Discussion Papers

Discussion Paper No. 239
April 29, 2020

Starke Erwartungsreaktionen auf Angela Merkels Covid-Erklärungen

Author:

Haan, Peter (DIW Berlin)
Peichl, Andreas (LMU Munich & ifo Institute)
Schrenker, Annekatrin (DIW Berlin)
Weizsäcker, Georg (HU Berlin)
Winter, Joachim (LMU Munich)

Abstract:

Wir führen hochfrequente Befragungen der in Deutschland lebenden Personen durch und erheben die Erwartungen zur Dauer der Covid-bedingten Beschränkungen des öffentlichen Lebens. In einer ersten Analyse der Daten finden wir Hinweise, dass zwei in den Erhebungszeitraum fallenden öffentlichen Auftritte von Bundeskanzlerin Angela Merkel die Erwartungen stark beeinflussen. Insbesondere messen wir nach Merkels Pressekonferenz vom 15.4.2020 eine deutlich pessimistische Bewegung der Erwartungen und die beabsichtigten Konsumausgaben der Haushalte sinken zeitgleich. Die Ergebnisse legen nahe, dass die deutsche Politik über die Möglichkeit eines sehr wirksamen Erwartungsmanagements verfügt.

Keywords:

ökonomische Erwartungen; Covid-Shutdown

JEL-Classification:

D12; D84

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Discussion Paper No. 238
April 28, 2020

Selling Dreams: Endogenous Optimism in Lending Markets

Author:

Bridet, Luc (University of St Andrews)
Schwardmann, Peter (LMU Munich)

Abstract:

We propose a simple model of borrower optimism in competitive lending markets with asymmetric information. Borrowers in our model engage in self-deception to arrive at a belief that optimally trades off the anticipatory utility benefits and material costs of optimism. Lenders’ contract design shapes these benefits and costs. The model yields three key results. First, the borrower’s motivated cognition increases her material welfare, regardless of whether or not she ends up being optimistic in equilibrium. Our model thus helps explain why wishful thinking is not driven out of markets. Second, in line with empirical evidence, a low cost of lending and a booming economy lead to optimism and the widespread collateralization of loans. Third, equilibrium collateral requirements may be inefficiently high.

Keywords:

optimal expectations; motivated cognition; wishful thinking; financial crisis; lending markets; screening

JEL-Classification:

D86; D82; G33

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Discussion Paper No. 237
April 21, 2020

Second-Chance Offers and Buyer Reputation: Theory and Evidence on Auctions with Default

Author:

Engelmann, Dirk (HU Berlin)
Frank, Jeff (Royal Holloway, University of London)
Koch, Alexander K. (Aarhus University)
Valente, Marieta (University of Minho)

Abstract:

Winners in online auctions frequently fail to complete purchases. Major auction platforms therefore allow “second-chance” offers, where the runner-up bidder pays his own bid price, and they let sellers leave negative feedback on buyers who default. We show theoretically that (i) all else equal, the availability of second-chance offers reduces bids; (ii) sellers have no incentive to exclude bidders, even if they are nearly certain to default; (iii) buyer reputation systems reward bidders with a reputation for defaulting, counter to the idea of deterring such behavior. Our auction experiments support these predictions and provide insights on their practical relevance.

Keywords:

auctions; default; reputation; second-chance offers

JEL-Classification:

D44; C91; L14; D83

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Discussion Paper No. 236
April 15, 2020

Politically Feasible Reforms of Non-Linear Tax Systems

Author:

Bierbrauer, Felix J. (University of Cologne)
Boyer, Pierre C. (École Polytechnique)
Peichl, Andreas (LMU Munich & ifo Institute)

Abstract:

We study reforms of non-linear income tax systems from a political economy perspective. We present a median voter theorem for monotonic tax reforms, reforms so that the change in the tax burden is a monotonic function of income. We also provide an empirical analysis of tax reforms, with a focus on the US. We show that past reforms have, by and large, been monotonic. We also show that support by the median voter was aligned with majority support in the population. Finally, we develop sufficient statistics that enable to test whether a given tax system admits a politically feasible reform.

Keywords:

non-linear income taxation; tax reforms; political economy; optimal taxation

JEL-Classification:

C72; D72; D82; H21

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Discussion Paper No. 235
April 6, 2020

Inducing Cooperation with Emotion – Who Is Affected?

Author:

Gärtner, Manja (DIW Berlin)
Tinghög, Gustav (Linköping University)
Västfjäll, Daniel (Linköping University)

Abstract:

We study the effects of dual processing differences that arise from the state level (through experimental manipulation of the decision mode), the trait level (using individual difference measures of the decision mode), and their interaction on cooperative behavior. In a survey experiment with a representative sample of the Swedish population (N = 1,828), we elicited the individuals’ primary decision mode and experimentally varied whether individuals could rely on their preferred mode or were induced to rely either on emotion or reason. Cooperation was measured across a series of commonly used and incentivized games (prisoner’s dilemma game, public goods game, trust game, dictator game). At the state level, our results show that average cooperation rates increased when emotions were induced rather than reason. At the trait level, our results show that individual decision modes and cooperation rates were not correlated when subjects could rely on their primary mode, but traits interacted with our processing manipulation: Experimentally inducing emotions increased cooperation among individuals who otherwise rely primarily on reason, but not among individuals who already rely primarily on emotion. These findings suggest that individuals integrate their traits with emotion-based states by substituting their trait rather than enhancing it. Thus, who is affected by emotions in their decision to cooperate crucially depends on state-trait interactions at the point of decision.

Keywords:

cooperation; intuition; emotion; reason; experiment

JEL-Classification:

C71; C91; D91

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Discussion Paper No. 234
April 6, 2020

Do Legal Standards Affect Ethical Concerns of Consumers?

Author:

Danz, David (University of Pittsburgh & WZB Berlin)
Engelmann, Dirk (HU Berlin)
Kübler, Dorothea (WZB Berlin & TU Berlin)

Abstract:

To address the impact of regulation on ethical concerns of consumers, we study the example of minimum wages. In our experimental market, consumers have monopsony power, firms set prices and wages, and workers are passive recipients of a wage payment. We find that the majority of consumers occasionally deviate from their self-interest and that markets with such consumers exhibit substantially higher wages. Consumers implement fair allocations using two distinct strategies: they split their demand equally between firms, or they buy all units from the firm with the higher price and higher wage. The two strategies can be captured by maximin preferences and indirect reciprocity in Charness and Rabin’s (2002) reciprocal fairness model. Introducing a minimum wage in a market raises average wages despite its significant crowding out effects on consumers’ fairness concerns. Abolishing a minimum wage crowds in consumer fairness concerns, but crowding in is not sufficient to avoid overall negative effects on workers’ wages.

Keywords:

fairness; consumer behavior; minimum wage; crowding out; experimental economics

JEL-Classification:

C72; C92; D83; D84

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Discussion Paper No. 233
March 30, 2020

Cooperation in a Company: A Large-Scale Experiment

Author:

Deversi, Marvin (LMU Munich)
Kocher, Martin G. (IHS & University of Vienna)
Schwieren, Christiane (University of Heidelberg)

Abstract:

We analyze cooperation within a company setting in order to study the relationship between cooperative attitudes and financial as well as non-financial rewards. In total, 910 employees of a large software company participate in an incentivized online experiment. We observe high levels of cooperation and the typical conditional contribution patterns in a modified public goods game. When linking experiment and company record data, we observe that cooperative attitudes of employees do not pay off in terms of financial rewards within the company. Rather, cooperative employees receive non-financial benefits such as recognition or friendship as the main reward medium. In contrast to most studies in the experimental laboratory, sustained levels of cooperation in our company setting relate to non-financial values of cooperation rather than solely to financial incentives.

Keywords:

cooperation; social dilemma; field experiment; company

JEL-Classification:

C93; D23; H41; J31; J32; M52

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Discussion Paper No. 232
March 9, 2020

Measuring Unfair Inequality: Reconciling Equality of Opportunity and Freedom from Poverty

Author:

Hufe, Paul (LMU Munich & ifo Institute)
Kanbur, Ravi (Cornell University)
Peichl, Andreas (LMU Munich & ifo Institute)

Abstract:

Empirical evidence on distributional preferences shows that people do not judge inequality as problematic per se but that they take the underlying sources of income differences into account. In contrast to this evidence, current measures of inequality do not adequately reflect these normative preferences. In this paper we address this shortcoming by developing a new measure of unfair inequality that reconciles two widely-held fairness principles: equality of opportunity and freedom from poverty. We provide two empirical applications of our measure. First, we analyze the development of inequality in the US from 1969 to 2014 from a normative perspective. Second, we conduct a corresponding international comparison between the US and 31 European countries in 2010. Our results document increasing unfairness in the US over time. This trend is driven by a strong decrease in social mobility that puts the “land of opportunity” among the most unfair countries in 2010.

Keywords:

inequality; equality of opportunity; poverty; fairness; measurement

JEL-Classification:

D31; D63; I32

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Discussion Paper No. 231
March 9, 2020

The Separation and Reunification of Germany: Rethinking a Natural Experiment Interpretation of the Enduring Effects of Communism

Author:

Becker, Sascha O. (Monash University)
Mergele, Lukas (ifo Institute)
Woessmann, Ludger (LMU Munich & ifo Institute)

Abstract:

German separation in 1949 into a communist East and a capitalist West and their reunification in 1990 are commonly described as a natural experiment to study the enduring effects of communism. We show in three steps that the populations in East and West Germany were far from being randomly selected treatment and control groups. First, the later border is already visible in many socio-economic characteristics in pre-World War II data. Second, World War II and the subsequent occupying forces affected East and West differently. Third, a selective fifth of the population fled from East to West Germany before the building of the Wall in 1961. In light of our findings, we propose a more cautious interpretation of the extensive literature on the enduring effects of communist systems on economic outcomes, political preferences, cultural traits, and gender roles.

Keywords:

political systems; communism; preferences; culture; Germany

JEL-Classification:

D72; H11; P26; P36; N44

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Discussion Paper No. 230
March 2, 2020

Repeated Games with Endogenous Discounting

Author:

Kochov, Asen (University of Rochester)
Song, Yangwei (HU Berlin)

Abstract:

In a symmetric repeated game with standard preferences, there are no gains from intertemporal trade. In fact, under a suitable normalization of utility, the payoff set in the repeated game is identical to that in the stage game. We show that this conclusion may no longer be true if preferences are recursive and stationary, but not time separable. If so, the players’ rates of time preference are no longer fixed, but may vary endogenously, depending on what transpires in the course of the game. This creates opportunities for intertemporal trade, giving rise to new and interesting dynamics. For example, the efficient and symmetric outcome of a repeated prisoner’s dilemma may be to take turns defecting, even though the efficient and symmetric outcome of the stage game is to cooperate. A folk theorem shows that such dynamics can be sustained in equilibrium if the players are sufficiently patient.

Keywords:

repeated games; efficiency; folk theorems; endogenous discounting

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