Contributions in Merlin

This paper describes individuals' inequality perceptions, distributional norms, and redistributive preferences in a panel of OECD countries, primarily focusing on the association between these subjective measures and the effective level of inequality and redistribution. Not surprisingly, the effective level of redistribution (after tax-and-transfer inequality) is positively (negatively) correlated with redistributive preferences. There is also evidence showing that the subjective and objective dimension of inequality and redistribution are, at least partially, linked with individuals' political preferences and their voting behavior. The association between objective and subjective measures of inequality and redistribution vanishes, however, once more fundamental country characteristics are taken into account. This suggests that these characteristics explain both redistributive preferences as well as the effective level of redistribution and after tax-and-transfer inequality.

Illicit drug use is prevalent around the world. While the nature of the market makes it difficult to determine the total sales worldwide with certainty, estimates suggest sales are around 150 billion dollar a year in the United States alone. Among illicit drugs marijuana is the most commonly used, where the US government spends upwards of $7.7 billion per year in enforcement of the laws for marijuana sales (Miron, 2005). For the past 30 years there has been a debate regarding whether marijuana should be legalized. There are two important avenues through which legalization could impact use: legalization would make marijuana easier to get, and it would remove the stigma (and cost) associated with illegal behavior. Studies to date have not disentangled the impact of limited accessibility from consumption decisions based solely on preferences. However, this distinction is particularly important in the market for cannabis as legalizing the drug would impact accessibility. Hence, if most individuals do not use because they don't know where to buy it, but would otherwise use, we would see a large increase in consumption ceteris paribus, which would be important to consider for policy. On the other hand, if accessibility plays little role in consumption decisions, then making drugs more readily available would impact the supply more. In order to access the impact of legalization on use, it is necessary to explicitly consider the role played by accessibility in use, the impact of illegal actions in utility, as well as the impact on the supply side. In this paper, we develop and estimate a model of buyer behavior that explicitly considers the impact of illegal behavior on utility as well as the impact of limited accessibility (either knowing where to buy or being offered) an illicit drug on using the drug. We use the demand side estimates to conduct counterfactuals on how use would change under a policy of legalization. We conduct counterfactuals under different assumptions regarding how legalization would impact the supply as well as various tax policies on the price of cannabis.

We compare asset allocations derived for cumulative prospect theory(CPT) based on two different methods: Maximizing CPT along the mean–variance efficient frontier and maximizing it without that restriction. We find that with normally distributed returns the difference is negligible. However, using standard asset allocation data of pension funds the difference is considerable. Moreover, with derivatives like call options the restriction to the mean-variance efficient frontier results in a sizable loss of e.g. expected return and expected utility.

This paper considers the problem of testing a finite number of moment inequalities. We propose a two-step approach. In the first step, a confidence region for the moments is constructed. In the second step, this set is used to provide information about which moments are “negative.” A Bonferonni-type correction is used to account for the fact that with some probability the moments may not lie in the confidence region. It is shown that the test controls size uniformly over a large class of distributions for the observed data. An important feature of the proposal is that it remains computationally feasible, even when the number of moments is large. The finite-sample properties of the procedure are examined via a simulation study, which demonstrates, among other things, that the proposal remains competitive with existing procedures while being computationally more attractive.

We employ laboratory methods to study stability of competitive equilibrium in Scarf's economy (International Economic Review, 1960). Tatonnement theory predicts that prices are globally unstable for this economy, i.e. unless prices start at the competitive equilibrium they oscillate without converging. Anderson et al. (Journal of Economic Theory, 2004) report that in laboratory double auction markets, prices in the Scarf economy do indeed oscillate with no clear sign of convergence. We replicate their experiments and confirm that tatonnement theory predicts the direction of price changes remarkably well. Prices are globally unstable with adverse effects for the economy's efficiency and the equitable distribution of the gains from trade. We also introduce a novel market mechanism where participants submit demand schedules and prices are computed using Smale's global Newtonian dynamic (American Economic Review, 1976). We show that for the Scarf economy, submitting a competitive schedule, i.e. a set of quantities that maximize utility taking prices as given, is a weakly dominant strategy. The resulting outcome corresponds to the unique competitive equilibrium of the Scarf economy. In experiments that employ the schedule market, prices do not oscillate but instead converge quickly to the competitive equilibrium. Besides stabilizing prices, the schedule market is more efficient and results in highly egalitarian outcomes.

This paper addresses the discussion between economic power and the power of politics with particular focus on financial markets. After general reflections about the economic basis of power, the paper discusses in a general equilibrium framework how financial innovations can lead to risk creation and an inflation of financial products. This creates a fundamental disorder in the financial system which from an aggregate point of view can be described in a standard portfolio framework, in which higher rates of return go hand in hand with higher private risks but also with increasing externalized (social) risk and insurance illusion. Rate of return regulation is proposed as an appropriate regulatory measure. Alternatively the deficiency could be cured by admission regulations for financial products which put the burden of proof for no external (systemic) damages of a financial instrument to the issuer.

Using longitudinal data that tracks bulimic behavior among young girls (National Heart, Lung, and Blood Institute Growth and Health Study), we examine (1) whether bulimic behavior is consistent with addiction criteria as stated in the Diagnostic and Statistical Manual of Mental Disorders DSM-IV (APA, 1994); and 2) whether the persistence in bulimia nervosa (BN) reflects tolerance formed from an addiction or if it can be attributed to slow learning about the deleterious health effects of BN. Making the case for treating BN as an addiction has important policy implications. First, it suggests that the timing of educational policy and treatment is crucial: preventive educational programs aimed at instructing girls about the deleterious health effects of BN, as well as treatment interventions, will be most effective if provided in the early stages. Second, it would put those exhibiting BN on more equal footing (from a treatment reimbursement perspective) with individuals with drug or alcohol addictions.

We analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the unique symmetric equilibrium for general distributions of valuations and any number of bidders. Variance aversion is a sufficient assumption to predict that high-valuation bidders increase their bids relative to the risk-neutral case while low types decrease their bid. Considering an asymmetric two-player environment with uniformly distributed valuations, we show that a variance-averse player always bids higher than her risk-neutral opponent with the same valuation. Utilising our analytically derived bidding functions we discuss all-pay auctions with variance-averse bidders from an auction designer’s perspective. We briefly consider possible extensions of our model, including noisy signals, type-dependent attitudes towards risk, and variance-seeking preferences.

Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing them to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972) critique of the Coasian approach.

Authority and power permeate political, social, and economic life, but empirical knowledge about the motivational origins and consequences of authority is limited. We study the motivation and incentive effects of authority experimentally in an authority- delegation game. Individuals often retain authority even when its delegation is in their material interest - suggesting that authority has non-pecuniary consequences for utility. Authority also leads to over-provision of effort by the controlling parties, while a large percentage of subordinates under-provide effort despite pecuniary incentives to the contrary. Authority thus has important motivational consequences that exacerbate the inefficiencies arising from suboptimal delegation choices.