Contributions in Merlin

Traders' values and information typically consist of both private and common-value elements. In such environments, full allocative efficiency is impossible when the private rate of information substitution differs from the social rate (Jehiel and Moldovanu, 2001). We link this impossibility result to a failure of the efficient market hypothesis, which states that prices adequately reflect all available information (Fama, 1970, 1991). The intuition is that if prices were able to reveal all information then the common value would simply shift traders' private values by a known constant and full allocative efficiency would result. In a series of laboratory experiments we study price formation in markets with private and common values. Rational expectations, which form the basis for the efficient market hypothesis, predict that the introduction of common values has no adverse consequences for allocative and informational efficiency. In contrast, a "private" expectations model in which traders' optimal behavior depends on both their private and common-value information predicts that neither full allocative nor full informational efficiency is possible. We test these competing hypotheses and find that the introduction of common values lowers allocative efficiency by 28% on average, as predicted by the private expectations model, and that market prices differ significantly and substantially from their rational expectation levels. Finally, a comparison of observed and predicted payoffs suggests that observed behavior is close to the equilibrium predicted by the private expectations model.

A key aspect of generating new ideas is drawing from different elements of preexisting knowledge and combining them into a new idea. In such a process, the diversity of ideas plays a central role. This paper examines the empirical question of how the internet affected the diversity of new research by making the existing literature accessible online. The internet marks a technological shock which affects how academic scientists search for and browse through published documents. Using article-level data from economics journals for the period 1991 to 2009, we document how online accessibility lead academic economists to draw from a more diverse set of literature, and to write articles which incorporated more diverse contents.

This paper investigates how precisely short-term, job-search oriented training programs as opposed to long-term, human capital intensive training programs work. We evaluate and compare their effects on time until job entry, stability of employment, and earnings. Further, we examine the heterogeneity of treatment effects according to the timing of training during unemployment as well as across different subgroups of participants. We find that participating in short-term training reduces the remaining time in unemployment and moderately increases job stability. Long-term training programs initially prolong the remaining time in unemployment, but once the scheduled program end is reached participants exit to employment at a much faster rate than without training. In addition, they benefit from substantially more stable employment spells and higher earnings. Overall, long-term training programs are well effective in supporting the occupational advancement of very heterogeneous groups of participants, including those with generally weak labor market prospects. However, from a fiscal perspective only the low-cost short-term training schemes are cost efficient in the short run.

The mispricing of marketing performance indicators (such as brand equity, churn, and customer satisfaction) is an important element of arguments in favor of the financial value of marketing investments. Evidence for mispricing can be assessed by examining whether or not portfolios composed of firms that load highly on marketing performance indicators deliver excess returns. Unfortunately, extant portfolio formation methods that require the use of a risk model are open to the criticism of time-varying risk factor loadings due to the changing composition of the portfolio over time. This is a serious critique, as the direction of the induced bias is unknown. As an alternative, we propose a new method and construct portfolios that are neutral with respect to the desired risk factors a priori. Consequently, no risk model is needed when analyzing the observed returns of our portfolios. We apply our method to a frequently studied marketing performance indicator, customer satisfaction. Using various ways of measuring customer satisfaction, we do not find any convincing evidence that portfolios that load on high customer satisfaction lead to abnormal returns.

In this paper, we test how reporting behaviors (response time, cognitive effort, questionnaire order) affect reported happiness in a large Dutch internet panel survey. We find that slower responses and higher cognitive effort reduce reported happiness. Moreover, in multivariate happiness equations, these factors moderate the estimated effect of income on happiness, while no interaction effects are found for other determinants of happiness. As a consequence, relative marginal effects may not be invariant to reporting circumstances.

The failure of uncovered interest rate parity to explain short-term interest rate movements is well documented. We show that short-term changes in long-term interest rates do help to explain short-term exchange rate movements. The relationship gets stronger over our sample period, as the liquidity of the exchange rate market increases. We also show that controlling for time-varying exchange rate risk also helps to improve the fit of the relationship.

In spite of the fact that they can draw on a larger, more liquid and more diversiedpool of capital than the equity of reinsurance companies, nancial markets have failedto displace reinsurance as the primary risk-sharing vehicle for natural catastropherisk. We show that this failure can be explained by dierences in information gatheringincentives between nancial markets and reinsurance companies. Using a simple modelof an insurance company that seeks to transfer a fraction of its risk exposure eitherthrough nancial markets or through traditional reinsurance, we nd that the supplyof information by informed traders in nancial markets may be excessive relative to itsvalue for the insurance company, causing reinsurance to be preferred. We show thatwhether traditional reinsurance or nancial markets are ultimately selected dependscrucially on the information acquisition cost structure and on the degree of redundancyin the information produced. Limits on the ability of informed traders to protablytake advantage of their information make the use of nancial markets more likely.

This paper describes individuals' inequality perceptions, distributional norms, and redistributive preferences in a panel of OECD countries, primarily focusing on the association between these subjective measures and the effective level of inequality and redistribution. Not surprisingly, the effective level of redistribution (after tax-and-transfer inequality) is positively (negatively) correlated with redistributive preferences. There is also evidence showing that the subjective and objective dimension of inequality and redistribution are, at least partially, linked with individuals' political preferences and their voting behavior. The association between objective and subjective measures of inequality and redistribution vanishes, however, once more fundamental country characteristics are taken into account. This suggests that these characteristics explain both redistributive preferences as well as the effective level of redistribution and after tax-and-transfer inequality.

Illicit drug use is prevalent around the world. While the nature of the market makes it difficult to determine the total sales worldwide with certainty, estimates suggest sales are around 150 billion dollar a year in the United States alone. Among illicit drugs marijuana is the most commonly used, where the US government spends upwards of $7.7 billion per year in enforcement of the laws for marijuana sales (Miron, 2005). For the past 30 years there has been a debate regarding whether marijuana should be legalized. There are two important avenues through which legalization could impact use: legalization would make marijuana easier to get, and it would remove the stigma (and cost) associated with illegal behavior. Studies to date have not disentangled the impact of limited accessibility from consumption decisions based solely on preferences. However, this distinction is particularly important in the market for cannabis as legalizing the drug would impact accessibility. Hence, if most individuals do not use because they don't know where to buy it, but would otherwise use, we would see a large increase in consumption ceteris paribus, which would be important to consider for policy. On the other hand, if accessibility plays little role in consumption decisions, then making drugs more readily available would impact the supply more. In order to access the impact of legalization on use, it is necessary to explicitly consider the role played by accessibility in use, the impact of illegal actions in utility, as well as the impact on the supply side. In this paper, we develop and estimate a model of buyer behavior that explicitly considers the impact of illegal behavior on utility as well as the impact of limited accessibility (either knowing where to buy or being offered) an illicit drug on using the drug. We use the demand side estimates to conduct counterfactuals on how use would change under a policy of legalization. We conduct counterfactuals under different assumptions regarding how legalization would impact the supply as well as various tax policies on the price of cannabis.

We compare asset allocations derived for cumulative prospect theory(CPT) based on two different methods: Maximizing CPT along the mean–variance efficient frontier and maximizing it without that restriction. We find that with normally distributed returns the difference is negligible. However, using standard asset allocation data of pension funds the difference is considerable. Moreover, with derivatives like call options the restriction to the mean-variance efficient frontier results in a sizable loss of e.g. expected return and expected utility.