Margit Osterloh, Bruno Frey, Shareholders Should Welcome Knowledge Workers as Directors, In: Working paper series / Institute for Empirical Research in Economics, No. No. 283, 2006. (Working Paper)
 
"The most influential approach of corporate governance, the view of shareholders supremacyndoes not take into consideration that the key task of modern corporations is to generate andntransfer firm-specific knowledge. It proposes that, in order to overcome the widespreadncorporate scandals, the interests of top management and directors should be increasinglynaligned to shareholder interests by making the board more responsible to shareholders, andnmonitoring of top management by independent outside directors should be strengthened.nCorporate governance reform needs to go in another direction altogether. Firm-specificnknowledge investments are, like financial investments, not ex ante contractible, leavingninvestors open to exploitation by shareholders. Employees therefore refuse to make firmspecificninvestments. To gain a sustainable competitive advantage, there must be an incentivento undertake such firm-specific investments. Three proposals are advanced to deal with thisndilemma: (1) The board should rely more on insiders. (2) The insiders should be elected bynthose employees of the firm who are making firm-specific knowledge investments. (3) Thenboard should be chaired by a neutral person. These proposals have major advantages: theynprovide incentives for knowledge investors; they countervail the dominance of executives;nthey encourage intrinsic work motivation and loyalty to the firm by strengthening distributivenand procedural justice, and they ensure diversity on the board while lowering transactionncosts. These proposals for reforming the board may help to overcome the crisis corporatengovernance is in. At the same time, they provide a step in the direction of a more adequatentheory of the firm as a basis for corporate governance." |
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Lars P Feld, Bruno Frey, Tax Compliance as the Result of a Psychological Tax Contract: The Role of Incentives and Responsive Regulation, In: Working paper series / Institute for Empirical Research in Economics, No. No. 287, 2006. (Working Paper)
 
In this paper, we develop the concept of a psychological tax contract that goes beyond thentraditional deterrence model and explains tax morale as a complicated interaction betweenntaxpayers and the government. Based on crowding theory, the impact of deterrence and rewardsnon tax morale is discussed. As a contractual relationship implies duties and rights for each contract partner, sticking to the fiscal exchange paradigm between citizens and the statenincreases tax compliance. Citizens are willing to honestly declare income even if they do not receive a full public good equivalent to their tax payments as long as the political process is perceived to be fair and legitimate. At the procedural level, a friendly treatment of taxpayers by the tax office in auditing processes increases tax compliance. |
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Lars P Feld, Bruno Frey, Tax Evasion in Switzerland: The Roles of Deterrence and Tax Morale, In: Working paper series / Institute for Empirical Research in Economics, No. No. 284, 2006. (Working Paper)
 
The traditional economic approach to tax evasion does not appear to be particularly successful in explaining the extent of tax compliance. We argue instead that a psychological tax contractnwhich establishes a fiscal exchange between the state and the citizens shapes tax compliance to a large extent. In that respect, a case study of Switzerland is useful because the small size of the cantons and their direct democratic political systems procedurally establish a close exchangenrelationship between taxpayers and tax authorities. In this paper, evidence is discussednon how tax evasion and tax morale in Switzerland evolved over time. In addition, the impact of economic, legal, socio-demographic, psychological and institutional factors on Swiss tax evasion is discussed. |
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Bruno Frey, Benno Torgler, Tax Morale and Conditional Cooperation, In: Working paper series / Institute for Empirical Research in Economics, No. No. 286, 2006. (Working Paper)
 
Why so many people pay their taxes, although fines and audit probability are low, has become a central question in the tax compliance literature. A homo economicus, with a more refined motivation structure, helps us to shed light on this puzzle. This paper provides empirical evidence for the relevance of conditional cooperation, using survey data from 30 West and East European countries. We find a high correlation betweennperceived tax evasion and tax morale. The results remain robust after exploitingnendogeneity and conducting several robustness tests. We also observe a strong positivencorrelation between institutional quality and tax morale. |
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Eric W K Tsang, Bruno Frey, The as-is journal review process: Let authors own their ideas, In: Working paper series / Institute for Empirical Research in Economics, No. No. 280, 2006. (Working Paper)
 
Recently, the problems associated with the existing journal review processnaroused discussions from seasoned management researchers, who have also made useful suggestions for improving the process. To complement these suggestions, we propose a more radical change: a manuscript should be reviewed on an “as is”nbasis and its fate be determined in one round of review. The as-is review process shortens the time period from submission to final acceptance, reduces thenworkload of editors, referees and authors, provides frank author feedback to referees, and, most important, lets authors own all of the ideas in their publications. |
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Anke Gerber, Direct versus Intermediated Finance: An Old Question and a New Answer, In: Working paper series / Institute for Empirical Research in Economics, No. No. 87, 2006. (Working Paper)
 
We consider a closed economy where a risk neutral bank competes with a competitive bond market. Firms can finance a risky project either by a bank credit or by issuing a bond which is directly sold to risk averse investors who also hold safe deposits at the bank. We show that the bank tends to allocate more capital to lower quality projects but there are some interesting qualifications. If the asymmetric information concerns only the success probability, then we observe adverse selection while if it concerns only the expected return, bad types are driven out of the market. |
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Pavlo R Blavatskyy, Ganna Pogrebna, Loss Aversion? Not with Half-a-Million on the Table!, In: Working paper series / Institute for Empirical Research in Economics, No. No. 274, 2006. (Working Paper)
 
In the television show Affari Tuoi a contestant is endowed with a sealed box containing anmonetary prize between one cent and half a million euros. In the course of the show the contestant is offered to exchange her box for another sealed box with the samendistribution of possible monetary prizes inside. This offers a unique natural laboratory for testing the predictions of expected utility theory versus prospect theory using lotteries with large stakes. While expected utility theory predicts that an individual is exactly indifferent between accepting and rejecting the exchange offer, prospect theory predictsnthat an individual should always reject the exchange offer due to the assumption of loss aversion. We find that the assumption of loss aversion is violated by 46 percent of all contestants in our recorded sample. Thus, contestants do not appear to be predominantly loss averse when dealing with lotteries involving large stakes. |
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Sandra Hanslin, Rainer Winkelmann, The Apple Falls Increasingly Far: Parent-Child Correlation in Schooling and the Growth of Post-Secondary Education in Switzerland, In: Working paper series / Socioeconomic Institute, No. No. 603, 2006. (Working Paper)
 
In this paper, we analyze the completed highest education degree of two birth cohorts (1934-1943 and 1964-1973) in Switzerland, using data from the 1999 wave of the Swiss Household Panel. As expected, the fraction of tertiary graduates has increased over time, for women more so than for men. Also, the educational attainment depends strongly on the educational attainment of parents. We then decompose the overall trend into a parental background effect, a general expansion effect and a distribution effect. For women in particular, we find that a substantial fraction of the overall increase in participation in tertiary education can be explained by the fact that the gap in participation rates between women with lowly educated parents and women with highly educated parents has narrowed. We then investigate the role of financial constraints in explaining these trends. Although the number of individuals suffering financial hardship during youth has declined over time, logit models show that financial problems have become more important as an impediment for higher education. |
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Simon Luechinger, Alois Stutzer, Rainer Winkelmann, The Happiness Gains From Sorting and Matching in the Labor Market, In: Working paper series / Institute for Empirical Research in Economics, No. No. 275, 2006. (Working Paper)
 
Sorting of people on the labor market not only assures the most productive use of valuable skills but also generates individual utility gains if people experience an optimal match between job characteristics and their preferences. Based on individual data on reported satisfaction with life it is possible to assess these latter gains from matching. We introduce a two-equation ordered probit model with endogenous switching and study self-selection into government and private sector jobs. We find considerable gains from matching amounting to an increase in the fraction of very satisfied workers from 53.8 to 58.8 percent relative to a hypothetical random allocationnof workers to the two sectors. |
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Stefan Reimann, The Process of price formation and the skewness of asset returns, In: Working paper series / Institute for Empirical Research in Economics, No. No. 276, 2006. (Working Paper)
 
Distributions of assets returns exhibit a slight skewness. In this note we show that our model of endogenous price formation [Reimann 2006] creates an asymmetric return distribution if the price dynamics are a process in which consecutive trading periods are dependent from each other in the sense that opening prices equal closing prices of the former trading period. The corresponding parameter skewness (preference) parameter is estimated from daily prices from 01/01/1999 - 12/31/2004 for 9 large indices. For the S&P 500, the skewness distribution of all its constituting assets is also calculated. The skewness distribution due to our model is compared with the distribution of the empirical skewness values of the single assets. |
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Stefan Reimann, An Elementary Model of Price Dynamics in a Financial Market: Distribution, Multiscaling & Entropy, In: Working paper series / Institute for Empirical Research in Economics, No. No. 271, 2006. (Working Paper)
 
Stylized facts of empirical assets log-returns include the existence of semi heavy tailedndistributions and a non-linear spectrum of Hurst exponents. Empirical datanconsidered are daily prices from 10 large indices from 01/01/1990 to 12/31/2004. We propose a stylized model of price dynamics which is driven by expectations. The model is a multiplicative random process with a stochastic, state-dependent growth rate which establishes a negative feedback component in the price dynamics. This 0-order modelnimplies that the distribution of log-returns is Laplacian, whose single parameter can be regarded as a measure for the long-time averaged liquidity in the respective market. A comparison with the (more general) Weibull distribution shows that empirical log returns are close to being Laplacian distributed. The spectra of Hurst exponents of both, empirical data and simulated data due to our model, are compared. Due to the finding of non-linear Hurst spectra, the Renyi entropy is considered. An explicit functional form of the RE for an exponential distribution is derived. Theoretical of simulated asset return trails are in good agreement with the estimated from empirical returns.n |
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Dennis Gaertner, Daniel Halbheer, Are There Waves in Merger Activity After All?, In: Working paper series / Socioeconomic Institute, No. No. 414, 2006. (Working Paper)
 
This paper investigates the merger wave hypothesis for the US and the UK employing a Markov regime switching model. Using quarterly data covering the last thirty years, for the US, we identify the beginning of a merger wave in the mid 1990s but not the much-discussed 1980s merger wave. We argue that the latter finding can be ascribed to the refined methods of inference offered by the Gibbs sampling approach. As opposed to the US, mergers in the UK exhibit multiple waves, with activity surging in the early 1970s and the late 1980s. |
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Matthias Benz, Stephan Meier, Do People Behave in Experiments as in the Field? Evidence from Donations, In: Working paper series / Institute for Empirical Research in Economics, No. No. 248, 2006. (Working Paper)
 
Laboratory experiments are an important methodology in economics, especially in the field of behavioral economics. However, it is still debated to what extent results from laboratory experiments can be applied to field settings. One highly important question with respect to the external validity of experiments is whether the same individuals act in experiments as they wouldnin the field.nThis paper presents evidence on how individuals behave in donation experiments and how thensame individuals behave in a naturally occurring decision situation on charitable giving. The results show that behavior in experiments is correlated with behavior in the field. The results are robust to variations in the experimental setting, and the correlation between experimental and field behavior is between 0.25 and 0.4. We discuss whether this correlation should be interpreted as strong or weak and what consequences the findings have for experimental economics. |
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Boris Krey, Peter Zweifel, Efficient Electricity Portfolios for Switzerland and the United States, In: Working paper series / Socioeconomic Institute, No. No. 602, 2006. (Working Paper)
 
This study applies financial portfolio theory to determine efficient electricity-generating technology mixes for Switzerland and the United States. Expected returns are given by the (negative of the) rate of increase of power generation cost. Volatility of returns relates to the standard deviation of the cost increase associated with the portfolio, which contains Nuclear, Run of river, Storage hydro and Solar in the case of Switzerland, and Coal, Nuclear, Gas, Oil, and Wind in the case of the United States. Since shocks in generation costs are found to be correlated, the seemingly unrelated regression estimation (SURE) method is applied for filtering out the systematic component of the covariance matrix of the cost changes. Results suggest that at observed generation costs in 2003, the maximum expected return (MER) portfolio for Switzerland would call for a shift towards Nuclear and Solar, and therefore away from Run of river and Storage hydro. By way of contrast, the minimum variance (MV) portfolio mainly contains Nuclear power and Storage hydro. The 2003 MER portfolio for the United States contains Coal generated electricity and Wind, while the MV alternative combines Coal, Nuclear, Oil and Wind. Interestingly, Gas does not play any role in the determination of efficient electricity portfolios in the United States. |
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Christian Stoff, Establishing Cooperation between Groups: Ingroup versus Outgroup Punishment, In: Working paper series / Socioeconomic Institute, No. No. 416, 2006. (Working Paper)
 
We analyse interethnic cooperation in an infinitely repeated prisoner’s dilemma when members of one group are unable to target punishment towards individual defectors from the other group. We first show that indiscriminate punishment may sustain cooperation in this setting. Our main result, however, is that the introduction of ingroup punishment in addition to outgroup punishment represents a better sanctioning institution in the sense that cooperative outcomes may persist in situations where outgroup punishment alone fails to induce cooperation. Our findings are consistent with historical evidence on the dynamics of interethnic conflicts. |
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Joseph P Romano, Michael Wolf, Improved Nonparametric Confidence Intervals in Time Series Regressions, In: Working paper series / Institute for Empirical Research in Economics, No. No. 273, 2006. (Working Paper)
 
Confidence intervals in econometric time series regressions suffer from notorious coveragenproblems. This is especially true when the dependence in the data is noticeable andnsample sizes are small to moderate, as is often the case in empirical studies. This papernsuggests using the studentized block bootstrap and discusses practical issues, such as thenchoice of the block size. A particular data-dependent method is proposed to automate the nmethod. As a side note, it is pointed out that symmetric confidence intervals are preferred over equal-tailed ones, since they exhibit improved coverage accuracy. The improvements in small sample performance are supported by a simulation study. |
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Pavlo R Blavatskyy, Stochastic Choice Under Risk, In: Working paper series / Institute for Empirical Research in Economics, No. No. 272, 2006. (Working Paper)
 
An individual makes random errors when evaluating the expected utility of a risky lottery. Errors are symmetrically distributed around zero as long as an individual does not make transparentnmistakes such as choosing a risky lottery over its highest possible outcome for certain. This stochastic decision theory explains many well-known violations of expected utility theory such as the fourfold pattern of risk attitudes, the discrepancy between certainty equivalent and probability equivalent elicitation methods, the preference reversal phenomenon, the generalizedncommon consequence effect (the Allais paradox), the common ratio effect and the violations of the betweenness. |
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Simon Luechinger, Stephan Meier, Alois Stutzer, Bureaucratic Rents and Life Satisfaction, In: Working paper series / Institute for Empirical Research in Economics, No. No. 269, 2006. (Working Paper)
 
The monopoly position of the public bureaucracy in providing public services allows government employees to acquire rents. Those rents can involve higher wages, monetary and non-monetary fringe benefits (e.g. pensions and staffing), and/or bribes. We propose a direct measure to capture the total of these rents: the difference in reported subjective well-being between bureaucrats and people working in the private sector. In a sample of 38 countries, we find large variations in the extent of rents in the public bureaucracy. The extent of rents is determined by differences in institutional constraints and correlates with perceptions of corruption. We find judicial independence to be of major relevance for a tamed bureaucracy. |
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Anke Gerber, Thorsten Hens, Bodo Vogt, Coordination in a Repeated Stochastic Game with Imperfect Monitoring, In: Working paper series / Institute for Empirical Research in Economics, No. No. 126, 2006. (Working Paper)
 
We consider a repeated stochastic coordination game with imperfect public monitoring. In the game any pattern of coordinated play is a perfect Bayesian Nash equilibrium. Moreover, standard equilibrium selection argumentsneither have no bite or they select an equilibrium that is not observed in actual plays of the game. We give experimental evidence for a unique equilibrium selection and explain this very robust finding by equilibrium selection based on behavioral arguments, in particular focal point analysis,nprobability matching and over-confidence. Our results have interesting applicationsnin finance because the observed equilibrium exhibits momentum,nreversal and excess volatility. Moreover, the results may help to explain why technical analysis is a commonly observed investment style. |
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Manuel Oechslin, Creditor Protection and the Dynamics of the Distribution in Oligarchic Societies, In: Working paper series / Institute for Empirical Research in Economics, No. No. 264, 2006. (Working Paper)
 
"This paper introduces credit market imperfections and barriers to entrepreneurship into the Ramsey growth model. It is assumed that only a small elite, the oligarchs, may run firms and that these oligarchs – when borrowing from workers – may renege on the debt contracts at low cost. In such an economy, poor contract enforcement slows down the transition towards the steady state and alters the dynamics of the distribution strongly in favour of the oligarchs. The reason is that the workers are forced to charge “low” borrowing rates in order to decrease the incumbents’ incentives to default. With dynastic preferences, low returns reduce the workers’ propensity to save; they discount future wages less and consume more out of current income. Calibrations of the model suggest that the elite’s welfare gains are large – even if the oligarchic structure were associated with substantially lower productivity growth rates. These findings point to political forces behind low financial development." |
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