Ernst Fehr, Keyu Wu, Obfuscation in competitive markets, In: Working paper series / Department of Economics, No. 391, 2023. (Working Paper)
In many markets, firms make their products complex through add-on features, thus making them difficult to evaluate and compare. Does this product obfuscation lure buyers into buying overpriced products, and if so, why does competition not eliminate this practice? More generally, under which conditions can sellers enforce stable obfuscation levels in a competitive environment such that they can increase their profits at the buyers’ expense? We show – based on competitive experimental markets – that add-ons that merely complicate the products render obfuscation quite fragile because buyers display an aversion against complex products. However, if add-ons are surplus-enhancing, sellers can mitigate competition via obfuscation which generates substantial profits and persistent dispersion in headline and add-on prices. Sellers anticipate that obfuscation limits the buyers’ depth and breadth of search, and they exploit this by hiding unattractive product features. Therefore, even the best product in the market is priced above marginal cost and buyers persistently fail to find the best product in the market such that inferior products have a good chance of being traded. We also identify the causal impact of obfuscation opportunities on profits and price dispersion because if we remove obfuscation opportunities, overall prices quickly converge to marginal cost. Thus, surplus-enhancing obfuscation opportunities cause persistent price dispersion, facilitate stable profits and reduce buyers’ share of the surplus. |
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Marek Pycia, M Bumin Yenmez, Matching with externalities, In: Working paper series / Department of Economics, No. 392, 2021. (Working Paper)
We incorporate externalities into the stable matching theory of two-sided markets. Extending the classical substitutes condition to markets with externalities, we establish that stable matchings exist when agent choices satisfy substitutability. We show that substitutability is a necessary condition for the existence of a stable matching in a maximal-domain sense and provide a characterization of substitutable choice functions. In addition, we extend the standard insights of matching theory, like the existence of side-optimal stable matchings and the deferred acceptance algorithm, to settings with externalities even though the standard fixed-point techniques do not apply. |
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Marek Pycia, Peter Troyan, A theory of simplicity in games and mechanism design, In: Working paper series / Department of Economics, No. 393, 2021. (Working Paper)
We introduce a general class of simplicity standards that vary the foresight abilities required of agents in extensive-form games. Rather than planning for the entire future of a game, agents are presumed to be able to plan only for those histories they view as simple from their current perspective. Agents may update their so-called strategic plan as the game progresses, and, at any point, for the called-for action to be simply dominant, it must lead to unambiguously better outcomes, no matter what occurs at non-simple histories. We use our gradated approach to simplicity to provide characterizations of simple mechanisms. While more demanding simplicity standards may reduce the flexibility of the designer in some cases, this is not always true, and many well-known mechanisms are simple, including ascending auctions, posted prices, and serial dictatorship-style mechanisms. In particular, we explain the widespread popularity of the well-known Random Priority mechanism by characterizing it as the unique mechanism that is efficient, fair, and simple to play. |
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Mauricio Drelichman, Jordi Vidal-Robert, Hans-Joachim Voth, The long run effects of religious persecution: evidence from the Spanish inquisition, In: CEPR Discussion Papers, No. 16030, 2021. (Working Paper)
Religious persecution is common in many countries around the globe. There is little evidence on its long-term effects. We collect new data from all across Spain, using information from over 67,000 trials held by the Spanish Inquisition between 1480 and 1820. This comprehensive new database allows us to demonstrate that municipalities of Spain with a history of stronger inquisitorial presence show lower economic performance, educational attainment, and trust today. The effects persist after controlling for historical indicators of religiosity and wealth, ruling out potential selection bias. |
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Cristina Borra, Ana Costa-Ramon, Libertad González, Almudena Sevilla-Sanz, The causal effect of an income shock on children’s human capital, In: Barcelona GSE Working Paper Series, No. 1272, 2021. (Working Paper)
We investigate the causal impact of a generous unconditional cash transfer at birth on children's later health outcomes and academic performance. Using rich administrative data, we take advantage of the unexpected introduction of a “baby bonus” in Spain in 2007, and implement a difference-in-discontinuity approach comparing children born in the surrounding months in different years. We find that the subsidy did not have a significant effect on health outcomes during childhood, nor on test scores in primary school. In line with this result, we show that the benefit did not affect the main potential mechanisms that could in turn have affected children’s health and academic performance. Our results contribute to understanding which interventions are effective at improving children's health and human capital formation. |
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Marcel Jochen Caesmann, Bruno Caprettini, Hans-Joachim Voth, David Yanagizawa-Drott, Going viral: propaganda, persuasion and polarization in 1932 Hamburg, In: Discussion Paper Series, No. 16356, 2021. (Working Paper)
Propaganda can convince or repel. Social interactions can magnify these effects. We estimate the impact of Nazi marches in 1932 Hamburg, using granular data on all households. Direct exposure immediately affected voting -- propaganda was persuasive. To study diffusion, we measure social connections using contagion patterns from the 1918 Spanish flu, combined with social similarity. Nazi support spread to other parts of the city along the predicted contagion paths. Social spillovers are of similar importance as direct exposure. The marches were also polarizing the electorate â?? in opposition strongholds, they backfired, and gains were concentrated in areas with high Nazi support. |
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Carlos Alos-Ferrer, Johannes Buckenmaier, Voting for Compromises: Alternative Voting Methods in Polarized Societies, In: Working paper series / Department of Economics, No. 394, 2021. (Working Paper)
Democratic societies have been increasingly confronted with extreme, knife-edge election outcomes that affect everybody’s lives and contribute to social instability. Even if political compromises based on social conventions as equity or economic arguments as efficiency are available, polarized societies might fail to select them. We demonstrate that part of the problem might be purely technical and, hence, potentially solvable. We study different voting methods in three experiments (total N = 5, 820), including small, medium-sized, and large electorates, and find that currently-used methods (Plurality Voting and Rank-Order systems) can lead voters to overwhelmingly support egoistic options. In contrast, alternative, more nuanced methods (Approval Voting and Borda Count) reduce the support for egoistic options and favor equity and efficiency, avoiding extreme outcomes. Those methods differ in whether they favor equity or efficiency when the latter benefits a majority. Our evidence suggests that targeted changes in the electoral system could favor socially-desirable compromises and increase social stability. |
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Sandro Ambühl, B Douglas Bernheim, Annamaria Lusardi, Evaluating deliberative competence: a simple method with an application to financial choice, In: Discussion Paper Series, No. 15863, 2021. (Working Paper)
We introduce a method for experimentally evaluating interventions designed to improve the quality of choices in settings where people imperfectly comprehend consequences. Among other virtues, our method yields an intuitive sufficient statistic for welfare that admits formal interpretations even when consumers suffer from biases outside the scope of analysis. We use it to study a financial education intervention, which we find improves the quality of decisions only when it incorporates practice and feedback, contrary to the implications of analyses based on conventional efficacy metrics. We trace the failures of conventional metrics to violations of assumptions that our method avoids. |
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Bruno Caprettini, Lorenzo Casaburi, Miriam Venturini, Voting and clientelism: evidence from the Italian land reform, In: Discussion Paper Series, No. 15679, 2021. (Working Paper)
Many democracies around the world feature pervasive clientelist practices. Inequality is often considered a key determinant of these practices. By reducing inequality, redistributive policies may therefore undermine clientelism. However, by inducing gratitude and reciprocity among beneficiaries, redistribution may also initiate clientelist exchange. We study the long-term effects of a major redistribution policy: the 1950 Italian land reform. Using a panel spatial regression discontinuity and data for half a century, we show that the large-scale redistribution led to the emergence of a long-lasting clientelist system characterized by political brokers, patronage and targeted benefits. Within this system, the Christian Democratic party, which promoted the reform, experienced persistent electoral benefits. |
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Sandro Ambühl, B Douglas Bernheim, Interpreting the will of the people: social preferences over ordinal outcomes, In: Working paper series / Department of Economics, No. 395, 2024. (Working Paper)
We investigate the nature of social preferences when a decision maker's information is limited to group members' ordinal rankings. By studying choices made on behalf of others, we identify social choice rules that embody the normative values decision makers implicitly favor. Few people are attracted to majority or plurality rule as a normative principle. Most favor scoring rules that promote compromise. People evaluate relative sacrifice by inferring cardinal utility from ordinal ranks, but also care about ranks intrinsically. Cluster analysis reveals that our social preference classification is comprehensive. Ordinal aggregation principles are stable across domains and countries with divergent traditions. |
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Stefanie Bossard, Armin Schmutzler, Selecting valuation distributions: non-price decisions of multi-product firms, In: Working paper series / Department of Economics, No. 396, 2021. (Working Paper)
This paper analyzes decisions of multi-product firms regarding product selection, innovation and advertising as choices of consumer valuation distributions. We show that a profit-maximizing monopolist chooses these distributions so as to maximize the dispersion of the valuation differences between goods across consumers. By contrast, she chooses the willingness-to-pay to be maximally or minimally dispersed, depending on the set of available distributions. In our benchmark model with uniform valuation differences, prices are increasing in valuation difference heterogeneity, but in more general settings this is not necessarily true. Moreover, the relation between willingness-to-pay heterogeneity and prices may well be non-monotone. Over wide parameter ranges, the firm’s choice of valuation distribution does not maximize net consumer surplus. This problem is exacerbated when the firm has access to strategies that distort valuation heterogeneity or willingness-to-pay heterogeneity. |
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Mathias Hoffmann, Egor Maslov, Bent E Sørensen, Small firms and domestic bank dependence in Europe’s Great Recession, In: Working paper series / Department of Economics, No. 397, 2021. (Working Paper)
After the inception of the euro, the real economy in most member countries remained dependent on credit by domestic banks, which increasingly funded themselves through cross-border interbank funding. We find that this pattern of ‘double-decker’ banking integration exposed domestic banks to sharp declines in cross-border interbank lending during the eurozone crisis. As a result, domestic banks reduced lending which led to large declines in output in sectors with many small (bank-dependent) firms. We propose a quantitative small open economy model to account for these patterns and conclude that a global banking shock leading to a sudden stop in cross-border interbank lending in the eurozone is required to account for them. |
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Cédric Chambru, Paul Maneuvrier-Hervieu, The evolution of wages in early modern Normandy (1600–1850), In: Working paper series / Department of Economics, No. 398, 2021. (Working Paper)
This paper presents new estimations of wages for Normandy between 1600 and 1850. We used a vast array of primary and secondary sources to assemble two new databases on wages and commodity prices to establish a new regional consumer price index (CPI) and twelve regional wage series. We posit that the sluggish demographic growth during the 18th century, and the resulting labour shortage, led to a convergence of wages across unskilled occupations and a relative catch-up with urban skilled construction labourers in the years preceding the French Revolution. We also provide tentative evidence suggesting that labourers in stable employment could have earned as much as their English counterparts during this period. |
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Anne-Lise Breivik, Ana Costa-Ramon, The career costs of children's health shocks, In: Working paper series / Department of Economics, No. 399, 2022. (Working Paper)
We provide novel evidence on the impact of a child's health shock on parental labor market outcomes. To identify the causal effect, we leverage long panels of high-quality Finnish and Norwegian administrative data and exploit variation in the timing of the health shock. We do this by comparing parents across families in similar parental and child age cohorts whose children experienced a health shock at different ages. We show that these families have very similar characteristics and were following parallel trends before the event. This allows us to use a simple difference-in-differences model: we construct counterfactuals for treated households with families who experience the same shock a few years later. We find a sharp break in parents' earnings trajectories that becomes visible just after the shock. The negative effect is persistent and stronger for mothers than for fathers. We also document a substantial impact on parents' mental well-being. Our results suggest that the effect on maternal labor earnings results from the combination of the increased time needed to care for the child and the worsening of mothers' mental health. |
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Aljosha Henkel, Ernst Fehr, Julien Senn, Thomas Epper, Beliefs about inequality and the nature of support for redistribution, In: Working paper series / Department of Economics, No. 442, 2024. (Working Paper)
Do beliefs about inequality depend on distributive preferences? What is the joint role of preferences and beliefs about inequality for support for redistribution? We study these questions in a staggered experiment with a representative sample of the Swiss population conducted in the context of a vote on a highly redistributive policy proposal. Our sample comprises a majority of inequality averse subjects, a sizeable group of altruistic subjects, and a minority of predominantly selfish subjects. Irrespective of preference types, individuals vastly overestimate the extent of income inequality. An information intervention successfully corrects these large misperceptions for all types, but essentially does not affect aggregate support for redistribution. These results hide, however, important heterogeneity because the effects of beliefs about inequality for demand for redistribution are preference-dependent: only affluent inequality averse individuals, but not the selfish and altruistic ones, significantly reduce their support for redistribution. These findings cast a new light on the seemingly puzzling result that, in the aggregate, large changes in beliefs about inequality often do not translate into changes in demand for redistribution. |
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Christian Ewerhart, A typology of military conflict based on the Hirshleifer contest, In: Working paper series / Department of Economics, No. 400, 2021. (Working Paper)
In a canonical model of military conflict, victory and defeat depend stochastically on the difference of resources deployed by the conflict parties. The present paper offers a comprehensive analysis of that model. The unique Nash equilibrium reflects either (i) peace, (ii) submission, (iii) insurgency, or (iv) war. Intuitive predictions regarding possible transitions between these types of equilibria are obtained. The analysis identifies advances in weaponry as an important driver of conflict and, less often so, of its resolution. The formal derivation exploits the variation-diminishing property of higher-order Pólya frequency functions. |
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Elisa Macchi, Worth your weight: experimental evidence on the benefits of obesity in low-income countries, In: Working paper series / Department of Economics, No. 401, 2022. (Working Paper)
I study the economic value of obesity - a seemingly inconsequential but unhealthy status symbol in poor countries. Randomizing decision-makers in Kampala, Uganda to view weight-manipulated portraits, I make four findings. First, obesity is perceived as a reliable signal of wealth rather than beauty and health. Second, being obese facilitates access to credit: in a real-stakes experiment involving loan officers, the obesity premium is comparable to raising borrower self-reported earnings by 60%. Third, asymmetric information drives this premium, which drops significantly when more financial information is provided. Fourth, obesity benefits and wealth-signaling value are commonly overestimated, raising the cost of healthy behaviors. |
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Benita Combet, Daniel Oesch, The social origin gap in university completion among youth with comparable school abilities in Switzerland, In: TREE Working Paper Series, No. 4, 2020. (Working Paper)
A large body of literature shows that families with extended socio-economic resources are able to provide better learning environments and make more ambitious educational choices for their children. At the end of compulsory education, the result is a social-origin gap in school-track attendance and learning outcomes. Our paper analyses whether this gap further widens thereafter for children with comparable school abilities, and whether the gap varies by gender and migrant status. We examine graduation rates from higher education by combining a cohort study from Switzerland with a reweighting method to match students on their school track, grades, reading literacy and place of residence at the end of com-pulsory school. The one observed feature that sets them apart is their parents’ socio-economic status. When analysing their graduation rates 14 years later at the age of 30, we find a large social-origin gap. The rate of university completion at age 30 is 26 percentage points higher among students from the highest socio-economic status quartile than among students from the lowest quartile, even though their school abilities were comparable at age 16. This gap appears to be somewhat smaller among women than men, and among natives than migrants, but differences are not statistically significant. For men and women, migrants and natives alike, abundant parental resources strongly increase the likelihood of uni-versity completion in Switzerland. |
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Thomas Dudek, Anne Ardila Brenøe, Jan Feld, Julia M Rohrer, No evidence that siblings’ gender affects personality across nine countries, In: Working paper series / Department of Economics, No. 408, 2022. (Working Paper)
Does growing up with a sister rather than a brother affect personality? In this paper, we provide a comprehensive analysis of the effects of siblings’ gender on adults’ personality, using data from 85,887 people from 12 large representative surveys covering 9 countries (the United States, the United Kingdom, the Netherlands, Germany, Switzerland, Australia, Mexico, China, and Indonesia). We investigated the personality traits risk tolerance, trust, patience, locus of control, and the Big Five. We found no meaningful causal effects of the gender of the next younger sibling, and no associations with the gender of the next older sibling. Based on high statistical power and consistent results in the overall sample and relevant subsamples, our results suggest that siblings’ gender does not systematically affect personality. |
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Daron Acemoglu, Philippe Aghion, Lint Barrage, David Hémous, Climate change, directed innovation, and energy transition: the long-run consequences of the shale gas revolution, In: NBER Working Paper Series, No. 31657, 2023. (Working Paper)
We investigate the short- and long-term effects of a natural gas boom in an economy where energy can be produced with coal, natural gas, or clean sources and the direction of technology is endogenous. In the short run, a natural gas boom reduces carbon emissions by inducing substitution away from coal. Yet, the natural gas boom discourages innovation directed at clean energy, which delays and can even permanently prevent the energy transition to zero carbon. We formalize and quantitatively evaluate these forces using a benchmark model of directed technical change for the energy sector. Quantitatively, the technology response to the shale gas boom results in a significant increase in emissions as the US economy is pushed into a “fossil-fuel trap” where long-run innovations shift away from renewables. Overall, the shale gas boom reduces our measure of social welfare under laissez-faire, whereas, combined with carbon taxes and more generous green subsidies, it could have increased welfare substantially. |
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