Contributions in Merlin

Many experimental studies implement two versions of one game for which agents’ behavior is fundamentally different even though the Nash prediction is the same. This paper provides a novel explanation of such findings. Starting from the observation that many of the games under consideration satisfy the strategic-complementarity property, I obtain predictions for the direction of adjustment in response to parameter changes which do not require calculation of the quilibrium. I show that these predictions explain the experimental evidence very well. Further, I provide a behavioral justification of the approach, and I explore the relation to alternative explanations based on equilibrium selection theories and the quantal response equilibrium.

In the presence of a time-inconsistency problem with optimal agency contracts, we show that competitive markets implement allocations that Pareto dominate those achieved by a benevolent planner, they induce strictly more effort, and they sometimes make the commitment problem disappear entirely. In particular, we analyze a model with moral hazard and two-sided lack of commitment. After agents have chosen a hidden effort and the need to provide incentives has vanished, firms can modify their contracts and agents can switch firms. As long as the ex-post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals who choose different effort levels, the market allocation is Pareto superior to a social planner’s allocation. We construct a specific market game that naturally generates robust equilibria with these properties. In addition, we show that equilibrium contracts without commitment are identical to those with full commitment if the latter involve no cross-subsidization between individuals who choose different effort levels.

"This paper studies the mental distress caused by bereavement. The largest emotional losses are from the death of a spouse; the second-worst in severitynare the losses from the death of a child; the third-worst is the death of a parent. The paper explores how happiness regression equations might benused in tort cases to calculate compensatory damages for emotional harm and pain-and-suffering. We examine alternative well-being variables, discuss adaptation, consider the possibility that bereavement affects someone’s marginal utility of income, and suggest a procedure forncorrecting for the endogeneity of income. Although the paper’s contribution is methodological, and further research is needed, some illustrative compensation amounts are discussed."

If human beings care about their relative weight, a form of imitative obesity can emerge (in which people subconsciously keep up with the weight of the Joneses). Using Eurobarometer data on 29 countries, this paper provides cross-sectional evidence that overweight perceptions and dieting are influenced by a person’s relative BMI, and longitudinal evidence from the German Socioeconomic Panel that well-being is influenced by relative BMI. Highly educated people see themselves as fatter -- at any given actual weight -- than those with low education. These results should be treated cautiously, and fixed-effects estimates are not always welldetermined, but there are grounds to take seriously the possibility of socially contagious obesity.

This paper analyses the equilibrium effects of individual information filters. Information is modelled as advertisements which are distributed across a population of consumers with heterogeneous preferences. An advertisement that provides knowledge about a product with little or no utility for a consumer is considered junk. Filters are characterised by their level of tolerance. The quality of the filter is measured in terms of the share of useful items in the total set of items passing the filter. It is shown that in conditions of decentralised competition, multiple equilibria arise. A social optimum can be achieved by demanding each consumer to reject a certain percentage of advertisements, leaving the choice of what is rejected up to the consumer him/herself.

This study applies financial portfolio theory to determine efficient electricity-generating technology portfolios for the United States and Switzerland, adopting an investor point of view. Expected returns are defined by the rate of decrease of power generation cost (with external costs included), their volatility, by its standard deviation. The 2003 portfolio contains Coal, Nuclear, Gas, Oil, and Wind in the case of the United States, and Nuclear, Storage hydro, Run of river, and Solar in the case of Switzerland, a country without domestic supplies of fossil fuels. Since shocks in generation costs are found to be correlated, Seemingly Unrelated Regression Estimation (SURE) is used to filter out the systematic component of the covariance matrix of the cost changes. Results suggest that as of 2003, the feasible maximum expected return (MER) electricity portfolio for the United States contains more Coal, Nuclear, and Wind than actual but markedly less Gas and Oil. By way of contrast, the minimum variance (MV) portfolio combines markedly more Oil, Coal, Nuclear, and Wind but almost no Gas. Therefore, regardless of the choice between MER and MV, U.S. utilities as investors are substantially inside the efficient frontier. This is even more true of their Swiss counterparts, likely due to continuing regulation of electricity markets.

This study uses Markowitz mean-variance portfolio theory with forecasted data for the years 2005 to 2035 to determine efficient electricity generating technology mixes for Switzerland. The SURE procedure has been applied to filter out the systematic components of the covariance matrix. Results indicate that risk-averse electricity users in 2035 gain in terms of higher expected return, less risk, more security of supply and a higher return-to-risk ratio compared to 2000 by adopting a feasible minimum variance (MV) technology mix containing 28 percent Gas, 20 percent Run of river, 13 percent Storage hydro, 9 percent Nuclear, and 5 percent each of Solar, Smallhydro, Wind, Biomass, Incineration, and Biogas respectively. However, this mix comes at the cost of higher CO2 emissions.

The empirical failure of the uncovered interest rate parity condition seems to be the reflection of risk premia on foreign currencies. After the formation of foreign currency portfolios according to interest rate differentials or forward discounts, recent studies suggest that either consumption- or currency return-based pricing factors explain the cross-section of foreign currency portfolio returns. The contribution of this paper is twofold. It shows that the returnbased explanation applies to foreign currency portfolios sorted from the perspective of a Euro Area investor. Secondly, the main results of this paper suggest that the decisive pricing factor, the so called carry trade premium, mirrors business cycle related risks. Times of relatively large amounts of uninsured Euro Area consumption growth risk are associated with an expected increase of the carry trade premium.

In this paper, the amount of income redistribution in the United States, the European Union, and Switzerland is compared and empirically related to economic, political, and behavioral determinants elaborated in the literature. Lying in between the two poles, Switzerland provides unique evidence about the relative merits of competing hypotheses. It tips the balance against the economic explanation, which predicts more rather than less income redistribution in the United States compared to the EU. It only weakly supports the political model linking proportional representation and multiparty structure (which also characterize Switzerland) to redistribution; yet the Swiss share of transfers in the GDP is low. Behavioral explanations receive a good deal of support from the case of Switzerland, a country that shares with the United States the belief that hard work rather than luck, birth, connections, and corruption determine wealth. In this way, the Janus face of Switzerland may help to explain the difference in the amount of U.S. and EU income redistribution.

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.