Discussion Paper No. 209
November 9, 2021
Delegation, Promotion, and Manager Selection
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Promotions serve two purposes. They ought to provide incentives for employees and to select the best employee for a management position. However, if non-contractible managerial decision rights give rise to private benefits and preference misalignment between managers and the firm, these two purposes are in conflict. This is because the worker with the largest private benefit as a manager has the strongest incentives to work hard to get promoted. This article shows how the interplay of managerial decision rights and performance-based promotions leads to a situation often referred to as the Peter principle: employees that create lower expected profits as managers have yet better promotion prospects. That finding still holds when the firm owner optimally chooses the promotion rule, the degree of delegation, and wage payments to both employees and managers. To optimize organizational design, the firm balances better worker incentivization but worse manager selection by using performance-based promotions and restricting managerial decision rights.
Keywords:
peter principle; promotion; delegation of decision rights; incentives; manager selection; organizational design;
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Discussion Paper No. 208
School Choice and Loss Aversion
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Extensive evidence suggests that participants in the direct student-proposing deferred-acceptance mechanism (DSPDA) play dominated strategies. In particular, students with low priority tend to misrepresent their preferences for popular schools. To explain the observed data, we introduce expectationbased loss aversion into a school-choice setting and characterize choiceacclimating personal equilibria in DSPDA. Truthful equilibria can fail to exist, and DSPDA might implement unstable and more ineffi cient allocations in both small and large markets. Speci fically, it discriminates against students who are more loss averse or less overconfident than their peers, and amplifi es already existing (or perceived) discrimination. To level the playing field, we propose serial dictatorship mechanisms as a strategyproof and stable alternative that is robust to these biases.
Keywords:
market design; matching; school choice; reference-dependent preferences; loss aversion; deferred acceptance;
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Discussion Paper No. 207
Rural Transformation, Inequality, and the Origins of Microfinance
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What determines the development of rural financial markets? Starting from a simple theoretical framework, we derive the factors shaping the market entry of rural microfinance institutions across time and space. We provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of Prussia between 1852 and 1913. This setting is attractive as it provides a free market benchmark scenario without public ownership, subsidization, or direct regulatory intervention. Furthermore, we exploit features of our historical set-up to identify causal effects. The results show that declining agricultural staple prices, as a feature of structural transformation, leads to the emergence of credit cooperatives. Similarly, declining bank lending rates contribute to their rise. Low asset sizes and land inequality inhibit the regional spread of cooperatives, while ethnic heterogeneity has ambiguous effects. We also offer empirical evidence suggesting that credit cooperatives accelerated rural transformation by diversifying farm outputs.
Keywords:
microfinance; credit cooperatives; rural transformation; land inequality; prussia;
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Discussion Paper No. 206
Nonparametric Regression with Selectively Missing Covariates
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We consider the problem of regressions with selectively observed covariates in a nonparametric framework. Our approach relies on instrumental variables that explain variation in the latent covariates but have no direct e ffect on selection. The regression function of interest is shown to be a weighted version of observed conditional expectation where the weighting function is a fraction of selection probabilities. Nonparametric identifi cation of the fractional probability weight (FPW) function is achieved via a partial completeness assumption. We provide primitive functional form assumptions for partial completeness to hold. The identi fication result is constructive for the FPW series estimator. We derive the rate of convergence and also the pointwise asymptotic distribution. In both cases, the asymptotic performance of the FPW series estimator does not suff er from the inverse problem which derives from the nonparametric instrumental variable approach. In a Monte Carlo study, we analyze the finite sample properties of our estimator and we demonstrate the usefulness of our method in analyses based on survey data. We also compare our approach to inverse probability weighting, which can be used alternatively for unconditional moment estimation. In the empirical application, we focus on two diff erent applications. We estimate the association between income and health using linked data from the SHARE survey data and administrative pension information and use pension entitlements as an instrument. In the second application we revisit the question how income aff ects the demand for housing based on data from the Socio-Economic Panel Study. In this application we use regional income information on the residential block level as an instrument. In both applications we show that income is selectively missing and we demonstrate that standard methods that do not account for the nonrandom selection process lead to signi ficantly biased estimates for individuals with low income.
Keywords:
selection model; instrumental variables; fractional probability weighting; nonparametric identification; partial completeness; incomplete data; series estimation; income distribution; health;
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Discussion Paper No. 205
The Dynamic Impact of FX Interventions on Financial Markets
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Evidence on the effectiveness of FX interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Applying this approach to the most important, freely floating currencies, we find that FX intervention shocks significantly affect exchange rates and that this impact persists for months. We show for Japan and the US that interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.
Keywords:
foreign exchange intervention; structural VAR; exchange rates; interest rates; stock prices;
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Discussion Paper No. 204
Organizing for Entrepreneurship: Field-Experiment Evidence on the Performance Effects of Autonomy in Choosing Project Teams Ideas
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Organizations constantly strive to unleash their entrepreneurial potential to keep up with market and technology changes. To this end, they engage employees in practices like corporate crowdsourcing, incubators, accelerators or hackathons. These organizational practices emulate independent “green-field” entrepreneurship by relinquishing hierarchical control and granting employees autonomy in the choices of how to conduct work. We aim to shed light on two such choices that are fundamental in differentiating hierarchical from entrepreneurial modes of organizing work: (1) choosing projects ideas to work on and (2) choosing project teams to work with. Both of these choices are typically pre-determined in hierarchies and self-determined in entrepreneurship. We run a field experiment in an entrepreneurship course carefully designed to disentangle the separate and joint effects of granting autonomy in both choosing teams and choosing ideas compared to a pre-determined base case. Our results show that high autonomy in choosing implies a trade-off between personal satisfaction and objective performance. Self-determined choices along both dimensions promote subjective well-being in a complementary way, but their joint performance impact is diminishing. After ruling out alternative explanations related to differing project qualities and homophilic team choices, the detrimental performance impact of too much choice seems to be related to the implied cognitive burden and overconfidence.
Keywords:
teams; ideation; entrepreneurial performance; field experiment;
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Discussion Paper No. 202
Leadership in a Public Goods Experiment with Permanent and Temporary Members
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We experimentally analyze leading by example in a public goods game with two permanent and two temporary group members. Our results show that leadership when permanent and temporary members interact leads to lower contributions than interaction without leadership.
Keywords:
cooperation; leadership; social dilemma; public goods provision; experiment;
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Discussion Paper No. 201
Longevity and Patience
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Why does patience vary across individuals and countries? We provide evidence on a widely-hypothesized mechanism, namely that higher longevity fosters patience. Using data on patience for 80,000 individuals in 76 countries, this paper relates exogenous variation in longevity across gender-age-country cells to variation in patience. We find that a ten-year increase in life expectancy implies a 5-percentage point higher discount factor. This relationship emerges for various sub-samples and is unaffected by other determinants including lifetime experiences regarding economic development, institutional quality, or violence. We provide a model to discuss the implications for the emergence of poverty traps.
Keywords:
time preferences; mortality; poverty traps;
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Discussion Paper No. 200
Don't Expect Too Much - High Income Expectations and Over-Indebtedness
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Household indebtedness is rising worldwide. This study investigates one possible driver of this increase that is rooted in the theory of permanent income: high income expectations. We collect data from an emerging country, Thailand, as (over-) indebtedness in markets with incomplete financial infrastructure and social security can be devastating. Furthermore, our sample of rural households is exposed to a high degree of uncertainty, which makes expectation formation prone to behavioral biases. We implement a new measure for high income expectations and show that it is strongly and robustly related to both objective and subjectively felt over-indebtedness. Controlling for various household characteristics, unexpected shocks, and other possible confounding factors reduces the concern about reverse causality. In an additional lab-in-the-field experiment, we explicitly find that overconfidence, a specific form of biased expectation, is related to overborrowing.
Keywords:
household debt; lab-in-the-field experiment; emerging markets;
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Discussion Paper No. 199
Weber Revisited: The Protestant Ethic and the Spirit of Nationalism
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We revisit Max Weber's hypothesis on the role of Protestantism for economic development. We show that nationalism is crucial to both, the interpretation of Weber's Protestant Ethic and empirical tests thereof. For late 19th century Prussia we reject Weber’s suggestion that Protestantism mattered due to an “ascetic compulsion to save”. Moreover, we find that income levels, savings, and literacy rates differed between Germans and Poles, not between Protestants and Catholics using pooled OLS and IV regressions as well as IV mediation analysis. We suggest that this result is due to anti-Polish discrimination.
Keywords:
Max Weber; protestantism; nationalism;
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