Discussion Papers

Discussion Paper No. 140
January 14, 2019

Learning about One’ s Self

Authors:

Le Yaouanq, Yves (LMU Munich)
Schwardmann, Peter (LMU Munich)

Abstract:

How can naivete about present bias persist despite experience? To answer this question, our experiment investigates participants' ability to learn from their own behavior. Participants decide how much to work on a real effort task on two predetermined dates. In the week preceding each work date, they state their commitment preferences and predictions of future effort. While we find that participants are present biased and initially naive about their bias, our methodology enables us to establish that they are Bayesian in how they learn from their experience at the first work date. A treatment in which we vary the nature of the task at the second date further shows that learning is unencumbered by a change in environment. Our results suggest that persistent naivete cannot be explained by a fundamental inferential bias. At the same time, we find that participants initially underestimate the information that their experience will provide - a bias that may lead to underinvestment in experimentation and a failure to activate self-regulation mechanisms.

Keywords:

naivete; present bias; learning.

JEL-Classification:

D83; D90

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Discussion Paper No. 138
January 8, 2019

Individual Life Horizon Influences Attitudes Toward Democracy

Authors:

Lechler, Marie (LMU Munich)
Sunde, Uwe (LMU Munich)

Abstract:

Support for democracy in the population is considered critical for the emergence and stability of democracy. Macro-determinants and retrospective experiences have been shown to affect the support for democracy at the individual level. We investigate whether and how the individual life horizon, in terms of the prospective length of life and age, affect individual attitudes toward democracy. Combining information from period life tables with individual survey response data spanning more than 260,000 observations from 93 countries over the period 1994-2014, we find evidence that the expected remaining years of life influence the attitudes toward a democratic political regime. The statistical identification decomposes the influence of age from the influence of the expected proximity to death. The evidence shows that support for democracy increases with age, but declines with expected proximity to death, implying that increasing longevity might help fostering the support for democracy. Increasing age while keeping the remaining years of life fixed as well as increasing remaining years of life for a given age group both contribute to the support for democracy.

Keywords:

attitudes toward democracy; life expectancy; aging

JEL-Classification:

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Discussion Paper No. 137
January 8, 2019

Weak Markets, Strong Teachers: Recession At Career Start and Teacher Effectiveness

Authors:

Nagler, Markus (LMU Munich)
Piopiunik, Marc (ifo Institute)
West, Martin R. (Harvard University)

Abstract:

How do alternative job opportunities affect teacher quality? We provide causal evidence on this question by exploiting business cycle conditions at career start as a source of exogenous variation in the outside options of potential teachers. Unlike prior research, we directly assess teacher quality with value-added measures of impacts on student test scores, using administrative data on over 30,000 teachers in Florida public schools. Consistent with a Roy model of occupational choice, teachers entering the profession during recessions are significantly more effective in raising student test scores. Results are supported by robustness tests and unlikely to be driven by differential attrition.

Keywords:

JEL-Classification:

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Discussion Paper No. 136
January 8, 2019

Disclosure and Subsequent Innovation: Evidence From the Patent Depository Library Program

Authors:

Furman, Jeffrey L. (Boston University Questrom School of Business)
Nagler, Markus (LMU Munich)
Watzinger, Martin (LMU Munich)

Abstract:

How important is information disclosure through patents for subsequent innovation? To answer this question, we examine the expansion of the USPTO Patent Library system after 1975. Before the Internet, patent libraries gave inventors access to patent documents. We find that after patent library opening, local patenting increases by 17% relative to control regions. Additional analyses suggest that the disclosure of technical information is the mechanism underlying this effect: inventors start to cite more distant prior art and the effect ceases after the introduction of the Internet. Our analyses thus provide evidence that disclosure plays an important role in cumulative innovation.

Keywords:

JEL-Classification:

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Discussion Paper No. 135
December 27, 2018

Sunspots in Global Games: Theory and Experiment

Authors:

Heinemann, Frank (TU Berlin)
Moradi, Homayoon (WZB Berlin)

Abstract:

We solve and test experimentally a global-games model of speculative attacks where agents can choose whether to read, at a cost, a payoff irrelevant (sunspot) announcement. Assuming that subjects exogenously believe some others to follow sunspots, we provide conditions for a unique equilibrium where agents follow a sunspot announcement depending on the realization of an informative private signal. Although most groups converge to classical global-game strategies that neglect sunspots, we find that about one-third of groups are eventually coordinating on sunspots, which is inconsistent with the standard theory. In line with the assumption of subjects expecting others to follow sunspots, subjects overestimate the number of subjects who follow sunspots by about 100% on average. We conclude that in environments with high strategic uncertainty, payoff irrelevant signals can affect behavior even if they are costly to obtain and not expected to be publicly observed.

Keywords:

creditor coordination; global games speculative attack; sunspots

JEL-Classification:

C09; D82; F31; G12

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Discussion Paper No. 134
December 20, 2018

Competition and Fatigue At Work

Authors:

Angelova, Vera (TU Berlin)
Giebe, Thomas (Linnaeus University)
Ivanova-Stenzel, Radosveta (TU Berlin)

Abstract:

We study theoretically and experimentally the role of fatigue and recovery within a competitive work environment. At work, agents usually make their effort choice in response to competition and monetary incentives. At the same time, they have to take into account fatigue, which accumulates over time if there is insufficient recovery. We model a sequence of work periods as tournaments that are linked through fatigue spillovers, inducing a non-time-separable decision problem. We also allow for variations in incentives in one work period, in order to analyze spillover effects to the work periods "before" and "after". Making recovery harder should, generally, reduce effort. This theoretical prediction is supported by the experimental data. A short-term increase in incentives in one period should lead to higher effort in that period, and, due to fatigue, to strategic resting before and after. Our experimental results confirm the former, whereas we do not find sufficient evidence for the latter. Even in the presence of fatigue, total effort should positively respond to higher-powered incentives. This is not supported by our data. Removing fatigue, we find the expected increase in total effort. For work environments, this may imply that the link between monetary incentives and effort provision becomes weaker in the presence of fatigue or insufficient recovery between work periods.

Keywords:

fatigue; recovery; incentives; experiment; tournament

JEL-Classification:

C72; C91; D09; J22; J33; M05; M52

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Discussion Paper No. 133
December 20, 2018

Bayesian Implementation and Rent Extraction in a Multi-Dimensional Procurement Problem

Authors:

Herweg, Fabian (University of Bayreuth)
Schmidt, Klaus (LMU Munich)

Abstract:

We consider a multi-dimensional procurement problem in which sellers have private information about their costs and about a possible design flaw. The information about the design flaw is necessarily correlated. We solve for the optimal Bayesian procurement mechanism that implements the efficient allocation under the constraint that sellers are protected by limited liability. We show that the rents obtained from reporting costs truthfully can be used to reduce the rents sellers must get for reporting the flaw. We compare the optimal Bayesian mechanism to the optimal ex post incentive compatible mechanism that is informationally less demanding.

Keywords:

auctions; correlated types; inefficient renegotiation; multidimensional screening; procurement;

JEL-Classification:

D44; D47; D82; H57;

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Discussion Paper No. 132
December 20, 2018

Overconfidence and Bailouts

Author:

Gietl, Daniel (LMU Munich)

Abstract:

Empirical evidence suggests that managerial overconfidence and government guarantees contribute substantially to excessive risk-taking in the banking industry. This paper incorporates managerial overconfidence and limited bank liability into a principal-agent model, where the bank manager unobservably chooses effort and risk. An overconfident manager overestimates the returns to effort and risk. We find that managerial overconfidence necessitates an intervention into banker pay. This is due to the bank's exploitation of the manager's overvaluation of bonuses, which causes excessive risk-taking in equilibrium. Moreover, we show that the optimal bonus tax rises in overconfidence, if risk-shifting incentives are sufficiently large. Finally, the model indicates that overconfident managers are more likely to be found in banks with large government guarantees, low bonus taxes, and lax capital requirements.

Keywords:

overconfidence; bailouts; banking regulation; bonus taxes

JEL-Classification:

H20; H30; G28; G41

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Discussion Paper No. 131
December 20, 2018

Active Learning Improves Financial Education:
Experimental Evidence

Authors:

Kaiser, Tim (University of Koblenz-Landau and DIW Berlin)
Menkhoff, Lukas (DIW Berlin)

Abstract:

We conduct a randomized field experiment to study the effects of two financial education interventions offered to small-scale retailers in Uganda. The treatments contrast "active learning" with "traditional lecturing" within standardized lesson-plans. We find that active learning has a positive and economically meaningful impact on savings and investment outcomes, in contrast to insignificant impacts of lecturing. These results are not conditional on prior education or financial literacy. Tentative evidence suggests that only active learning stimulates several cognitive and non-cognitive mechanisms; moreover, a social mechanism may be at play as treated individuals join social groups discussing financial matters.

Keywords:

financial behavior; financial literacy; active learning; lecturing; training method; field experiment

JEL-Classification:

I21; A20; D14; O16

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Discussion Paper No. 130
December 20, 2018

Giving Once, Giving Twice: A Two-Period Field Experiment On Intertemporal Crowding in Charitable Giving

Authors:

Adena, Maja (WZB Berlin)
Huck, Steffen (WZB Berlin and University College London)

Abstract:

We study intertemporal crowding between two fundraising campaigns for the same charitable organization by manipulating donors' beliefs about the likelihood of future campaigns in two subsequent field experiments. The data shows that initial giving is decreasing in the likelihood of a future campaign while subsequent giving increases in initial giving. While this refutes the predictions of a simple expected utility model, the pattern is in line with a model that allows for (anticipated or unanticipated) habit formation provided that donations in the two periods are substitutes.

Keywords:

charitable giving; field experiments; intertemporal crowding

JEL-Classification:

C93; D64; D12

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