Igor Letina, The road not taken: competition and the R&D portfolio, In: Working paper series / Department of Economics, No. 127, 2015. (Working Paper)
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This article examines the effects of market structure on the variety of research projects undertaken and the amount of duplication of research. A characterization of the equilibrium market portfolio of R&D projects and the socially optimal portfolio is provided. It is shown that a merger decreases the variety of developed projects and decreases the amount of duplication of research. An increase in the intensity of competition among firms leads to an increase in the variety of developed projects and a decrease in the amount of duplication of research. |
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Philipp Böhme, Walter Pohl, Karl Schmedders, The perils of performance measurement in the German mutual-fund industry, In: Swiss Finance Institute Research Paper, No. 13-30, 2013. (Working Paper)
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We document a curious feature of the German mutual fund industry. Unlike U.S. mutual funds, funds domiciled in Germany do not necessarily compute their net asset values (NAV) as of market close. Using a sample of German equity funds, we infer each fund's NAV closing time from the best-fit market model using both maximum likelihood and Bayesian estimation. The results of both approaches coincide perfectly and show that all but one of the funds domiciled in Germany report intraday NAVs. We show that using market returns computed at the end of the day instead of the best-fit time, usually leads to misleading inferences about mutual fund performance. |
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Holger Herz, Dmitry Taubinsky, Market experience is a reference point in judgments of fairness, In: Working paper series / Department of Economics, No. 128, 2013. (Working Paper)
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People's desire for fair transactions can play an important role in negotiations, organizations, and markets. In this paper, we show that markets can also shape what people consider to be a fair transaction. We propose a simple and generally-applicable model of path-dependent fairness preferences, in which past experiences shape preferences, and we experimentally test the model's predictions. We find that previous exposure to competitive pressure substantially and persistently reduces subjects' fairness concerns, making them more likely to accept low offers. Consistent with our theory, we also find that past experience has little effect on subjects' inclinations to treat others unfairly. |
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Alexey Kushnir, On the equivalence between Bayesian and dominant strategy implementation: the case of correlated types, In: Working paper series / Department of Economics, No. 129, 2013. (Working Paper)
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We consider general social choice environments with private values and correlated types. Each agent's matrix of conditional probabilities satisfies the full rank condition. We show that for any Bayesian incentive compatible mechanism there exists a dominant strategy incentive compatible mechanism that delivers the same interim expected utilities to all agents and generates at least the same social surplus. In addition, if there is a social alternative that is inferior to the other alternatives for all agents the dominant strategy incentive compatible mechanism matches exactly the social surplus. These results extend to environments with interdependent values satisfying the single crossing condition. |
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Wolfgang Dauth, Sebastian Findeisen, Jens Suedekum, The rise of the East and the Far East: German labor markets and trade integration, In: UBS Center Working Paper Series, No. 3, 2013. (Working Paper)
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We analyze the effects of the unprecedented rise in trade between Germany and "the East" – China and Eastern Europe – in the period 1988 – 2008 on German local labor markets. Using detailed administrative data, we exploit the cross-regional variation in initial industry structures and use trade flows of other high-income countries as instruments for regional import and export exposure. We find that the rise of "the East" in the world economy caused substantial job losses in German regions specialized in import-competing industries, both in manufacturing and beyond. Regions specialized in export-oriented industries, however, experienced even stronger employment gains and lower unemployment. In the aggregate, we estimate that this trade integration has caused some 493,000 additional jobs in the economy and contributed to retaining the manufacturing sector in Germany. We also conduct our analysis at the individual worker level, and find that trade had a stabilizing overall effect on employment relationships. |
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Alain Cohn, Jan Engelmann, Ernst Fehr, Michel Maréchal, Evidence for countercyclical risk aversion: an experiment with financial professionals, In: UBS Center Working Paper Series, No. 4, 2014. (Working Paper)
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A key ingredient of many popular asset pricing models is that investors exhibit countercyclical risk aversion, which helps explain major economic puzzles such as the strong and systematic variation in risk premiums over time and the high volatility of asset prices. There is, however, surprisingly little evidence for this assumption because it is difficult to control for the host of factors that change simultaneously during financial booms and busts. We circumvent these control problems by priming financial professionals with either a boom or a bust scenario and by subsequently measuring their risk aversion in two experimental investment tasks with real monetary stakes. Subjects who were primed with a financial bust were substantially more risk averse than those who were primed with a boom. Subjects were also more fearful in the bust than in the boom condition, and their fear is negatively related to investments in the risky asset, suggesting that fear may play an important role in countercyclical risk aversion. The mechanism described in this paper is relevant for theory and has important implications, as it provides the basis for a self-reinforcing process that amplifies market dynamics. |
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Ernst Fehr, Holger Herz, Tom Wilkening, The lure of authority: Motivation and incentive effects of power, In: UBS Center Working Paper Series, No. 2, 2012. (Working Paper)
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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. |
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Frédéric-Guillaume Schneider, Roberto A. Weber, Long-term commitment and cooperation, In: Working paper series / Department of Economics, No. 130, 2013. (Working Paper)
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We study how the willingness to enter long-term bilateral relationships affects cooperation even when parties have little information about each other, ex ante, and cooperation is otherwise unenforceable. We experimentally investigate a finitely-repeated Prisoner’s Dilemma, allowing players to endogenously select interaction durations. Consistent with prior research, longer interactions facilitate cooperation. However, many individuals avoid long-term commitment, with uncooperative types less likely to commit than conditional cooperators. Endogenously chosen long-term commitment yields higher cooperation rates (98% in one condition) than exogenously imposed commitment. Thus, the willingness to enter into long-term relationships provides a means for fostering - and screening for - efficient cooperation. |
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Hartmut Egger, Josef Falkinger, Limited Consumer Attention in International Trade, In: CESifo Working Paper, No. 4166, 2013. (Working Paper)
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This paper introduces a model of limited consumer attention into an otherwise standard new trade theory model with love-of-variety preferences and heterogeneous firms. In this setting, we show that trade liberalization needs not be welfare enhancing if the consumers’ capacity to gather and process information is limited. Rather, it intensifies competition for scarce consumer attention, thereby triggering wasteful advertising, and it may divert purchases to imported goods at an inefficient scale. Wasteful advertising provides scope for policy intervention in the form of an advertising tax. However, the tax instrument cannot eliminate inefficient diversion of consumer purchases to imports. Therefore, even under an optimal advertising tax, neither a fall in transport costs nor advancements in the global distribution of information need generate gains from trade in this framework. |
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Josef Falkinger, Distribution and use of knowledge under the “Laws of the web”, In: CESifo Working Paper, No. 2154, 2007. (Working Paper)
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Empirical evidence shows that the perception of information is strongly concentrated in those environments in which a mass of producers and users of knowledge interact through a distribution medium. This paper considers the consequences of this fact for economic equilibrium analysis. In particular, it examines how the ranking schemes applied by the distribution technology affect the use of knowledge, and it then describes the characteristics of an optimal ranking scheme. The analysis is carried out using a model in which agents’ productivity is based on the stock of knowledge used. The value of a piece of information is assessed in terms of its contribution to productivity. |
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Josef Falkinger, Noncooperative support of public norm enforcement in large societies, In: CESifo Working Paper, No. 1368, 2004. (Working Paper)
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In small groups norm enforcement is provided by mutual punishment and reward. In large societies we have enforcement institutions. This paper shows how such institutions can emerge as a decentralized equilibrium. In a first stage, individuals invest in a public enforcement technology. This technology generates a sanctioning system whose effectiveness depends on the aggregate amount of invested resources. In a second stage, in which individuals contribute to the provision of a public good, the sanctioning system imposes penalties and rewards on deviations from the endogenous norm contribution. It is shown that even if group size goes to infinity public norm enforcement is supported in a noncooperative equilibrium. Psychological factors are not necessary but can be favorable for the emergence of effective public norm enforcement. |
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Josef Falkinger, Volker Grossmann, Institutions and development: The interaction between trade regime and political system, In: CESifo Working Paper, No. 1279, 2004. (Working Paper)
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This paper argues that openness to goods trade in combination with an unequal distribution of political power has been a major determinant of the comparatively slow development of resource- or land-abundant regions like South America and the Caribbean in the nineteenth century. We develop a two-sector general equilibrium model with a tax-financed public sector, and show that in a feudal society (dominated by landed elites) productivity-enhancing public investments like the provision of schooling are typically lower in an open than in a closed economy. Moreover, we find that, under openness to trade, development is faster in a democratic system. We also endogenize the trade regime and demonstrate that, in political equilibrium, a land-abundant and landowner-dominated economy supports openness to trade. Finally, we discuss empirical evidence which strongly supports our basic hypotheses. |
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Alexis Antoniades, Ganesh Seshan, Roberto A. Weber, Robertas Zubrickas, On altruism and remittances, In: Working paper series / Department of Economics, No. 131, 2013. (Working Paper)
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We provide a direct test of the impact of altruism on remittances. From a sample of 105 male migrant workers from Kerala, India working in Qatar, we elicit the propensity to share with others from their responses in a dictator game, and use it as a proxy for altruism. When the entire sample is considered, we find that only migrants' income robustly explains remittances. Altruism does not seem to matter. However, we document a strong positive relationship between altruism and remittances for those migrants that report a loan obligation back home, which is nearly half the sample. We explain the role of loan obligations with a standard remittance model, extended with reference-dependent preferences. |
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Alain Cohn, Michel Maréchal, Thomas Noll, Bad boys: how criminal identity salience affects rule violation, In: Working paper series / Department of Economics, No. 132, 2015. (Working Paper)
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We conducted an experiment with 182 inmates from a maximum security prison to analyze the impact of criminal identity salience on cheating. The results show that inmates cheat more when we exogenously render their criminal identity more salient. This effect is specific to individuals who have a criminal identity, because an additional placebo experiment shows that regular citizens do not become more dishonest in response to crime-related reminders. Moreover, our experimental measure of cheating correlates with inmates' offenses against in-prison regulation. Together, these findings suggest that criminal identity salience plays a crucial role in rule violating behavior. |
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Björn Bartling, Roberto A. Weber, Lan Yao, Do markets erode social responsibility?, In: Working paper series / Department of Economics, No. 134, 2014. (Working Paper)
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This paper studies socially responsible behavior in markets. We develop a laboratory product market in which low-cost production creates a negative externality for third parties, but where alternative production with higher costs mitigates the externality. Our first study, conducted in Switzerland, reveals a persistent preference among many consumers and firms for avoiding negative social impact in the market, reflected both in the composition of product types and in a price premium for socially responsible products. Socially responsible behavior is generally robust to varying market settings, such as increased seller competition and limited consumer information, and it responds to costs and prices in a manner consistent with a model in which positive social impact is a utility-enhancing feature of a consumer product. In a second study, we investigate whether market social responsibility varies across societies by comparing market behavior in Switzerland and China. While subjects in Switzerland and China do not differ in their degree of social concern in non-market contexts, we find that low-cost production that creates negative externalities is significantly more prevalent in markets in China. Across both studies, consumers in markets exhibit less social concern than subjects in a comparable individual choice context, though the difference is much smaller in Switzerland. |
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Christian Ewerhart, Federico Quartieri, Unique equilibrium in contests with incomplete information, In: Working paper series / Department of Economics, No. 133, 2018. (Working Paper)
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Considered are imperfectly discriminating contests in which players may possess private information about the primitives of the game, such as the contest technology, valuations of the prize, cost functions, and budget constraints. We find general conditions under which a given contest of incomplete information admits a unique pure-strategy Nash equilibrium. In particular, provided that all players have positive budgets in all states of the world, existence requires only the usual concavity and convexity assumptions. Information structures that satisfy our conditions for uniqueness include independent private valuations, correlated private values, pure common values, and examples of interdependent valuations. The results allow dealing with inactive types, asymmetric equilibria, population uncertainty, and the possibility of resale. It is also shown that any player that is active with positive probability ends up with a positive net rent. |
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Lasse Steiner, Bruno Frey, Magnus Resch, Home is where your art is: the home bias of art collectors, In: Working paper series / Department of Economics, No. 135, 2013. (Working Paper)
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This paper analysis the global distribution of art collections and collectors´ biases with respect to the origin of artworks. Employing a unique dataset we find that the greatest number of private art collections are located in Europe, North America and Asia. There are relatively few collections in Latin America and Africa. The artists whose oeuvres dominate the markets for collected art come from North America, followed by Asian and European artists. The home bias in private art collections turns out to be strong in all continents and countries. It is highest for Asian and African collections and smaller for European and North American collections. The home bias can partly be accounted for by high export and import restrictions. |
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Simon Alder, Lin Shao, Fabrizio Zilibotti, Economic reforms and industrial policy in a panel of Chinese cities, In: UBS Center Working Paper Series, No. 5, 2013. (Working Paper)
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The process of economic reforms launched in 1978, and gradually extended until current days, has catapulted China into a stellar growth trajectory that has proven highly resilient. In this paper, we estimate the effect on economic development of China’s industrial policy, in particular, the establishment of Special Economic Zones (SEZ), a salient economic reform. We use data from a panel of 276 Chinese cities and prefectures from 1988 to 2010. Our difference-in-difference estimator exploits the variation in the establishment of SEZ across time and space. We find that the establishment of a state-level SEZ is associated with an increase in the level of GDP of about 20%, but not with a permanently steeper growth path. This finding is confirmed with alternative specifications and in a sub-sample of inland provinces, where the selection of cities to host the zones was based on administrative criteria. Decomposing the effect of SEZ on GDP into different channels shows that this worked mainly through the accumulation of physical capital, although there is some evidence of increasing productivity and human capital investments. Using light intensity as an alternative measure for economic activity confirms the positive effects of SEZ. |
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Björn Bartling, Roberto A. Weber, Do markets erode social responsibility?, In: UBS Center Working Paper Series, No. 6, 2013. (Working Paper)
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This paper studies the stability of socially responsible behavior in markets. We develop a laboratory product market in which low-cost production creates a negative externality for third parties, but where alternative production with higher costs entirely mitigates the externality. Our data reveal a robust and persistent preference for avoiding negative social impact in the market, reflected both in the composition of product types and in a price premium for socially responsible products. Socially responsible behavior in the market is generally robust to varying market characteristics, such as increased seller competition and limited consumer information. Fair behavior in the market is slightly lower than that measured in comparable individual decisions. |
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Olivier Ledoit, Michael Wolf, Nonlinear shrinkage of the covariance matrix for portfolio selection: Markowitz meets Goldilocks, In: Working paper series / Department of Economics, No. 137, 2017. (Working Paper)
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Markowitz (1952) portfolio selection requires an estimator of the covariance matrix of returns. To address this problem, we promote a nonlinear shrinkage estimator that is more flexible than previous linear shrinkage estimators and has just the right number of free parameters (that is, the Goldilocks principle). This number is the same as the number of assets. Our nonlinear shrinkage estimator is asymptotically optimal for portfolio selection when the number of assets is of the same magnitude as the sample size. In backtests with historical stock return data, it performs better than previous proposals and, in particular, it dominates linear shrinkage. |
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