Discussion Papers

Discussion Paper No. 57
November 9, 2017

The Impact of Social Media On Belief Formation

Author:

Schwarz, Marco A. (University of Innsbruck)

Abstract:

Social media are becoming increasingly important in our society and change the way people communicate, how they acquire information, and how they form beliefs. Experts are concerned that the rise of social media may make interaction and information exchange among like-minded individuals more pronounced and therefore lead to increased disagreement in a society. This paper analyzes a learning model with endogenous network formation in which people have different types and live in different regions. I show that when the importance of social media increases, the amount of disagreement in the society first decreases and then increases. Simultaneously people of the same type hold increasingly similar beliefs. Furthermore, people who find it hard to communicate with people in the same region may interact with similar people online and consequently hold extreme beliefs. Finally, I propose a simple way to model people who neglect a potential correlation of signals and show that these people may be made worse off by social media.

Keywords:

social media; network formation; social learning; polarization; homophily; correlation neglect

JEL-Classification:

C72; D72; D83; D85; Z10; Z19

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Discussion Paper No. 56
November 9, 2017

Optimal Cost Overruns: Procurement Auctions with Renegotiation

Authors:

Herweg, Fabian (University of Bayreuth)
Schwarz, Marco A. (University of Innsbruck)

Abstract:

Cost overrun is ubiquitous in public procurement. We argue that this can be the result of a constrained optimal award procedure: The procurer awards the contract via a price-only auction and cannot commit not to renegotiate. If cost differences are more pronounced for a fancy than a standard design, it is optimal to fix the standard design ex ante. If renegotiation takes place and the fancy design has higher production costs or the contractor's bargaining position is strong, the final price exceeds the initial price. Moreover, the procurer cannot benefit from using a multi-dimensional auction, i.e., under the optimal scoring auction each supplier proposes the standard design.

Keywords:

auction; cost overrun; procurement; renegotiation

JEL-Classification:

D44; D82; H57

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Discussion Paper No. 55
November 6, 2017

The Life-Cycle Dynamics of Exporters and Multinational Firms

Authors:

Gumpert, Anna (LMU Munich)
Moxnes, Andreas (University of Oslo)
Ramondo, Natalia (University of California at San Diego)
Tintelnot, Felix (University of Chicago)

Abstract:

This paper studies the life-cycle dynamics of exporters and multinational enterprises (MNEs). We present a dynamic model of trade and MNE activity in which the mode of serving a market depends on the well-known proximity-concentration tradeoff. We show that the option of performing MNE activities in the model produces life-cycle patterns for exporters that differ from those in an export-only model. Calibrating our model to rich firm-level data from France and Norway, our main quantitative finding is that a reduction in trade costs triggers much larger responses in growth rates and exit rates, for young exporters, in the model with MNEs than in the model without MNEs. We also show that the model is largely consistent with a set of new facts on the joint life-cycle dynamic behavior of exporters and MNEs.

Keywords:

international trade; exporters; multinational firm; markov process; sunk cost; proximity-concentration tradeoff; trade liberalization

JEL-Classification:

F01; F02

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Discussion Paper No. 54
November 2, 2017

Testing Consumer Theory: Evidence From a Natural Field Experiment

Authors:

Adena, Maja (WZB)
Huck, Steffen (WZB)
Rasul, Imran (UCL)

Abstract:

We present evidence from a natural field experiment designed to shed light on whether individual behavior is consistent with a neoclassical model of utility maximization subject to budget constraints. We do this through the lens of a field experiment on charitable giving. We find that the behavior of at least 80% of individuals, on both the extensive and intensive margins, can be rationalized within a standard neoclassical choice model in which individuals have preferences, defined over own consumption and their contribution towards the charitable good, satisfying the axioms of revealed preference.

Keywords:

natural field experiment; revealed preference

JEL-Classification:

C93; D01; D12; D64

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Discussion Paper No. 53
November 2, 2017

Consumer-Optimal Information Design

Author:

von Wangenheim, Jonas (Humboldt University Berlin)

Abstract:

In many trade environments - such as online markets - buyers fully learn their valuation for goods only after contracting. I characterize the buyer-optimal ex-ante information in such environments. Employing a classical sequential screening framework, I find that buyers prefer to remain partially uninformed, since such an information structure induces the seller to set low prices. For the optimal information signal, trade is efficient, and the seller only extracts the static monopoly profit. Further, I fully characterize all possible surplus divisions that can arise in sequential screening for a given prior.

Keywords:

information disclosure; sequential screening; strategic learning; bayesian persuasion; mechanism design

JEL-Classification:

D82

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Discussion Paper No. 52
November 2, 2017

Coal and Blood: Industrialization and the Rise of Nationalism in Prussia before 1914

Author:

Kersting, Felix (Humboldt-Universität zu Berlin)

Abstract:

Industrialization and the rise of nationalism were the two major developments in Germany before the World War I. A novel county-level dataset reveals that industrialization and nationalism measured by membership in the "Kriegervereine'", the biggest civil organization at the time, were negatively correlated. Using coal potential as an IV for identification, I find strong evidence for a causal impact of industrialization on nationalism. In order to detect possible mechanisms, a three stage IV regression model produces strong support that migration and trade union membership were crucial factors that linked industrialization and nationalism.

Keywords:

nationalism; industrialization; prussia

JEL-Classification:

F06; N13; N33

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Discussion Paper No. 51
October 30, 2017

Behavioral Biases in Marketing

Authors:

Guhl, Daniel (Humboldt University Berlin)
Klapper, Daniel (Humboldt University Berlin)
Massner, Katharina (LMU)
Spann, Martin (LMU)
Stich, Lucas (LMU)
Yegoryan, Narine (Humboldt University Berlin)

Abstract:

Psychology and economics (the mixture of which is known as behavioral economics) are two fundamental disciplines underlying marketing. Various marketing studies document the non-rational behavior of consumers, even though behavioral biases might not always be consistently termed or formally described. In this review, we identify empirical research that studies behavioral biases in marketing. We summarize the key findings according to three classes of deviations (i.e., non-standard preferences, non-standard beliefs, and non-standard decision-making) and the marketing mix instruments (i.e., product, price, place, and promotion). We thereby introduce marketing researchers to the theoretical foundation of and terminology used in behavioral economics. For scholars from behavioral economics, we provide ready access to the rich empirical, applied marketing literature. We conclude with important managerial implications resulting from the behavioral biases of consumers, and we present avenues for future research.

Keywords:

marketing; behavioral economics; behavioral biases; review

JEL-Classification:

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Discussion Paper No. 50
October 26, 2017

Why Should Majority Voting Be Unfair?

Authors:

Breitmoser, Yves (Humboldt University Berlin)
Tan, Jonathan H.W. (Nottingham University)

Abstract:

The common use of majority rule in group decision making is puzzling. In theory, it inequitably favors the proposer, and paradoxically, it disadvantages voters further if they are inequity averse. In practice, however, outcomes are equitable. The present paper analyzes data from a novel experimental design to identify the underlying social preferences. Our experiment compares one-shot and indefinite horizon versions of random-proposer majority bargaining (the Baron-Ferejohn game) which allow us to disentangle behaviors compatible with altruism, inequity aversion, and reference dependent altruism. Most subjects are classified as reference-dependent altruists, around 10% are inequity averse. Subjects are egoistic when their payoff is below their reference point, they become efficiency concerned when satisfied, and the reference point is either the ex ante expectation or the opponent's payoff. Finally, we successfully test RDA out-of-sample on a number of distribution and bargaining games from three seminal social preference experiments.

Keywords:

bargaining; voting; experiment; social preferences; quantal response equilibrium

JEL-Classification:

C72; C78; D72

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Discussion Paper No. 49
October 24, 2017

The Timing of Choice-Enhancing Policies

Authors:

Murooka, Takeshi (Osaka University)
Schwarz, Marco (University of Innsbruck)

Abstract:

Recent studies investigate policies motivating consumers to make an active choice as a way to protect unsophisticated consumers. We analyze the optimal timing of such choice-enhancing policies when a firm can strategically react to them. In our model, a firm provides a contract with automatic renewal. We show that a policy intending to enhance consumers choices when they choose a contract can be detrimental to welfare. By contrast, a choice-enhancing policy at the time of contract renewal increases welfare more robustly. Our results highlight that policies should be targeted in timing to the actual choice inefficiency.

Keywords:

active choice; automatic renewal; automatic enrollment; procrastination; consumer naivete; present bias

JEL-Classification:

D03; D18; D21; D40; L51

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Discussion Paper No. 48
October 20, 2017

English versus Vickrey Auctions with Loss Averse Bidders

Author:

von Wangenheim, Jonas (Humboldt University Berlin)

Abstract:

Evidence suggests that people evaluate outcomes relative to expectations. I analyze this expectation-based loss aversion (Köszegi and Rabin (2006, 2009)) in the context of dynamic and static auctions, where the reference point is given by the (endogenous) equilibrium outcome. If agents update their reference point during the auction, the arrival of information crucially affects equilibrium behavior. Consequently, I show that even with independent private values the Vickrey auction yields strictly higher revenue than the English auction, violating the well known revenue equivalence. Thus, dynamic loss aversion offers a novel explanation for empirically observed differences between these auction formats.

Keywords:

vickrey auction; english auction; expectation-based loss aversion; revenue equivalence; dynamic loss aversion; personal equilibrium

JEL-Classification:

D03; D44

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