Contributions in Merlin

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.

This paper analyzes responsibility attributions for outcomes of collective decision making processes. In particular, we ask if decision makers are blamed for being pivotal if they implement an unpopular outcome in a sequential voting process. We conduct an experimental voting game in which decision makers vote about the allocation of money between themselves and recipients without voting rights. We measure responsibility attributions for voting decisions by eliciting the monetary punishment that recipients assign to individual decision makers. We find that pivotal decision makers are punished significantly more for an unpopular voting outcome than non-pivotal decision makers. Our data also suggest that some voters avoid being pivotal by voting strategically in order to delegate the pivotal vote to subsequent decision makers.

We identify the causal effect of house prices on mortgage demand and supply in Switzerland by exploiting exogenous shocks to immigration and thereby to house prices. Detailed micro data allow us to observe multiple offers for each mortgage request. We find a 1% increase in house prices to raise the requested mortgage amount by 0.52%. Due to positive feedback effects, the entire partial correlation is 0.78%. While we find higher house prices to increase mortgage demand, they induce banks to make fewer offers and charge higher rates, especially later in the boom and especially for highly leveraged households.

Any symmetric mixed-strategy equilibrium in a Tullock contest with intermediate values of the decisiveness parameter ("2 < R < ∞") has countably infinitely many mass points. All probability weight is concentrated on those mass points, which have the zero bid as their sole point of accumulation. With contestants randomizing over a non-convex set, there is a cost of being "halfhearted," which is absent from both the lottery contest and the all-pay auction. Numerical bid distributions are generally negatively skewed, and exhibit, for some parameter values, a higher probability of ex-post overdissipation than the all-pay auction.

This paper discusses and proposes random selection as a component in decision-making in society. Random procedures have played a significant role in history, especially in classical Greece and the medieval city-states of Italy. We examine the important positive features of decisions by random Mechanisms. Random processes allow representativeness with respect to individuals and groups. They significantly reduce opportunities to influence political decisions by means of bribery and corruption and decrease the large expenses associated with today’s democratic election campaigns. Random mechanisms can be applied fruitfully to a wide range of fields, including politics, the judiciary, the economy, science and the cultural sector. However, it is important that random selection processes are embedded in appropriately designed institutions.

Empirical evidence shows that workers care about the mission of their job in addition to their wage. This suggests that employers can use the job mission to incentivize and screen their workers. I study a model in which a principal selects an agent to develop a project and influences the agent's ex post level of effort not by outcome-contingent rewards, but by the choice of the project mission. The principal's and the agents' preferences about the mission are misaligned and the degree to which an agent cares about the mission is private information. I derive the optimal mechanism (allocation rule, project mission, payment) to select and motivate the agent. I show that under the optimal mechanism the project mission is distorted towards the principal's ideal mission compared to the full information optimum. As a consequence, effort is lower. If the mission must be chosen prior to the allocation of the project, competition brings the principal to align the mission more with the agent's preferences, which increases his effort. Finally, in the presence of budget constraints, the principal should offer the same mission and the same payment to all types of agents. Several applications and links to the empirical evidence are discussed.

Major bubble episodes are rare events. In this paper, we examine what factors might cause some asset price bubbles to become very large. We recreate, in a laboratory setting, some of the specific institutional features investors in the South Sea Company faced in 1720. Several factors have been proposed as potentially contributing to one of the greatest periods of asset overvaluation in history: an intricate debt-for-equity swap, deferred payment for these shares, and the possibility of default on the deferred payments. We consider which aspect might have had the most impact in creating the South Sea bubble. The results of the experiment suggest that the company’s attempt to exchange its shares for government debt was the single biggest contributor to the stock price explosion, because of the manner in which the swap affected fundamental value. Issuing new shares with only partial payments required, in conjunction with the debtequity swap, also had a significant effect on the size of the bubble. Limited contract enforcement, on the other hand, does not appear to have contributed significantly.

Social capital is often associated with desirable political and economic outcomes. This paper contributes to a growing literature on its "dark side". We examine the role of social capital in the downfall of democracy in interwar Germany. We analyze Nazi Party entry in a cross-section of cities, and show that dense networks of civic associations such as bowling clubs, choirs, and animal breeders went hand-in-hand with a rapid rise of the Nazi Party. Towns with one standard deviation higher association density saw at least one-third faster entry. All types of associations – veteran associations and non-military clubs, “bridging” and “bonding” associations – positively predict NS Party entry. Party membership, in turn, predicts electoral success. These results suggest that social capital aided the rise of the Nazi movement that ultimately destroyed Germany’s first democracy. We also show that the effects of social capital were more important in the starting phase of the Nazi movement, and in towns less sympathetic to its message.

We introduce a simple two-stage game of endogenous network formation and information sharing for reasoning about the optimal design of social networks like Facebook or Google+. We distinguish between unilateral and bilateral connections and between targeted and collective information sharing. Agents value being connected to other agents and sharing and receiving information. We consider multiple utility specifications. We show that the game always has an equilibrium in pure strategies and then we study how the network design and the utility specifications affect welfare. Surprisingly, we find that in general, targeted information sharing is not necessarily better than collective information sharing. However, if all agents are either "babblers" or "friends", irrespective of whether the network is unilateral or bilateral, in equilibrium, targeted information sharing yields higher welfare than collective information sharing.

Behavioral robustness is essential in mechanism design. Existing papers focus on robustness as captured by dominant strategies. This paper studies the novel concept of externality-robustness, which addresses players’ motives to affect other players’ monetary payoffs. One example is externalities due to spite, which has been used to explain overbidding in second-price auctions. We show theoretically and experimentally that a trade-off exists between dominant-strategy implementation and externality-robust implementation. In particular, we derive the externality-robust counterpart of the second-price auction. Our experiments replicate the earlier finding of overbidding in the second-price auction, but we find that average bids equal value in the externality-robust auction. Our data also reveal that both auctions produce the same level of efficiency, suggesting that both dimensions of robustness are equally important. Our results are relevant for mechanism design in general, because the concept of externality-robustness is applicable to arbitrary mechanism design problems.