Discussion Paper No. 178
November 8, 2021
Managerial Payoff and Gift-Exchange in the Field
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We conduct a field experiment where we vary both the presence of a gift-exchange wage and the effect of the worker's effort on the manager's payoff. Results indicate a strong complementarity between the initial wage-gift and the agent's ability to "repay the gift". We control for differences in ability and reciprocal inclination and show that gift-exchange is more effective with more reciprocal agents. We present a principal-agent model with reciprocal subjects that motivates our findings. Our results help to reconcile the conflicting evidence on the efficacy of gift-exchange outside the lab.
Keywords:
incentives; field experiments; gift-exchange; reciprocity;
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Discussion Paper No. 177
Should There Be Lower Taxes On Patent Income?
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A "patent box" is a term for the application of a lower corporate tax rate to the income derived from the ownership of patents. This tax subsidy instrument has been introduced in a number of countries since 2000. Using comprehensive data on patents filed at the European Patent Office, including information on ownership transfers pre- and post-grant, we investigate the impact of the introduction of a patent box on international patent transfers, on the choice of ownership location, and on invention in the relevant country. We find that the impact on transfers is small but present, especially when the tax instrument contains a development condition and for high value patents (those most likely to have generated income), but that invention itself is not affected. This calls into question whether the patent box is an effective instrument for encouraging innovation in a country, rather than simply facilitating the shifting of corporate income to low tax jurisdictions.
Keywords:
patent box; ip box; innovation tax; beps; epo; invention incentive; patent ownership;
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Discussion Paper No. 176
Patents, Data Exclusivity, and the Development of New Drugs
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Pharmaceutical firms typically enjoy market exclusivity for new drugs from concurrent protection of the underlying invention (through patents) and the clinical trials data submitted for market approval (through data exclusivity). Patent invalidation during drug development renders data exclusivity the sole source of protection and shifts the period of market exclusivity at the project level. In instrumental variables regressions we quantify the effect of a one-year reduction in expected market exclusivity on the likelihood of drug commercialization. The effect is largely driven by patent invalidations early in the drug development process and by the responses of large originators. We hereby provide first estimates of the responsiveness of R&D investments to market exclusivity expectations.
Keywords:
patents; drugs; data exclusivity; clinical trials;
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Discussion Paper No. 175
Speculative Trade and Market Newcomers
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Arguing that in the real world relatively optimistic inexperienced investors are prey for relatively pessimistic veteran traders, we formalize this intuitive conjecture as a proven proposition in a simple model. This agreement to disagree leads to a perpetual bubble, in which more experienced, but less optimistic, investors keep selling overpriced assets to less experienced traders. As in a fraction of the uniform-experience literature, lack of short-selling makes room for the success of such bubble schemes. This previous literature did not allow for persistent effects of experience on beliefs and, instead, relied on more direct assumptions of belief heterogeneity. Although we map experience into beliefs in a specific way, the intuition behind the perpetual bubble involves the above-mentioned disagreement patterns, not belief formation itself.
Keywords:
speculative trade; price bubble; experience; optimism; belief heterogeneity; non-bayesian learning; short-telling;
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Discussion Paper No. 174
Immigration and the Evolution of Local Cultural Norms
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We study the local evolution of cultural norms in West Germany in reaction to the sudden presence of East Germans who migrated to the West after reunification. These migrants grew up with very high rates of maternal employment, whereas West German families followed the traditional breadwinner-housewife model. We find that West German women increase their labor supply and that this holds within household. We provide additional evidence on stated gender norms, West-East friendships, intermarriage, and childcare infrastructure. The dynamic evolution of the local effects on labor supply is best explained by local cultural learning and endogenous childcare infrastructure.
Keywords:
cultural norms; local learning; gender; immigration;
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Discussion Paper No. 173
Boolean Representations of Preferences under Ambiguity
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We propose a class of multiple-prior representations of preferences under ambiguity where the belief the decision-maker (DM) uses to evaluate an uncertain prospect is the outcome of a game played by two conflicting forces, Pessimism and Optimism. The model does not restrict the sign of the DM's ambiguity attitude, and we show that it provides a unified framework through which to characterize different degrees of ambiguity aversion, as well as to represent context-dependent negative and positive ambiguity attitudes documented in experiments. We prove that our baseline representation, Boolean expected utility (BEU), yields a novel representation of the class of invariant biseparable preferences (Ghirardato, Maccheroni and Marinacci, 2004), which drops uncertainty aversion from maxmin expected utility (Gilboa and Schmeidler, 1989), while extensions of BEU allow for more general departures from independence.
Keywords:
multiple priors; ambiguity; dual-self models;
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Discussion Paper No. 172
The Rise of Fiscal Capacity
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Having sufficient fiscal capacity to tax is a key hallmark and defining feature of states, and there is a growing literature trying to explain its origins. Existing empirical evidence on fiscal capacity is scarce and focuses on large, ex-post successful territories. In this paper we study the introduction of the first centralized, permanent fiscal institutions in the multifarious territories of the Holy Roman Empire from 1400 to 1800. We link information on fiscal centralization and the size and survival of territories to an extensive dataset on state-formation and growth-related outcomes. We empirically confirm that territories are more likely to centralize when neighboring territories are centralized and when they are exposed to a higher threat of war. In line with the literature on the consequences of fiscal capacity, we show that centralized territories are more likely to survive than non-centralized territories and as a result grow more in size. They invest more in administrative and military structures, but investments in the military only occur in the core areas of centralized territories. This contradicts the central assumption of models on fiscal capacity which states that investments into the military are a non-excludable public good.
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Discussion Paper No. 171
The Standard Portfolio Choice Problem in Germany
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We study an investment experiment with a representative sample of German households. Respondents invest in a safe asset and a risky asset whose return is tied to the German stock market. Experimental investments correlate with beliefs about stock market returns and exhibit desirable external validity at least in one respect: they predict real-life stock market participation. But many households are unresponsive to an exogenous increase in the risky asset's return. The data analysis and a series of additional laboratory experiments suggest that task complexity decreases the responsiveness to incentives. Modifying the safe asset's return has a larger effect on behaviour than modifying the risky asset's return.
Keywords:
stock market expectations; stock market participation; portfolio choice; financial literacy; complexity;
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Discussion Paper No. 170
Belief Updating: Does the 'Good-News, Bad-News' Asymmetry Extend to Purely Financial Domains?
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Bayes' statistical rule remains the status quo for modeling belief updating in both normative and descriptive models of behavior under uncertainty. Some recent research has questioned the use of Bayes' rule in descriptive models of behavior, presenting evidence that people overweight 'good news' relative to 'bad news' when updating ego-relevant beliefs. In this paper, we present experimental evidence testing whether this 'good-news, bad-news' effect is present in a financial decision making context (i.e. a domain that is important for understanding much economic decision making). We find no evidence of asymmetric updating in this domain. In contrast, in our experiment, belief updating is close to the Bayesian benchmark on average. However, we show that this average behavior masks substantial heterogeneity in individual updating. We find no evidence in support of a sizeable subgroup of asymmetric updators.
Keywords:
economic experiments; bayes' rule; belief updating; belief measurement; proper scoring rules; motivated beliefs;
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Discussion Paper No. 169
Confidence and Career Choices: An Experiment
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Confidence is often seen as the key to success. Empirical evidence about how such beliefs about one's abilities causally map into actions is, however, sparse. In this paper, we experimentally investigate the causal effect of an increase in confidence about one's own ability on two central choices made by workers in the labor market: choosing between jobs with different incentive schemes, and the subsequent choice of how much effort to exert within the job. An exogenous increase in confidence leads to an increase in subjects' propensity to choose payment schemes that depend heavily on ability. This is detrimental for low ability workers. Policy implications are discussed.
Keywords:
overconfidence; experiment; beliefs; real-effort; career choices;
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