Yves Schneider, Peter Zweifel, Spatial Effects in Willingness-to-Pay: The Case of Two Nuclear Risks, In: Working paper series / Socioeconomic Institute, No. No. 502, 2007. (Working Paper)
 
This paper examines the spatial dimension of marginal willingness to pay (MWP) for reduction of nuclear risks through increased insurance coverage. The effect of distance from a nuclear power plant on individuals’ MWP is ambiguous. MWP is expected to decrease with distance because the risk of being affected by an accident decreases. However, if individuals choose their residential location taking the operational risk into account, MWP is predicted to first increase and later decrease with distance from the nuclear power plant. On the other hand, there are risks associated with transportation and disposal of nuclear waste where distance should matter only in the vicinity of the plant. These theoretical predictions are tested with data collected using a stated choice experiment. The predictions are largely confirmed by the evidence. |
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Mathias Hoffmann, Thomas Nitschka, The Consumption - Real Exchange Rate Anomaly: an Asset Pricing Perspective, In: Working paper series / Institute for Empirical Research in Economics, No. No. 331, 2007. (Working Paper)
 
Idiosyncratic consumption risk explains more than 60 percent of the cross-sectional variation in quarterly exchange rate changes and currency returns. Our results are obtained from data of 13 industrialized countries and arenbased on an international version of the consumption capital asset pricing model (CCAPM) in which we account for international consumption heterogeneity. We use this framework to dissect the consumption-exchange rate anomaly, the empirical fact that international variation in purchasing power alone does not appear to account for differences in consumption growth rates across countries. As an explanation for this phenomenon, we explore the presence of currency risk premia that also lead to departures from uncovered interest parity (UIP). We decompose the cross-sectional variation in consumption into one component that is due to cross-country differences in inflation rates and a second component that is due to international variation in nominal interest rates. We interpret these factors as indicators of goods and financial market segmentation respectively. We find that bothnhelp account to virtually equal parts for the cross-section of exchange rate changes. Interestingly, the price of aggregate consumption risk has declined over the 1990s, in line with a growing literature that documents a growingninternationalisation of country portfolios over this period. |
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Daniel Halbheer, Ernst Fehr, Lorenz Götte, Armin Schmutzler, Self-Reinforcing Market Dominance, In: Working paper series / Socioeconomic Institute, No. No. 711, 2007. (Working Paper)
 
Are initial competitive advantages self-reinforcing, so that markets exhibit an endogenous tendency to be dominated by only a few firms? Although this question is of great economic importance, no systematic empirical study has yet addressed it. Therefore, we examine experimentally whether firms with an initial cost advantage are more likely to invest in cost reductions than firms with higher initial costs. Wefind that the initial competitive advantages are indeed self-reinforcing, but subjects in the role of firms overinvest relative to the Nash equilibrium. However, the pattern of overinvestment even srengthens the tendency towards self-reinforcing cost advantages relative to the theoretical prediction. Further, as predicted by the Nash equilibrium, aggregate investment is not affected by the initial efficiency distribution. Finally, investment spillovers reduce investment, and investment is higher than the joint-profit maximizing benchmark for the case without spillovers and lower for the case with spillovers. |
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Fabian Waltert, Felix Schlaepfer, The role of landscape amenities in regional development: a survey of migration, regional economic and hedonic pricing studies, In: Working paper series / Socioeconomic Institute, No. No. 710, 2007. (Working Paper)
 
Quality of life factors continue to gain importance in residential location decisions as well as location decisions of firms. One such factor is an attractive local landscape. The aim of this paper is to provide a survey of the empirical literature on the role of landscape amenities in local economic change. Following common amenity definitions, we define landscape amenities as landscape features that are location-specific, latent non-market input goods that directly enter residents’ utility functions. Using this definition we identify thirty-nine relevant studies that use either migration or regional economic models or hedonic pricing techniques. One result from the analysis of migration and regional economic studies is that intra-country migrants were attracted by amenities about as frequently as by a low tax burden. Effects of amenities on employment and income are less well established. However, many of these studies used rather limited amenity variables. The results from hedonic studies show that a wide variety of local amenity attributes are partly capitalized in housing prices and that studies on a larger geographic scale are more likely to identify a significant a role of amenities. Newly available land cover datasets and spatial analysis tools have the potential to overcome important data limitations of many earlier studies. Future research may thus contribute to a better understanding of the role of landscape amenities in economic change and to a better coordination of regional and environmental policies. |
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Michael Kosfeld, Ferdinand A Von Siemens, Competition, Cooperation, and Corporate Culture, In: Working paper series / Institute for Empirical Research in Economics, No. No. 328, 2007. (Working Paper)
 
Teamwork and cooperation between workers can be of substantial value to a firm, yet the level of worker cooperation often varies between individual firms. We show that these differences can be the result of labor market competition if workers have heterogeneous preferences and preferences are private information. In our model there are two types of workers: selfish workers who only respond to monetary incentives, and conditionally cooperative workers who might voluntarily provide team work if their co-workers do the same. We show that there is no pooling in equilibrium, and that workers self-select into firms that differ in their incentives as well as their resulting level of team work. Our model can explain why firms develop different corporate cultures in an ex-ante symmetric environment. Moreover, the results show that, contrary to first intuition, labor market competition does not destroy but may indeed foster within-firm cooperation. |
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Stefan Boes, Nonparametric Analysis of Treatment Effects in Ordered Response Models, In: Working paper series / Socioeconomic Institute, No. No. 709, 2007. (Working Paper)
 
This paper deals with the identification of treatment effects when the outcome variable is ordered. If outcomes are measured ordinally, previously developed methods to investigate the impact of an endogenous binary regressor on average outcomes cannot be applied as the expectation of an ordered variable, in its strict sense, does not exist, and a shift in focus to distributional effects is indispensable. Without imposing a fully fledged parametric model the treatment effects are generally not point-identified. Assuming a threshold crossing model on both the ordered potential outcomes and the binary treatment variable leaving the distribution of error terms and functional forms unspecified, it is discussed how the treatment effects can be bounded and inference on the bounds can be conducted. |
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Adrian Bruhin, Helga Fehr-Duda, Thomas Epper, Risk and Rationality: Uncovering Heterogeneity in Probability Distortion, In: Working paper series / Socioeconomic Institute, No. No. 705, 2007. (Working Paper)
 
It has long been recognized that there is considerable heterogeneity in individual risk taking behavior but little is known about the distribution of risk taking types. We present a parsimonious characterization of risk taking behavior by estimating a finite mixture regression model for three different experimental data sets, two Swiss and one Chinese, over a large number of real gains and losses. We find two distinct types of individuals: In all three data sets, the choices of roughly 80% of the subjects exhibit significant deviations from rational probability weighting consistent with prospect theory. 20% of the subjects weight probabilities linearly and behave essentially as expected value maximizers. Moreover, the individuals are assigned to one of these two groups with probabilities of close to one resulting in a low measure of entropy. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling. |
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Bruno Frey, Terrorism and Business, In: Working paper series / Institute for Empirical Research in Economics, No. No. 329, 2007. (Working Paper)
 
Deterrence has been a crucial element in fighting terrorism, both in politics and in rational choice analyses of terrorism. However, there are two strategies that are superior to deterrence. The first one is to make terrorist attacks less devastating and less attractive to terrorists through decentralization. The second one is to raise the opportunity cost – rather than the material cost – for terrorists. These alternative strategies will effectively dissuade potential terrorists. It is here argued that they not only apply to society as a whole but can also usefully be applied by business enterprises. |
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Wolfgang R Köhler, Why does context matter? Attraction effects and binary comparisons, In: Working paper series / Institute for Empirical Research in Economics, No. No. 330, 2007. (Working Paper)
 
A large experimental and empirical literature on asymmetric dominance and attraction effects shows that the probability that an alternative is chosen can increase if additional alternatives become available. Hence context matters and choices and, therefore, market shares can not be accurately described by standard choice models where individuals choose the alternative that yields the highest utility. This paper analyzes a simple procedural choice model. Individuals determine their choice by a sequence of binary comparisons. The model offers an intuitive explanation for violations of regularity such as the attraction and the asymmetric dominance effect and shows their relation to the similarity effect. The model analyzes a new rationale why context matters. The model is applied to explain primacy and recency effects and to derive implications with respect to product design. |
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Karolin Becker, Peter Zweifel, Age and Choice in Health Insurance: Evidence from Switzerland, In: Working paper series / Socioeconomic Institute, No. No. 410, 2007. (Working Paper)
 
Elements of regulation inherent in most social health insurance systems are a uniform package of benefits and uniform cost sharing. Both elements risk to burden the population with a welfare loss if preferences differ. This suggests introducing more contracted choice; however, it is widely believed that this would not benefit the aged. This study examines the relationship between age and willingness-to-pay (WTP) for additional options in Swiss social health insurance. Through discrete choice experiments (DCE), a marked diversity of preferences can be established. The findings suggest that while the aged do exhibit more status quo bias, they require less rather than more specific compensation for selected cutbacks considered, pointing to potential for contracts that induce self-rationing in return for lower premiums. |
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Matthias Doepke, Fabrizio Zilibotti, Occupational Choice and the Spirit of Capitalism, In: Working paper series / Institute for Empirical Research in Economics, No. No. 326, 2007. (Working Paper)
 
The British Industrial Revolution triggered a reversal in the social order of society whereby the landed elite was replaced by industrial capitalists rising from thenmiddle classes as the economically dominant group. Many observers have linkednthis transformation to the contrast in values between a hard-working and frugal middle class and an upper class imbued with disdain for work. We propose an economic theory of preference formation where both the divergence of attitudesnacross social classes and the ensuing reversal of economic fortunes are equilibriumnoutcomes. In our theory, parents shape their children's preferences in response toneconomic incentives. If financial markets are imperfect, this results in the stratification of society along occupational lines. Middle-class families in occupationsnthat require effort, skill, and experience develop patience and work ethic, whereas upper-class families relying on rental income cultivate a refined taste for leisure. These class-specific attitudes, which are rooted in the nature of pre-industrial professions, become key determinants of success once industrialization transforms the economic landscape. |
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Stefan Buehler, Christian Kaiser, Franz Jaeger, On the Geographic and Cultural Determinants of Bankruptcy, In: Working paper series / Socioeconomic Institute, No. No. 701, 2007. (Working Paper)
 
This paper examines the role of geography and culture in explaining bankruptcy. We adopt survival analyses to model the bankruptcy risk of a firm, allowing for time-varying covariates. Based on a large sample from all major sectors of the Swiss economy, we find the following results: (i) The geographic location of a firm, which is characterized using a core-periphery approach, has a significant impact on its bankruptcy risk; (ii) Variables proxying for the cultural environment of a firm have significant explanatory power; (iii) The results of the previous literature on the standard determinants of bankruptcy are confirmed. |
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Christian Ewerhart, Relative Performance in Bilateral Trade, In: Working paper series / Institute for Empirical Research in Economics, No. No. 327, 2007. (Working Paper)
 
Concerns for relative performance are integrated into a model of contractual renegotiation in bilateral trade. It is shown that concernsnfor relative performance do never impede efficient trade. Moreover, conditional on renegotiation to occur, concerns for relative performance tend to mitigate material rent expropriation. However, concerns for relative performance make the occurrence of renegotiation more likely, and may thereby lead to underinvestment even in very optimistic environments. The analysis suggests an explanation for the occurrence of the Druzhba pipeline conflictnbetween Russia and Belarus in January 2007. |
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Zheng Song, Kjetil Storesletten, Fabrizio Zilibotti, Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt, In: Working paper series / Institute for Empirical Research in Economics, No. No. 325, 2007. (Working Paper)
 
This paper proposes a dynamic politico-economic theory of debt, government finance and expenditure. Agents have preferences over a private and a government-provided publicngood, financed through labor taxation. Subsequent generations of voters choose taxation, government expenditure and debt accumulation through repeated elections. Debt introducesna conflict of interest between young and old voters: the young want more fiscal discipline.nWe characterize the Markov Perfect Equilibrium of the dynamic voting game. If taxes do not distort labor supply, the economy progressively depletes its resources throughndebt accumulation, leaving future generations “enslaved”. However, if tax distortions arensufficiently large, the economy converges to a stationary debt level which is bounded awaynfrom the endogenous debt limit. The current fiscal policy is disciplined by the concern ofnyoung voters for the ability of future government to provide public goods. The steady-statenand dynamics of debt depend on the voters’ taste for public consumption. The stronger the preference for public consumption, the less debt is accumulates. We extend the analysis to redistributive policies and political shocks. The theory predicts government debt to be mean reverting and debt growth to be larger under right-wing than under left-wingngovernments. Data from the US and from a panel of 21 OECD countries confirm thesentheoretical predictions. |
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Philippe Mahler, I'm not fat, just too short for my weight - Family Child Care and Obesity in Germany, In: Working paper series / Socioeconomic Institute, No. No. 707, 2007. (Working Paper)
 
Obesity is increasing worldwide for both adults and children. Genetic disposition is responsible for some variation in body weight but cannot explain the dramatic increase in the last two decades. The increase must be due to structural and behavioral changes. One such behavioral change is the increase in working females in the last decades. The absence from the mother reduces potential child care time in the family. Reduced child care time may have adverse effects on the prevalence of obesity in children and adults. This paper analyzes the effect of mother’s labor supply in childhood on young adults probability of being obese in Germany. Using a sample drawn from the German Socio-Economic Panel the results show that a higher labor supply of the mother increases the probability for her child to be obese as young adult. This result underlines the importance of childhood environment on children’s later life outcome and the importance of behavioral changes in explaining the increase in obesity. |
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Bruno Frey, Overprotected Politicians, In: Working paper series / Institute for Empirical Research in Economics, No. No. 321, 2007. (Working Paper)
 
This paper argues that politicians are overprotected. The costs of politicalnassassination differ systematically depending on whether a private or a public point of view is taken. A politician attributes a very high (if not infinite) cost to his or her survival. The social cost of political assassination is much smaller as politicians are replaceable. Conversely, the private cost of the security measures is low fornpoliticians, its bulk – including time loss and inconvenience – is imposed on taxpayers and the general public. The extent of overprotection is larger in dictatorial than in democratic countries. |
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Bruno Frey, Why Kill Politicians? A Rational Choice Analysis of Political Assassinations, In: Working paper series / Institute for Empirical Research in Economics, No. No. 324, 2007. (Working Paper)
 
In the course of history a large number of politicians has been assassinated. A rationalnchoice analysis is used to distinguish the expected marginal benefits of killing, and the marginal cost of attacking a politician. The comparative analysis of various equilibria helps us to gain insights into specific historical events.nThe analysis suggests that – in addition to well-known security measures – an extension of democracy, a rule by a committee of several politicians, more decentralization via the division of power and federalism, and a strengthening of civil society significantly reduce politicians’ probability of being attacked and killed. |
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Donja Darai, Dario Sacco, Armin Schmutzler, Competition and Innovation: An Experimental Investigation, In: Working paper series / Socioeconomic Institute, No. No. 608, 2007. (Working Paper)
 
The paper analyzes the effects of more intense competition on firms'incentives to invest in process innovations. We carry out experiments for two-stage games, where R&D investment choices are followed by product market competition. As predicted by theory, an increase in the number of firms from two to four reduces investments. However, a positive effect is observed for a switch from Cournot to Bertrand, even though theory predicts a negative effect in the four-player case. This result reflects overinvestment in the Bertrand case. The results arise both in treatments in which both stages are implemented and in treatments in which only one stage is implemented. |
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Armin Falk, Christian Zehnder, Discrimination and In-group Favoritism in a Citywide Trust Experiment, In: Working paper series / Institute for Empirical Research in Economics, No. No. 318, 2007. (Working Paper)
 
This paper provides field experimental evidence on the prevalence and determinants ofndiscrimination and in-group favoritism in trust decisions. We observe choices of aboutn1,000 inhabitants of the city of Zurich who take part in a sequential trust game, in whichnfirst movers can condition their investments on the residential districts of second movers.nOur main results can be summarized as follows: First movers discriminate significantly in their investment choices, i.e., strangers receive different investments depending on thendistrict they live in. The systematics of the discrimination pattern is underlined by data from an additional newspaper study, where participants correctly guessed the outcome of the study. In terms of district characteristics two factors seem to be key for a district'snreputation: while expected trustworthiness of a district increases in the socio-economicnstatus it decreases in the degree of ethnic heterogeneity. Observed discrimination is notnjust based on mistaken stereotypes but can at least partly be classified as statistical discrimination. This can be inferred from the fact that, on a district level, both expected return on investment and actual investments are positively correlated with actual backntransfers. First movers correctly anticipate different levels of trustworthiness and discriminate accordingly. Furthermore, we provide evidence of in-group favoritism, i.e., peoplentrust strangers from their own district significantly more than strangers from other dis-ntricts. Finally, we discuss individual determinants of discrimination and in-group favoritism. |
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Hans Gersbach, Armin Schmutzler, Does Globalization Create Superstars?, In: Working paper series / Socioeconomic Institute, No. No. 706, 2007. (Working Paper)
 
To examine the impact of globalization on managerial compensation, we consider a matching model where a number of firms compete both in the product market and in the managerial market. We show that globalization, i.e. the simultaneous integration of product markets and managerial pools, leads to an increase in the heterogeneity of managerial salaries. Typically, while the most able managers obtain a wage increase, less able managers are faced with a reduction in wages. Hence our model can explain the increasing heterogeneity of CEO compensation that has been observed in the last few decades. |
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