Contributions in Merlin

This paper investigates the design of incentives in a dynamic adverse selection framework when agents’ production technologies display learning effects and agents’ rate of learning is private knowledge. In a simple two-period model with full commitment available to the principal, we show that whether learning effects are over- or under-exploited crucially depends on whether learning effects increase or decrease the principal’s uncertainty about agents’ costs of production. Hence, what drives the over- or under-exploitation of learning effects is whether more efficient agents also learn faster (so costs diverge through learning effects) or whether it is the less efficient agents who learn faster (so costs converge). Furthermore, we show that if divergence in costs through learning effects is strong enough, learning effects will not be exploited at all, in a sense to be made precise.

The paper analyzes the infinite-horizon alternating-offers bargaining game between agents with inequity-averse preferences. Without prior investments,nthe model predicts a shift of the outcome towards equal division. Asymmetricninvestments affect the ex-post bargaining outcome, giving an advantage to the party that contributed more. Under suitable circumstances, this effectnmay significantly mitigate the hold-up problem. In fact, in a symmetric setup, if production is sufficiently profitable, and parties are sufficiently patient, then the first-best investment levels can be approximated without a con

Objectives - Preferences of both Alzheimer patients and their spouse caregivers are related to a willingness-to-pay (WTP) measure which is used to test for the presence of mutual (rather than the conventional one-way) altruism. Methods - Identical contingent valuation interviews were conducted in 2000 - 2002 for 126 Alzheimer patients and their caregiving spouses living in the Zurich metropolitan area (Switzerland). We elicit WTP three hypothetical treatments of the demented patient. The treatment Stabilization prevents the worsening of the disease, bringing dementia to a standstill. Cure restores patient health to its original level. In No burden, dementia takes its normal course while caregiver’s burden is reduced to its level before the disease. Results - Different characteristics of therapies are reflected in differences in WTP values. Accepting WTP values as expression of preferences, one finds that patients do not rank Cure higher than No burden; implying that their WTP is entirely altruistic. Caregiving spouses rank Cure before Burden, some 40 percent of their WTP reflecting an altruistic motive again. Discussion - The evidence suggests that WTP values are reliable measures of subjective preferences even in Alzheimer patients. Using this indicator, it is found that only caregivers have extra WTP for Cure, implying that curing dementia has value exclusively to them.

The goal of this paper is to assess, for the first time, the empirical impact of "Keynes’ beauty contest", or "higher order beliefs", on asset price volatility. The paper shows that heterogeneous expectations induce higher order beliefs and that heterogeneous expectation asset pricing models theoretically generate more volatility than rational expectation models. The paper also explains how, with some assumptions on the distribution of public and private information, a model with higher order beliefs can be empirically estimated. The model is then applied to annual data of the American stock market. The results show that a model with higher order beliefs generates a level of volatility in line with the price volatility observed on the market.

"This paper derives a central bank’s optimal liquidity supply towards a money market with an unrestricted lending facility. We show that when the effect ofnliquidity on market rates is not too small, and the monetary authority cares for both interest rates and liquidity conditions, then the optimal allotment policy may entail a discontinuous reaction to initial conditions. In particular, the model predicts a threshold level of liquidity below which the central banknwill not bail out the banking system. An estimation of the liquidity effect for the euro area suggests that the discontinuity might have contributed to the Eurosystem’s tight response to occurrences of underbidding during the period June 2000 through March 2004."

"We analyze the dynamics of neighbourhood watch programs in a local interaction framework. Agents can watch their neighbours' houses and thus deter burglars from breaking in.nAt the same time, agents also try to recruit their neighbours to join the neighbourhood watchnprogram. The probability of an agent joining the neighbourhood watch program depends on the success of the program, i.e., whether burglaries continue to occur. We show that the punishment of burglars plays a dual role in this context. On the one hand, punishmentndeters burglaries if the level of punishment is sufficiently high. On the other hand, it alsonaffects the probability of an agent joining the neighbourhood watch program. In particular,nwe show that if recruitment is harder when burglaries do not occur, a legal policy attemptingnto improve deterrence using more severe punishment is suboptimal. In a second part, we extend our model to the study of norm enforcement in public goods dilemmas and show that our results remain valid if agents can punish each other (instead of burglars) for not contributing to the public good. Our paper thus provides a first analysis of the evolution of ""altruistic punishment"" in large populations with local interaction."

There are at least two reasons why multiple prizes can be optimal in symmetric imperfectly discriminating contests. First, the introduction of multiple prizes reduces the standard deviation of contestants' effort in asymmetric equilibria, when the majority of contestants actively participate in competition. Second, the introduction of multiple prizes may increase the aggregate (average) effort contributed in the contest. When more of a total prize fund is shifted away from the first prize, on the one hand, the active contestants obtain an incentive to reduce their individual effort, but, on the other hand, the number of active contestants may increase. Therefore, the aggregate (average) effort may increase when the number of active contestants in equilibrium increases.

"Corporate scandals, reflected in excessive management compensation and fraudulent accounts, cause great damage. Agency theory’s insistence to link the compensation of mangers and directors as closely as possible to firm performance is a major reason for these scandals.nThey cannot be overcome by improving variable pay for performance as selfish extrinsicnmotivation is reinforced. Based on the common pool approach to the firm, institutions arenproposed, serving to raise intrinsically motivated corporate virtue. More importance is to benattributed to fixed pay and strengthening the legitimacy of authorities by procedural fairness, relational contracts and organizational citizenship behavior."

"Women earn less than men but are not less satisfied with life. This paper argues that norms on the appropriate pay for women compared to men explain thesenfindings. We take citizens’ approval of an equal rights amendment to the Swissnconstitution as a proxy for the norm that “women and men shall have the right to equal pay for work of equal value”. We find that the gender wage gap narrows by onenfifth due to an increase by one standard deviation in the approval. Rejecting annexplanation in terms of discrimination, we find that employed women are less (notnmore) satisfied with life in liberal communities where the gender wage gap is smaller."

This paper reports on a two-task principal-agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece rate contracts. Many principals reward high efforts on both tasks with substantial bonuses. Agents anticipate this and provide high efforts on both tasks. In contrast, almost all agents with a piece rate contract focus on the first task and disregard the second.nPrincipals understand this and predominantly offer bonus contracts. This behavior contradicts the self-interest theory but is consistent with theories of fairness.