Pavlo R Blavatskyy, A Stochastic Expected Utility Theory, In: Working paper series / Institute for Empirical Research in Economics, No. No. 231, 2005. (Working Paper)
This paper proposes a new model that explains the violations of expected utility theory throughnthe role of random errors. The paper analyzes decision making under risk when individuals makenrandom errors when they compute expected utilities. Errors are drawn from the normal distribution, which is truncated so that the stochastic utility of a lottery cannot be greater (lower) than the utility of the highest (lowest) possible outcome. The standard deviation of random errors is higher for lotteries with a wider range of possible outcomes. It converges to zero for lotteries converging to a degenerate lottery. The model explains all major stylized empirical facts such as the Allais paradox and the fourfold pattern of risk attitudes. The model fits the data from tennwellknown experimental studies at least as good as cumulative prospect theory. 

Samuel Mühlemann, Jürg Schweri, Rainer Winkelmann, Stefan C Wolter, A Structural Model of Demand for Apprentices, In: Working paper series / Socioeconomic Institute, No. No. 504, 2005. (Working Paper)
It is a widely held opinion that apprenticeship training represents a net investment for training firms, and that therefore firms only train if they have the possibility to recoup these investments after the training period. A recent study using a new firmlevel dataset for Switzerland showed, however, that for 60 percent of the firms, the apprenticeship training itself does not result in net cost. In this context it seems important to examine the question whether the potential net cost of training (during the training period) are a major determinant for the demand for apprentices. Different count data models, in particular hurdle models, are used to estimate the effect of net cost on the demand for apprentices. The results show that the net cost have a significant impact on the training decision but no significant influence on the demand for apprentices, once the firm has decided to train. For policy purposes, these results indicate that subsidies for firms that already train apprentices would not boost the demand for apprentices. 

Pavlo R Blavatskyy, Axiomatization of a Preference for Most Probable Winner, In: Working paper series / Institute for Empirical Research in Economics, No. No. 230, 2005. (Working Paper)
In binary choice between discrete outcome lotteries, an individual may prefer lottery L1 tonlottery L2 when the probability that L1 delivers a better outcome than L2 is higher than thenprobability that L2 delivers a better outcome than L1. Such a preference can be rationalizednby three standard axioms (solvability, convexity and symmetry) and one less standard axiom (a fanningin). A preference for the most probable winner can be represented by a skewsymmetric bilinear utility function. Such a utility function has the structure of a regret theory when lottery outcomes are perceived as ordinal and the assumption of regret aversion isnreplaced with a preference for a win. The empirical evidence supporting the proposed systemnof axioms is discussed. 

Peter Zweifel, Harry Telser, Stephan Vaterlaus, Consumer Resistance Against Regulation: The Case of Health Care, In: Working paper series / Socioeconomic Institute, No. No. 505, 2005. (Working Paper)
Regulation fostering Managed Care alternatives in health insurance is spreading. This work reports on an experiment designed to measure the amounts of compensation asked by the Swiss population (in terms of reduced premiums) for ManagedCare type restrictions in the provision of health care. It finds that restrictions on the freedom of physician choice would require an average compensation of more than onethird of the premium, while generic substitution even meets with a small willingness to pay. Marked preference heterogeneity is an argument against regulation imposing uniformity of contract in Swiss social health insurance. 

Christian Ewerhart, Christoph Nitzsche, On the Notion of the First Best in Standard Hidden Action Problems, In: Working paper series / Institute for Empirical Research in Economics, No. No. 229, 2005. (Working Paper)
It is well known that exante randomization can improve uponnsecond best contracts in principalagent problems. In this note, we show that even the firstbest can be dominated by a random contract. Our example isncast in a standard textbook setup with two effort levels and two states of nature. 

Harry Telser, Peter Zweifel, Validity of DiscreteChoice Experiments  Evidence for Health Risk Reduction, In: Working paper series / Socioeconomic Institute, No. No. 313, 2005. (Working Paper)
There is growing interest in discretechoice experiments (DCE) as a method to elicit consumers' preferences in the health care sector. Increasingly this method is used to determine willingnesstopay (WTP) for healthrelated goods. However, its external validity in the health care domain has not been investigated until today. This paper examines the external validity of DCE concerning the reduction of a health risk. Convergent validity is examined by comparing the value of a statistical life with other preference elicitation techniques, such as revealed preference. Criterion validity is shown by comparing WTP values derived from stated choices in the experiment with those derived from actual choices made by the same individuals. Both tests provide strong evidence in favor of external validity of the DCE method. 

Peter Woehrmann, A dynamic model of the financialreal interaction as a model selection criterion for nonparametric stock market prediction, In: Working paper series / Institute for Empirical Research in Economics, No. No. 226, 2005. (Working Paper)
Inspired by findings of low–dimensional nonlinearities and the Theorem of Takens (1983) forecasting models of financial time series are often built upon nonparametric, i.e. universal nonlinear, univariate relationships. Empirical investigations, however, are seriously contaminated by the problem of overfitting. Since statistical model selection theory in the nonlinear case is still in its infancy we would like to suggest the application of economic model selection criteria. It is a method of combining the flexibility of nonparametric regressions and important structural information in dynamic economic models. Therefore, conditions of economic models are imposed on the embedded nonlinear dynamical system to be estimated nonparametrically. In our empirical investigations we apply an univariate nonparametric forecasting model of stock returns, implemented via the Local Linear Maps of Ritter (1991), by an economic model selection criterion based on a discretized form of a continuous–time dynamic model on the interaction of real activity and asset markets. The dynamic economic model is estimated based on the Maximum Entropy inference since unobservable variables are involved. Results for monthly U.S. data show that nonparametric model selection is improved by this economic model selection criterion. On the other hand this result may be interpreted as support for the economic model. 

Patrick Leoni, Stéphane Luchini, Designing the Financial Tools to Promote Universal Free Access to AIDS Care, In: Working paper series / Institute for Empirical Research in Economics, No. No. 227, 2005. (Working Paper)
Typical of the AIDS epidemics is that governments in developing countries underinvest inndrugs production because of the possible appearance of a curative vaccine. We design a set ofnfinancial tools allowing to hedge against this event and achieving full risksharing. We shownthat the introduction of those assets increase social welfare in developing countries, as well asnthe number of treated patients and the provision of public good. 

Ernst Fehr, Susanne Kremhelmer, Klaus M Schmidt, Fairness and the Optimal Allocation of Ownership Rights, In: Working paper series / Institute for Empirical Research in Economics, No. No. 224, 2005. (Working Paper)
We report on several experiments on the optimal allocation of ownership rights. The experiments confirm the property rights approach by showing that the ownership structure affects relationshipspecific investments and that subjects attain the most efficient ownership allocation despite starting from different initial conditions. However, in contrast to the property rights approach, the most efficient ownership structure is joint ownership. These results are neither consistent with the selfinterest model nor with models that assume that all people behave fairly, but they can be explained by the theory of inequity aversion that focuses on the interaction between selfish and fair players. 

Peter Woehrmann, Willi Semmler, Martin Lettau, Nonparametric Estimation of the Timevarying Sharpe Ratio in Dynamic Asset Pricing Models, In: Working paper series / Institute for Empirical Research in Economics, No. No. 225, 2005. (Working Paper)
Economic research of the last decade linking macroeconomic fundamentals to asset prices has revealed evidence that standard intertemporal asset pricing theory is not successful in explaining (unconditional) first moments of asset market characteristics such as the riskfree interest rate, equity premium and the Sharperatio. Subsequent empirical research has pursued the question whether those characteristics of asset markets are time varying and, in particular, varying over the business cycle. Recently intertemporal asset pricing models have been employed to replicate those time varying characteristics. The aim of our contribution is (1) to relax some of the assumptions that previous work has imposed on underlying economic and financial variables, (2) to extend the solution technique of Marcet and Den Haan (1990) for those models by nonparametric expectations and (3) to propose a new estimation procedure based on the above solution technique. To allow fornnonparametric expectations in the expectations approach for numerically solving the intertemporal economic model we employ the Local Linear Mapsn(LLMs) of Ritter, Martinetz and Schulten (1992) to approximate conditional expectations in the Euler equation. In our estimation approach based on nonparametric expectations we are able to use full structural information and,nconsequently, Monte Carlo simulations show that our estimations are less biased than the widely applied GMM procedure. Based on quarterly U.S. data we also empirically estimate structural parameters of the model and explore its time varying asset price characteristics for two types of preferences, power utility and habit persistence. We in particular focus on the Sharperatio and find indication that the model is able to capture the time variation of thenSharperatio. 

Stefan Buehler, Armin Schmutzler, On The Role of Access Charges Under Network Competition, In: Working paper series / Socioeconomic Institute, No. No. 501, 2005. (Working Paper)
We aim to clarify the role of access charges under twoway network competition, employing a reducedform approach. Retaining the key features of specific network competition models but imposing less structure, we analyze the impact of changes in access charges on linear and nonlinear retail prices. We derive su.cient conditions for usage fees to be increasing (and subscriber charges to be decreasing) in access charges. These conditions are shown to be satisfied only under rather restrictive assumptions on the demand for calls, suggesting that implementing collusion by inflating access charges is likely to be nonfeasible. 

Enrico De Giorgi, Thierry Post, Second Order Stochastic Dominance, RewardRisk Portfolio Selection and the CAPM, In: Working paper series / Institute for Empirical Research in Economics, No. No. 213, 2005. (Working Paper)
"Starting from the rewardrisk model for portfolio selection introduced in De Giorgi (2004), we derive the rewardrisk Capital Asset Pricing Model (CAPM) analogously to the classical meanvariance CAPM. The rewardrisk portfolio selection arises from an axiomatic definition of reward and risk measures based on few basic principles, including consistency with second order stochastic dominance. With complete markets,nwe show that at any financial market equilibrium, investors’ optimal allocations arencomonotonic and therefore the capital market equilibrium model can be reduced to a representative investor model. Moreover, the pricing kernel is an explicitly given,nmonotone function of the market portfolio return, corresponding to the increments of the distortion function characterizing the representative investor’s risk perceptions.nFinally, an empirical application shows that the rewardrisk CAPM better captures the crosssection of US stock returns than the meanvariance CAPM does." 

Margit Osterloh, Bruno Frey, Shareholders Should Welcome Employees as Directors, In: Working paper series / Institute for Empirical Research in Economics, No. No. 228, 2005. (Working Paper)
"The most influential theory of corporate governance, principal agency theory, does not take intonconsideration that the key task of modern corporations is to generate and transfer firmspecific knowledge. It proposes that, in order to overcome the widespread corporate scandals, the interests of top management and directors should be increasingly aligned to shareholder interests by making the board more responsible to shareholders, and strengthening the monitoring of top management by independent outside directors. Corporate governance reform needs to go in another direction altogether. Firmspecific knowledge investments are, like financial investments, not ex ante contractible, leaving investors open to exploitation by shareholders. Employees therefore refuse to make firmspecific investments. To gain a sustainable competitive advantage, there must be an incentive to undertake such firmspecific investments. Three proposals are advanced to deal with this conflict: (1) The board should rely more on insiders. (2) The insidersnshould be elected by those employees of the firm making firmspecific knowledge investments.(3) The board should be chaired by a neutral person. These proposals have major advantages: they provide incentives for knowledge investors; they countervail the dominance of executives; they encourage intrinsic work motivation and loyalty to the firm by strengthening distributive andnprocedural justice, and they ensure diversity on the board while lowering transaction costs. These proposals for reforming the board may help to overcome the crisis corporate governance is in. At the same time, they connect agency theory with the knowledgebased theory of the firm." 

Aleksander Berentsen, Gabriele Camera, Christopher Waller, The Distribution of Money Balances and the NonNeutrality of Money, In: Working paper series / Institute for Empirical Research in Economics, No. No. 220, 2005. (Working Paper)
"Recent monetary models with explicit microfoundations are made tractable by assumingnthat agents have access to centralized markets after one round of decentralized trade. Given quasilinear preferences, this makes the distribution of money degenerate — which keeps the models simple but precludes discussion of distributional effects of monetary policy. We generalize these models by assuming two rounds of trade before agents can readjust their money holdings to study a range of new distributional effects analytically. We show that unexpected symmetric lumpsum money injections may increase shortrun output and welfare,nwhile asymmetric injections may increase longrun output and welfare." 

Patrick Leoni, Stéphane Luchini, Designing the Financial Tool to Promote Universal FreeAccess to AIDS Care, In: Working paper series / Institute for Empirical Research in Economics, No. No. 214, 2004. (Working Paper)
Typical of the AIDS epidemics is that governments in developing countries underinvest in drugs production because of the possible appearance of a curative vaccine. We design a financialntool allowing to hedge against this event. We show that the introduction of this asset increases social welfare, as well as the number of patients treated and the provision of public good. 

Bruno Frey, Alois Stutzer, Economic Consequences of Mispredicting Utility, In: Working paper series / Institute for Empirical Research in Economics, No. No. 218, 2004. (Working Paper)
Individuals make systematic mistakes in their decisions, because they mispredict utility from choice options. When deciding, extrinsic attributes of choice options are more salient than intrinsic attributes. Adaptation is neglected, recollection of feelings is distorted, decisions are rationalized and wrong intuitive theories of happiness are applied. People overestimate extrinsic attributes and therefore put too much emphasis on acquiring income and gaining status. In contrast, they underestimate intrinsic attributes and devote too littlentime to their family, friends or hobbies, which lowers their utility level. The theoreticalnanalysis is consistent with an econometric study on commuting decisions using reported subjective wellbeing data. 

Patrick Leoni, Learning in Repeated Games without Repeating the Game, In: Working paper series / Institute for Empirical Research in Economics, No. No. 215, 2004. (Working Paper)
"This paper extends the convergence result on Bayesian learning in Kalai and Lehrern(1993a, 1993b) to a class of games where players have a payoff function continuous for the product topology. Provided that 1) every player maximizes her expected payoff against her own beliefs, 2) every player updates her beliefs in a Bayesian manner, and 3) prior beliefs other players’ strategies have a grain of truth, we show that after some finite time the equilibrium outcome of the above game is arbitrarily close to a Nash equilibrium. Those assumptions are shown to be tight." 

Alois Stutzer, Bruno Frey, Making International Organizations More Democratic, In: Working paper series / Institute for Empirical Research in Economics, No. No. 217, 2004. (Working Paper)
World governance today is characterized by international organizations lacking democratic legitimacy and control by the citizens they claim to represent. They are also criticized for being inefficient. This leads to violent protests and to NGOs having great influence. To address these problems, we propose international governance base on the democratic idea of citizen participation: All citizens of the member countries of international organizations have the potential right to participate in the decisionmaking of international organizations via initiatives, referendums and recalls. In order to reduce transaction costs, a representative group of citizens is randomly selected who can actually exercise their participation rights. 

Patrick Leoni, Market Power, Survival and Accuracy of Predictions in Financial Markets, In: Working paper series / Institute for Empirical Research in Economics, No. No. 216, 2004. (Working Paper)
"This paper aims to show that the market selection hypothesis in finance is not solely driven by the competitiveness of such markets, as was originally claimed by Alchian [1] and Friedman [4]. Within a standard intertemporal General Equilibrium framework, we allow for an agentnto have enough influence on financial markets to strategically affect prices of assets traded. We then show that, as in Sandroni [15], the agent’ longrun consumption will vanish if she makes less accurate predictions than the market, and maintain her market power otherwise. We conclude thatnthe Darwinian justification to this market selection is not the only explanation for the eventualndomination of agents making the most accurate predictions. Rather, we claim that the origin of market selection, and in turn of the common prior assumption in asset pricing, is associated withnthe ability to foresee accurately market uncertainty." 

Stefan Buehler, Armin Schmutzler, Asymmetric Vertical Integration, In: Working paper series / Socioeconomic Institute, No. No. 306, 2004. (Working Paper)
We examine vertical backward integration in a reducedform model of successive oligopolies. Our key findings are: (i) There may be asymmetric equilibria where some firms integrate and others remain separated, even if firms are symmetric initially; (ii) Efficient firms are more likely to integrate vertically. As a result, integrated firms also tend to have a large market share. The driving force behind these findings are demand/markup complementarities in the product market. We also identify countervailing forces resulting from strong vertical foreclosure, upstream sales and endogenous acquisition costs. 
