Contributions in Merlin

"Economists long considered money illusion to be largelynirrelevant. Here we show, however, that money illusion has powerfulneffects on equilibrium selection. If we represent payoffs in nominal terms,nchoices converge to the Pareto inefficient equilibrium; however, if we liftnthe veil of money by representing payoffs in real terms, the Pareto efficientnequilibrium is selected. We also show that strategic uncertainty about thenother players’ behavior is key for the equilibrium selection effects ofnmoney illusion: even though money illusi on vanishes over time if subjectsnare given learning opportunities in the context of an individual optimizationnproblem, powerful and persistent effects of money illusion are found whennstrategic uncertainty prevails."

We construct a tractable model of divisible money and equilibrium heterogeneity in money balances and prices. We do so by considering randomized monetary trades in a standard search-theoretic model of money where agents can hold multiple units of indivisible 'tokens'. By studying a simple trading pattern, we can generate monetary distributions that match those observed in numerically simulated economies with fully divisible money and price heterogeneity.

"We examine the characteristics and the relative strength of third party sanctions in a series of experiments. We hypothesize that egalitarian distribution norms and cooperation norms apply in our experiments, and that third parties, whose economic payoff is unaffected by the norm violation, may be willing to enforce these norms although the enforcement is costly for them. Almost two-thirds of the third parties indeed punish the violation of the distribution norm and their punishment increases the more the norm is violated. Likewise, up to roughly 60 percent of the third parties punish the violation of the cooperation norm. Thus, our results show that the notion of strong reciprocity also extends to the sanctioning behavior of "unaffected" third parties. In addition, these experiments suggest that third party punishment games are powerful tools for studying the characteristics and the content of social norms. Further experiments indicate that second parties, whose economic payoff is reduced by the norm violation, punish the violation much more strongly than do third parties. We also collect questionnaire evidence that is consistent with the view that fairness motives and negative emotions are a determinant of third party sanctions."

I consider the problem of evaluating the effect of a health care reform on the demand for doctor visits when the effect is potentially different in different parts of the outcome distribution. Quantile regression is a useful technique for studying such heterogeneous treatment effects. Recent progree has been made to extend such methods to applications with a count dependent variable. An analysis of a 1997 health care reform in Germany shows the benefit of the approach: lower quantiles, such as the 25 percent quantile, fell by substantially larger amounts than what would have been predicted based on Poisson or negative binomial models.

We study the role of whistleblowing in the following inspection game. Two agents who compete for a prize can either behave legally or illegally. After the competition, a controller investigates the agents’ behavior. This inspection game has a unique (Bayesian) equilibrium in mixed strategies. We then add a whistleblowing stage, where the controller asks the loser to blow the whistle. This extended game has a unique perfect Bayesian equilibrium in which only a cheating loser accuses the winner of cheating and the controller tests the winner if and only if the winner is accused of cheating. Whistleblowing reduces the frequencies of cheating, is less costly in terms of test frequencies, and leads to a strict Pareto-improvement if punishments for cheating are suffciently large.

The paper analyses the effect of mother tongue on labor market outcomes of Swiss residents. This type of analysis can shed light on an important policy question. Is the Swiss labor market well integrated, or can one find instead segmentation along language borders? Improving on previous research in this area, we use a nationally representative household survey, the Swiss Household Panel 1999 and 2000, and we explicitly account for self-selection of workers into language areas. Overall, we find no evidence to suggest that the Swiss labor market is not perfectly integrated or that internal migrants are positively selected.

"The self-employed are substantially more satisfied with their worknthan employed persons. We document this relationship for 23 countries andnshow that the higher job satisfaction can directly be attributed to thengreater autonomy that self-employed persons enjoy. ""Being your own boss""nseems to provide non-pecuniary benefits from work that point to thenexistence of procedural utility: autonomy is valued beyond outcomes as angood decision-making procedure. The results hold not only for WesternnEuropean, North American and former communist Eastern European countries,nbut largely also for countries with a non-western cultural background."

In Part I the author was concerned with modeling the monthly logarithmicnCHF/USD exchange rate, ''s''. He rejected a model proposed by B.T.nMcCallum. Searching for a more appropriate framework a story by P. DenGrauwe was introduced, bringing complex cognitive processes and socialnpractices into the picture.nThis paper treats again P. De Grauwe's story, supplements it and embedds itninto a broader setting showing its links to a subtle concept of agents'nrationality. We derive a testable implication of this approach. Althoughnthe test result is negative, it will be helpful for the misspecificationnanalysis of B.T. McCallum's model (applied to ''s''), which will finally benpresented in Part III of this paper.

We suggest a simple asset market model in which we analyze competitive and strategic behaviornsimultaneously. If for competitive behavior two-fund separation holds across periods then itnalso holds for strategic behavior. In this case the relative prices of the assets do not dependnon whether agents behave strategically or competitively. Those agents acting strategically willnhowever invest less in the common mutual fund. Constant relative risk aversion and absencenof aggregate risk are shown to be two alternative sufficient conditions for two-period fundnseparation. With derivatives further strategic aspects arise and strategic behavior is distinctnfrom competitive behavior even for those utility functions leading to two-fund separation.

Terrorism will be high on the political agenda for many years to come. Various policies are open to a government fighting terrorism but, in any case, considerable costs are involved. In the competition for politicalnsupport, the costs and benefits of anti-terrorism policies will be debated. Better information about terrorism and its consequences can improve policy outcome if there is electoral competition. Over the last few years, economic scholars have analysed the effects terrorist acts have on various aspects of the economy. The findings of these impact studies are summarised in this paper. They capture, however, only part of the overall utility losses.nHence, several approaches to value public goods and conceptual issues concerning their application to terrorismnare discussed. In particular, the hedonic market approach, the averting behaviour method, the contingent valuation method and vote and popularity functions are reviewed. Further, an exploratory analysis of estimating individuals' utility losses using life satisfaction or happiness data is presented. This paper also discusses ansubstantially different approach combining measurement and decision-making, namely popular referenda.