Contributions published at Department of Economics (Florian Scheuer)

This paper presents a complete analysis of a stochastic version of the Solow growth model in which all parameters are ergodic random variables. Applying random dynamical systems theory, we prove that the dynamics and, in particular, the long-runnbehavior is uniquely determined by a globally attracting stable random fixed point. We also discuss the relation of our approach to that of ergodic Markov equilibria.

In this paper, we study the effect of financial markets on the investment of a two-good two-country economy with stochastic production in a dynamic framework. Each country produces and invests only one good and, therefore, makes decisions as a central planner in an optimal growth model. Trade between consumers of both countries, however, takes place on competitive (spot or financial) markets. Wencompare the investment-consumption decisions of both `market' models with the benchmark-case of an integrated world-equilibrium. In the log-linear case, we can uniquely characterize the state-dependent preferences of consumers that lead to dynamically efficient investment decisions. We show that the investment decisions in both `market' models are, in general, inefficient as compared with the efficient, ornintegrated world economy, case.n

Adam Smith's idea that wage differences reveal preferences for risk rests on firm theoretical foundations. This paper argues, however, that the standard approach to identify these differentials in practice may be flawed. Empirical practice usually identifies compensating wage differentials for risk by regressing individual wages on aggregate measures of risk, usually industry or occupation average risk. If jobs differ within industries or occupations, the ''aggregate approach'' may identify arbitrary compensating differentials for risk. In a dataset with precise information on job risk as well as aggregate risk, I demonstrate that using aggregate risk identifies wage differentials that are two to five times larger than wage differentials based on job riskninformation. This result is robust to controlling for time constant unobserved individual or job heterogeneity.

"In this paper we study experimentally four remedies to overcome inefficiencies that arise from the incompleteness of contracts. These remedies are reciprocity, repeated game effects, social embeddedness, and incentive contracts. In our baseline treatment we find that reciprocity is a powerful contract enforcement device. A second experiment establishes that repeated game effects interact with reciprocity in a complementary way, i.e., efficiency is increased compared to our baseline. Adding social approval incentives does not contribute significantly to efficiency. Finally, we show that explicit incentive contracts may have perverse effects in the sense that they ""crowd out"" reciprocity and therefore reduce efficiency compared to the baseline. In our concluding section we discuss the relation of our findings to the recent literature on ""intrinsic motivation""."

We consider a two-stage model of locational choice. Firms decide in which of three locations (or countries) to build plants; they then compete in all three markets. Knowledge spillovers reduce marginal costs in agglomerations; through intra-firm spillovers these cost reductions can be exported to other locations. We show that improvements in the exchange of information within firms make agglomeration more likely, because knowledge obtained in the center can be transmitted to other locations more easily. Decreases in transportation costs tend to destabilize agglomerations, since competition for peripheral locations increases, which decreases the value of knowledge obtained in agglomerations.

"This paper advances two propositions, one concerning content, the other concerning research strategy.n(1) The advent of wide-spread internet publishing reduces the stifling impact of the refereeing process on the papers accepted and submitted to journals. Economics scholars are less bound to devoting a large part of their time and effort on formalisms. They have more leeway to concentrate on matters of content. This greater freedom also improves the chances of the advice and suggestions proposed by economic methodologists being put into practice.n(2) Economic methodology is only able to influence the practice of economics if it takes into account the incentives to which scholars are subjected when they want to pursue an academic career and become prominent. Incentives are transmitted by institutions; it is therefore necessary for economic methodology to analyse how institutions work and how they may change in the future."

This paper considers the European countries' output of eminent economists, i.e. the 160 most often cited academics in the period 1993-96. The influence of the size of the population and GNP is analyzed, and a ranking of the top-20 scholars is provided. The United Kingdom outperforms: it is leading with respect to the absolute number, per capita, and GNP per capita. More surprisingly, most small countries do very well if size is accounted for. The four large Continental countries only do well according to the absolute number of eminent economists. But weighted by population and GNP they chop back dramatically.

Recently developed models of fairness can explain a wide variety of seemingly contradictory facts. The most controversial and yet unresolved issue in the modeling of fairness preferences concerns the behavioral relevance of fairness intentions. In this paper we provide clear and unambiguous experimental evidence for the behavioral relevance of fairness intentions. Our results indicate that the attribution of fairness intentions is important both in the domain of negatively reciprocal behavior and in the domain of positively reciprocal behavior. This means that reciprocal behavior cannot be fully captured by equity models that are exclusively based on preferences over the distribution of material payoffs. Models that take into account players' fairness intentions and distributional preferences are consistent with our data while models thatnfocus exclusively on intentions or on the distribution of material payoffs are not.

In this paper we show that a simple model of reciprocal preferences explains major experimental regularities of common pool resource (CPR) experiments. The evidence indicates that in standard CPR games without communication and without sanctioning possibilities inefficient excess appropriation is the rule. However, when communication or informal sanctions are available appropriation behavior is more efficient. Our analysis shows that these regularities arise naturally when a fraction of the subjects exhibits reciprocal preferences.

We study behavior within a simple principal--agent experiment. Our design allows for a large class of linear contracts. Principals can offer any feasible combination of (negative) fixed wages and incentives in the form of return sharing. This great contractual flexibility allows us to study incentive compatibility simultaneously with issues of `fair sharing' and reciprocity, which were previously found to be important. We find a high degree of incentive-compatible behavior, but also `fair sharing' and reciprocity. In contrast to other incentive devices studied in the literature, the incentives are `reciprocity-compatible'. Principals recognize the agency problem and react accordingly.

"At present, new EU-members have to fully accept the ""acquis communautaire"" even if their economic and institutional development differs drastically from the EU-average. In contrast, we propose that there should be the possibility of partial entry into the EU. East European Countries should have the option of specifically entering with respect to functions where they expect positive net benefits. In order to enable such partial entry, a new type of jurisdictions called FOCJ (Functional, Overlapping and Competing Jurisdictions) is proposed between the EU, the CEECs, and beyond. Such FOCJ allow for partial integration based on economic efficiency and democratic rules."

"Most contracts, whether between voters and politicians or between house owners and contractors, are incomplete. ""More law,"" it typically is assumed, increases the likelihood of contract performance by increasing the probability of enforcement and/or the cost of breach. This paper studies a contractual relationship where the first mover has to decide whether she wants to enter a contract without knowing whether the second mover will perform. We analyze how contract enforceability affects individual performance for exogenous preferences. Then we apply a dynamic model of preference adaptation and find that economic incentives have a non-monotonic impact on behavior. Individuals perform a contract when enforcement is strong or weak but not with medium enforcement probabilities: Trustworthiness is ""crowded in"" with weak and ""crowded out"" with medium enforcement. In a laboratory experiment we test our model's implications and find support for the crowding prediction."

We investigate to what extent contribution decisions to a public good depend on the contributions of others. We employ a novel experimental technique that allows us to elicit people's willingness to be conditionally cooperative, i.e., to contribute more to the public good the more the other beneficiaries contribute. We find that about a third of subjects' contribution schedules is characterized by complete free-riding. However, a majority of 50 percent of the subjects displays conditional cooperation. Our results can explain why in most repeated public goods experiments subjects initially cooperate while towards the final periods cooperation declines to very low levels

This paper recasts Temin's (1976) question of whether monetary forces caused the Great Depression in a modern time series framework. We evaluate the effects of monetary policy against nonmonetary alternatives in a Bayesian updating framework with time-varying parameters. The predictive power of monetary policy for output is very small for the early phase of the depression and breaks down almost entirely after 1931. During the propagation phase of 1930-31, monetary policy is able to forecast correctly at short time horizons put invariably predicts recovery at longer horizons. In contrast, nonmonetary leading indicators on residential construction and equipment investment have impressive predictive power. Recursive calculation of the impulse response functions exhibits remarkable structural instability and strong reactions to monetary regime changes during the depression, just as predicted by the Lucas (1976) critique.

"A growing economic literature recognizes and deals with the fact that economic agents' utility and well-being is not solely determined by absolute achievements, but also by achievements relative to a reference standard or reference group. In this literature it is assumed that the reference standard is completely exogenous. Social psychologists have questioned the exogenous nature of the comparison process (""forced comparison conception"") and have emphasized that people play a more active role in the determination of their reference standards (""coping approach""). The present paper takes up this idea. In our model the reference standard is determined endogenously. Following the social comparison literature we assume that in choosing the optimal reference standard people pursue goals of self-improvement and self-enhancement. Our model predicts that the optimally chosen reference standard (or group) increases in people's abilities. We present new questionnaire data together with a review of various important findings from social perception studies (minimum income, happiness, subjective social class). It turns out that the empirical regularities conform well to the predictions of our model, but are difficult (if not impossible) to explain by both the standard economic approach (with its neglect of social comparison) and the forced comparison approach. "

"This paper presents a formal theory of reciprocity. Reciprocity means that people reward kind actions and punish unkind ones. The theory takes into account that people evaluate the kindness of an action not only by it’s consequences but also by the intention underlying this action. The theory explains the relevant stylized facts of a wide range of experimental games. Among them are the ultimatum game, the gift-exchange game, a reduced best-shot game, the dictator game, the prisoner's dilemma, public goods games, and the investment game. Further, the theory explains why subjects behave differently in treatments where they experience the actions of real persons compared to treatments where they face 'actions' caused by a random device. Finally, the theory explains why in bilateral interactions outcomes tend to be ''fair'' whereas in competitive markets even extremely unfair distributions may arise."

The paper takes a closer look at cultural festivals such as musical or operatic festivals. From an economic viewpoint the paper shows that such festivals offer great artistic and economic opportunities, but that at the same time these opportunities are also easy to destroy. Empirical evidence from the Salzburg Festival show that government support can have negative effects on the innovative and economically success of festivals by introducing distorting incentives and imposing all sorts of restrictions. The paper draws policy suggestions on how the state can support art festivals.

The Motivation Crowding Effect suggests that external intervention via monetary incentives or punishments may undermine, and under different identifiable conditions strengthen, intrinsic motivation. As of today, the theoretical possibility of motivation crowding has been the main subject of discussion among economists. This study demonstrates that the effect is also of empirical relevance. There exist a large number of studies, offering empirical evidence in support of the existence of crowding-out and crowding-in exists. The study is based on circumstantial evidence, laboratory studies by both psychologists and economists, as well as field research by econometric studies. The pieces of evidence presented refer to a wide variety of areas of the economy and society and have been collected for many different countries and periods of time. Crowding effects thus are an empirically relevant phenomenon, which can, in specific cases, even dominate the traditional relative price effect.

We study the employment and distributional effects of regulating (reducing) working time in a general equilibrium model with search-matching frictions. Job creation entails fixed costs, but existing jobs are subject to diminishing returns. We characterize the equilibrium in the de-regulated economy where firms and individual workers freely negotiate wages and hours. Then, we consider the effects of a legislation restricting the maximum working time, while we let wages respond endogenously. Employment effects are sensitive to the representation of preferences. In our benchmark, small reductions in working time, starting from the laissez-faire equilibrium solution, always result in a small increase in the equilibrium employment, while larger reductions reduce employment. The regulation benefits workers, both unemployed and employed (even if wages decrease and even in cases where employment falls), but reduces profits and output.

This study applies conjoint analysis (CA) to estimate the marginal willingness-to-pay (MWTP) of elderly individuals for a reduction of the risk of fracture of the femur. The good in question are hypothetical hip protectors which lower the risk of a fracture by different amounts. Other attributes are ease of handling, wearing comfort, and out-of-pocket cost. Thus, the novelty of the present work lies in its letting risk reduction be traded off against several attributes. In 500 face-to-face interviews, pensioners stated whether or not they would buy the product. Results suggest that MWTP for wearing comfort exceeds that for risk reduction. Indeed, willingness to pay for the product as a whole is negative, indicating that it should not be included as a mandatory benefit in health insurance.