Discussion Papers

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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Discussion Paper No. 129
December 20, 2018

Mean-Field Leader-Follower Games with Terminal State Constraint

Authors:

Fu, Guanxing (HU Berlin)
Horst, Ulrich (HU Berlin)

Abstract:

We analyze linear McKean-Vlasov forward-backward SDEs arising in leader-follower games with mean-field type control and terminal state constraints on the state process. We establish an existence and uniqueness of solutions result for such systems in time-weighted spaces as well as a convergence result of the solutions with respect to certain perturbations of the drivers of both the forward and the backward component. The general results are used to solve a novel single-player model of portfolio liquidation under market impact with expectations feedback as well as a novel Stackelberg game of optimal portfolio liquidation with asymmetrically informed players.

Keywords:

mean-field control; stackelberg game; mean-field game with a major player; portfolio liquidation

JEL-Classification:

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Discussion Paper No. 128
December 20, 2018

Obstacles to Efficient Allocations of Public Education Spending
Evidence From a Representative Survey Experiment

Author:

Werner, Katharina (ifo Institute)

Abstract:

Economic research suggests that investments in early education are generally more successful than investments at later ages. This paper presents a representative survey experiment on education spending in Germany, which exhibits low relative public spending on early education. Results are consistent with a model of misconceptions: informing randomly selected respondents about benefits of early education spending shifts majority support for public spending increases from later education levels to spending on early and primary education. Effects of information provision persist over a two-week period in a follow-up survey. By contrast, results do not suggest self-interested groups inefficiently allocate public education spending.

Keywords:

misconceptions; public spending; education spending; information; survey experiment

JEL-Classification:

I22; D83; H52; P16

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Discussion Paper No. 127
December 20, 2018

Behavioral Characterizations of Naivete for Time-Inconsistent Preferences

Authors:

Ahn, David S. (University of California)
Iijima, Ryota (Yale University)
Le Yaouanq, Yves (LMU Munich)
Sarver, Todd (Duke University)

Abstract:

We propose nonparametric definitions of absolute and comparative naivete. These definitions leverage ex-ante choice of menu to identify predictions of future behavior and ex-post (random) choices from menus to identify actual behavior. The main advantage of our definitions is their independence from any assumed functional form for the utility function representing behavior. An individual is sophisticated if she is indifferent ex ante between retaining the option to choose from a menu ex post or committing to her actual distribution of choices from that menu. She is naive if she prefers the flexibility in the menu, reflecting a mistaken belief that she will act more virtuously than she actually will. We propose two definitions of comparative naivete and explore the restrictions implied by our definitions for several prominent models of time inconsistency.

Keywords:

naive; sophisticated; time inconsistent; comparative statics

JEL-Classification:

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Discussion Paper No. 126
December 13, 2018

A Proposed Data Set for Analyzing the Labor Market Trajectories of East Germans Around Reunification

Authors:

Liepmann, Hannah (HU Berlin)
Müller, Dana (Research Data Centre (FDZ) of the Federal Employment Agency (BA) at the Institute for Employment Research (IAB))

Abstract:

Data from German social security notifications and internal procedures of the Federal Employment Agency are an important source for analyzing labor market trajectories. However, for East Germans these data are only fully available from 1992 onwards. As a consequence of German reunification, by 1992 significant fractions of East Germans had already lost their jobs, had changed their occupations and industries, and had moved to West Germany. We partially close the gap in the data by linking the "Integrated Employment Biographies" - that start in 1992 for East Germany - with the GDR's "Data Fund of Societal Work Power" from 1989. The new data set permits the analysis of phenomena such as unemployment, job mobility, and regional mobility. It can also be used to refine the existing knowledge of the individual-level labor market consequences of German reunification. Our long-term goal is to make the new data set available to the research community via the Research Data Center of the Federal Employment Agency.

Keywords:

east germany; german reunification; labor market trajectories; administrative data; record linkage

JEL-Classification:

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Discussion Paper No. 125
November 8, 2018

Dissecting Between-Plant and Within-Plant Wage Dispersion – Evidence From Germany

Authors:

Baumgarten, Daniel (LMU Munich)
Felbermayr, Gabriel (ifo Institute)
Lehwald, Sybille (Federal Ministry for Economic Affairs and Energy)

Abstract:

Using rich linked employer-employee data for (West) Germany between 1996 and 2014, we analyze the most important drivers of the recent rise in German wage dispersion and pin down the relative contribution of plant and worker characteristics. Moreover, we separately investigate the drivers of between-plant and within-plant wage dispersion. We also analyze the sources of the recent slowdown in German wage inequality and compare the results for West Germany to the ones for East Germany. We disentangle the relative contribution of each single variable to the rise in wage dispersion using recentered influence function (RIF) regressions. The most important drivers of wage dispersion are industry effects and the bargaining regime. The former predominantly works through the wage structure effect while, in the latter case, both the decline in collective bargaining coverage and the strong increase in wage dispersion within the group of covered plants have played a substantial role. While education has been another factor contributing to both between-plant and within-plant wage inequality, other candidate factors such as plant size, the exporting status, plant technology, and investment intensity are all of little if any direct quantitative importance for the increase in wage dispersion.

Keywords:

wage inequality; decomposition; rif-regression; linked employer-employee data

JEL-Classification:

J31; J51; C21; F16

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Discussion Paper No. 124
November 2, 2018

It’s not my Fault! Self-Confidence and Experimentation

Authors:

Hestermann, Nina (Toulouse School of Economics)
Le Yaouanq, Yves (LMU Munich)

Abstract:

We study the inference and experimentation problem of an agent in a situation where the outcomes depend on the individual's intrinsic ability and on an external variable. We analyze the mistakes made by decision-makers who hold inaccurate prior beliefs about their ability. Overconfident individuals take too much credit for their successes and excessively blame external factors if they fail. They are too easily dissatisfied with their environment, which leads them to experiment in variable environments and revise their self-confidence over time. In contrast, underconfident decision-makers might be trapped in low-quality environments and incur perpetual utility losses.

Keywords:

overconfidence; attribution bias; experimentation; learning.

JEL-Classification:

D83

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Discussion Paper No. 123
October 25, 2018

Beliefs as a Means of Self-Control? Evidence from a Dynamic Student Survey

Authors:
König, Tobias (HU Berlin)
Schweighofer-Kodritsch, Sebastian (HU Berlin and WZB Berlin)
Weizsäcker, Georg (HU Berlin)
Abstract:

We repeatedly elicit beliefs about the returns to study effort in a panel survey of students of a large university course. A behavioral model of quasi-hyperbolic discounting and malleable beliefs yields the prediction that the dynamics of return beliefs mirrors the importance of exerting self-control, such that return expectations first increase as the exam approaches, and then sharply drop post-exam. Exploiting variation in exam timing to control for common information shocks, we find this prediction confirmed: average subjective expectations of returns increase by about 20% over the period before the exam, and drop by about the same amount afterwards.

Keywords:
belief elicitation; return to study effort; dynamic belief patterns
JEL-Classification:
D90; I26
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