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. |
|
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. |
|
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. |
|
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. |
|
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. |
|
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. |
|
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. |
|
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." |
|
Thorsten Hens, Martin Vlcek, Does Prospect Theory Explain the Disposition Effect?, In: Working paper series / Institute for Empirical Research in Economics, No. No. 262, 2006. (Working Paper)
The disposition effect is the observation that investors hold winning stocks too long and sell losing stocks too early. A standard explanation of the disposition effect refers to prospect theory and in particular to the asymmetric risk aversion according to which investors are risk averse when faced with gains and risk-seeking when faced withnlosses. We show that for reasonable parameter values the disposition effect can however not be explained by prospect theory as proposed by Kahneman and Tversky. The reason is that those investors who sell winning stocks and hold loosing assets would in the first place notnhave invested in stocks. That is to say the standard prospect theory argument is sound ex-post, assuming that the investment has takennplace, but not ex-ante, requiring that the investment is made in the first place. |
|
Reto Foellmi, Manuel Oechslin, Equity and Efficiency under Imperfect Credit Markets, In: Working paper series / Institute for Empirical Research in Economics, No. No. 265, 2006. (Working Paper)
Recent macroeconomic research discusses credit market imperfections as a key channel through which inequality retards growth. Limited borrowing prevents the less affluent individuals from investing the efficient amount, and the inefficiencies are considered to become stronger as inequality rises. This paper, though, argues that higher inequality may actually boost aggregate output even with convex technologies and limited borrowing. Less equality in the middle or at the top end of the distribution is associated with a lower borrowing rate and hence better access to credit for the poor. We find, however, that rising relative poverty is unambiguously bad for economic performance. Hence, we suggest that future empirical work on the inequality-growth nexus should use more specific measures of inequality rather than measures of “overall” inequality such as the Gini index. |
|
Urs Fischbacher, Simon Gächter, Heterogeneous social preferences and the dynamics of free riding in public goods, In: Working paper series / Institute for Empirical Research in Economics, No. No. 261, 2006. (Working Paper)
"We provide a direct test of the role of social preferences in voluntary cooperation. We elicit individuals’ cooperation preference in one experiment and make a point prediction about the contribution to a repeated public good. This allows for a novel test as to whether there are ""types"" of players who behave consistently with their elicited preferences. We find clear-cut evidence for the existence of ""types"". People who express free rider preferences show the most systematic deviation from the predicted contributions, because they contribute in the first half of the experiment. We also show that the interaction of heterogeneous types explains a large part of the dynamics of free riding. " |
|
Dominic Rohner, Anna Winestein, Bruno Frey, Ich Bin Auch ein Lemming: Herding and Consumption Capital in Arts and Culture, In: Working paper series / Institute for Empirical Research in Economics, No. No. 270, 2006. (Working Paper)
Trends in arts and culture tend to be longer-lasting and less fragile than in other fields such as clothing design. Most herding models are not able to explain such stability, instead predicting informational cascades to be fragile and fads to be frequent. Thenpresent contribution is able to explain the hysterisis of trends in arts by incorporating thenaccumulation of consumption capital into a herding model. Further, the model is testednempirically by analyzing measures of relative and absolute concentration in the television business. It is concluded that by being exposed to art and culture people accumulate consumption capital for a particular style or artist and that this mechanism tends to make herding in arts stable over time. |
|
Manuel Oechslin, Reto Foellmi, Market Imperfections, Wealth Inequality, and the Distribution of Trade Gains, In: Working paper series / Institute for Empirical Research in Economics, No. No. 266, 2006. (Working Paper)
We explore the role of the ownership structure of capital in an economy that suffers from barriers to entry and an imperfect financial system. In such an environment, an unequal distribution of capital provides an explanation for trade flows and trade gains even when countries do not differ in relative factor endowments or available technologies. Moreover, an uneven asset distribution is associated with a large import-competing sector and only a small number of export-oriented entrepreneurs. Along these lines, we suggest that an unequal asset distribution may be key to understand why still many less developed countries protect their firms from foreign competition. |
|
Benno Torgler, Sascha L Schmidt, Bruno Frey, Relative Income Position And Performance: An Empirical Panel Analysis, In: Working paper series / Institute for Empirical Research in Economics, No. No. 268, 2006. (Working Paper)
Many studies have established that people care a great deal about their relative economic position and not solely, as standard economic theory assumes, about their absolute economic position. However, behavioral evidence is rare. This paper provides an empirical analysis on how individuals’ relative income position affectsntheir performance. Using a unique data set for 1114 soccer players over a period ofneight seasons (2833 observations), our analysis suggests that the larger the income differences within a team, the worse the performance of the soccer players is. Thenmore the players are integrated in a particular social environment (their team), thenmore evident this negative effect is. |
|
Michael Wolf, Resampling vs. Shrinkage for Benchmarked Managers, In: Working paper series / Institute for Empirical Research in Economics, No. No. 263, 2006. (Working Paper)
A well-known pitfall of Markowitz (1952) portfolio optimization is that the sample covariance matrix, which is a critical input, is very erroneous when there are many assets to choose from. Ifnunchecked, this phenomenon skews the optimizer towards extreme weights that tend to performnpoorly in the real world. One solution that has been proposed is to shrink the sample covariance matrix by pulling its most extreme elements towards more moderate values. An alternative solution is the resampled efficiency suggested by Michaud (1998). This paper compares shrinkagenestimation to resampled e*ciency. In addition, it studies whether the two techniques can bencombined to achieve a further improvement. All this is done in the context of an active port-nfolio manager who aims to outperform a benchmark index and who is evaluated by his realizedninformation ratio. |
|
Alois Stutzer, Bruno Frey, What Happiness Research Can Tell Us About Self-Control Problems And Utility Misprediction, In: Working paper series / Institute for Empirical Research in Economics, No. No. 267, 2006. (Working Paper)
Neoclassical economic theory rules out systematic errors in consumption choice. According to the basic view, individuals know what they choose. They are able to predict how much utility an activity or a good produces for them now and in the future and they can maximize their utility. This implies that behavior reveals consistent preferences. This approach makes it impossible to detect and understand sub-optimal consumption decisions, due to problems of self-control and thenmisprediction of utility. We propose the economics of happiness as a methodologicalnapproach to study these phenomena. Based on proxy measures for experiencednutility, it is, in principle, possible to directly address whether some observed behaviornis sub-optimal and is therefore reducing a person’s well-being. We discuss recent evidence on smoking and eating habits, TV viewing and commuting choice. |
|
Salvador Barberà, Anke Gerber, A Note on the Impossibility of a Satisfactory Concept of Stability for Coalition Formation Games, In: Working paper series / Institute for Empirical Research in Economics, No. No. 238, 2005. (Working Paper)
In this note we show that no solution to coalition formation games can satisfy a set of axioms that we propose as reasonable. Our result points out that “solutions” to the coalition formation cannot be interpreted as predictions of what would be “resting points” for a game in the way stable coalition structures are usually interpreted. |
|
David Afshartous, Michael Wolf, Avoiding Data Snooping in Multilevel and Mixed Effects Models, In: Working paper series / Institute for Empirical Research in Economics, No. No. 260, 2005. (Working Paper)
"Multilevel or mixed effects models are commonly applied to hierarchical data; for example,nsee Goldstein (2003), Raudenbush and Bryk (2002), and Laird and Ware (1982). Although therenexist many outputs from such an analysis, the level-2 residuals, otherwise known as randomneffects, are often of both substantive and diagnostic interest. Substantively, they are frequently used for institutional comparisons or rankings. Diagnostically, they are used to assess the modelnassumptions at the group level. Current inference on the level-2 residuals, however, typicallyndoes not account for data snooping, that is, for the harmful effects of carrying out a multitude of hypothesis tests at the same time. We provide a very general framework that encompasses both of the following inference problems: (1) Inference on the `absolute' level-2 residuals tondetermine which are significantly different from zero, and (2) Inference on any prespecified number of pairwise comparisons. Thus, the user has the choice of testing the comparisons of interest. As our methods are flexible with respect to the estimation method invoked, the user may choose the desired estimation method accordingly. We demonstrate the methods with the London Education Authority data used by Rasbash et al. (2004), the Wafer data used by Pinheiro and Bates (2000), and the NELS data used by Afshartous and de Leeuw (2004)." |
|
Joseph P Romano, Azeem M Shaikh, Michael Wolf, Formalized Data Snooping Based on Generalized Error Rates, In: Working paper series / Institute for Empirical Research in Economics, No. No. 259, 2005. (Working Paper)
It is common in econometric applications that several hypothesis tests are carried out at the same time. The problem then becomes how to decide whichnhypotheses to reject, accounting for the multitude of tests.nThe classical approach is to control the familywise error rate (FWE), that is, thenprobability of one or more false rejections. But when thennumber of hypotheses under consideration is large, control of the FWE can become too demanding. As a result, the number of false hypotheses rejected may be small or even zero. This suggests replacingncontrol of the FWE by a more liberal measure. To this end,nwe review a number of proposals from the statistical literature.nWe briefly discuss how these procedures apply to the general problem of model selection. A simulation study and two empirical applications illustrate the methods. |
|
Karolin Becker, Peter Zweifel, Cost Sharing in Health Insurance: An Instrument for Risk Selection?, In: Working paper series / Socioeconomic Institute, No. No. 513, 2005. (Working Paper)
Health insurance is potentially subject to risk selection, i.e. adverse selection on the part of consumers and cream skimming on the part of insurers. Adverse selection models predict that competitive health insurers can eschew high-risk individuals by offering contracts with low deductibles or co-payment rates, while attracting low-risk individuals with higher copayments, resulting in a separating equilibrium. This contribution seeks to determine whether in competitive Swiss social health insurance policies with deductibles in excess of the legal minimum do indeed serve as an instrument of risk selection. In a discrete choice experiment, effected in 2003, some 1,000 individuals were given the hypothetical choice of alternative insurance contracts that differed both in terms of deductibles and copayments and in bene.ts covered. Results suggest that healthy individuals, i.e. those not having consulted medical services during the past six months, were more likely to select a policy with a high deductible. Compensation demanded for voluntarily accepting an increase in the annual deductible also varies with socioeconomic characteristics and increases with the current level of deductible, as predicted by theory and constituting evidence in favor of the risk selection hypothesis. The experiment allows to compute necessary premium reductions and provides guidance for the pricing policy of insurers when offering differentiated products. |
|