Discussion Papers

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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Discussion Paper No. 37
June 8, 2017

Does Financial Education Impact Financial Literacy and Financial Behavior, and if so, When?

Authors:

Kaiser, Tim (DIW Berlin and University of Kiel)
Menkhoff, Lukas (DIW Berlin and Humboldt University Berlin)

Abstract:

In a meta-analysis of 126 impact evaluation studies, we find that financial education significantly impacts financial behavior and, to an even larger extent, financial literacy. These results also hold for the subsample of randomized experiments (RCTs). However, intervention impacts are highly heterogeneous: Financial education is less effective for low-income clients as well as in low and lower-middle income economies. Specific behaviors, such as the handling of debt, are more difficult to influence and mandatory financial education tentatively appears to be less effective. Thus, intervention success depends crucially on increasing education intensity and offering financial education at a 'teachable moment'.

Keywords:

financial education; financial literacy; financial behavior; meta-analysis; meta-regression; impact evaluation

JEL-Classification:

D14; I21

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Discussion Paper No. 36
June 6, 2017

Knowing Me, Imagining You:
Projection and Overbidding in Auctions

Author:

Breitmoser, Yves (Humboldt University Berlin)

Abstract:

Overbidding in auctions has been attributed to e.g. risk aversion, loser regret, level-k, and cursedness, relying on varying identifying assumptions. I argue that "type projection'" organizes these findings and largely captures observed behavior. Type projection formally models that people tend to believe others have object values similar to their own - a robust psychological phenomenon that naturally applies to auctions. First, I show that type projection generates the main behavioral phenomena observed in auctions, including increased sense of competition ("loser regret") and broken Bayesian updating ("cursedness"). Second, re-analyzing data from seven experiments, I show that type projection explains the stylized facts of behavior across private and common value auctions. Third, in a structural analysis relaxing the identifying assumptions made in earlier studies, type projection consistently captures behavior best, in-sample and out-of-sample. The results reconcile bidding patterns across conditions and have implications for behavioral and empirical analyses as well as policy.

Keywords:

auctions; overbidding; projection; risk aversion; cursed equilibrium; depth of reasoning

JEL-Classification:

C72; C91; D44

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Discussion Paper No. 35
June 6, 2017

Discrete Choice with Presentation Effects

Author:

Breitmoser, Yves (Humboldt University Berlin)

Abstract:

Experimenters have to make theoretically irrelevant decisions concerning user interfaces and ordering or labeling of options. Such presentation decisions affect behavior and cause results to appear contradictory across experiments, obstructing utility estimation and policy recommendations. The present paper derives a model of choice allowing analysts to control for both presentation effects and stochastic errors in econometric analyses. I test the model in a comprehensive re-analysis of dictator game experiments. Controlling for presentation effects, preference estimates are consistent across experiments and predictive out-of-sample, highlighting the fundamental role of presentation for choice, and this notwithstanding the possibility of reliable estimation and prediction.

Keywords:

discrete choice; presentation effects; utility estimation; counterfactual predictions; laboratory experiment

JEL-Classification:

C10; C90

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Discussion Paper No. 34
May 20, 2017

Bonus Taxes and International Competition for Bank Managers

Authors:

Gietl, Daniel (University of Munich)
Haufler, Andreas (University of Munich)

Abstract:

We analyze the competition in bonus taxation when banks compensate their managers by means of fixed and incentive pay and bankers are internationally mobile. Banks choose bonus payments that induce excessive managerial risk-taking to maximize their private benefits of existing government bailout guarantees. In this setting the international competition in bonus taxes may feature a 'race to the bottom' or a 'race to the top', depending on whether bankers are a source of net positive tax revenue or inflict net fiscal losses on taxpayers as a result of incentive pay. A 'race to the top' becomes more likely when governments' impose only lax capital requirements on banks, whereas a 'race to the bottom' is more likely when bank losses are partly collectivized in a banking union.

Keywords:

bonus taxes; international tax competition; migration

JEL-Classification:

H20; H87; G28

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Discussion Paper No. 33
May 20, 2017

Motivated Health Risk Denial and Preventative Health Care Investments

Author:

Schwardmann, Peter (University of Munich)

Abstract:

People deny health risks, invest too little in disease prevention, and are highly sensitive to the price of preventative health care, especially in developing countries. Moreover, private sector R and D spending on developing-country diseases is almost non-existent. To explain these empirical observations, I propose a model of motivated belief formation, in which an agent's decision to engage in health risk denial balances the psychological benefits of reduced anxiety with the physical cost of underprevention. I use the model to study firms' price-setting behaviour and incentive to innovate. I also show that tax-funded prevention subsidies are welfare enhancing.

Keywords:

health risk denial; optimal expectations; motivated beliefs; disease prevention; self-protection

JEL-Classification:

D03; I15; I11; I18

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Discussion Paper No. 32
May 20, 2017

Deterministic Mechanisms, the Revelation Principle, and Ex-Post Constraints

Authors:

Jarman, Felix (University of Mannheim)
Meisner, Vincent (Technical University Berlin)

Abstract:

This note establishes a revelation principle in terms of payoff for deterministic mechanisms under ex-post constraints: the maximal payoff implementable by a feasible deterministic mechanism can also be implemented by a feasible deterministic direct mechanism.

Keywords:

mechanism design; revelation principle; ex-post constraints

JEL-Classification:

D82

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Discussion Paper No. 31
April 28, 2017

Competition and Incentives

Authors:

Schmidt, Klaus (University of Munich)
Fey, Lisa (University of Munich)
Thoma, Carmen (University of Munich)

Abstract:

We report on two experiments that identify non-monetary incentive effects of competition. As the number of competitors increases, monetary incentives to engage in cost reduction tend to decrease. We test the hypothesis that there are non-monetary incentive effects of competition going in the opposite direction. In the experiments we change the number of competitors exogenously keeping the monetary incentives to spend effort constant. The first experiment shows that subjects spend significantly more effort in duopolistic and oligopolistic markets than in a monopoly. The second experiment focuses on social comparisons as one potential mechanism for this effect. It shows that competition turns the effort decisions of competing managers into strategic complements.

Keywords:

incentive effects of competition; behavioral industrial organization

JEL-Classification:

D03; L10; O31

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Discussion Paper No. 30
April 26, 2017

The Capital Gains Tax: A Curse but Also a Blessing for Venture Capital Investment

Authors:

Bock, Carolin (TU Darmstadt)
Watzinger, Martin (University of Munich)

Abstract:

Our study analyzes the effect of the capital gains tax on the individual investment decisions of venture capitalists. By doing so, we are able to study the decisions for a sample of 76,852 funding rounds in 32 countries from 2000 to 2012. Our results support the predictions of the theoretical model that higher capital gains tax rates are associated with fewer start-ups financed and a lower probability of receiving follow-up funding. However, the results concerning the effect on the probability of success of start-ups show that a higher tax burden is associated with a higher probability of eventual start-up success.

Keywords:

Venture Capital; Capital Gains Tax; Selection Effect; Follow-up Funding; Innovation

JEL-Classification:

G24; H25; H32

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Discussion Paper No. 29
April 25, 2017

The Organization of Knowledge in Multinational Firms

Author:

Gumpert, Anna (University of Munich)

Abstract:

This paper provides the first in-depth study of the organization of knowledge in multinational firms. In the theory, knowledge is a costly input for firms that they can acquire at their headquarters or their production plants. Communication costs impede the access of the plants to headquarter knowledge. The model shows that multinational firms systematically acquire more knowledge at both their foreign and domestic plants than non-multinationals if their foreign plants face higher communication costs with headquarters than their domestic plants. This theoretical prediction helps understand why multinational firms pay higher wages to workers than non-multinational firms, and why their sales decrease across space. The empirical analyses show that higher communication costs indeed decrease multinational firms' foreign sales. Consistent with model-specific comparative statics, the decrease is stronger in sectors with less predictable production processes. Novel data on corporate transferees allow shedding light on one tool of multinational firms' organization of knowledge.

Keywords:

multinational firm; knowledge hierarchy; organization; geography of FDI; multinational wage premium; corporate transferees

JEL-Classification:

D21; D24; F21; F23

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