Discussion Papers

Discussion Paper No. 47
October 17, 2017

Procurement with Unforeseen Contingencies

Authors:

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

Abstract:

The procurement of complex projects is often plagued by large cost overruns. One important reason for these additional costs are flaws in the initial design. If the project is procured with a price-only auction, sellers who spotted some of the flaws have no incentive to reveal them early. Each seller prefers to conceal his information until he is awarded the contract and then renegotiate when he is in a bilateral monopoly position with the buyer. We show that this gives rise to three inefficiencies: inefficient renegotiation, inefficient production and inefficient design. We derive the welfare optimal direct mechanism that implements the efficient allocation at the lowest possible cost to the buyer. The direct mechanism, however, imposes strong assumptions on the buyer's prior knowledge of possible flaws and their payoff consequences. Therefore, we also propose an indirect mechanism that implements the same allocation but does not require any such prior knowledge. The optimal direct and indirect mechanisms separate the improvement of the design and the selection of the seller who produces the good.

Keywords:

procurement; renegotiation; auctions; design flaws; adaptation costs; behavioral contract theory

JEL-Classification:

D44; D82; D83; H57

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Discussion Paper No. 46
September 13, 2017

Measuring the Spillovers of Venture Capital

Authors:

Schnitzer, Monika (LMU München)
Watzinger, Martin (LMU München)

Abstract:

We provide the first measurement of knowledge spillovers from venture capital-financed companies onto the patenting activities of other companies. On average, these spillovers are nine times larger than those generated by the R&D investment of established companies. Spillover effects are larger in complex product industries than in discrete product industries. Start-ups with experienced inventors holding a patent at the time of receiving the first round of investment produce the largest spillovers, indicating that venture capital fosters the commercialization of technologies. Methodologically, we contribute by developing a novel definition of the spillover pool, combining citation-based and technological proximity-based approaches.

Keywords:

venture capital, spillovers, innovation

JEL-Classification:

G24; O30; O31; O32

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Discussion Paper No. 45
August 3, 2017

Mechanism Design with Partially Verifiable Information

Author:

Strausz, Roland (Humboldt University Berlin)

Abstract:

In mechanism design with (partially) verifiable information, the revelation principle holds if allocations are modelled as the Cartesian product of outcomes and verifiable information, giving rise to evidence-contingent mechanisms. Consequently, incentive constraints characterize the implementable set. The revelation principle does not hold when an allocation is modelled as only an outcome so that mechanisms are non-contingent. Yet, any outcome implementable by an evidence-contingent mechanism is implementable by a non-contingent mechanism, provided it can both extend and restrict reporting information. A type-independent bad outcome implies the latter property.

Keywords:

revelation principle; mechanism design; verifiable information

JEL-Classification:

D82

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Discussion Paper No. 44
July 31, 2017

Politically Induced Regulatory Risk and Independent Regulatory Agencies

Author:

Strausz, Roland (Humboldt Universität Berlin)

Abstract:

Uncertainty in election outcomes generates politically induced regulatory risk. For monopoly regulation, political parties' risk attitudes towards such risk depend on a fluctuation effect that hurts both parties and an output--expansion effect that benefits at least one party. Irrespective of the parties' risk attitudes, political parties have incentives to negotiate away regulatory risk by pre-electoral bargaining. Pareto-efficient bargaining outcomes fully eliminate regulatory risk and are attainable through institutionalizing independent regulatory agencies with a specific objective. Key aspects of the regulatory overhaul of the US Postal system in 1970 are argued to be consistent with these results.

Keywords:

regulation;independent regulatory agency;regulatory risk;electoral uncertainty

JEL-Classification:

D82

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Discussion Paper No. 43
October 5, 2017

Additional Career Assistance and Educational Outcomes for Students in Lower Track Secondary Schools

Authors:

Fitzenberger, Bernd (Humboldt University Berlin and ZEW Mannheim)
Licklederer, Stefanie (University of Freiburg)

Abstract:

Based on local policy variation, this paper estimates the causal effect of additional career assistance on educational outcomes for students in Lower Track Secondary Schools in Germany. We find mostly insignificant effects of the treatment on average outcomes, which mask quite heterogeneous effects. For those students, who are taking extra coursework to continue education, the grade point average is unaffected and the likelihood of completing a Middle Track Secondary School degree falls. In contrast, educational outcomes improve for students who do not take extra coursework. Hence, the treatment causes a reversal of educational plans after graduation.

Keywords:

lower track secondary schools; career guidance; educational upgrading

JEL-Classification:

I20; J24

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Discussion Paper No. 42
July 27, 2017

Teamwork as a Self-Disciplining Device

Authors:

Fahn, Matthias (LMU Munich and CESifo)
Hakenes, Hendrik (University of Bonn and CEPR)

Abstract:

We show that team formation can serve as an implicit commitment device to overcome problems of self-control. If individuals have present-biased preferences, effort that is costly today but rewarded at some later point in time is too low from the perspective of an individual's long-run self. If agents interact repeatedly and can monitor each other, a relational contract involving teamwork can help to improve performance. The mutual promise to work harder is credible because the team breaks up after an agent has not kept this promise - which leads to individual underproduction in the future and hence a reduction of future utility.

Keywords:

self-control problems; teamwork; relational contracts

JEL-Classification:

L22; L23

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Discussion Paper No. 41
July 8, 2017

The Commitment Role of Equity Financing

Authors:

Fahn, Matthias (LMU Munich and CESifo)
Wamser, Georg (University of Tuebingen and CESifo)
Merlo, Valeria (University of Tuebingen and CESifo)

Abstract:

Existing theories of a firm's optimal capital structure seem to fail in explaining why many healthy and profitable firms rely heavily on equity financing, even though benefits associated with debt (like tax shields) appear to be high and the bankruptcy risk low. This holds in particular for firms that show a strong commitment towards their workforce and are popular among employees. We demonstrate that such financing behavior may be driven by implicit arrangements made between a firm and its managers or employees. Equity financing generally strengthens a firm's credibility to honor implicit promises. Debt, however, has an adverse effect on the enforceability of these arrangements because too much debt increases the firm's reneging temptation, as some of the negative consequences of breaking implicit promises can be shifted to creditors. Our analysis provides an explanation for why some firms only use little debt financing. Predictions made by our theory are in line with a number of empirical results, which seem to stay in contrast to existing theories on capital structure.

Keywords:

relational contracts; capital structure; corporate finance; debt financing

JEL-Classification:

C73; D24; D86; G32

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Discussion Paper No. 40
July 1, 2017

Gender Differences in Willingness to Compete: The Role of Public Observability

Authors:

Buser, Thomas (University of Amsterdam and the Tinbergen Institute)
Ranehill, Eva (University of Zürich)
van Veldhuizen, Roel (WZB Berlin Social Science Center)

Abstract:

A recent literature emphasizes the importance of the gender gap in willingness to compete as a partial explanation for gender differences in labor market outcomes. However, whereas experiments investigating willingness to compete typically do so in anonymous environments, real world competitions often have a more public nature, which introduces potential social image concerns. If such image concerns are important, we should expect public observability to further exacerbate the gender gap. We test this prediction using a laboratory experiment that varies whether the decision to compete, and its outcome, is publicly observable. Across four different treatments, however, all treatment effects are close to zero. We conclude that the public observability of decisions and outcomes does not exert a significant impact on male or female willingness to compete, indicating that the role of social image concerns related to competitive decisions may be limited.

Keywords:

gender differences; competitiveness; social image; experiment

JEL-Classification:

C91; D03; J16

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Discussion Paper No. 39
July 1, 2017

Trading under Market Impact
-Crossing Networks Interacting with Dealer Markets-

Authors:

Bielagk, Jana (Humboldt University Berlin)
Horst, Ulrich (Humboldt University Berlin)
Moreno-Bromberg, Santiago (University of Zurich)

Abstract:

We use a model with agency frictions to analyze the structure of a dealer market that faces competition from a crossing network. Traders are privately informed about their types (e.g. their portfolios), which is something the dealer must take into account when engaging his counterparties. Instead of participating in the dealer market, the traders may take their business to a crossing network. We show that the presence of such a network results in more trader types being serviced by the dealer and that, under certain conditions, the book's spread shrinks. We allow for the pricing on the dealer market to determine the structure of the crossing network and show that the same conditions that lead to a reduction of the spread imply the existence of an equilibrium book or crossing network pair.

Keywords:

asymmetric information; crossing networks; dealer markets; non-linear pricing; principal-agent games

JEL-Classification:

D42; D53; G12; G14

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Discussion Paper No. 38
June 18, 2017

Time Preferences and Bargaining

Author:

Schweighofer-Kodritsch, Sebastian (Humboldt University Berlin and WZB Berlin)

Abstract:

This paper presents an analysis of general time preferences in the canonical Rubinstein (1982) model of bargaining, allowing for arbitrarily history-dependent strategies. I derive a simple sufficient structure for optimal punishments and thereby fully characterize (i) the set of equilibrium outcomes for any given preference profile, and (ii) the set of preference profiles for which equilibrium is unique. Based on this characterization, I establish that a weak notion of present bias - implied, e.g., by any hyperbolic or quasi-hyperbolic discounting - is sufficient for equilibrium to be unique, stationary and efficient. Conversely, I demonstrate how certain violations of present bias give rise to multiple (non-stationary) equilibria that feature delayed agreement under gradually increasing offers.

Keywords:

time preferences; dynamic inconsistency; alternating offers; bargaining; optimal punishments; delay

JEL-Classification:

C78; D03; D74

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