Adrian Bruhin, Helga Fehr-Duda, Thomas Epper, Risk and Rationality: Uncovering Heterogeneity in Probability Distortion, In: Working paper series / Institute for Empirical Research in Economics, No. No. 414, 2009. (Working Paper)
It has long been recognized that there is considerable heterogeneity in individual risk taking behavior but little is known about the distributionnof 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 exhibitnsignificant deviations from linear probability weighting, consistent with prospect theory. 20% of the subjects weight probabilities near linearly and behave essentially as expected value maximizers. Moreover, individuals are cleanly assigned to one type with probabilities close to unity. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling. |
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Thomas Epper, Helga Fehr-Duda, Adrian Bruhin, Uncertainty Breeds Decreasing Impatience: The Role of Risk Preferences in Time Discounting, In: Working paper series / Institute for Empirical Research in Economics, No. No. 412, 2009. (Working Paper)
Future events are uncertain by their very nature. Therefore, people's risk preferences are likely to play a role in the valuation of allegedly guaranteed future outcomes. We show that future uncertainty conjointly with people's proneness to nonlinear probability weighting generates a unifying framework for explaining many anomalies in intertemporal choice, such as hyperbolic discounting and subadditivity of discount factors. Moreover, our approach implies that higher uncertainty of future prospects increases the hyperbolicity of discount rates, suggesting that institutional deficiencies such as lack of contract enforcement, may be a source ofnhyperbolic discounting behavior. Based on an experiment with monetary incentives, we show that people's risk taking behavior is indeed a significant determinant of their time discounting behavior: Greater departures from linear probability weighting predict a stronger decline in impatience on the level of individual behavior. |
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Stefan Boes, Stephan Nüesch, New Flight Regimes and Exposure to Aircraft Noise: Identifying Housing Price Effects Using a Ratio-of-Ratios Approach, In: Working paper series / Socioeconomic Institute, No. No. 906, 2009. (Working Paper)
In October 2003, a new flight regime was introduced at Zurich airport that significantly changed the levels of noise pollution in surrounding communities. We investigate the impact of the new flight policy on apartment prices using a hedonic price model and a non-linear difference-in-differences identification strategy. Our results suggest that rental prices increased by about 3 to 8 percent less in regions affected by the policy change, controlling for several apartment and location characteristics. The noise discount is still significant, although smaller, even after the inclusion of object-speciffc fixed effects. However, we do not find evidence of price changes in the sales market. |
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Jim Malley, Ulrich Woitek, Technology shocks and aggregate fluctuations in an estimated hybrid RBC model, In: Working paper series / Institute for Empirical Research in Economics, No. No. 408, 2009. (Working Paper)
This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of technology shocks in explainingnaggregate fluctuations. To this end we estimate the model’snposterior density using Markov-Chain Monte-Carlo (MCMC) methods. Within this framework we extend Ireland’s (2001, 2004) hybrid estimation approach to allow for a vector autoregressive moving averagen(VARMA) process to describe the movements and co-movementsnof the model’s errors not explained by the basic RBC model. The results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model’s fit relative to the VAR and AR alternatives. Moreover, despite setting the RBC model a more difficult task under the VARMA specification, our analysis,nbased on forecast error and spectral decompositions, suggests that the RBC model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post-war U.S. economy. |
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Olivier Ledoit, Sandrine Péché, Eigenvectors of some large sample covariance matrices ensembles, In: Working paper series / Institute for Empirical Research in Economics, No. No. 407, 2009. (Working Paper)
We consider sample covariance matrices constructed from real or complex i.i.d. variates with finite 12th moment. We assume that the population covariance matrix is positive definite and its spectral measure almost surely converges to some limiting probability distribution as the number of variables and the number of observations go to infinity together, with their ratio converging to a finite positive limit. We quantify the relationship between sample and population eigenvectors, by studying the asymptotics of a broad family of functionals that generalizes the Stieltjes transform of the spectral measure. This is then used to compute the asymptotically optimal bias correction for sample eigenvalues, paving the way for a new generation of improved estimators of the covariance matrix and its inverse. |
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Thomas Nitschka, Momentum in stock market returns, risk premia on foreign currencies and international financial integration, In: Working paper series / Institute for Empirical Research in Economics, No. No. 405, 2009. (Working Paper)
Momentum in developed countries' stock market index returns can be exploited to form portfolios of excess returns on foreign currencies as relatively high past foreign stock market returns signal a foreign currency appreciation. Two risk factors extracted from the stock index momentum based currency portfolio returns explain more than 80 percent of their cross-sectional variation. In contrast to currency risk factors constructed from forward discount sorted currency portfolios, these risk factors are not related to business cycle or liquidity risk. But high currency risk premia are associated with relatively deep financial integration and a high level of risk sharing. |
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Donja Darai, Jens Grosser, Nadja Trhal, Patents versus Subsidies - A Laboratory Experiment, In: Working paper series / Socioeconomic Institute, No. No. 905, 2009. (Working Paper)
This paper studies the effects of patents and subsidies on R&D investment decisions. The theoretical framework is a two-stage game consisting of an investment and a market stage. In equilibrium, both patents and subsidies induce the same amount of R&D investment, which is higher than the investment without governmental incentives. In the first stage, the firms can invest in a stochastic R&D project which might lead to a reduction of the marginal production costs and in the second stage, the firms face price competition. Both stages of the game are implemented in a laboratory experiment and the obtained results support the theoretical predictions. Patents and subsidies increase investment in R&D and the observed amounts of investment in the patent and subsidy treatment do not differ significantly across both instruments. However, we observe overinvestment in all three treatments. Observed prices in the market stage converge to equilibrium price levels. |
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Ganna Pogrebna, Pavlo R Blavatskyy, Coordination, focal points and voting in strategic situations: a natural experiment, In: Working paper series / Institute for Empirical Research in Economics, No. No. 403, 2009. (Working Paper)
This paper studies coordination in a multi-stage elimination tournament with large monetarynincentives and a diversified subject pool drawn from the adult British population. In thentournament, members of an ad hoc team earn money by answering general knowledgenquestions and then eliminate one contestant by plurality voting without prior communication. We find that in the early rounds of the tournament, contestants use a focal principle and coordinate on one of the multiple Nash equilibria in pure strategies by eliminating the weakest member of the team. However, in the later rounds, contestants switch to playing a mixednstrategy Nash equilibrium. |
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Stefan Buehler, Dennis L Gaertner, Making Sense of Non-Binding Retail-Price Recommendations, In: Working paper series / Socioeconomic Institute, No. No. 902, 2009. (Working Paper)
This paper provides a theoretical rationale for non-binding retail price recommendations (RPRs) in vertical supply relations. Analyzing a bilateral manufacturer-retailer relationship with repeated trade, we show that linear relational contracts can implement the surplus-maximizing outcome. If the manufacturer has private information about production costs or consumer demand, RPRs may serve as a communication device from manufacturer to retailer. We characterize the properties of efficient bilateral relational contracts with RPRs and discuss extensions to settings where consumer demand is affected by RPRs, and where there are multiple retailers or competing supply chains. |
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Mathias Hoffmann, Ronald MacDonald, Real Exchange Rates and Real Interest Rate Differentials: a Present Value Interpretation, In: Working paper series / Institute for Empirical Research in Economics, No. No. 404, 2009. (Working Paper)
Although the real exchange rate - real interest rate (RERI) relationship is central to most open economy macroeconomic models, empirical support for the relationship is generally found to be rather weak. In this paper we re-investigate the RERI relationship using bilateral U.S. real exchange rate data spanning the period 1978 to 2007. Instead of testing one particular model, we build on Campbell and Shiller (1987) to propose a metric of the economic significance of the relationship. Our empirical results provide robust evidence that the RERI link is economically significant and that the real interest rate differential is a reasonable approximation of the expectednrate of depreciation over longer horizons. |
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Kevin E Staub, Simple tests for exogeneity of a binary explanatory variable in count data regression models, In: Working paper series / Socioeconomic Institute, No. No. 904, 2009. (Working Paper)
This article investigates power and size of some tests for exogeneity of a binary explanatory variable in count models by conducting extensive Monte Carlo simulations. The tests under consideration are Hausman contrast tests as well as univariate Wald tests, including a new test of notably easy implementation. Performance of the tests is explored under misspecification of the underlying model and under different conditions regarding the instruments. The results indicate that often the tests that are simpler to estimate outperform tests that are more demanding. This is especially the case for the new test. |
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Sule Akkoyunlu, Frank R Lichtenberg, Boriss Siliverstovs, Peter Zweifel, Spurious correlation in estimation of the health production function: A note, In: Working paper series / Socioeconomic Institute, No. No. 903, 2009. (Working Paper)
In this paper, we address the issue of spurious correlation in the production of health in a systematic way. Spurious correlation entails the risk of linking health status to medical (and nonmedical) inputs when no links exist. This note first presents the bounds testing procedure as a method to detect and avoid spurious correlation. It then applies it to a recent contribution by Lichtenberg (2004), which relates longevity in the United States to pharmaceutical innovation and public health care expenditure. The results of the bounds testing procedure show longevity to be linearly related to these two factors. Therefore, the estimates reported by Lichtenberg (2004) cannot be said to be result of spurious correlation, to the contrary, they very likely reflect an effective relationship, at least for the United States. |
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Johannes Schoder, Peter Zweifel, Flat-of-the-Curve Medicine - A New Perspective on the Production of Health, In: Working paper series / Socioeconomic Institute, No. No. 901, 2009. (Working Paper)
Health economists have studied the determinants of the expected value of health status as a function of medical and nonmedical inputs, often finding small marginal effects of the former. This paper argues that both types of input have an additional benefit, viz. a reduced variability of health status. Using OECD health data for 24 countries between 1960 and 2004, medical and nonmedical inputs are found to reduce the variability of life expectancy. While the evidence supports the "flat-of-the-curve medicine" hypothesis with respect to the expected value of life expectancy and its variability, healthcare expenditure is comparatively effective in reducing variability. |
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Ernst Fehr, On the Economics and Biology of Trust, In: Working paper series / Institute for Empirical Research in Economics, No. No. 399, 2009. (Working Paper)
In recent years, many social scientists have claimed that trust plays an important role in economic and social transactions. Despite its proposed importance, the measurement and the definition of trust seem to be not fully settled, and the identification of the exact role of trust in economic interactions has proven to be elusive. It is still not clear whether trust is just an epiphenomenon of good institutions or whether it plays an independent causal role capable of shaping important aggregate economic outcomes. In this paper, I rely on a behavioral definition of trust that enables us to relate it to economic primitives such as preferences and beliefs. I review strong biological and behavioral evidence indicating that trusting is not just a special case of risk-taking, but based on important forms of social preferences such as betrayal aversion. Behaviorally defined trust also opens the door for understanding national and ethnic trust differences in terms of differences in preferences and beliefs, and it suggests ways to examine and interpret a causal role of trust. |
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Bruno Frey, Susanne Neckermann, Awards in Economics. Towards a New Field of Inquiry, In: Working paper series / Institute for Empirical Research in Economics, No. No. 401, 2008. (Working Paper)
Awards play a large role in the economics profession, which is documented by the large varietynand number of awards. However, little scientific attention has been devoted to them. This paperndocuments the prevalence of awards in the economics profession and analyzes the number and type of awards received by the 1,200 leading economists included in Who’s Who in Economics. First steps towards integrating awards into economic theory are undertaken. |
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Joseph P Romano, Azeem M Shaikh, Michael Wolf, Control of the False Discovery Rate under Dependence using the Bootstrap and Subsampling, In: Working paper series / Institute for Empirical Research in Economics, No. No. 337, 2008. (Working Paper)
This paper considers the problem of testing s null hypotheses simultaneously while controlling the false discovery rate (FDR). Benjamini and Hochberg (1995) provide a method for controlling the FDR based on p-values for each of the null hypotheses under the assumption that the p-values are independent. Subsequent research has since shown that this procedure is valid under weaker assumptions on the joint distribution of the p-values. Related procedures that are valid under no assumptions on the joint distribution of the p-values have also been developed. None of these procedures, however, incorporate information about the dependence structure of the test statistics. This paper develops methods for control of the FDR under weak assumptions that incorporate such information and, by doing so, are better able to detect false null hypotheses. We illustrate this property via a simulation study and two empirical applications. In particular, the bootstrap method is competitive with methods that require independence if independence holds, but it outperforms these methods under dependence. |
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Andrew J Oswald, Rainer Winkelmann, Delay and Deservingness after Winning the Lottery, In: Working paper series / Socioeconomic Institute, No. No. 815, 2008. (Working Paper)
Economics rests upon a set of presumptions about how human beings are affected by income. Yet causal evidence is scant. This paper reports a longitudinal study of randomly selected lottery winners. Remarkably, we show that it takes almost three years before they enjoy their money. We develop a model of dissonance and deservingness. We argue that, despite the tradition of economics, human beings may weight differently the different kinds of income that accrue to them. If so, it is not sufficient to describe utility by a function u(y), and it is not true that ‘a dollar is a dollar’. |
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Philipp C Wichardt, Daniel Schunk, Patrick W Schmitz, Participation costs for responders can reduce rejection rates in ultimatum bargaining, In: Working paper series / Institute for Empirical Research in Economics, No. No. 398, 2008. (Working Paper)
This paper reports data from an ultimatum mini-game in which responders first had to choose whether or not to participate. Participation was costly, but the participation cost was smaller than the minimum payoff that a responder could guarantee himself in the ultimatum game. Compared to a standard treatment, we find that the rejection rate of unfavorable offers is significantly reduced when participation is costly. A possible explanation based on cognitive dissonance is offered. |
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Stefan Boes, Kevin E Staub, Rainer Winkelmann, Relative status and satisfaction, In: Working paper series / Socioeconomic Institute, No. No. 816, 2008. (Working Paper)
This paper investigates the relationship between income satisfaction of adult children and their relative economic status, using data from the German Socio-Economic Panel and income rank as an indicator of status. The results show that children appear to compare their actual economic status with that of their parents, deriving large satisfaction gains from an income rank that is higher than that of their parents. The effect is asymmetric with regard to parents, as these seem not to be ifluenced by their children's income rank. |
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Mathias Hoffmann, Thomas Nitschka, Securitization of Mortgage Debt, Asset Prices and International Risk Sharing, In: Working paper series / Institute for Empirical Research in Economics, No. No. 376, 2008. (Working Paper)
We explore the impact of mortgage securitization on the international diversification of macroeconomic risk. By making mortgage-related risks internationally tradeable, securitization contributes considerably to better international consumption risk sharing: we find that countries with the most highly developed markets for securitized mortgage debt have consumption responses to a typical idiosyncratic business cycle shock that are 20-30 percent less volatile than those experienced by countries that do not allow for mortgage securitization. Our results are based on quarterly data from a panel of 16 industrialized countries and cover the sample period 1985-2008Q1. They are robust to a range of controls for other aspects of financial globalization, international differences in the structure of housing markets and the financial system etc. Against the backdrop of the subprime crisis, these findings inevitably raise the question whether securitization could notnjust facilitate risk sharing in tranquil times but that it actually fails to provide international insurance in severe crisis periods. Indeed, we find that international risk sharing decreases in global asset price downturns and increases in booms. But we do not find evidence that countries with more developed securitization markets are systematically more exposed to these fluctuations in the extent to which risk can be shared across national boundaries. |
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