Discussion Papers

Discussion Paper No. 166
July 12, 2019

Socio-Economic Status and Inequalities in Children’s Iq and Economic Preferences

Authors:

Deckers, Thomas (University of Bonn)
Falk, Armin (University of Bonn & briq)
Kosse, Fabian (LMU)
Kosse, Fabian (LMU & briq)
Pinger, Pia (University of Bonn & briq)
Schildberg-Hörisch, DICE ()

Abstract:

This paper explores inequalities in IQ and economic preferences between children from high and low socio-economic status (SES) families. We document that children from high SES families are more intelligent, patient and altruistic, as well as less risk-seeking. To understand the underlying causes and mechanisms, we propose a framework of how parental investments as well as maternal IQ and economic preferences influence a child's IQ and preferences. Within this framework, we allow SES to influence both the level of parental time and parenting style investments, as well as the productivity of the investment process. Our results indicate that disparities in the level of parental investments hold substantial importance for SES gaps in economic preferences and, to a lesser extent, IQ. In light of the importance of IQ and preferences for behaviors and outcomes, our findings offer an explanation for social immobility

Keywords:

socio-economic status; time preferences; risk preferences; altruism; experiments with children; origins of preferences; human capital

JEL-Classification:

C90; D64; D90; D81; J13; J24; J62

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Discussion Paper No. 165
July 11, 2019

Trade Exposure and the Decline in Collective Bargaining: Evidence From Germany

Authors:

Baumgarten, Daniel (LMU)
Lehwald, Sybille (Federal Ministry for Economic Affairs and Energy)

Abstract:

We analyze the effect of the increase in trade exposure induced by the rise of China and the transformation of Eastern Europe on collective bargaining coverage of German plants in the period 1996-2008. We exploit cross-industry variation in trade exposure and use trade flows of other high-income countries as instruments for German trade exposure. We find that increased import exposure has led to an increase in the probability of German plants leaving industry-wide bargaining agreements, accounting for about one fifth of the overall decline in the German manufacturing sector. The effect is most pronounced for small and medium-sized plants.

Keywords:

international trade; import competition; collective bargaining

JEL-Classification:

F16; J51

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Discussion Paper No. 164
July 3, 2019

An Economic Model of the Meat Paradox

Authors:

Hestermann, Nina (University of St Andrews)
Le Yaouanq, Yves (LMU Munich)
Treich, Nicolas (Toulouse School of Economics and INRA)

Abstract:

Many individuals have empathetic feelings towards animals but frequently consume meat. We investigate this "meat paradox" using insights from the literature on motivated reasoning in moral dilemmata. We develop a model where individuals form self-serving beliefs about the suffering of animals caused by meat consumption in order to alleviate the guilt associated with their dietary choices. The model makes several specific predictions: in particular, it predicts a positive relationship between individuals' taste for meat and their propensity to engage in self-deception, a high price elasticity of demand for meat, and a causal effect of prices and aggregate consumption on individual beliefs.

Keywords:

motivated reasoning; moral dilemmata; self-deception; meat paradox; meat price-elasticity; animal welfare

JEL-Classification:

D72; D81; D83; D84; Z13

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Discussion Paper No. 163
June 28, 2019

Firm Organization with Multiple Establishments

Authors:

Gumpert, Anna (LMU Munich)
Steimer, Henrike (Stanford GSB)
Antoni, Manfred (Institut für Arbeitsmarkt- und Berufsforschung)

Abstract:

How do geographic frictions affect firm organization? We show theoretically and empirically that geographic frictions increase the use of middle managers in multi-establishment firms. In our model, we assume that a CEO's time is a resource in limited supply, shared across headquarters and establishments. Geographic frictions increase the costs of accessing the CEO. Hiring middle managers at one establishment substitutes for CEO time, which is reallocated across all establishments. Consequently, geographic frictions between the headquarters and one establishment affect the organization of all establishments of a firm. Our model is consistent with novel facts about multi-establishment firm organization that we document using administrative data from Germany. We exploit the opening of high-speed train routes to show that not only the establishments directly affected by faster travel times but also the other establishments of the firm adjust their organization. Our findings imply that local conditions propagate across space through firm organization.

Keywords:

firm organization; multi-establishment firm; knowledge hierarchy; geography

JEL-Classification:

D21; D22; D24

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Discussion Paper No. 162
June 26, 2019

Heads We Both Win, Tails Only You Lose: the Effect of Limited Liability On Risk-Taking in Financial Decision Making

Authors:

Ahrens, Steffen (TU Berlin)
Bosch-Rosa, Ciril (TU Berlin)

Abstract:

One of the reasons for the recent crisis is that financial institutions took "too much risk" (Brunnermeier, 2009; Taylor et al., 2010). Why were these institutions taking so much risk is an open question. A recent strand in the literature points towards the "cognitive dissonance" of investors who, because of the limited liability of their investments, had a distorted view of riskiness (e.g., Barberis (2013); Benabou (2015)). In a series of laboratory experiments we show how limited liability does not affect the beliefs of investors, but does increase their willing exposure to risk. This results points to a simple explanation for the over-investment of banks and hedge-funds: When incentives are not aligned, investors take advantage of the moral hazard opportunities.

Keywords:

moral hazard; cognitive dissonance; behavioral finance

JEL-Classification:

C91; D84; G11; G41

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Discussion Paper No. 161
June 26, 2019

Price Dynamics and Trader Overconfidence

Authors:

Ahrens, Steffen (TU Berlin)
Bosch-Rosa, Ciril (TU Berlin)
Roulund, Rasmus (Danmarks Nationalbank)

Abstract:

Overconfidence is one of the most important biases in financial markets and commonly associated with excessive trading and asset market bubbles. So far, most of the finance literature takes overconfidence as a given, "static" personality trait. In this paper we introduce a novel experimental design which allows us to track different measures of overconfidence during an asset market bubble. The results show that overconfidence co-moves with asset prices and points towards a feedback loop in which overconfidence adds fuel to the flame of existing bubbles.

Keywords:

overconfidence; experiment; asset markets

JEL-Classification:

C91; D84; G11; G41

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Discussion Paper No. 160
June 25, 2019

Economic Uncertainty and Subjective Inflation Expectations

Author:

Rossmann, Tobias (LMU Munich)

Abstract:

Measuring economic uncertainty is crucial for understanding investment decisions by individuals and firms. Macroeconomists increasingly rely on survey data on subjective expectations. An innovative approach to measure aggregate uncertainty exploits the rounding patterns in individuals' responses to survey questions on inflation expectations (Binder, 2017). This paper uses the panel dimension of household surveys to study individual-level heterogeneity in this measure of individual uncertainty. The results provide evidence for the existence of considerable heterogeneity in individuals' response behavior and inflation expectations.

Keywords:

uncertainty; inflation; expectations; mixture models

JEL-Classification:

C10; D80; D83; D84; E31

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Discussion Paper No. 159
June 24, 2019

Magnitude Effect in Intertemporal Allocation Tasks

Authors:

Sun, Chen (HU Berlin)
Potters, Jan (Tilburg University)

Abstract:

We investigate how intertemporal allocation of monetary rewards is influenced by the size of total budget, with a particular interest in the channels of influence. We find a significant magnitude effect: the budget share allocated to the later date increases with the size of the budget. At the aggregate level as well as at the individual level, we find magnitude effects both on the discount rate and on intertemporal substitutability (i.e. utility curvature). The latter effect is consistent with theories in which the degree of asset integration is increasing in the stake.

Keywords:

time preference; magnitude effect; convex time budget method

JEL-Classification:

C91; D12; D91

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Discussion Paper No. 158
May 31, 2019

Decentralizing Centralized Matching Markets: Implications From Early Offers in University Admissions

Authors:

Grenet, Julien (Paris School of Economics)
He, Yinghua (Rice University)
Kübler, Dorothea (WZB Berlin Social Science Center)

Abstract:

The matching literature commonly rules out that market design itself shapes agent preferences. Underlying this premise is the assumption that agents know their own preferences at the outset and that preferences do not change throughout the matching process. Under this assumption, a centralized matching market can often outperform a decentralized one. Using a quasi-experiment in Germany's university admissions, we provide evidence against this assumption. We study a centralized clearinghouse that implements the early stages of the university-proposing Gale-Shapley deferred-acceptance mechanism in real time, resembling a decentralized market with continuous offers, rejections, and acceptances. With data on the exact timing of every decision, we show that early offers are more likely to be accepted than (potential) later offers, despite early offers not being made by more desirable universities. Furthermore, early offers are only accepted after some time rather than immediately. These results and direct survey evidence are consistent with a model of information acquisition: it is costly for students to learn about universities and accepting a university that turns out to be inferior causes regret. We discuss and rule out some alternative hypotheses. Our findings motivate a hybrid mechanism that balances centralization and decentralization. By allowing sequential learning, it improves welfare, especially in markets with substantial learning costs.

Keywords:

centralized matching market; gale-shapley deferred acceptance mechanism; university admissions; early offers; information acquisition

JEL-Classification:

C78; D47; I23; D81; D83

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Discussion Paper No. 157
May 28, 2019

Dynamics and Heterogeneity of Subjective Stock Market Expectations

Authors:

Heiss, Florian (University of Dusseldorf)
Hurd, Michael (RAND)
Rossmann, Tobias (University of Munich)
Winter, Joachim (LMU Munich)
van Rooij, Maarten (De Nederlandsche Bank)

Abstract:

Between 2004 and 2016, we elicited individuals' subjective expectations of stock market returns in a Dutch internet panel at bi-annual intervals. In this paper, we develop a panel data model with a finite mixture of expectation types who differ in how they use past stock market returns to form current stock market expectations. The model allows for rounding in the probabilistic responses and for observed and unobserved heterogeneity at several levels. We estimate the type distribution in the population and find evidence for considerable heterogeneity in expectation types and meaningful variation over time, in particular during the financial crisis of 2008/09.

Keywords:

expectations; stock markets; financial crisis; mixture models; surveys

JEL-Classification:

D12; D84; G11

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