Discussion Paper No. 163
November 8, 2021
Firm Organization with Multiple Establishments
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How do geographic frictions affect firm organization? We show theoretically and empirically that geographic frictions increase the use of middle managers in multi-establishment firms. In our model, we assume that a CEO's time is a resource in limited supply, shared across headquarters and establishments. Geographic frictions increase the costs of accessing the CEO. Hiring middle managers at one establishment substitutes for CEO time, which is reallocated across all establishments. Consequently, geographic frictions between the headquarters and one establishment affect the organization of all establishments of a firm. Our model is consistent with novel facts about multi-establishment firm organization that we document using administrative data from Germany. We exploit the opening of high-speed train routes to show that not only the establishments directly affected by faster travel times but also the other establishments of the firm adjust their organization. Our findings imply that local conditions propagate across space through firm organization.
Keywords:
firm organization; multi-establishment firm; knowledge hierarchy; geography;
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Discussion Paper No. 162
Heads We Both Win, Tails Only You Lose: the Effect of Limited Liability on Risk-Taking in Financial Decision Making
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One of the reasons for the recent crisis is that financial institutions took "too much risk" (Brunnermeier, 2009; Taylor et al., 2010). Why were these institutions taking so much risk is an open question. A recent strand in the literature points towards the "cognitive dissonance" of investors who, because of the limited liability of their investments, had a distorted view of riskiness (e.g., Barberis (2013); Benabou (2015)). In a series of laboratory experiments we show how limited liability does not affect the beliefs of investors, but does increase their willing exposure to risk. This results points to a simple explanation for the over-investment of banks and hedge-funds: When incentives are not aligned, investors take advantage of the moral hazard opportunities.
Keywords:
moral hazard; cognitive dissonance; behavioral finance;
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Discussion Paper No. 161
Price Dynamics and Trader Overconfidence
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Overconfidence is one of the most important biases in financial markets and commonly associated with excessive trading and asset market bubbles. So far, most of the finance literature takes overconfidence as a given, "static" personality trait. In this paper we introduce a novel experimental design which allows us to track different measures of overconfidence during an asset market bubble. The results show that overconfidence co-moves with asset prices and points towards a feedback loop in which overconfidence adds fuel to the flame of existing bubbles.
Keywords:
overconfidence; experiment; asset markets;
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Discussion Paper No. 160
Economic Uncertainty and Subjective Inflation Expectations
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Measuring economic uncertainty is crucial for understanding investment decisions by individuals and firms. Macroeconomists increasingly rely on survey data on subjective expectations. An innovative approach to measure aggregate uncertainty exploits the rounding patterns in individuals' responses to survey questions on inflation expectations (Binder, 2017). This paper uses the panel dimension of household surveys to study individual-level heterogeneity in this measure of individual uncertainty. The results provide evidence for the existence of considerable heterogeneity in individuals' response behavior and inflation expectations.
Keywords:
uncertainty; inflation; expectations; mixture models;
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Discussion Paper No. 159
Magnitude Effect in Intertemporal Allocation Tasks
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We investigate how intertemporal allocation of monetary rewards is influenced by the size of total budget, with a particular interest in the channels of influence. We find a significant magnitude effect: the budget share allocated to the later date increases with the size of the budget. At the aggregate level as well as at the individual level, we find magnitude effects both on the discount rate and on intertemporal substitutability (i.e. utility curvature). The latter effect is consistent with theories in which the degree of asset integration is increasing in the stake.
Keywords:
time preference; magnitude effect; convex time budget method;
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Discussion Paper No. 158
Decentralizing Centralized Matching Markets: Implications from Early Offers in University Admissions
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The matching literature commonly rules out that market design itself shapes agent preferences. Underlying this premise is the assumption that agents know their own preferences at the outset and that preferences do not change throughout the matching process. Under this assumption, a centralized matching market can often outperform a decentralized one. Using a quasi-experiment in Germany's university admissions, we provide evidence against this assumption. We study a centralized clearinghouse that implements the early stages of the university-proposing Gale-Shapley deferred-acceptance mechanism in real time, resembling a decentralized market with continuous offers, rejections, and acceptances. With data on the exact timing of every decision, we show that early offers are more likely to be accepted than (potential) later offers, despite early offers not being made by more desirable universities. Furthermore, early offers are only accepted after some time rather than immediately. These results and direct survey evidence are consistent with a model of information acquisition: it is costly for students to learn about universities and accepting a university that turns out to be inferior causes regret. We discuss and rule out some alternative hypotheses. Our findings motivate a hybrid mechanism that balances centralization and decentralization. By allowing sequential learning, it improves welfare, especially in markets with substantial learning costs.
Keywords:
centralized matching market; gale-shapley deferred acceptance mechanism; university admissions; early offers; information acquisition;
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Discussion Paper No. 157
Dynamics and Heterogeneity of Subjective Stock Market Expectations
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Between 2004 and 2016, we elicited individuals' subjective expectations of stock market returns in a Dutch internet panel at bi-annual intervals. In this paper, we develop a panel data model with a finite mixture of expectation types who differ in how they use past stock market returns to form current stock market expectations. The model allows for rounding in the probabilistic responses and for observed and unobserved heterogeneity at several levels. We estimate the type distribution in the population and find evidence for considerable heterogeneity in expectation types and meaningful variation over time, in particular during the financial crisis of 2008/09.
Keywords:
expectations; stock markets; financial crisis; mixture models; surveys;
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Discussion Paper No. 155
The Disciplinary Effect of Post-Grant Review
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We study the causal impact of invalidating marginally valid patents during post-grant opposition at the European Patent Office on affected inventors' subsequent patenting. We exploit exogenous variation in invalidation by leveraging the participation of a patent's original examiner in the opposition division as an instrument. We find a disciplinary effect of invalidation: Affected inventors file 20% fewer patent applications in the decade after the decision. This effect is entirely driven by a reduction in low-quality filings, i.e., filings that examiners associate with prior art that threatens the application's novelty or inventive step. We do not observe shifts into national patenting.
Keywords:
inventors; marginal patents; patent invalidation; patent opposition; postgrant review; epo; innovation;
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Discussion Paper No. 156
Explaining Gaps in Educational Transitions Between Migrant and Native School Leavers
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This paper analyzes the reasons for the large and persistent gaps in transitions after secondary school between native pupils compared to second- and third generation immigrant pupils in Germany. I first document that differences in parental background, skills (such as school degrees or test scores), and school fixed effects explain part of the migrant-native gaps, but are not sufficient. Conditional on these factors, there is a "polarization" of educational choices: migrants are more likely to attend tertiary education, less likely to attend vocational education, and more likely to end without qualified training than their background and skills would predict. I then show that this polarization is driven by the migrant pupils' more academically oriented career aspirations and expectations before leaving school. On the one hand, these higher ambitions allow higher skilled migrants to hieventertiary education despite their less favourable background characteristics. On the other hand, less skilled migrants who in Germany's tracked school system do not have the option to enter academic education, may be diverted from vocational training as a more viable alternative. These patterns are stronger for boys than for girls. Finally, I discuss various possible explanations for the migrants' different career plans, including expected labour market returns to education, expected discrimination, the intention to leave Germany, overconfidence, or information deficits.
Keywords:
migrant youth; vocational education; tertiary education; aspirations; expectations;
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Discussion Paper No. 154
An Experimental Analysis of Overconfidence in Tariff Choice
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Digitalization has changed existing business models and enabled new ones. This development has been accompanied by the emergence of new pricing options and the possibility of applying established pricing models in new domains. Today, consumers can, for example, pay for accessing a product instead of buying it. Within such sharing services, consumers can usually choose between a flat-rate and a pay-per-use option. Prior work demonstrated that consumers' tariff choices are often systematically biased. Overconfidence was identified as one of the key drivers. Yet, prior research is non-experimental and focused on the so-called flat-rate bias. By contrast, we examine the effects of overconfidence on tariff choice experimentally. We show that overconfident consumers overestimate their ability to predict their future usage, which leads them to underestimate their actual usage, and eventually leads them to choose a pay-per-use (vs. a flat-rate) option more frequently. We discuss theoretical and managerial implications.
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