Tobias Straumann, Ulrich Woitek, A pioneer of a new monetary policy? Sweden's price level targeting of the 1930s revisited, In: Working paper series / Institute for Empirical Research in Economics, No. No. 386, 2008. (Working Paper)
 
The paper re-examines Sweden’s price level targeting during the 1930s which is regarded as a precursor of today’s inflation targeting. According to conventional wisdom the Riksbank was the first central bank to adopt price level targeting as the guideline for its activities, although in practice giving priority to exchange rate stabilisation over price level stabilisation. On the basis of econometric analysis (Bayesian VAR) and the evaluation of new archival sources we come to a more skeptical conclusion. Our results suggest that it is hard to reconcile the Riksbank’s striving for a fixed exchange rate with the claim that it adopted price level targeting. This finding has implications for the prevailing view of the 1930s as a decade of great policy innovations. |
|
Ernst Fehr, Martin Brown, Christian Zehnder, On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity, In: Working paper series / Institute for Empirical Research in Economics, No. No. 384, 2008. (Working Paper)
 
We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks. |
|
Pavlo R Blavatskyy, Preference Reversals and Probabilistic Choice, In: Working paper series / Institute for Empirical Research in Economics, No. No. 383, 2008. (Working Paper)
 
Preference reversals occur when different (but formally equivalent) elicitation methodsnreveal conflicting preferences over two alternatives. This paper shows that when people have fuzzy preferences i.e. when they choose in a probabilistic manner, their observed decisions can generate systematic preference reversals. A simple model of probabilistic choice and valuation can account for a higher incidence of standard (nonstandard) preference reversals for certainty (probability) equivalents and it can also rationalize the existence of strong reversals. An important methodological contribution of the paper is a new definition of a probabilistic certainty/probability equivalent of a risky lottery. |
|
Thomas Nitschka, The Risk Premium on the Euro Area Market Portfolio: The Role of Real Estate, In: Working paper series / Institute for Empirical Research in Economics, No. No. 385, 2008. (Working Paper)
 
Incomplete consumption risk sharing implies that the market risk premium is high in times of lack of risk sharing and vice versa. In the time period from 1980 to 2007, this implication of incomplete consumption risk sharing for the market price of risk is not mirrored in excess returns on stocks but in returns on real estate both in the Euro Area and in the U.S. This finding thus casts doubt on the common practice to approximate the market return by a stock index return in empirical tests of the Sharpe-Lintner capital asset pricing model. However, cross-sectional asset pricing tests suggest that there are fundamental differences between the Euro Area and the U.S. in this respect. The return on real estate does not add any explanatory power for domestic or foreign asset returns in excess of a stock index return in the U.S. The opposite reasoning applies to the Euro Area. Finally, this paper shows that the distinction between rather global and country-specific pricing factors does not seem to be important for the pricing of excess returns on foreign currencies. |
|
Joseph P Romano, Michael Wolf, Balanced Control of Generalized Error Rates, In: Working paper series / Institute for Empirical Research in Economics, No. No. 379, 2008. (Working Paper)
 
"Consider the problem of testing s hypotheses simultaneously. In this paper, we derive methods which control the generalized familywise error rate given by the probability of k or more false rejections, abbreviated k-FWER. We derive both single-step and stepdown procedures that control the k-FWER in finite samples or asymptotically, depending on the situation. Moreover, the procedures are asymptotically balanced in an appropriate sense. We briefly consider control of the average number of false rejections. Additionally, we considernthe false discovery proportion (FDP), defined as the number of false rejections divided by the total number of rejections (and defined to be 0 if there are no rejections). Here, the goal is to construct methods which satisfy, for given γ and α, P{FDP > γ} ≤ α, at least asymptotically. Special attention attention is paid to the construction of methods which implicitly take into account the dependence structure of the individual test statistics in ordernto further increase the ability to detect false null hypotheses. A general resampling and subsampling approach is presented which achieves these objectives, at least asymptotically." |
|
Ernst Fehr, Andreas Leibbrandt, Cooperativeness and Impatience in the Tragedy of the Commons, In: Working paper series / Institute for Empirical Research in Economics, No. No. 378, 2008. (Working Paper)
 
This paper examines the role of other-regarding and time preferences for ncooperation in the field. We study the preferences of fishermen whose main, and often only, nsource of income stems from using a common pool resource (CPR). The exploitation of a nCPR involves a negative interpersonal and inter-temporal externality because individuals who nexploit the CPR reduce the current and the future yield for both others and themselves. nAccordingly, economic theory predicts that more cooperative and more patient individuals nshould be less likely to exploit the CPR. Our data supports this prediction because fishermen nwho exhibit a higher propensity for cooperation in a laboratory public goods experiment, and nthose who show more patience in a laboratory time preference experiment, exploit the fishing ngrounds less in their daily lives. Moreover, because the laboratory public goods game exhibits nno inter-temporal spillovers, measured time preferences should not predict cooperative nbehavior in the laboratory. This prediction is also borne out by our data. Thus, laboratory npreference measures are useful to capture important dimensions of field behavior. |
|
Dario Sacco, Is there a U-shaped Relation between Competition and Investment?, In: Working paper series / Socioeconomic Institute, No. No. 808, 2008. (Working Paper)
 
We argue that, in a simple setting, the relation between the intensity of competition and cost-reducing investment is U-shaped. We consider a two-stage game with cost-reducing investments followed by a linear differentiated Cournot duopoly. We first show that, except for firms that are much less efficient than the competitor, investment in the subgame-perfect equilibrium is minimal for intermediate levels of competition, which is inversely parameterized by the extent of product differentiation. An extensive set of laboratory experiments also provides support for the U-shape, both for symmetric firms and for leaders. Also consistent with predictions, the relation is negative for firms that are lagging behind. |
|
Wolfgang R Köhler, Job Design and Randomization in Principal Agent Models, In: Working paper series / Institute for Empirical Research in Economics, No. No. 381, 2008. (Working Paper)
 
We analyze task allocation and randomization in Principal Agent models. We identify a new rationale that determines the allocation of tasks and show that it can be optimal to assign tasks that are very different to one agent. Similar to randomization, the reason to assign several tasks to one agent is to mitigate the effect of the participation constraint. We show that the allocation of tasks can be used as a substitute if randomization is not feasible. |
|
Richard M Bittman, Joseph P Romano, Carlos Vallarino, Michael Wolf, Optimal testing of multiple hypotheses with common effect direction, In: Working paper series / Institute for Empirical Research in Economics, No. No. 307, 2008. (Working Paper)
 
We present a theoretical basis for testing related endpoints. Typically, it is known hownto construct tests of the individual hypotheses, and the problem is how to combine them into a multiple test procedure that controls the familywise error rate. Using the closure method, we emphasize the role of consonant procedures, from an interpretive as well as a theoretical viewpoint. Suprisingly, even if each intersection test has an optimality property, the overallnprocedure obtained by applying closure to these tests may be inadmissible. We introduce annew procedure, which is consonant and has a maximin property under the normal model. The results are then applied to PROactive, a clinical trial designed to investigate the effectivenessnof a glucose-lowering drug on macrovascular outcomes among patients with type 2 diabetes.n |
|
Reinhard Madlener, Weiyu Gao, Ilja Neustadt, Peter Zweifel, Promoting renewable electricity generation in imperfect markets: price vs. quantity policies, In: Working paper series / Socioeconomic Institute, No. No. 809, 2008. (Working Paper)
 
The search for economically e?cient policy instruments designed to promote the diffusion of renewable energy technologies in liberalized markets has led to the introduction of quota-based tradable ‘green’ certi?cate (TGC) schemes for renewable electricity. However, there is a debate about the pros and cons of TGC, a quantity control policy, compared to guaranteed feed-in tariffs, a price control policy. In this paper we contrast these two alternatives in terms of social welfare, taking into account that electricity markets are not perfectly competitive, and show that the price control policy dominates the quantity control policy in terms of social welfare. |
|
Björn Bartling, Urs Fischbacher, Shifting the Blame: On Delegation and Responsibility, In: Working paper series / Institute for Empirical Research in Economics, No. No. 380, 2008. (Working Paper)
 
To fully understand the motives for delegating a decision right, it is important to study responsibility attributions for outcomes of delegated decisions. We conducted an experiment in which subjects were able to delegate the choice between a fair or unfair allocation, and used a punishment option to elicit responsibility attributions. Our results show that, first, responsibility attribution can be effectively shifted and, second, this constitutes a powerful motive for the delegation of a decision right.nFurthermore, we propose a formal measure of responsibility and show thatnthis measure outperforms measures based on outcome or intention in predicting punishment behavior. |
|
Wolfgang R Köhler, Suburbanization and Homeownership Rates, In: Working paper series / Institute for Empirical Research in Economics, No. No. 382, 2008. (Working Paper)
 
Homeownership rates in suburbs are much higher than in central cities. This paper shows that the systematic difference between homeownership rates causes suburbanization. We consider an economy with several regions: the central city, where most households rent, and the suburbs, where most own. Households migrate and vote on local policies. Renters do not consider the effect of policies on house prices. Therefore, renter dominated central cities provide public goods inefficiently and have high taxes and high debt. Since house prices are lower in the central city, few houses are built and households migrate to the suburbs as houses depreciate. The durability of houses has two effects: it provides owners with incentives to vote for efficient policies and it makes inefficient policies sustainable. |
|
Pavlo R Blavatskyy, Loss Aversion, In: Working paper series / Institute for Empirical Research in Economics, No. No. 375, 2008. (Working Paper)
 
Loss aversion is traditionally defined in the context of lotteries over monetary payoffs. This paper extends the notion of loss aversion to a more general setup where outcomes (consequences) may not be measurable in monetary terms and people may have fuzzy preferences over lotteries, i.e. they may choose in a probabilistic manner. The implications of loss aversion are discussed for expected utility theory and rankdependentnutility theory as well as for popular models of probabilistic choice such as the constant error/tremble model and a strong utility model (that includes the Fechner model of random errors and Luce choice model as special cases). |
|
Katja Rost, Emil Inauen, Margit Osterloh, Bruno Frey, The Corporate Governance of Benedictine Abbeys: What can Stock Corporations Learn from Monasteries?, In: Working paper series / Institute for Empirical Research in Economics, No. No. 374, 2008. (Working Paper)
 
The corporate governance structure of monasteries is analyzed to derive new insights into solving agency problems of modern corporations. In the long history of monasteries, some abbots and monks lined their own pockets and monasteries were undisciplined. Monasteries developed special systems to check these excesses and therefore were able to survive for centuries. These features are studied from an economic perspective. Benedictine monasteries in Baden-Württemberg, Bavaria and German speaking Switzerland have an average lifetime of almost 500 years and only a quarter of them broke up as a result of agency problems. We argue that this is due to an appropriate governance structure, relying strongly on the intrinsic motivation of the members and on internal control mechanisms. |
|
Dario Sacco, Armin Schmutzler, All-Pay Auctions with Negative Prize Externalities: Theory and Experimental Evidence, In: Working paper series / Socioeconomic Institute, No. No. 806, 2008. (Working Paper)
 
The paper characterizes the mixed-strategy equilibria in all-pay auctions with endogenous prizes that depend positively on own e?ort and negatively on the e?ort of competitors. Such auctions arise naturally in the context of investment games, lobbying games, and promotion tournaments. We also provide an experimental analysis of a special case which captures the strategic situation of a two-stage game with investment preceding homogenous Bertrand competition. We obtain overinvestment both relative to the mixed-strategy equilibrium and the social optimum. |
|
Josef Falkinger, Between Agora and Shopping Mall, In: Working paper series / Socioeconomic Institute, No. No. 805, 2008. (Working Paper)
 
Advertisements provide consumers with knowledge about private products, whereas political information is required to provide voters with knowledge of public issues. Modern information technologies and globalisation are increasing the exposure of individuals to information. Goods advertising is competing with political information for people's attention. This paper presents a politico-economic equilibrium model in which the tension between private and public agendas can be analysed. It is shown that in an information-rich society, international goods market integration tends to reduce the quality of public policy. Complementing economic integration with political integration can increase the gains from globalisation, though not in all cases. |
|
Dario Sacco, Armin Schmutzler, Competition and Innovation: An Experimental Investigation, In: Working paper series / Socioeconomic Institute, No. No. 807, 2008. (Working Paper)
 
The paper analyzes the effects of more intense competition on firms’ incentives to invest in process innovations. We carry out experiments based on 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. |
|
Aleksander Berentsen, Esther Brügger, Simon Loertscher, Learning, public good provision, and the information trap, In: Working paper series / Institute for Empirical Research in Economics, No. No. 371, 2008. (Working Paper)
 
We consider an economy where decision maker(s) do not know the true production function for a public good. By using Bayes rule they can learn from experience. We show that the economy may learn the truth, but that it may also converge to an inefficient policy where no further inference is possible so that the economy is stuck in an information trap. We also show that our results are robust with respect to experimentation. |
|
Benno Torgler, Markus Schaffner, Bruno Frey, Sascha L Schmidt, Looking Awkward When Winning and Foolish When Losing: Inequity Aversion and Performance in the Field, In: Working paper series / Institute for Empirical Research in Economics, No. No. 369, 2008. (Working Paper)
 
The experimental literature and studies using survey data have established that people care a great deal about their relative economic position and not solely, as standard economic theory assumes, about their absolute economic position. Individuals are concerned about social comparisons. However, behavioral evidence in the field is rare. This paper provides an empirical analysis testing the model of inequity aversion using two unique panel data sets for basketball and soccer players. We find support that the concept of inequity aversion helps to understand how the relative income situation affects performance in a real competitive environment with real tasks and real incentives. |
|
Aleksander Berentsen, Christopher Waller, Outside Versus Inside Bonds, In: Working paper series / Institute for Empirical Research in Economics, No. No. 372, 2008. (Working Paper)
 
When agents are liquidity constrained, two options exist — borrow or sell assets. We compare the welfare properties of these options in two economies: in one, agents can borrow (issue inside bonds) and in the other they can sell government bonds (outside bonds). All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds and that the converse is not true. Moreover, under best policies, the allocation with outside bonds strictly Pareto dominates the allocation with inside bonds. |
|