Discussion Paper No. 98
November 4, 2021
Persuasion Against Self-Control Problems
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Abstract:
I derive a social planner's optimal information design in an environment with quasi-hyperbolic discounting consumers without commitment. Consumption induces instantaneous utility, but unknown delayed cost. Consumers may or may not acquire additional costless information on the cost parameter. The planner's optimal signal can be interpreted as an incentive compatible consumption recommendation whenever the cost parameter is below some cut-off. Welfare strictly exceeds the one under full information. I characterize distributional conditions under which welfare attains first best.
Keywords:
bayesian persuasion; present bias; hyperbolic discounting; rational inattention;
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Discussion Paper No. 97
How Do Sellers Benefit From Buy-It-Now Prices in Ebay Auctions? - an Experiment Investigation
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In Buy-It-Now (BIN, hereafter) auctions, sellers can make a "take-it-or-leave-it" price offer (BIN price) prior to an auction. We analyse experimentally how eBay sellers set BIN prices and whether they benefit from offering them. Using the real eBay environment in the laboratory, we find that the eBay auction format supports deviations from truthful bidding leading to auction prices substantially below those expected in second-price auctions. Our results reveal that the observed price deviations are not an artefact due to the existence of the BIN price, rather a consequence of the specific features of the eBay-auction format - a mixture between sealed-bid and open second-price auction with a fixed end-time. Moreover, we find that information available on eBay can be used as indicator for the price deviation and that sellers respond strategically to this information. Seller risk aversion does not affect BIN prices and more experienced sellers ask for higher BIN prices. The introduction of BIN prices to eBay auctions has an enhancing effect: the eBay BIN auction is more efficient and generates significantly higher revenue compared to a standard eBay auction without a BIN price.
Keywords:
experience; online markets; ebay; bin price; private value; experiment;
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Discussion Paper No. 96
God Does Not Play Dice, but Do We?
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When do we cooperate and why? This question concerns one of the most persistent divides between "theory and practice", between predictions from game theory and results from experimental studies. For about 15 years, theoretical analyses predict completely-mixed "behavior" strategies, i.e. strategic randomization rendering "when" and "why" questions largely moot, while experimental analyses seem to consistently identify pure strategies, suggesting long-run interactions are deterministic. Reanalyzing 145,000 decisions from infinitely repeated prisoner's dilemma experiments, and using data-mining techniques giving pure strategies the best possible chance, we conclude that subjects play semi-grim behavior strategies similar to those predicted by theory.
Keywords:
C72; C73; C92; D12;
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Discussion Paper No.
Does Financial Literacy Improve Financial Inclusion? Cross Country Evidence
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While financial inclusion is typically addressed by improving the financial infrastructure, we show that a higher degree of financial literacy also has a clear beneficial effect. We study this effect at the cross-country level, which allows us to consider institutional variation. Regarding "access to finance", financial infrastructure and financial literacy are mainly substitutes. However, regarding the "use of financial services", the effect of higher financial literacy strengthens the effect of more financial depth. The causal interpretation of these results is supported by IV-regressions. Moreover, the positive impact of financial literacy holds across income levels and several subgroups within countries.
Keywords:
financial inclusion; financial literacy; financial institutions; financial development;
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Discussion Paper No. 94
Of Restarts and Shutdowns: Dynamic Contracts with Unequal Discounting
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A large supplier (principal) contracts with a small firm (agent) to repeatedly provide working capital in return for payments. The total factor productivity of the agent is private and follows a Markov process. Moreover, the agent is less patient than the principal. We solve for the optimal contract in this environment. Distortions are pervasive and efficiency unattainable. The optimal contract is characterized by two key properties: restart and shutdown, which capture various aspects of contracts offered in the marketplace. The optimal distortions are completely pinned down by the number of low TFP shocks since the last high shock. Once a high shock arrives, the contract loses memory and repeats the same cycle, we call this endogenous resetting feature restart. If ex ante agency frictions are high, the principal commits to not serving the low type, we call this shutdown. The principal prefers a patient agent if the interim agency friction, as measured by the persistence of the private information is large, and she prefers an impatient agent if it is small. Finally, when global incentive constraints bind, we (i) provide the complete recursive solution, and (ii) characterize a simpler incentive compatible contract that is approximately optimal.
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Discussion Paper No. 93
Deterministic versus Stochastic Contracts in a Dynamic Principal-Agent Model
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I show that deterministic dynamic contracts between a principal and an agent are always at least as profitable to the principal as stochastic ones, if the so-called first-order approach in dynamic mechanism design is satisfied. The principal commits, while the agent's type evolution follows a Markov process. My results demonstrate, even when allowing for potential correlation of stochastic contracts across periods that the usual restriction in the literature to deterministic contracts is admissible, as long as the first-order approach is valid.
Keywords:
contract theory; principal-agent theory; dynamic contracting;
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Discussion Paper No. 92
Efficient Implementation with Interdependent Valuations and Maxmin Agents
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We consider a single object allocation problem with multidimensional signals and interdependent valuations. When agents' signals are statistically independent, Jehiel and Moldovanu [Efficient design with interdependent valuations, Econometrica, 69(5):1237-1259, 2001] show that efficient and Bayesian incentive compatible mechanisms generally do not exist. In this paper, we extend the standard model to accommodate maxmin agents and obtain necessary as well as sufficient conditions under which efficient allocations can be implemented. In particular, we derive a condition that quantifies the amount of ambiguity necessary for efficient implementation. We further show that under some natural assumptions on the preferences, this necessary amount of ambiguity becomes sufficient. Finally, we provide a definition of informational size such that given any nontrivial amount of ambiguity, efficient allocations can be implemented if agents are sufficiently informationally small.
Keywords:
efficient implementation; ambiguity aversion; multidimensional signal; interdependent valuation;
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Discussion Paper No. 91
Does Ignorance of Economic Returns and Costs Explain the Educational Aspiration Gap? Evidence from Representative Survey Experiments
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The gap in university enrollment by parental education is large and persistent in many countries. In our representative survey, 74 percent of German university graduates, but only 36 percent of those without a university degree favor a university education for their children. The latter are more likely to underestimate returns and overestimate costs of university. Experimental provision of return and cost information significantly increases educational aspirations. However, it does not close the aspiration gap as university graduates respond even more strongly to the information treatment. Persistent effects in a follow-up survey indicate that participants indeed process and remember the information. Differences in economic preference parameters also cannot account for the educational aspiration gap. Our results cast doubt that ignorance of economic returns and costs explains educational inequality in Germany.
Keywords:
inequality; higher education; university; aspiration; information; returns to education; survey experiment;
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Discussion Paper No. 90
Monetary Policy Obeying the Taylor Principle Turn Prices Into Strategic Substitutes
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Monetary policy affects the degree of strategic complementarity in firms pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications.
Keywords:
monopolistic competition; monetary policy rule; pricing decisions; strategic complementarity; strategic substitutability;
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Discussion Paper No. 89
Welfare-Base Altruism
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Why do people give when asked, but prefer not to be asked, and even take when possible? We show that standard behavioral axioms including separability, narrow bracketing, and scaling invariance predict these seemingly inconsistent observations. Specifically, these axioms imply that interdependence of preferences ("altruism") results from concerns for the welfare of others, as opposed to their mere payoffs, where individual welfares are captured by the reference-dependent value functions known from prospect theory. The resulting preferences are non-convex, which captures giving, sorting, and taking directly. Re-analyzing choices of 981 subjects in 83 treatments covering many variants of dictator games, we find that individual reference points are distributed consistently across studies, allowing us to classify subjects as either non-givers, altruistic givers, or social pressure givers and use welfare-based altruism to reliably predict giving, sorting, and taking across experiments.
Keywords:
social preferences; axiomatic foundation; robustness; giving; charitable donations;
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