Discussion Paper No. 93
November 4, 2021
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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Discussion Paper No. 88
Individual Differences and Contribution Sequences in Threshold Public Goods
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Following the notion that organizations often face public good dilemmas when collective action is needed, we use a real-time provision-point mechanism to experimentally explore the process of achieving cooperative equilibria. Specifically, besides exploring group outcomes, we identify individual antecedents for the timing of the contribution to the public good. In addition, we study the role of different situational factors for sustaining high rates of cooperation: information about others' actions and the number of individuals necessary for public good provision. We find that contribution and implementation rates are relatively high, with only a moderate decline over time, and that social value orientation as well as several personality traits help to explain the observed contribution sequences.
Keywords:
provision-point mechanism; real-time protocol; personality traits;
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Discussion Paper No. 87
The Influence of Overconfidence and Competition Neglect on Entry into Competition
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I investigate whether two mechanisms leading to biased beliefs about success, overconfidence and competition neglect, influence decisions to enter competitive environments. I use a controlled laboratory setting that allows to elicit belief distributions related to absolute as well as relative overconfidence to study it comprehensively and introduce two treatment variations: First, some participants receive detailed performance feedback addressing absolute and relative overconfidence before making their decision. Second, I vary whether the competition group consists of all potential competitors or only of individuals who also chose to compete. I find that there is systematic heterogeneity in perception biases. In addition, both mechanisms influence individuals' decisions. However, choices are closely tied to previous performance and assessments, and there are no significant gender differences.
Keywords:
competition neglect; competitive behavior; feedback; overconfidence;
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Discussion Paper No. 86
Online Fundraising, Self-Image, and the Long-Term Impact of Ask Avoidance
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We provide the first field evidence for the role of pure self-image, independent of social image, in charitable giving. In an online fundraising campaign for a social youth project run on an opera ticket booking platform we document how individuals engage in self-deception to preserve their self-image. In addition, we provide evidence on stark adverse long-run effects of the fundraising campaign for ticket sales. "Avoiding the ask," opera customers who faced more insistent online fundraising buy fewer tickets in the following season. Our results suggest that fundraising management should not decide in isolation about their campaigns, even if very successful. Rather broader operational concerns have to be considered.
Keywords:
online fundraising; quasi-experiment; self-image;
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Discussion Paper No. 85
A Model of Ideological Thinking
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This paper develops a theory in which heterogeneity in political preferences produces a partisan disagreement about objective facts. A political decision involving both idiosyncratic preferences and scientific knowledge is considered. Voters form motivated beliefs in order to improve their subjective anticipation of the future political outcome. In equilibrium, they tend to deny the scientific arguments advocating the political orientations that run counter to their interests. Collective denial is the strongest in societies where contingent policy is the least likely to be implemented, either because of voters' intrinsic preferences or because of rigidities in the political process. The theory predicts that providing mixed evidence produces a temporary polarization of beliefs, but that disclosing unequivocal information eliminates the disagreement.
Keywords:
beliefs; ideology; cognition; disagreement; polarization;
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Discussion Paper No. 84
Risk, Time Pressure, and Selection Effects
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Time pressure is a central aspect of economic decision making nowadays. It is therefore natural to ask how time pressure affects decisions, and how to detect individual heterogeneity in the ability to successfully cope with time pressure. In the context of risky decisions, we ask whether a person's performance under time pressure can be predicted by measurable behavior and traits, and whether such measurement itself may be affected by selection issues. We find that the ability to cope with time pressure varies significantly across decision makers, leading to selected subgroups that differ in terms of their observed behaviors and personal traits. Moreover, measures of cognitive ability and intellectual efficiency jointly predict individuals' decision quality and ability to keep their decision strategy under time pressure.
Keywords:
risk; cognitive ability; selection; time pressure;
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