Oliver Ruf, Effects of Firm Size and Business Cycle on Earning Losses of Displaced Workers, In: Working paper series / Institute for Empirical Research in Economics, No. No. 366, 2008. (Working Paper)
This paper analyzes labor market success of workers who are displaced in boom versus recession periods. Moreover, the empirical analysis contrasts workers from small firms and large firms. The idea is that displacement carries no information about workers' productivity in large firms but is a signal of low productivity in small firms. This signal is stronger when the plant closure occurs in a boom period than in a recession period. Results indicate that the (i) state of the business cycle is important for influence the effect of displacement on labor market success and (ii) the effect differs by the size of the firm. In large firms, displaced workers suffer from larger earning losses when displacement occurs in recession compared to boom, thenopposite result is found for workers displaced from small firms. |
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Pavlo R Blavatskyy, Probabilistic Choice and Stochastic Dominance, In: Working paper series / Institute for Empirical Research in Economics, No. No. 364, 2008. (Working Paper)
This paper presents an axiomatic model of probabilistic choice under risk. In this model, when it comes to choosing one lottery over another, each alternative has a chance of being selected, unless one lottery stochastically dominates the other. An individual behaves as if he compares lotteries to a reference lottery—a least upper bound or a greatest lower boundnin terms of weak dominance. The proposed model is compatible with several well-known violations of expected utility theory such as the common ratio effect and the violations of the betweenness. Necessary and sufficient conditions for the proposed model are completeness, weak stochastic transitivity, continuity, common consequence independence,noutcome monotonicity, and odds ratio independence. |
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Pavlo R Blavatskyy, Wolfgang R Köhler, Range Effects and Lottery Pricing, In: Working paper series / Institute for Empirical Research in Economics, No. No. 323, 2008. (Working Paper)
A standard method to elicit certainty equivalents is the Becker-DeGroot-Marschak (BDM) procedure. We compare the standard BDM procedure and a BDM procedure with a restricted range of minimum selling prices that an individual can state. We find that elicited prices are systematically affected by the range of feasible minimum selling prices. Expected utility theory cannot explain these results. Non-expected utility theories can only explain the results if subjects consider compound lotteries generated by the BDM procedure. We present an alternative explanation where subjectsnsequentially compare the lottery to monetary amounts in order to determine theirnminimum selling price. The model offers a formal explanation for range effects and for the underweighting of small and the overweighting of large probabilities. |
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Pavlo R Blavatskyy, Risk Aversion, In: Working paper series / Institute for Empirical Research in Economics, No. No. 370, 2008. (Working Paper)
Risk aversion is traditionally defined in the context of lotteries over monetary payoffs. This paper extends the notion of risk aversion to a more general setup where outcomes (consequences) may not be measurable in monetary terms and people may have fuzzy preferences over lotteries, i.e. they may choose in a probabilistic manner. The paper considers comparative risk aversion within neoclassical expected utility theory, a constant error/tremble model and a strong utility model of probabilistic choice (which includes the Fechner model and the Luce choice model as special cases). The paper also provides a new definition of relative riskiness of lotteries. |
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Benno Torgler, Sascha L Schmidt, Bruno Frey, The Power of Positional Concerns, In: Working paper series / Institute for Empirical Research in Economics, No. No. 368, 2008. (Working Paper)
People care a great deal about their relative economic position and not solely about their absolute economic position. However, behavioral evidence is rare. This paper provides evidence on how the relative income position affectsnprofessional sports performances. Our analysis suggests that if a player’s salary is below the average and this difference increases, his performance worsens. Moreover, the larger the income differences, the stronger positional concern effects are observable. We also find that the more the players are integrated, the more evident a relative income effect is. Finally, we find that positional effects are stronger among high performing teams. |
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Andreas Kuhn, Oliver Ruf, The Value of a Statistical Injury: New Evidence from the Swiss Labor Market., In: Working paper series / Institute for Empirical Research in Economics, No. No. 367, 2008. (Working Paper)
This paper deals with the compensation for non-fatal accident risk in Switzerland and presents empirical estimates of the value of a statistical injury. We approach the problem of endogenous sorting of workers into jobs with different accident risks based on unobserved productivity differences twofold. First, we have access to the number of accidents not only at the level of industries, but within cells defined over industry x skill-level of the job, which allows us to estimate risk compensation within groups of workers defined over the same cells. Second, we capitalize on the partial panel structure of our data which allows us to empirically isolate the wage component specific to the employer. Our different approaches to identification in fact yield very different estimates of the value of a statistical injury. Our preferred estimate gives an estimate of about 40,000 Swiss francs (per prevented injury pernyear). |
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Mathias Hoffmann, Iryna Shcherbakova, Consumption Risk Sharing over the Business cycle: the role of Small Firms' Access to Credit Markets, In: Working paper series / Institute for Empirical Research in Economics, No. No. 363, 2008. (Working Paper)
Consumption risk sharing among U.S. federal states increases in booms and decreases in recessions. We find that small firms' access to financial markets plays an important role in explaining this stylized fact: business cycle fluctuations in aggregate risk sharing are more pronounced in states in which small firms account for a large share of output. In addition, better access of small firms to credit markets in the wake of state-level banking deregulationnduring the 1980s seems to have loosened the dependence of aggregate risk sharing on the business cycle. Not only do our result support that better access to credit markets may have made it easier for the owners of small firms to smooth income in the face of adverse cash-flows shocks to their business. They also suggest an additional welfare benefit from banking deregulation: access to financial markets has become more reliable and is more easilynavailable when households and firms need it most urgently - in economic downturns. A possible implication of these findings is that the welfare costs of a monetary tightening could have been substantially reduced as a result of the financial liberalization at the state level. |
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Assenmacher-Wesche Katrin, Stefan Gerlach, Ensuring Financial Stability: Financial Structure and the Impact of Monetary Policy on Asset Prices, In: Working paper series / Institute for Empirical Research in Economics, No. No. 361, 2008. (Working Paper)
This paper studies the responses of residential property and equity prices,ninflation and economic activity to monetary policy shocks in 17 countries, using data spanning 1986-2006. We estimate VARs for individual economies and panel VARs in which we distinguish between groups of countries on the basis of the characteristics of their financial systems. The results suggest that using monetary policy to offset asset price movements in order to guardnagainst financial instability may have large effects on economic activity. Furthermore, while financial structure influences the impact of policy on asset prices, its importance appears limited. |
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Victoria Galsb, Mathias Hoffmann, Heterogeneous Expectations, International Consumption Correlations, and Common Risk Factors in World Stock Markets, In: Working paper series / Institute for Empirical Research in Economics, No. No. 362, 2008. (Working Paper)
This paper establishes a surprising and robust empirical similarity between short-run heterogeneous consumption and long-term consumption growth risk models. The models not only deliver a similar fit on a given set of portfolios, their actual pricing errors are also highly correlated. In addition, we find that consumption dispersion is a robust predictor of the transitory component in aggregate consumption growth. To interpret these findings, we propose a model in which aggregate uncertainty is a function of idiosyncratic uncertainty and only long-term consumption growth risknis priced. An implication of this being that consumption dispersion is priced empirically not because markets are necessarily incomplete but because investors disagree in the short-run about theirncommon long-term consumption prospects. |
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Paolo Epifani, Gino Gancia, Openness, Government Size and the Terms of Trade, In: Working paper series / Institute for Empirical Research in Economics, No. No. 359, 2008. (Working Paper)
This paper investigates the relationship between trade openness and the size ofngovernments, both theoretically and empirically. We argue that openness can increase the size of governments through two channels: (1) a terms of trade externality, whereby trade lowers the domestic cost of taxation, and (2) the demand for insurance, whereby trade raises risk and public transfers. We provide a unified framework for studying and testing these two mechanisms. Our main theoretical prediction is that the relative strength of the two explanations depends on a key parameter, namely, the elasticity of substitution between domestic and foreign goods. Moreover, while the first mechanism is inefficient from the standpoint of world welfare, the second is instead optimal. In the empirical part of the paper, we provide new evidence on the positive association between openness and government size and we explore its determinants. Consistently with the terms of trade externality channel, we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods. Our findings raise warnings that globalization may have led to inefficiently large governments. |
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Timo Boppart, Josef Falkinger, Volker Grossmann, Ulrich Woitek, Gabriela Wüthrich, Qualifying Religion: The Role of Plural Identities for Educational Production, In: Working paper series / Institute for Empirical Research in Economics, No. No. 360, 2008. (Working Paper)
This paper examines the role of religious denomination for human capital formation. We employ a unique data set which covers, inter alia, information on numerous measures of school inputs in 169 Swiss districts for the years 1871/72, 1881/82nand 1894/95, marks from pedagogical examinations of conscripts (1875-1903), andnresults from political referenda to capture conservative or progressive values in addition to the cultural characteristics language and religion. Catholic districts show on average significantly lower educational performance than Protestant districts. However, accounting for other sociocultural characteristics qualifies the role of religion for educational production. The evidence suggests that Catholicism is harmful onlynin a conservative milieu. We also exploit information on absenteeism of pupils fromnschool to separate provision of schooling from use of schooling. |
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Adrian Bruhin, Stochastic Expected Utility and Prospect Theory in a Horse Race: A Finite Mixture Approach, In: Working paper series / Socioeconomic Institute, No. No. 803, 2008. (Working Paper)
This study compares the performance of Prospect Theory versus Stochastic Expected Utility Theory at fitting data on decision making under risk. Both theories incorporate well-known deviations from Expected Utility Maximization such as the Allais paradox or the fourfold pattern of risk attitudes. Stochastic Expected Utility Theory parsimoniously extends the standard microeconomic model, whereas Prospect Theory, the benchmark for aggregate choice so far, is based on psychological findings. First, the two theories' fit to representative choice is assessed for two experimental data sets, one Swiss and one Chinese. In a second step, finite mixture regressions reveal a consistent mix of two different behavioral types suggesting that researchers may take individual heterogeneity into account in order to avoid aggregation bias. |
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Sandra Hanslin, The effect of trade openness on optimal government size under endogenous firm entry, In: Working paper series / Socioeconomic Institute, No. No. 802, 2008. (Working Paper)
This paper analyzes the effect of trade liberalization on government spending in a general equilibrium model with a continuum of industries supplying tradable and nontradable goods under monopolistic competition. Trade liberalization is modeled as the opening up of product markets between two countries, which may differ in total factor productivity, factor endowment and fix cost technology. In this setup, I show that the optimal provision of a public consumption good depends positively on the degree of openness. Moreover, the richer and more productive country chooses a lower optimal government share. |
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Harry Telser, Karolin Becker, Peter Zweifel, Validity and Reliability of Willingness-to-Pay Estimates: Evidence from Two Overlapping Discrete-Choice Experiments, In: Working paper series / Socioeconomic Institute, No. No. 412, 2008. (Working Paper)
Discrete-choice experiments, while becoming increasingly popular, have rarely been tested for validity and reliability. This contribution purports to provide some evidence of a rather unique type. Two surveys designed to measure willingness-to-accept (WTA) for reform options in Swiss health care and health insurance are used to provide independent information with regard to two elements of reform. The issue to be addressed is whether WTA values converge although the three overlapping attributes (a more restrictive drug benefit, a delayed access to medical innovation, and a change in the monthly insurance premium) are embedded in widely differing choice sets. Experiment A contains rather radical health system reform options, while experiment B concentrates on more familiar elements such as copayment and the benefit catalogue. While mean WTA values differ between experiments, they tend to vary in similar ways, suggesting at least theoretical validity and reliability. |
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Adrian Bruhin, Rainer Winkelmann, Happiness Functions with Preference Interdependence and Heterogeneity: The Case of Altruism within the Family, In: Working paper series / Socioeconomic Institute, No. No. 702, 2008. (Working Paper)
This study investigates the prevalence and extent of altruism by examining the relationship between parents' and their adult children's subjective well-being in a data set extracted from the German Socio-Economic Panel. In order to segregate the share of parents with altruistic preferences from those who are selfish, we estimate a finite mixture regression model. We control for various sources of potential bias by taking advantage of the data's panel structure. To validate our modeling approach we show that predicted altruists indeed make higher average transfer payments. |
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Anke Gerber, Philipp C Wichardt, Providing Public Goods in the Absence of Strong Institutions, In: Working paper series / Institute for Empirical Research in Economics, No. No. 303, 2008. (Working Paper)
This paper proposes a simple two-stage mechanism to establishnpositive contributions to public goods in the absence of powerful institutions tonprovide the public good and to sanction free-riders. In this mechanism players commit to the public good by paying a deposit prior to the contribution stage.nIf there is universal commitment, deposits are immediately refunded whenever anplayer contributes her speci¯ed share to the public good. If there is no universalncommitment, all deposits are refunded and the standard game is played. For suitable deposits, prior commitment and full ex post contributions are supported as a strict subgame perfect Nash equilibrium for the resulting game. As the mechanism obviates the need for any ex post prosecution of free-riders, it is particularlynsuited for situations where players do not submit to a common authority as in the case of international agreements. |
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Helga Fehr-Duda, Adrian Bruhin, Thomas Epper, Renate Schubert, Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size, In: Working paper series / Socioeconomic Institute, No. No. 708, 2008. (Working Paper)
How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that, contrary to gains, no coherent change in relative risk aversion is observed for losses. The increase in relative risk aversion over gains cannot be captured by the curvature of the utility function. It is driven predominantly by a change in probability weighting of a majority group of individuals who exhibit more rational probability weighting at high stakes. These results not only challenge expected utility theory, but also prospect theory. |
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Bruno Frey, Susanne Neckermann, Awards: A view from psychological economics, In: Working paper series / Institute for Empirical Research in Economics, No. No. 357, 2008. (Working Paper)
Awards in the form of orders, decorations, prizes, and titles are ubiquitous in monarchies and republics, private organizations, not-for-profit, and profit-oriented firms. This paper argues that awards present a unique combination of different stimuli and that they are distinct and unlike other monetary and non-monetary rewards. Despite their relevance in all areas of life awards have not received much scientific attention. We propose to study awards and present results on a vignette experiment that quantifies andnisolates the effects of different award characteristics such as the publicity associated with winning an award. Further, employing a unique data set, we demonstrate that there are substantial differences in the intensity of usage of awards across countries. |
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Pavlo R Blavatskyy, Betting on Own Knowledge: Experimental Test of Overconfidence, In: Working paper series / Institute for Empirical Research in Economics, No. No. 358, 2008. (Working Paper)
"This paper presents a new incentive compatible method for measuring confidence in own knowledge. This method consists of two parts. First, an individual answers several general knowledge questions. Second, the individual chooses among three alternatives: 1) one question is selected at random and the individual receives a payoff if he or she has answered this question correctly; 2) the individual receives the same payoff with a probability equal to the percentage of correctly answerednquestions; 3) either the first or the second alternative is selected. The choice of thenfirst (second) alternative reveals overconfidence (underconfidence). The individual is well calibrated if he or she chooses the third alternative. Experimental results show that subjects, on average, exhibit underconfidence about their ownnknowledge when the incentive compatible mechanism is used. Their confidence in own knowledge does not depend on their attitude towards risk/ambiguity." |
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Matthias Doepke, Humankapital, politischer Wandel und langfristige Wirtschaftsentwickung, In: Working paper series / Institute for Empirical Research in Economics, No. No. 356, 2008. (Working Paper)
Seit Mitte der achtziger Jahre hat die neue Wachstumstheorie verstärkt Aufmerksamkeit auf Humankapital als eine Quelle des Wirtschaftswachstumsngelenkt. Neuere empirische Ergebnisse weisen allerdings darauf hin, dass Bildungsinvestitionen nur geringe soziale Externalitäten erzeugen und dass der direkte Beitrag des Humankapitals zum Wirtschaftswachstum relativngering ist. In dieser Arbeit wird der Beitrag des Humankapitals zur Wirtschaftsentwicklungnim Rahmen der langfristigen Wachstumstheorie dargestellt,nderen Gegenstand ist, den Übergang von Ländern von vor-industrieller Stagnation zu stetigem Wirtschaftswachstum zu erklären. Hier erweist sich,ndass Humankapital nicht nur direkte Produktivitätseffekte erzeugt, sondern auch als Auslöser verschiedener entwicklungsfördernder politischer Reformen dienen kann. |
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