Discussion Paper No. 133
November 8, 2021
Bayesian Implementation and Rent Extraction in a Multi-Dimensional Procurement Problem
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Abstract:
We consider a multi-dimensional procurement problem in which sellers have private information about their costs and about a possible design flaw. The information about the design flaw is necessarily correlated. We solve for the optimal Bayesian procurement mechanism that implements the efficient allocation under the constraint that sellers are protected by limited liability. We show that the rents obtained from reporting costs truthfully can be used to reduce the rents sellers must get for reporting the flaw. We compare the optimal Bayesian mechanism to the optimal ex post incentive compatible mechanism that is informationally less demanding.
Keywords:
auctions; correlated types; inefficient renegotiation; multidimensional screening; procurement;
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Discussion Paper No. 132
Overconfidence and Bailouts
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Empirical evidence suggests that managerial overconfidence and government guarantees contribute substantially to excessive risk-taking in the banking industry. This paper incorporates managerial overconfidence and limited bank liability into a principal-agent model, where the bank manager unobservably chooses effort and risk. An overconfident manager overestimates the returns to effort and risk. We find that managerial overconfidence necessitates an intervention into banker pay. This is due to the bank's exploitation of the manager's overvaluation of bonuses, which causes excessive risk-taking in equilibrium. Moreover, we show that the optimal bonus tax rises in overconfidence, if risk-shifting incentives are sufficiently large. Finally, the model indicates that overconfident managers are more likely to be found in banks with large government guarantees, low bonus taxes, and lax capital requirements.
Keywords:
overconfidence; bailouts; banking regulation; bonus taxes;
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Discussion Paper No. 131
Active Learning Improves Financial Education
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We conduct a randomized field experiment to study the effects of two financial education interventions offered to small-scale retailers in Uganda. The treatments contrast "active learning" with "traditional lecturing" within standardized lesson-plans. We find that active learning has a positive and economically meaningful impact on savings and investment outcomes, in contrast to insignificant impacts of lecturing. These results are not conditional on prior education or financial literacy. Tentative evidence suggests that only active learning stimulates several cognitive and non-cognitive mechanisms; moreover, a social mechanism may be at play as treated individuals join social groups discussing financial matters.
Keywords:
financial behavior; financial literacy; active learning; lecturing; training method; field experiment;
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Discussion Paper No. 130
Giving Once, Giving Twice: A Two-Period Field Experiment on Intertemporal Crowding in Charitable Giving
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We study intertemporal crowding between two fundraising campaigns for the same charitable organization by manipulating donors' beliefs about the likelihood of future campaigns in two subsequent field experiments. The data shows that initial giving is decreasing in the likelihood of a future campaign while subsequent giving increases in initial giving. While this refutes the predictions of a simple expected utility model, the pattern is in line with a model that allows for (anticipated or unanticipated) habit formation provided that donations in the two periods are substitutes.
Keywords:
charitable giving; field experiments; intertemporal crowding;
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Discussion Paper No. 129
Mean-Field Leader-Follower Games with Terminal State Constraint
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We analyze linear McKean-Vlasov forward-backward SDEs arising in leader-follower games with mean-field type control and terminal state constraints on the state process. We establish an existence and uniqueness of solutions result for such systems in time-weighted spaces as well as a convergence result of the solutions with respect to certain perturbations of the drivers of both the forward and the backward component. The general results are used to solve a novel single-player model of portfolio liquidation under market impact with expectations feedback as well as a novel Stackelberg game of optimal portfolio liquidation with asymmetrically informed players.
Keywords:
mean-field control; stackelberg game; mean-field game with a major player; portfolio liquidation;
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Discussion Paper No. 128
Obstacles to Efficient Allocations of Public Education Spending
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Economic research suggests that investments in early education are generally more successful than investments at later ages. This paper presents a representative survey experiment on education spending in Germany, which exhibits low relative public spending on early education. Results are consistent with a model of misconceptions: informing randomly selected respondents about benefits of early education spending shifts majority support for public spending increases from later education levels to spending on early and primary education. Effects of information provision persist over a two-week period in a follow-up survey. By contrast, results do not suggest self-interested groups inefficiently allocate public education spending.
Keywords:
misconceptions; public spending; education spending; information; survey experiment;
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Discussion Paper No. 127
Behavioral Characterizations of Naivete for Time-Inconsistent Preferences
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We propose nonparametric definitions of absolute and comparative naivete. These definitions leverage ex-ante choice of menu to identify predictions of future behavior and ex-post (random) choices from menus to identify actual behavior. The main advantage of our definitions is their independence from any assumed functional form for the utility function representing behavior. An individual is sophisticated if she is indifferent ex ante between retaining the option to choose from a menu ex post or committing to her actual distribution of choices from that menu. She is naive if she prefers the flexibility in the menu, reflecting a mistaken belief that she will act more virtuously than she actually will. We propose two definitions of comparative naivete and explore the restrictions implied by our definitions for several prominent models of time inconsistency.
Keywords:
naive; sophisticated; time inconsistent; comparative statics;
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Discussion Paper No. 126
A Proposed Data Set for Analyzing the Labor Market Trajectories of East Germans Around Reunification
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Data from German social security notifications and internal procedures of the Federal Employment Agency are an important source for analyzing labor market trajectories. However, for East Germans these data are only fully available from 1992 onwards. As a consequence of German reunification, by 1992 significant fractions of East Germans had already lost their jobs, had changed their occupations and industries, and had moved to West Germany. We partially close the gap in the data by linking the "Integrated Employment Biographies" - that start in 1992 for East Germany - with the GDR's "Data Fund of Societal Work Power" from 1989. The new data set permits the analysis of phenomena such as unemployment, job mobility, and regional mobility. It can also be used to refine the existing knowledge of the individual-level labor market consequences of German reunification. Our long-term goal is to make the new data set available to the research community via the Research Data Center of the Federal Employment Agency.
Keywords:
east germany; german reunification; labor market trajectories; administrative data; record linkage;
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Discussion Paper No. 125
Dissecting Between-Plant and Within-Plant Wage Dispersion - Evidence from Germany
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Using rich linked employer-employee data for (West) Germany between 1996 and 2014, we analyze the most important drivers of the recent rise in German wage dispersion and pin down the relative contribution of plant and worker characteristics. Moreover, we separately investigate the drivers of between-plant and within-plant wage dispersion. We also analyze the sources of the recent slowdown in German wage inequality and compare the results for West Germany to the ones for East Germany. We disentangle the relative contribution of each single variable to the rise in wage dispersion using recentered influence function (RIF) regressions. The most important drivers of wage dispersion are industry effects and the bargaining regime. The former predominantly works through the wage structure effect while, in the latter case, both the decline in collective bargaining coverage and the strong increase in wage dispersion within the group of covered plants have played a substantial role. While education has been another factor contributing to both between-plant and within-plant wage inequality, other candidate factors such as plant size, the exporting status, plant technology, and investment intensity are all of little if any direct quantitative importance for the increase in wage dispersion.
Keywords:
wage inequality; decomposition; rif-regression; linked employer-employee data;
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Discussion Paper No. 124
It's not my Fault! Self-Confidence and Experimentation
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We study the inference and experimentation problem of an agent in a situation where the outcomes depend on the individual's intrinsic ability and on an external variable. We analyze the mistakes made by decision-makers who hold inaccurate prior beliefs about their ability. Overconfident individuals take too much credit for their successes and excessively blame external factors if they fail. They are too easily dissatisfied with their environment, which leads them to experiment in variable environments and revise their self-confidence over time. In contrast, underconfident decision-makers might be trapped in low-quality environments and incur perpetual utility losses.
Keywords:
overconfidence; attribution bias; experimentation; learning;
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