Thomas Nitschka, Cashflow news, the value premium and an asset pricing view on European stock market integration, In: Working paper series / Institute for Empirical Research in Economics, No. No. 339, 2007. (Working Paper)
The decomposition of national CAPM market betas of European countries’ value and growthnportfolio returns into cashflow and discount rate news driven components reveals that i) highnaverage returns on value portfolios are associated with disproportionately high sensitivity to national cashflow news which corroborates recent evidence for the U.S. and ii) two-beta variants of national CAPMs capture the cross-sectional dispersion in European stock returns. The latter finding is suggestive of relatively well integrated stock markets among the core European countries and reflects basic asset pricing theory. One (national) discount factornshould price any (international) asset. |
|
Thomas Nitschka, Consumption growth, uncovered equity parity and the cross-section of returns on foreign currencies, In: Working paper series / Institute for Empirical Research in Economics, No. No. 340, 2007. (Working Paper)
Lagged foreign stock returns in excess of the U.S. stock market return are informative aboutnquarterly exchange rate movements. A past high foreign stock return relative to the U.S. signals a foreign currency depreciation and hence low returns on the foreign currency.nConditional on stock return differentials, the consumption-based CAPM (CCAPM) explains the cross-sectional dispersion in U.S. dollar exchange rates. The CCAPM captures more than 40 percent of the variation in foreign currency returns scaled with the respective stock returnndifferential on a country-by-country basis. |
|
Felix Schlaepfer, Contingent valuation: a new perspective, In: Working paper series / Socioeconomic Institute, No. No. 715, 2007. (Working Paper)
After several decades of academic research on the contingent valuation (CV) method a consistent behavioral explanation of 'hypothetical bias' is still lacking. Based on evidence from economics, economic psychology and the political sciences, I propose an explanation that is based on two simple working hypotheses about respondent behaviour in contingent valuation surveys. The first hypothesis is that survey respondents are unable to form consistent preferences about unfamiliar goods unless the choice context offers reliable, informative cues that can be rationally exploited in simplified heuristics. The second hypothesis is that the probability and impact of strategic responses in dichotomous-choice questions about public goods depends on the extent to which the presented hypothetical costs differ from the actual costs. The literature on hypothetical bias is revisited in the light of these behavioral hypotheses. I find that the hypotheses are generally supported by the empirical data. Moreover, the hypotheses are able to explain several important empirical phenomena that previous research has not been able to explain. In particular, they solve the puzzle that pre-election polls, but not CV surveys, are able to predict actual referendum outcomes, and they explain why income effects on willingness to pay are lower in CV responses than in actual votes. If confirmed by further studies, the hypotheses will have important implications for future research and practice. First, the hypothetical costs presented in the dichotomous choice question should to be close enough to the actual costs to be credible to all respondents. This can be achieved by specifying the costs as a percentage (rather than absolute) change in taxes. Second, the respondents should be given the option to answer based on information about the positions of large parties and interest groups with known political orientation rather than based on the raw policy information. Theory and evidence suggest that this new survey paradigm largely eliminates the fundamental problems of the conventional stated preference methods. |
|
Florian Ederer, Ernst Fehr, Deception and Incentives. How Dishonesty Undermines Effort Provision, In: Working paper series / Institute for Empirical Research in Economics, No. No. 341, 2007. (Working Paper)
In this paper we show that subtle forms of deceit undermine the effectiveness of incentives.nWe design an experiment in which the principal has an interest in underreporting the true performance difference between the agents in a dynamic tournament. According to thenstandard approach, rational agents should completely disregard the performance feedback of self-interested principals and choose their effort level as if they had not been given any information. However, despite substantial underreporting many principals seem to exhibit lying aversion which renders their feedback informative. Therefore, the agents respond to the feedback but discount it strongly by reducing their effort relative to fully truthful performance feedback. Moreover, previous experiences of being deceived exacerbate the problem and eventually reduce average effort even below the level that prevails in the absence of any feedback. Thus, both no feedback and truthful feedback are better for incentives than biased feedback. |
|
Thomas Nitschka, International evidence for return predictability and the implications for long-run covariation of the G7 stock markets, In: Working paper series / Institute for Empirical Research in Economics, No. No. 338, 2007. (Working Paper)
Temporary fluctuations of the U.S. consumption-wealth ratio, cay, predict excess returns onninternational stock markets at the business cycle frequency. This finding is the reflection of a common, temporary component in national stock markets. Exposure to this common component explains up to 60 percent of the covariation among long-horizon returns on the G7nstock markets for the time period from 1973 to 2005. The impact of the common componentnon stock market comovement is particularly pronounced in the period from 1990 to 2005. |
|
Dario Sacco, Competition and Innovation: An Experimental Investigation, In: Working paper series / Socioeconomic Institute, No. No. 714, 2007. (Working Paper)
The paper analyzes the effects of competitive intensity on firms' incentives to invest in process innovations through an experiment based on two-stage games, where R&D investment choices are followed by product market competition. An increase in the intensity of competition is modeled as an increase in the number of Þrms or as a switch from Cournot to Bertrand. The theoretical prediction is that more intense competition is unfavorable to investments for both cases. In the experiment it turns out that the way of modeling the intensity of competition is essential. The theoretical prediction is confirmed for the number effects. On the other hand, the comparison of Cournot and Bertrand shows that more intense competition is beneÞcial for investments. |
|
Stefan Boes, Kevin E Staub, Rainer Winkelmann, Hedonic Adaptation to Living Standards and the Hidden Cost of Parental Income, In: Working paper series / Socioeconomic Institute, No. No. 713, 2007. (Working Paper)
High parental income, while undeniably causing beneÞts for a child in terms of better access to education and more favorable labor market outcomes, may at the same time increase a childÕs income aspirations and thereby reduce Þnancial satisfaction, ceteris paribus. In this paper, we investigate the relationship between Þnancial satisfaction and parental income with data from the German Socio-Economic Panel. The results indicate that there is indeed a negative well-being externality of parental income, and that children appear to compare their actual income situation with the aspiration level acquired while growing up. |
|
Bruno Frey, Daniel Waldenström, Using Financial Markets to Analyze History: The Case of the Second World War, In: Working paper series / Institute for Empirical Research in Economics, No. No. 335, 2007. (Working Paper)
A central aspect of historical research is to provide explanations for the causes and effects of events that occurred in the past, in particular the Second World War. History can be analyzed and explained from different perspectives. Two such perspectives are considered, the first being the traditional historiographic approach, in which the main emphasis is on the qualitative analysis of various kinds of historical sources and documents, and the second being what we call the financial market approach, a recent methodology for linking significant changes in historical market prices to simultaneously occurring geopolitical events. The fundamental characteristics of the two approaches are identified and compared in answering some important historical questions concerning the Second World War. The financial market approach, as reflected in the secondary market for government bonds, isnstudied for various countries. Both approaches rely heavily on interpretation – but inndifferent ways. They complement each other in a useful way. |
|
Felix Schläpfer, Marcel Schmitt, Anna Roschewitz, Competitive politics, simplified heuristics, and preferences for public goods, In: Working paper series / Socioeconomic Institute, No. No. 712, 2007. (Working Paper)
This paper examines the role of simplified heuristics in the formation of preferences for public goods. Political scientists have suggested that voters use simplified heuristics based on the positions of familiar parties to infer how a proposed policy will affect them and to cast a vote in line with their interests and values. Here, we use a two-stage field-survey experiment to investigate how knowledge of party positions affects policy choices. We followed standard procedures in developing an attribute-based choice experiment on alternative land-use policies in Switzerland. In contrast to the usual formulation, however, the hypothetical costs of the proposed policies were formulated as a percentage change in taxes. The benefit of this formulation relative to the usual absolute money amounts is that the credibility of the (hypothetical) costs for respondents does not depend on respondent income. Furthermore, the formulation allowed us to solicit party positions on the proposed policies. Six out of eight contacted parties provided their positions. We then conducted a split-sample mail survey where we included a table of the party positions with a sub-sample of the questionnaires. We report six main experimental results. (1) The response rate of the survey was unaffected by the party positions. (2) The proportion of no-choice answers was decreased by forty percent relative to the control. (3) The party information significantly affected the choices directly and in interaction with respondents’ general attitudes towards public spending for nature and landscape conservation and thus affected the way how individuals mapped from general attitudes to preferences for specific policies. (4) The information interacted with educational level in only eight out of forty choice sets, suggesting that even the more educated relied on simplified heuristics. (5) Respondents who knew the party positions were more sensitive to the tax attribute. (6) For respondents with medium and higher tax bills, the resulting willingness-to-pay estimates were decreased by a factor of two to ten relative to the control. These findings suggest that the party information helped the respondents to articulate more consistent preferences than in the treatment without the party information. |
|
Michael J Artis, José G Clavel, Mathias Hoffmann, Dilip Nachane, Harmonic Regression Models: A Comparative Review with Applications, In: Working paper series / Institute for Empirical Research in Economics, No. No. 333, 2007. (Working Paper)
Strongly periodic series occur frequently in many disciplines. This paper reviews one specific approach to analyzing such series viz. the harmonic regression approach.In this paper the five major methodsnsuggested under this approach are critically reviewed and compared, and their empirical potential highlighted via two applications. The out-of-sample forecast comparisons are made using the Superior Predictive Ability test, which specifically guards against the perils of data snooping. Certain tentative conclusions are drawn regarding the relative forecasting ability of the different methods. |
|
Lukas Haag, Ashok Kaul, Reformen auf der Suche nach Skaleneffekten: die Struktur der Verwaltungs- und Verfahrenskosten der öffentlichen Unfallkassen in Deutschland, In: Working paper series / Institute for Empirical Research in Economics, No. No. 332, 2007. (Working Paper)
Wir untersuchen die Struktur der Verwaltungs- und Verfahrenskosten der öffentlichen Unfallkassen in Deutschland. Als Datengrundlage dienen die Zahlen aus den Geschäfts- undnRechnungsergebnissen der Unfallträger der öffentlichen Hand für die Jahre 1998 bis 2005. Die Ergebnisse einer Regressionsanalyse liefern Aufschlüsse über Kostentreibernund Skaleneffekte. Die Verwaltungs- und Verfahrenskosten konnten durchnmeldepflichtige Unfälle in der Allgemeinen und Schülerunfallversicherung sowie die Präventionsintensität der Unfallkassen sehr gut erklärt werden.nDie Arbeit hat drei Hauptergebnisse. Erstens sind die Unfallkassen sehr heterogennbezüglich ihrer Verwaltungs- und Verfahrenskosten. Zweitens haben diese Kostenunterschiede nichts mit der Größe der Unfallkassen zu tun: es kann keinerlei Evidenz für Kostenvorteile größerer Unfallkassen (Skaleneffekte) gefunden werden. Drittens ziehen Schülerunfälle erheblich geringere Kosten in der Verwaltung nach sich als Unfälle in der Allgemeinen Unfallversicherung. Ferner gibt es Hinweise, dass eine höhere Präventionsintensität einer Unfallkasse auch höhere Kosten in der Verwaltung nach sich zieht. |
|
Yves Schneider, Peter Zweifel, Spatial Effects in Willingness-to-Pay: The Case of Two Nuclear Risks, In: Working paper series / Socioeconomic Institute, No. No. 502, 2007. (Working Paper)
This paper examines the spatial dimension of marginal willingness to pay (MWP) for reduction of nuclear risks through increased insurance coverage. The effect of distance from a nuclear power plant on individuals’ MWP is ambiguous. MWP is expected to decrease with distance because the risk of being affected by an accident decreases. However, if individuals choose their residential location taking the operational risk into account, MWP is predicted to first increase and later decrease with distance from the nuclear power plant. On the other hand, there are risks associated with transportation and disposal of nuclear waste where distance should matter only in the vicinity of the plant. These theoretical predictions are tested with data collected using a stated choice experiment. The predictions are largely confirmed by the evidence. |
|
Mathias Hoffmann, Thomas Nitschka, The Consumption - Real Exchange Rate Anomaly: an Asset Pricing Perspective, In: Working paper series / Institute for Empirical Research in Economics, No. No. 331, 2007. (Working Paper)
Idiosyncratic consumption risk explains more than 60 percent of the cross-sectional variation in quarterly exchange rate changes and currency returns. Our results are obtained from data of 13 industrialized countries and arenbased on an international version of the consumption capital asset pricing model (CCAPM) in which we account for international consumption heterogeneity. We use this framework to dissect the consumption-exchange rate anomaly, the empirical fact that international variation in purchasing power alone does not appear to account for differences in consumption growth rates across countries. As an explanation for this phenomenon, we explore the presence of currency risk premia that also lead to departures from uncovered interest parity (UIP). We decompose the cross-sectional variation in consumption into one component that is due to cross-country differences in inflation rates and a second component that is due to international variation in nominal interest rates. We interpret these factors as indicators of goods and financial market segmentation respectively. We find that bothnhelp account to virtually equal parts for the cross-section of exchange rate changes. Interestingly, the price of aggregate consumption risk has declined over the 1990s, in line with a growing literature that documents a growingninternationalisation of country portfolios over this period. |
|
Daniel Halbheer, Ernst Fehr, Lorenz Götte, Armin Schmutzler, Self-Reinforcing Market Dominance, In: Working paper series / Socioeconomic Institute, No. No. 711, 2007. (Working Paper)
Are initial competitive advantages self-reinforcing, so that markets exhibit an endogenous tendency to be dominated by only a few firms? Although this question is of great economic importance, no systematic empirical study has yet addressed it. Therefore, we examine experimentally whether firms with an initial cost advantage are more likely to invest in cost reductions than firms with higher initial costs. Wefind that the initial competitive advantages are indeed self-reinforcing, but subjects in the role of firms overinvest relative to the Nash equilibrium. However, the pattern of overinvestment even srengthens the tendency towards self-reinforcing cost advantages relative to the theoretical prediction. Further, as predicted by the Nash equilibrium, aggregate investment is not affected by the initial efficiency distribution. Finally, investment spillovers reduce investment, and investment is higher than the joint-profit maximizing benchmark for the case without spillovers and lower for the case with spillovers. |
|
Fabian Waltert, Felix Schlaepfer, The role of landscape amenities in regional development: a survey of migration, regional economic and hedonic pricing studies, In: Working paper series / Socioeconomic Institute, No. No. 710, 2007. (Working Paper)
Quality of life factors continue to gain importance in residential location decisions as well as location decisions of firms. One such factor is an attractive local landscape. The aim of this paper is to provide a survey of the empirical literature on the role of landscape amenities in local economic change. Following common amenity definitions, we define landscape amenities as landscape features that are location-specific, latent non-market input goods that directly enter residents’ utility functions. Using this definition we identify thirty-nine relevant studies that use either migration or regional economic models or hedonic pricing techniques. One result from the analysis of migration and regional economic studies is that intra-country migrants were attracted by amenities about as frequently as by a low tax burden. Effects of amenities on employment and income are less well established. However, many of these studies used rather limited amenity variables. The results from hedonic studies show that a wide variety of local amenity attributes are partly capitalized in housing prices and that studies on a larger geographic scale are more likely to identify a significant a role of amenities. Newly available land cover datasets and spatial analysis tools have the potential to overcome important data limitations of many earlier studies. Future research may thus contribute to a better understanding of the role of landscape amenities in economic change and to a better coordination of regional and environmental policies. |
|
Michael Kosfeld, Ferdinand A Von Siemens, Competition, Cooperation, and Corporate Culture, In: Working paper series / Institute for Empirical Research in Economics, No. No. 328, 2007. (Working Paper)
Teamwork and cooperation between workers can be of substantial value to a firm, yet the level of worker cooperation often varies between individual firms. We show that these differences can be the result of labor market competition if workers have heterogeneous preferences and preferences are private information. In our model there are two types of workers: selfish workers who only respond to monetary incentives, and conditionally cooperative workers who might voluntarily provide team work if their co-workers do the same. We show that there is no pooling in equilibrium, and that workers self-select into firms that differ in their incentives as well as their resulting level of team work. Our model can explain why firms develop different corporate cultures in an ex-ante symmetric environment. Moreover, the results show that, contrary to first intuition, labor market competition does not destroy but may indeed foster within-firm cooperation. |
|
Stefan Boes, Nonparametric Analysis of Treatment Effects in Ordered Response Models, In: Working paper series / Socioeconomic Institute, No. No. 709, 2007. (Working Paper)
This paper deals with the identification of treatment effects when the outcome variable is ordered. If outcomes are measured ordinally, previously developed methods to investigate the impact of an endogenous binary regressor on average outcomes cannot be applied as the expectation of an ordered variable, in its strict sense, does not exist, and a shift in focus to distributional effects is indispensable. Without imposing a fully fledged parametric model the treatment effects are generally not point-identified. Assuming a threshold crossing model on both the ordered potential outcomes and the binary treatment variable leaving the distribution of error terms and functional forms unspecified, it is discussed how the treatment effects can be bounded and inference on the bounds can be conducted. |
|
Adrian Bruhin, Helga Fehr-Duda, Thomas Epper, Risk and Rationality: Uncovering Heterogeneity in Probability Distortion, In: Working paper series / Socioeconomic Institute, No. No. 705, 2007. (Working Paper)
It has long been recognized that there is considerable heterogeneity in individual risk taking behavior but little is known about the distribution of 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 exhibit significant deviations from rational probability weighting consistent with prospect theory. 20% of the subjects weight probabilities linearly and behave essentially as expected value maximizers. Moreover, the individuals are assigned to one of these two groups with probabilities of close to one resulting in a low measure of entropy. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling. |
|
Bruno Frey, Terrorism and Business, In: Working paper series / Institute for Empirical Research in Economics, No. No. 329, 2007. (Working Paper)
Deterrence has been a crucial element in fighting terrorism, both in politics and in rational choice analyses of terrorism. However, there are two strategies that are superior to deterrence. The first one is to make terrorist attacks less devastating and less attractive to terrorists through decentralization. The second one is to raise the opportunity cost – rather than the material cost – for terrorists. These alternative strategies will effectively dissuade potential terrorists. It is here argued that they not only apply to society as a whole but can also usefully be applied by business enterprises. |
|
Wolfgang R Köhler, Why does context matter? Attraction effects and binary comparisons, In: Working paper series / Institute for Empirical Research in Economics, No. No. 330, 2007. (Working Paper)
A large experimental and empirical literature on asymmetric dominance and attraction effects shows that the probability that an alternative is chosen can increase if additional alternatives become available. Hence context matters and choices and, therefore, market shares can not be accurately described by standard choice models where individuals choose the alternative that yields the highest utility. This paper analyzes a simple procedural choice model. Individuals determine their choice by a sequence of binary comparisons. The model offers an intuitive explanation for violations of regularity such as the attraction and the asymmetric dominance effect and shows their relation to the similarity effect. The model analyzes a new rationale why context matters. The model is applied to explain primacy and recency effects and to derive implications with respect to product design. |
|