Discussion Paper No. 225
November 9, 2021
Optimal Need-Based Financial Aid
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We study the optimal design of student financial aid as a function of parental income. We derive optimal financial aid formulas in a general model. For a simple model version, we derive mild conditions on primitives under which poorer students receive more aid even without distributional concerns. We quantitatively extend this result to an empirical model of selection into college for the United States that comprises multidimensional heterogeneity, endogenous parental transfers, dropout, labor supply in college, and uncertain returns. Optimal financial aid is strongly declining in parental income even without distributional concerns. Equity and efficiency go hand in hand.
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financial aid; college subsidies; optimal taxation; inequality;
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Discussion Paper No. 224
Refugee-Specific Government Air, Institutional Embeddedness and Child Refugees' Economic Success Later in Life: Evidence from Post-WWII GDR Refugees
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We exploit a unique historical setting to investigate how refugee-specific government aid affects the medium-term outcomes of refugees who migrate as children and young adults. German Democratic Republic (GDR) refugees who escaped to West Germany between 1946 and 1961 who were acknowledged to be “political refugees” were eligible for refugee-targeted aid, but only after 1953. We combine several approaches to address identification issues resulting from the fact that refugees eligible for aid are both self-selected and screened by local authorities. We find positive effects of aid-eligibility on educational attainment, job quality and income among the refugees who migrated as young adults (aged 15-24). We do not find similar effects of aid-eligibility for refugees who migrated as children (aged 1-14). The overall results suggest that factors coming from the refugee experience per se do not impact negatively on the later-in-life socio-economic success of refugees. The often-found negative effects in various measures of integration in other refugee episodes are therefore likely driven by confounding factors that our unique historical setting allows mitigates.
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Discussion Paper No. 223
The Role of Unemployment and Job Change when Estimating the Returns to Migration
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Estimating the returns to migration from East to West Germany, this paper focuses on pre-migration employment dynamics, earnings uncertainty, and job change in the source region. Migrants are found to be negatively selected with respect to labor market outcomes, with a large drop in earnings and employment during the last few months before migration. We find sizeable positive earnings and employment gains of migration both in comparison to staying or job change. The size of the gains varies considerably with pre-migration earnings and with the counterfactual considered. Future migrants have worse expectations for their labor market prospects in the East and migrants show a greater openness to mobility.
Keywords:
migration; returns; selection; unemployment; moving costs;
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Discussion Paper No. 222
Fair Procedures with naive Agents: Who Wants the Boston Mechanism?
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We study preferences over procedures in the presence of naive agents. We employ a school choice setting following Pathak and Sönmez (2008) who show that sophisticated agents are better off under the Boston mechanism than under a strategy-proof mechanism if some agents are sincere. We use lab experiments to study the preferences of subjects for the Boston mechanism or the assortative matching. We compare the preferences of stakeholders who know their own role with agents behind the veil of ignorance and spectators. As predicted, stakeholders vote for the Boston mechanism if it maximizes their payoffs and vote for the assortative matching otherwise. This is in line with the model of Pathak and Sönmez (2008). Subjects behind the veil of ignorance mainly choose the Boston mechanism when the priority at schools is determined randomly. In a second experiment with priorities based on performance in a real-effort task, spectators whose payoff does not depend on the choice of the mechanism are split in their vote for the Boston mechanism and the assortative matching. According to the spectators’ statements in the post-experimental questionnaire, the main reason for preferring the Boston mechanism is that playing the game well deserves a higher payoff. These findings provide a novel explanation for the widespread use of the Boston mechanism.
Keywords:
matching markets; school choice; voting; Boston mechanism; naive agents; stable assortative matching;
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Discussion Paper No. 221
Inattention and Switching Costs as Sources of Inertia in Medicare Part D
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Consumers’ health plan choices are highly persistent even though optimal plans change over time. This paper separates two sources of inertia, inattention to plan choice and switching costs. We develop a panel data model with separate attention and choice stages, linked by heterogeneity in acuity, i.e., the ability and willingness to make diligent choices. Using data from Medicare Part D, we find that inattention is an important source of inertia but switching costs also play a role, particularly for low-acuity individuals. Separating the two stages and allowing for heterogeneity is crucial for counterfactual simulations of interventions that reduce inertia.
Keywords:
medicare; prescription drugs; health insurance demand; dynamic discrete choice;
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Discussion Paper No. 220
Bargaining Failure and Freedom to Operate: Re-evaluating the Effect of Patents on Cumulative Innovation
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We investigate the causal effect of patent rights on cumulative innovation, using large-scale data that approximate the patent universe in its technological and economic variety. We introduce a novel instrumental variable for patent invalidation that exploits personnel scarcity in post-grant opposition at the European Patent Office. We find that patent invalidation leads to a highly significant and sizeable increase of follow-on inventions. The effect is driven by cases where the removal of the individual exclusion right creates substantial freedom to operate for third parties. Importantly, our results suggest that bargaining failure between original and follow-on innovators is not limited to environments commonly associated with high transaction costs.
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cumulative innovation; patents; bargaining failure; freedom to operate; opposition;
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Discussion Paper No. 219
The E-Word - On the Public Acceptance of Experiments
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Randomized experiments are often viewed as the “gold standard” of scientific evidence but people’s scepticism towards experiments has compromised their viability in the past. We study preferences for experimental policy evaluations in a representative survey in Germany (N>1,900). We find that a majority of 75% supports the idea of small-scale evaluations of policies before enacting them at a large scale. Experimentally varying whether the evaluations are explicitly described as “experiments” has a precisely estimated overall zero effect on public support. Our results indicate political leeway for experimental policy evaluation, a practice that is still uncommon in Germany.
Keywords:
experiment aversion; policy experimentation; education;
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Discussion Paper No. 218
Long-run Expectations of Households
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The rational expectations assumption, e.g. in life-cycle models and portfolio-choice models, prescribes agents to have model-consistent beliefs and to avoid systematic prediction errors. In reality, justi cation and identi cation of expectations are nontrivial. One way to solve this problem is to elicit expectations collecting survey data. We utilize the German SOEP Innovation Sample to analyze short-run and long-run expectations of households in three di erent domains: stock market, labor market and housing market. Our main contribution to the existing literature is that we study expectations about price developments over longer periods, which is of central relevance since many important economic decisions of households concern the long run. Previous studies have mainly focused on short-run or medium-run expectations. We document that while expectations about wages are similar to historical values, the long-run expectations about the developments of the stock market index and about house prices are strongly pessimistic. In the case of the stock market, respondents expect only a small percentage of historical growth. We also observe substantial heterogeneity of expectations by socio-economic background.
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long-run expectations; biased beliefs; returns to education;
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Discussion Paper No. 216
Intertemporal Preferences and the Adoption Decision for Bluetooth Speakers
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The adoption decision for durable goods is intertemporal by definition. However, estimating utility and discount functions from revealed preference data using dynamic discrete choice models is difficult because of an inherent identification problem. To overcome this issue, we use stated preference data. Specifically, we employ the experimental design of Dubé, Hitsch, and Jindal (2014), where future prices are known and that elicits intertemporal adoption decisions for Bluetooth speakers in a discrete choice framework. We estimate several models of discounting (e.g., static, myopic, geometric, and quasi-hyperbolic) and find considerably lower discount factors than typical market interest rates would suggest. The values are also smaller compared to respondents’ matching-based discount factors, even though the correlation is positive and significant. Furthermore, there are substantial differences in discounting across respondents (i.e., heterogeneity in time-preferences) and lastly, there is no strong empirical evidence for quasi-hyperbolic discounting. Thus, the standard economic model seems to be appropriate for the data at hand.
Keywords:
intertemporal preferences; dynamic discrete choice models; durable goods adoption;
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Discussion Paper No. 215
Standing on the Shoulders of Science
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The goal of science is to advance knowledge, yet little is known about its value for marketplace inventions. While important breakthrough technologies could not have been developed without scientific background, skeptics argue that this is the exception rather than the rule, questioning the usefulness of basic research for private sector innovations and the effectiveness of the knowledge transfer from university to industry. We analyze the universe of U.S. patents to establish three new facts about the relationship between science and the value of inventions. First, we show that a patent that directly builds on science is on average 2.9 million U.S. dollars more valuable than a patent in the same technology that is unrelated to science. Based on the analysis of the patent text, we show second that the novelty of patents predicts their value, and third that science-intensive patents are more novel. This documents that science introduces new concepts that are valuable for marketplace inventions. Our study informs the debate on the merits of science for corporate innovation and the origins of breakthrough inventions.
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