Olivier Ledoit, Michael Wolf, Optimal estimation of a large-dimensional covariance matrix under Stein’s loss, In: Working paper series / Department of Economics, No. 122, 2017. (Working Paper)
This paper introduces a new method for deriving covariance matrix estimators that are decision-theoretically optimal within a class of nonlinear shrinkage estimators. The key is to employ large-dimensional asymptotics: the matrix dimension and the sample size go to infinity together, with their ratio converging to a finite, nonzero limit. As the main focus, we apply this method to Stein’s loss. Compared to the estimator of Stein (1975, 1986), ours has five theoretical advantages: (1) it asymptotically minimizes the loss itself, instead of an estimator of the expected loss; (2) it does not necessitate post-processing via an ad hoc algorithm (called “isotonization”) to restore the positivity or the ordering of the covariance matrix eigenvalues; (3) it does not ignore any terms in the function to be minimized; (4) it does not require normality; and (5) it is not limited to applications where the sample size exceeds the dimension. In addition to these theoretical advantages, our estimator also improves upon Stein’s estimator in terms of finite-sample performance, as evidenced via extensive Monte Carlo simulations. To further demonstrate the effectiveness of our method, we show that some previously suggested estimators of the covariance matrix and its inverse are decision-theoretically optimal in the large-dimensional asymptotic limit with respect to the Frobenius loss function. |
|
Joseph P Romano, Azeem M Shaikh, Michael Wolf, A practical two-step method for testing moment inequalities, In: Working paper series / Department of Economics, No. 90, 2014. (Working Paper)
This paper considers the problem of testing a finite number of moment inequalities. We propose a two-step approach. In the first step, a confidence region for the moments is constructed. In the second step, this set is used to provide information about which moments are “negative.” A Bonferonni-type correction is used to account for the fact that with some probability the moments may not lie in the confidence region. It is shown that the test controls size uniformly over a large class of distributions for the observed data. An important feature of the proposal is that it remains computationally feasible, even when the number of moments is large. The finite-sample properties of the procedure are examined via a simulation study, which demonstrates, among other things, that the proposal remains competitive with existing procedures while being computationally more attractive. |
|
Alain Cohn, Ernst Fehr, Lorenz Goette, Fair wages and effort provision: Combining evidence from the lab and the field, In: Working paper series / Department of Economics, No. 107, 2013. (Working Paper)
The presence of workers who reciprocate higher wages with greater effort can have important consequences for labor markets. Knowledge about the determinants of reciprocal effort choices is, however, incomplete. We investigate the role of fairness perceptions and social preferences in workers’ performance in a field experiment in which workers were hired for a one-time job. We show that workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, while those who feel adequately paid or overpaid at the base wage do not change their performance. Moreover, we find that only workers who display positive reciprocity in a lab experiment show reciprocal performance responses in the field, while workers who lack positive reciprocity in the lab do not respond to the wage increase even if they feel underpaid at the base wage. Our findings suggest that fairness perceptions and social preferences are key in workers’ performance response to a wage increase. They are the first direct evidence of the fair-wage effort hypothesis in the field and also help interpret previous contradictory findings in the literature. |
|
Jacob Goeree, Luke Lindsay, Stabilizing the economy: Market design and general equilibrium, In: Working paper series / Department of Economics, No. 92, 2012. (Working Paper)
We employ laboratory methods to study stability of competitive equilibrium in Scarf's economy (International Economic Review, 1960). Tatonnement theory predicts that prices are globally unstable for this economy, i.e. unless prices start at the competitive equilibrium they oscillate without converging. Anderson et al. (Journal of Economic Theory, 2004) report that in laboratory double auction markets, prices in the Scarf economy do indeed oscillate with no clear sign of convergence. We replicate their experiments and confirm that tatonnement theory predicts the direction of price changes remarkably well. Prices are globally unstable with adverse effects for the economy's efficiency and the equitable distribution of the gains from trade. We also introduce a novel market mechanism where participants submit demand schedules and prices are computed using Smale's global Newtonian dynamic (American Economic Review, 1976). We show that for the Scarf economy, submitting a competitive schedule, i.e. a set of quantities that maximize utility taking prices as given, is a weakly dominant strategy. The resulting outcome corresponds to the unique competitive equilibrium of the Scarf economy. In experiments that employ the schedule market, prices do not oscillate but instead converge quickly to the competitive equilibrium. Besides stabilizing prices, the schedule market is more efficient and results in highly egalitarian outcomes. |
|
Martin Biewen, Bernd Fitzenberger, Aderonke Osikominu, Marie Paul, The effectiveness of public sponsored training revisited: the importance of data and methodological choices, In: Working paper series / Department of Economics, No. 91, 2012. (Working Paper)
As the first, substantive contribution, this paper revisits the effectiveness of two widely used public sponsored training programs, the first one focusing on intensive occupational training and the second one on short-term activation and job entry. We use an exceptionally rich administrative data set for Germany to estimate their employment and earnings effects in the early 2000s. We employ a stratified propensity score matching approach to address dynamic selection into heterogeneous programs. As a second, methodological contribution, we carefully assess to what extent various aspects of our empirical strategy such as conditioning flexibly on employment and benefit histories, the availability of rich personal information, handling of later program participations, and further methodological and specification choices affect estimation results. Our results imply pronounced negative lock-in effects in the short run in general and positive medium-run effects on employment and earnings when job-seekers enroll after having been unemployed for some time. We find that data and specification issues can have a large effect on impact estimates. |
|
Josef Falkinger, Em-powering economics: Some thoughts on policy and financial markets, In: Working paper series / Department of Economics, No. 93, 2012. (Working Paper)
This paper addresses the discussion between economic power and the power of politics with particular focus on financial markets. After general reflections about the economic basis of power, the paper discusses in a general equilibrium framework how financial innovations can lead to risk creation and an inflation of financial products. This creates a fundamental disorder in the financial system which from an aggregate point of view can be described in a standard portfolio framework, in which higher rates of return go hand in hand with higher private risks but also with increasing externalized (social) risk and insurance illusion. Rate of return regulation is proposed as an appropriate regulatory measure. Alternatively the deficiency could be cured by admission regulations for financial products which put the burden of proof for no external (systemic) damages of a financial instrument to the issuer. |
|
Gregori Baetschmann, Kevin E Staub, Raphael Studer, Does the stork deliver happiness? Parenthood and life satisfaction, In: Working paper series / Department of Economics, No. 94, 2012. (Working Paper)
This paper examines the relationship between parenthood and life satisfaction using longitudinal data on women from the German Socio-Economic Panel. Previous studies have focused on satisfaction differences between parents and comparable childless adults, mostly finding small and often negative effects of parenthood. These comparisons of ex-post similar individuals are problematic if a self-selection into motherhood exists. In this study we examine the selection issue in detail by exploiting the extended longitudinal dimension of the panel to track self-reported life satisfaction of women eventually to become mothers and of women eventually attaining a completed fertility of zero. We document that these groups' satisfaction paths diverge around five years before mothers' first birth, even after adjusting for differences in observables. In our estimations, we employ matching and regression techniques which account for this selection into motherhood. We find motherhood to be associated with substantial positive satisfaction gains. |
|
Daniela Iorio, Michelle S. Sovinsky, How bulimia nervosa relates to addictive behavior, In: Working paper series / Department of Economics, No. 95, 2012. (Working Paper)
Using longitudinal data that tracks bulimic behavior among young girls (National Heart, Lung, and Blood Institute Growth and Health Study), we examine (1) whether bulimic behavior is consistent with addiction criteria as stated in the Diagnostic and Statistical Manual of Mental Disorders DSM-IV (APA, 1994); and 2) whether the persistence in bulimia nervosa (BN) reflects tolerance formed from an addiction or if it can be attributed to slow learning about the deleterious health effects of BN. Making the case for treating BN as an addiction has important policy implications. First, it suggests that the timing of educational policy and treatment is crucial: preventive educational programs aimed at instructing girls about the deleterious health effects of BN, as well as treatment interventions, will be most effective if provided in the early stages. Second, it would put those exhibiting BN on more equal footing (from a treatment reimbursement perspective) with individuals with drug or alcohol addictions. |
|
Thomas Epper, Helga Fehr-Duda, The missing link: unifying risk taking and time discounting, In: Working paper series / Department of Economics, No. 96, 2018. (Working Paper)
Standard economic models view risk taking and time discounting as two independent dimensions of decision makers' behavior. However, mounting experimental evidence demonstrates the existence of robust and systematic interaction effects. There are striking parallels in patterns of risk taking and time discounting behavior, which suggests that there is a common underlying force driving these interactions. Here we show that decision makers' anticipation of something going wrong in the future conjointly with their proneness to probability weighting generates a unifying framework for explaining seven puzzling regularities: delay-dependent risk tolerance, aversion to sequential resolution of uncertainty, preferences for resolution timing, hyperbolic discounting, subadditive discounting, the differential discounting of risky and certain outcomes, and the order dependence of prospect valuation. Finally, we discuss the implications of our framework for understanding real-world behavior, such as the coexistence of underinsuring and overinsuring. |
|
Bettina Susanne Klose, Paul Schweinzer, Auctioning risk: The all-pay auction under mean-variance preferences, In: Working paper series / Department of Economics, No. 97, 2017. (Working Paper)
We analyse the all-pay auction with incomplete information and variance-averse bidders. We characterise the unique symmetric equilibrium for general distributions of valuations and any number of bidders. Variance aversion is a sufficient assumption to predict that high-valuation bidders increase their bids relative to the risk-neutral case while low types decrease their bid. Considering an asymmetric two-player environment with uniformly distributed valuations, we show that a variance-averse player always bids higher than her risk-neutral opponent with the same valuation. Utilising our analytically derived bidding functions we discuss all-pay auctions with variance-averse bidders from an auction designer’s perspective. We briefly consider possible extensions of our model, including noisy signals, type-dependent attitudes towards risk, and variance-seeking preferences. |
|
Stefan Notz, Peter Rosenkranz, Business cycles in emerging markets: the role of liability dollarization and valuation effects, In: Working paper series / Department of Economics, No. 163, 2014. (Working Paper)
Understanding differences in business cycle phenomena between Emerging Market Economies (EMEs) and industrialized countries has been at the center of recent research on macroeconomic fluctuations. The purpose of this paper is to investigate the importance of certain credit market imperfections in different EMEs. To this end, we develop a small open economy Dynamic Stochastic General Equilibrium (DSGE) framework featuring both permanent and transitory productivity shocks, differentiated home and foreign goods, and endogenous exchange rate movements. Furthermore, our model incorporates liability dollarization as a particular form of financial frictions in EMEs. In this vein, we account for the fact that emerging markets traditionally have had difficulties in borrowing in domestic currency on international capital markets and thus allow for valuation effects in our analysis. We estimate our model using Bayesian techniques for a number of EMEs and thereby control for potential heterogeneity across countries. Contrary to previous studies in this strand of the literature, we include a (vector-)autoregressive measurement error component to capture off-model dynamics. Regarding business cycles in emerging markets, our main findings are that (i) even though we incorporate financial frictions in the framework, trend shocks are the main determinant of macroeconomic fluctuations, (ii) accounting for liability dollarization ameliorates the model fit, and (iii) valuation effects on average stabilize changes in the net foreign asset position. |
|
Björn Bartling, Ernst Fehr, Klaus M Schmidt, Use and abuse of authority: A behavioral foundation of the employment relation, In: Working paper series / Department of Economics, No. 98, 2012. (Working Paper)
Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing them to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972) critique of the Coasian approach. |
|
Josef Falkinger, Verantwortliches Handeln - Gestalten von Ordnung, In: Working paper series / Department of Economics, No. 100, 2012. (Working Paper)
Das Geschehen auf den Finanzmärkten hängt vom individuellen Verhalten ab, wird aber auch wesentlich bestimmt durch die Ausgestaltung des Finanzsystems, das heisst durch die Rollen, die den einzelnen Akteure zugewiesen werden, und durch die Regeln für die Interaktion der verschiedenen Rollen. Diese Arbeit behandelt nach einleitenden methodischen Vorbemerkungen zunächst die Frage der Verantwortung im gesamtwirtschaftlichen System (Kapitel 2) und beschäftigt sich dann mit der Verantwortung von einflussreichen Rollen und Subsystemen der Wirtschaft. Insbesondere wird diskutiert, was Verantwortung für die Ökonomie und die Finance als wissenschaftliches Disziplin bedeutet (Kapitel 3). Kapitel 4 setzt sich mit dem Finanzsystem auseinander und argumentiert, dass eine Inflation an Finanzprodukten und Finanztransaktionen zu Konfusion und negativen externen Effekten führt, die das Marktgeschehen in der realen Wirtschaft und im Finanzsektor stören. Im abschliessenden fünften Kapitel werden politische Massnahmen zur Herstellung von Ordnung im Finanzsystem dargelegt. |
|
Ernst Fehr, Holger Herz, Tom Wilkening, The lure of authority: Motivation and incentive effects of power, In: Working paper series / Department of Economics, No. 99, 2012. (Working Paper)
Authority and power permeate political, social, and economic life, but empirical knowledge about the motivational origins and consequences of authority is limited. We study the motivation and incentive effects of authority experimentally in an authority- delegation game. Individuals often retain authority even when its delegation is in their material interest - suggesting that authority has non-pecuniary consequences for utility. Authority also leads to over-provision of effort by the controlling parties, while a large percentage of subordinates under-provide effort despite pecuniary incentives to the contrary. Authority thus has important motivational consequences that exacerbate the inefficiencies arising from suboptimal delegation choices. |
|
Wolfgang Buchholz, Josef Falkinger, Dirk Ruebbelke, Non-governmental public norm enforcement in large societies as a two-stage game of voluntary public good provision, In: Working Paper Series in Economics and Econometrics, No. 566, 2011. (Working Paper)
In small groups, norm enforcement is achieved through mutual punishment and reward. In large societies, norms are enforced by specialists such as government officials. However, not every public cause is overseen by states, for instance those organized at the international level. This paper shows how non-governmental norm enforcement can emerge as a decentralized equilibrium. As a first stage, individuals voluntarily contribute to a non-governmental agency that produces an incentive system. The second stage is the provision of a public good on the basis of private contributions. The incentive system punishes and rewards deviations from the norm for contributions by means of public approval or disapproval of behavior. It is shown that, even in large populations, nongovernmental norm enforcement can be supported in a non-cooperative equilibrium of utility-maximizing individuals. |
|
Christian Hansen, Damian Kozbur, Sanjog Misra, Targeted undersmoothing, In: Working paper series / Department of Economics, No. 282, 2018. (Working Paper)
This paper proposes a post-model selection inference procedure, called targeted undersmoothing, designed to construct uniformly valid confidence sets for functionals of sparse high-dimensional models, including dense functionals that may depend on many or all elements of the high-dimensional parameter vector. The confidence sets are based on an initially selected model and two additional models which enlarge the initial model. By varying the enlargements of the initial model, one can also conduct sensitivity analysis of the strength of empirical conclusions to model selection mistakes in the initial model. We apply the procedure in two empirical examples: estimating heterogeneous treatment effects in a job training program and estimating profitability from an estimated mailing strategy in a marketing campaign. We also illustrate the procedure’s performance through simulation experiments. |
|
Nick Netzer, Florian Scheuer, A game theoretic foundation of competitive equilibria with adverse selection, In: NBER working paper series, No. 18471, 2012. (Working Paper)
We construct a fully specified extensive form game that aptures competitive markets with adverse selection. In articular, it allows firms to offer any finite set of contracts, so that cross-subsidization is not ruled out. Moreover, firms can withdraw from the market after initial contract offers have been observed. We show that a subgame perfect equilibrium always exists and that, in fact, when withdrawal is costless, the set of subgame perfect equilibrium outcomes may correspond to the entire set of feasible contracts. We then focus on robust equilibria that exist both when withdrawal costs are zero and when they are arbitrarily small but strictly positive. We show that the Miyazaki-Wilson contracts are the unique robust equilibrium outcome of our game. This outcome is always constrained efficient and involves cross-subsidization from low to high risk agents that is increasing in the share of low risks in the population under weak conditions on risk preferences. |
|
Mathias Hoffmann, Toshihiro Okubo, 'By a Silken Thread': regional banking integration and credit reallocation during Japan’s Lost Decade, In: Working paper series / Department of Economics, No. 102, 2021. (Working Paper)
A key benefit from banking integration is that it allows credit to be reallocated to regions with high credit demand. Using the natural experiment of Japan’s lost decade, we show that this reallocation channel mitigated the real effects from the bank liquidity shock in prefectures with many bank-dependent SMEs. To account for the potential endogeneity of banking integration, we exploit the fact that regional segmentation of banking markets in Japan goes back to the institutions set up for silk export finance in the late 19th century. Using silk as an instrument for modern-day regional banking integration, we illustrate how the bias of the OLS estimate can provide information about unobserved cross-regional heterogeneity in bank-firm matches when only aggregate regional data is available. Our results highlight that well-integrated banking markets are important and complementary to bond markets in limiting macroeconomic asymmetries in a monetary union, in particular during major financial crises. |
|
Eva Ranehill, Frédéric-Guillaume Schneider, Roberto A. Weber, Growing groups, cooperation, and the rate of entry, In: Working paper series / Department of Economics, No. 103, 2013. (Working Paper)
We study the stability of voluntary cooperation in response to varying group growth rates. Using a laboratory public-good game, we construct a situation where increasing group size yields potential efficiency gains, but only with sustained cooperation. We then study the effect of exogenously varying growth rates on cooperation. Slow growth yields higher cooperation rates and welfare than fast growth, both for incumbents and entrants, which is consistent with optimistic self-reinforcing beliefs persisting under slower growth. Allowing incumbent group members to select growth rates also sustains high cooperation rates, but growth stalls at intermediate group sizes, leaving potential efficiency gains unrealized. |
|
Holger Herz, Daniel Schunk, Christian Zehnder, How do judgmental overconfidence and overoptimism shape innovative activity?, In: Working paper series / Department of Economics, No. 106, 2013. (Working Paper)
Recent field evidence suggests a positive link between overconfidence and innovative activities. In this paper we argue that the connection between overconfidence and innovation is more complex than the previous literature suggests. In particular, we show theoretically and experimentally that different forms of overconfidence may have opposing effects on innovative activity. While overoptimism is positively associated with innovation, judgmental overconfidence is negatively linked to innovation. Our results indicate that future research is well advised to take into account that the relationship between innovation and overconfidence may crucially depend on what type of overconfidence is most prevalent in a particular context. |
|