Contributions in Merlin

"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."

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.

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.

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.

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.

"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)."

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.

Famous cultural monuments are often regarded as unique icons, making them an attractive target for terrorists. Despite huge military and police outlays, terrorist attacks on important monuments can hardly be avoided. We argue that an effective strategy for discouraging terrorist attacks on iconic monuments is for the government to show a firm commitment to swift reconstruction. Using a simple game-theoretic model, we demonstrate how a credible claim to rebuild any cultural monuments destroyed discourages terrorist attacks by altering the terrorists’ expectations and by increasing the government’s reputation costs if they fail to rebuild.

Laut ökonomischer Standardtheorie sollen Arbeitsanreize mittels Geldzahlungen vermittelt werden. Materielle Anreize in nicht-monetärer Form sind demgegenüber weniger effizient, sind aber dennoch weit verbreitet. Auszeichnungen in Form von Titeln, Orden, Medaillen und Ehrungen (Preisen) wurden bisher nicht beachtet. Es handelt sich dabei um extrinsische, nicht-materielle Anreize die ihre Wirkung über den Urtrieb der Individuen nach sozialer Anerkennung und Status entfalten. Wir analysieren wie sich monetäre Anreize und Auszeichnungen unterscheiden: Auszeichnungen sind in der Regel billig, begründen soziale Beziehungen, sind nicht direkt mit der Leistung verknüpft und verfügen über eine Signalwirkung. Darüber hinaus unterstützen Auszeichnungen die intrinsische Motivation, können die Wohlfahrt erhöhen und sind steuerfrei. Auszeichnungen sind ein wichtiges zusätzliches Instrument im Arsenal der Prinzipal-Agenten-Theorie. In vielen Kontexten wirken sie besser als Geld.

This paper analyzes and compares different ways of assessing how people perceived impending threats of war in the past. Conventional Nordic historiography of World War IInclaims there were few, if any, people in the Nordic countries who perceived a significantlynincreased threat of war between 1938 and early 1940. At the same time, historical methodsnface problems when it comes to capturing the often tacitly held beliefs of a large numbernof people in the past. In this paper, we analyze these assessments by looking at suddennshifts in sovereign debt yields and spreads in the Nordic bond markets at that time. Ournresults suggest that Nordic contemporaries indeed perceived significant war risk increasesnaround the time of major war-related geopolitical events. While these findings questionnsome – but not all – of standard Nordic World War II historiography, they also demonstrate the value of analyzing historical market prices to reassess the often tacitly held views and opinions of large groups of people in the past.