live in. |
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Daron Acemoglu, Philippe Aghion, Fabrizio Zilibotti, Vertical Integration and Distance to Frontier, Journal of the European Economic Association, Vol. 1 (2-3), 2003. (Journal Article)
We construct a model where the equilibrium organization of firms changes as an economy approaches the world technology frontier. In vertically integrated firms, owners (managers) have to spend time both on production and innovation activities, and this creates managerial overload, and discourages innovation. Outsourcing of some production activities mitigates the managerial overload, but creates a holdup problem, causing some of the rents of the owners to be dissipated to the supplier. Far from the technology frontier, imitation activities are more important, and vertical integration is preferred. Closer to the frontier, the value of innovation increases, encouraging outsourcing. |
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John Hassler, Kjetil Storesletten, Fabrizio Zilibotti, Dynamic political choice in macroeconomics, Journal of the European Economic Association, Vol. 1 (2-3), 2003. (Journal Article)
We analyze positive theories of redistribution, social insurance and public good provision in a dynamic macroeconomic framework. Political outcomes are determined via repeated voting and driven by a conflict of interests between agents. Voters and politicians rationally forecast the impact of current political choices on future political and economic outcomes. The theory is consistent with large differences in the size of governments across societies. These need not rely on intrinsic differences in preferences or technology, but may be driven by self-fulfilling expectations about the robustness of the welfare state. |
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Ernst Fehr, Joseph Henrich, Is Strong Reciprocity a Maladaptation? On the Evolutionary Foundations of Human Altruism, In: Working paper series / Institute for Empirical Research in Economics, No. No. 140, 2003. (Working Paper)
In recent years a large number of experimental studies have documented the existence of strong reciprocity among humans. Strong reciprocity means that people willingly repay gifts and punish the violation of cooperation and fairness norms even in anonymous one-shot encounters with genetically experimental evidence suggesting that ultimate evolutionary explanations of strong reciprocity. can rationalize strong reciprocity only if it is viewed as maladaptive behavior whereas the evidence suggests that it is an adaptive trait. Thus, we conclude that alternative evolutionary approaches are needed to provide ultimate accounts of strong reciprocity. |
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Ernst Fehr, Urs Fischbacher, Bernhard von Rosenbladt, Jürgen Schupp, Gert G Wagner, A Nation-Wide Laboratory - Examining trust and trustworthiness by integrating behavioral experimen, In: Working paper series / Institute for Empirical Research in Economics, No. No. 141, 2003. (Working Paper)
"Typically, laboratory experiments suffer from homogeneous subject pools and self-selection biases. The usefulness of survey data is limited by measurement error and by the questionability of their behavioral relevance. Here we present a method integrating interactive experiments and representative surveys thereby overcoming crucial weaknesses of both approaches. One of the major advantages of our approach is that it allows for the integration of experiments, which require interaction among the participants, with a survey of non-interacting respondents in a smooth and inexpensive way. We illustrate the power of our approach with the analysis of trust and trustworthiness in Germany by combining representative survey data with representative behavioral data from a social dilemma experiment. We identify which survey questions intended to elicit peoples trust correlate well with behaviorally exhibited trust in the experiment. People above the age of 65, highly skilled workersnand people living in bigger households exhibit less trusting behavior. Foreign citizens, Catholics andnpeople favoring the Social Democratic Party or the Christian Democratic Party exhibit more trust.nPeople above the age of 65 and those in good health behave more trustworthy or more altruistically,nrespectively. People below the age of 35, the unemployed and people who say they are in favor ofnnone of the political parties behave less trustworthy or less altruistically, respectively." |
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Peter Zweifel, Roger Zäch, Vertical restraints: the case of multinationals, Antitrust Bulletin, Vol. 48 (1), 2003. (Journal Article)
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Lukas Steinmann, Peter Zweifel, On the (in)efficiency of Swiss hospitals, Applied Economics, Vol. 35 (3), 2003. (Journal Article)
The efficiency of hospitals is of interest to health insurers, government authorities and hospital management itself. However, econometric methods for determining (in)efficiency have severe drawbacks since hospitals are multiproduct firms and because the duality between production and cost functions cannot be assumed. In this work, non-parametric, deterministic data envelopment analysis (DEA) is used to measure the relative inefficiency of 89 Swiss hospitals covering the years 1993-1996 (310 observations). Special attention is given to the role of patient days in the production of health. The findings depend on whether patient days are viewed as an input of patient time or as an output, as in previous studies. While the probability of a unit being inefficient cannot be explained using the available data, the degree of overall inefficiency is shown to significantly depend on the financial incentives faced by management, in particular due to subsidization. Private hospitals do not seem to be less inefficient than public ones; however, this may be caused by their 'overusing' inputs that in fact are valued as amenities by patients. This consideration points to an important limitation in applying the purely quantitative criteria of DEA to hospitals. |
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Peter Zweifel, Medical innovation: a challenge to society and insurance, Geneva Papers on Risk and Insurance, Vol. 28 (2), 2003. (Journal Article)
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Joop Hartog, Rainer Winkelmann, Comparing migrants to non-migrants: the case of Dutch migration to New Zealand, Journal of Population Economics, Vol. 16 (4), 2003. (Journal Article)
We analyse post-war Dutch migration to New Zealand. We document that history, reflect on analytical and econometric modelling and then combine a sample of Dutch migrants in New Zealand with a representative sample of Dutch in The Netherlands to estimate wage equations and the determinants of the migration decision. We use the results for ex post evaluation of the migration decision. |
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Jacob Goeree, Bidding for the future: signaling in auctions with an aftermarket, Journal of Economic Theory, Vol. 108 (2), 2003. (Journal Article)
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Jacob Goeree, Theo Offerman, Competitive Bidding in Auctions with Private and Common Values, Economic Journal, Vol. 113 (489), 2003. (Journal Article)
This paper investigates the behavioural implications of penalty designs on market performance using an experimental method. Three penalty types and two penalty levels are enforced in a laboratory permit market with auctioning, including the Australian Carbon Pollution Reduction Scheme proposed design of tying the penalty rate to the auction price. Compliance strategies are limited to undertaking irreversible abatement investment decisions or buying permits. We aim to assess how penalty design under the presence of subjects‟ risk preferences might affect compliance incentives, permit price discovery, and efficiency. In contrast to theory, we find that penalty levels serve as a focal point that indicates compliance costs and affects compliance strategies. The make-good provision penalty provides stronger compliance incentives than the other penalty types. However, the theory holds with regard to permit price discovery, as we find no evidence of the effect of penalty design on auction price. Interestingly, risk preference does not directly affect compliance decision, but it does influence price discovery, which evidently is a significant factor in compliance decisions as well as efficiency. Most importantly, a trade-off between investment incentives and efficiency is observed. |
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Jacob Goeree, Theo Offerman, Winner's curse without overbidding, European Economic Review, Vol. 47 (4), 2003. (Journal Article)
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Jacob Goeree, Charles A. Holt, Thomas R. Palfrey, Risk averse behavior in generalized matching pennies games, Games and Economic Behavior, Vol. 45 (1), 2003. (Journal Article)
We let subjects interact with anonymous partners in trust (investment) games with and without one of two kinds of pre-play communication: numerical (tabular) only, and verbal and numerical. We find that either kind of pre-play communication increases trusting, trustworthiness, or both, in inter-subject comparisons, but that the inclusions of verbal communication generates both a larger effect and one that is robust across both inter-subject and intra-subject comparisons. In all conditions, trustors earn more when they invest more of their endowment, trustors and trustees gravitate to \"fair and efficient\" interactions, and the majority of trustees adhere to their commitments, whether explicit or implicit. Finally, we study trusting and trustworthiness in the sense of adhering to agreements, and we find that both are enhanced when the parties can use words, and especially when an agreement is reached with words and not only with the exchange of numerical proposals. |
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Christian Ewerhart, Karsten Fieseler, Procurement auctions and unit-price contracts, RAND Journal of Economics, Vol. 34 (3), 2003. (Journal Article)
In competitive procurement auctions, bids often have the form of unit-price contracts (UPCs). We show that optimal bidding behavior in UPC auctions is typically non-monotonic, and therefore may lead to inefficient allocations. However, UPC auctions may still be desirable for the buyer when compared to efficient mechanisms such as the first-price auction. In a UPC auction, low types are subsidized, and the resulting stronger competition reduces the winning bidder's informational rent, which overcompensates the efficiency loss. |
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Christian Ewerhart, A short and intuitive proof of Marshall's rule, Economic Theory, Vol. 22 (2), 2003. (Journal Article)
When the price of an input factor to a production process increases, then the optimal output level declines and the input is substituted by other factors. Marshall's rule is a formula that determines the own-price elasticity for one factor as a weighted sum of the elasticities of output market demand and factor substitution. This note offers a proof for Marshall's rule that is significantly shorter and somewhat more intuitive than existing derivations. |
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Andreas Polk, Armin Schmutzler, Lobbying against Environmental Regulation vs. Lobbying for Loopholes, In: Working paper series / Socioeconomic Institute, No. No. 301, 2003. (Working Paper)
We analyze the determinants of environmental policy when two firms engage in two types of lobbying against a restriction on allowed pollution: General lobbying increases the total amount of allowed pollution, which is beneficial for both firms. Private lobbying increases the individual pollution standard of the lobbying firm, but has a negative or zero effect on the allowed emissions of the competitor. We determine the lobbying equilibrium and discuss the resulting emission level. In many cases, a higher effectiveness of private lobbying is detrimental for firms and beneficial for environmental quality, as it induces firms to turn towards excessive amounts of relatively unproductive private lobbying. |
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Hans Gersbach, Armin Schmutzler, A Product Market Theory of Worker Training, In: Working paper series / Socioeconomic Institute, No. No. 214, 2003. (Working Paper)
We develop a product market theory that explains why firms invest in general training of their workers. We consider a model where firms first decide whether to invest in general human capital, then make wage offers for each others’ trained employees and finally engage in imperfect product market competition. Equilibria with and without training, and multiple equilibria can emerge. If competition is suffciently soft and trained workers are substitutes, firms may invest in non-specific training if others do the same, because they would otherwise suffer a competitive disadvantage or need to pay high wages in order to attract trained workers. Government intervention can be socially desirable to turn training into a focal equilibrium. |
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