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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Rafael Lalive, Armin Schmutzler, Entry in Liberalized Railway Markets: The German Experience, In: Working paper series / Socioeconomic Institute, No. No. 609, 2007. (Working Paper)
 
In Germany, competitive franchising is increasingly being used to procure passenger railway services that were previously provided by a state monopolist. This paper analyzes the 77 tenders that have taken place since the railway reform in 1994. The tenders differ with respect to the size of the franchise network, the required frequency of service, the duration of the contract and the proximity to other lines that are already run by competitors of DB Regio, a subsidiary of the successor of the former state monopolist. Our analysis shows that larger networks are less likely to be won by the competitors. Also, more recent auctions have been won by competitors more frequently than earlier auctions. Other control variables such as the duration of the contract and the adjacency to other lines run by entrants are insignificant. |
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Rafael Lalive, Armin Schmutzler, Exploring the Effects of Competition for Railway Markets, In: Working paper series / Socioeconomic Institute, No. No. 511, 2007. (Working Paper)
 
This paper studies the effects of introducing competition for local passenger railway markets in the German state of Baden-Württemberg. We compare the evolution of the frequency of service on lines that were exposed to competition for the market and lines that were not. Our results suggest that competitive lines enjoyed a stronger growth of the frequency of service than non-competitive lines, even after controlling for various line characteristics that might have an independent influence on the frequency of service. Our results further suggest that the effects of competition may depend strongly on the operator and on characteristics of the line. |
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Pavlo R Blavatskyy, Ganna Pogrebna, Models of Stochastic Choice and Decision Theories: Why Both are Important for Analyzing Decisions, In: Working paper series / Institute for Empirical Research in Economics, No. No. 319, 2007. (Working Paper)
 
Economic research offers two traditional ways of analyzing decision making under risk. One option is to compare the goodness of fit of different decision theories using the samenmodel of stochastic choice. An alternative way is to vary models of stochastic choicencombining them with only one or two decision theories. This paper proposes to look at the bigger picture by comparing different combinations of decision theories and modelsnof stochastic choice. We select a menu of seven popular decision theories and embedneach theory in five models of stochastic choice including tremble, Fechner and randomnutility model. We find that the estimated parameters of decision theories differnsignificantly when theories are combined with different models. Depending on the selected model of stochastic choice we obtain different ranking of decision theories with regard to their goodness of fit to the data. The fit of all analyzed decision theories improves significantly when they are embedded in a Fechner model of heteroscedastic truncated errors (or random utility model in a dynamic decision problem). |
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Martin Brown, Christian Zehnder, The Emergence of Information Sharing in Credit Markets, In: Working paper series / Institute for Empirical Research in Economics, No. No. 317, 2007. (Working Paper)
 
We examine how asymmetric information and competition in the credit market affect voluntary information sharing between lenders. We study an experimental credit market in which information sharing can help lenders to distinguish goodnborrowers from bad ones, because borrowers may exogenously switch locations.nLenders, however, are also engaged in spatial competition, and lose market power by sharing information with close competitors. Our results suggest that more asymmetric information in the credit market increases information sharing behavior significantly. Stronger competition between lenders reduces information sharing, but its impact seems to be only of second order importance. |
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Marcus Hagedorn, Ashok Kaul, Tim Mennel, An Adverse Selection Model of Optimal Unemployment Insurance, In: Working paper series / Institute for Empirical Research in Economics, No. No. 315, 2007. (Working Paper)
 
We ask whether offering a menu of unemployment insurance contracts is welfare-improving in a heterogeneous population. We adopt a repeated moral hazard framework as in Shavell/Weiss (1979), supplemented by unobservednheterogeneity about agents’ job opportunities. Our main theoretical contribution is an analytical characterization of the sets of jointly feasible entitlements that renders an efficient computation of these sets feasible. Our main economic result is that optimal contracts for “bad” searchers tend to be upward-sloping due to an adverse selection effect. This is in contrast to thenwell-known optimal decreasing time profile of benefits in pure moral hazard environments that continue to be optimal for “good” searchers in our model. |
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Stefan Boes, Count Data Models with Unobserved Heterogeneity: An Empirical Likelihood Approach, In: Working paper series / Socioeconomic Institute, No. No. 704, 2007. (Working Paper)
 
As previously argued, the correlation between included and omitted regressors generally causes inconsistency of standard estimators for count data models. Using a specific residual function and suitable instruments, a consistent generalized method of moments estimator can be obtained under conditional moment restrictions. This approach is extended here by fully exploiting the model assumptions and thereby improving efficiency of the resulting estimator. Empirical likelihood estimation in particular has favorable properties in this setting compared to the two-step GMM procedure, which is demonstrated in a Monte Carlo experiment. The proposed method is applied to the estimation of a cigarette demand function. |
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Bruno Frey, Alois Stutzer, Should National Happiness Be Maximized ?, In: Working paper series / Institute for Empirical Research in Economics, No. No. 306, 2007. (Working Paper)
 
Cross-disciplinary ‘happiness research’ has made big progress in the measurementnof individual welfare. This development makes it tempting to pursue the old dream ofnmaximizing aggregate happiness as a social welfare function. However, we postulate that thenappropriate approach is not to maximize aggregate happiness in seeking to improve outcomesnby direct policy interventions. The goal of happiness research should rather be to improve thennature of the processes through which individuals can express their preferences. Individualsnshould become better able to advance their idea of the good life, both individually andncollectively. |
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