Discussion Paper No. 45
November 3, 2021
Mechanism Design with Partially Verifiable Information
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In mechanism design with (partially) verifiable information, the revelation principle holds if allocations are modelled as the Cartesian product of outcomes and verifiable information, giving rise to evidence-contingent mechanisms. Consequently, incentive constraints characterize the implementable set. The revelation principle does not hold when an allocation is modelled as only an outcome so that mechanisms are non-contingent. Yet, any outcome implementable by an evidence-contingent mechanism is implementable by a non-contingent mechanism, provided it can both extend and restrict reporting information. A type-independent bad outcome implies the latter property.
Keywords:
revelation principle; mechanism design; verifiable information;
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Discussion Paper No. 44
Politically Induced Regulatory Risk and Independent Regulatory Agencies
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Uncertainty in election outcomes generates politically induced regulatory risk. For monopoly regulation, political parties’ risk attitudes towards such risk depend on a fluctuation effect that hurts both parties and an output–expansion effect that benefits at least one party. Irrespective of the parties’ risk attitudes, political parties have incentives to negotiate away regulatory risk by pre-electoral bargaining. Pareto-efficient bargaining outcomes fully eliminate regulatory risk and are attainable through institutionalizing independent regulatory agencies with a specific objective. Key aspects of the regulatory overhaul of the US Postal system in 1970 are argued to be consistent with these results.
Keywords:
regulation; independent regulatory agency; regulatory risk; electoral uncertainty;
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Discussion Paper No. 42
Teamwork as a Self-Disciplining Device
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We show that team formation can serve as an implicit commitment device to overcome problems of self-control. If individuals have present-biased pref- erences, effort that is costly today but rewarded at some later point in time is too low from the perspective of an individual’s long-run self. If agents in- teract repeatedly and can monitor each other, a relational contract involving teamwork can help to improve performance. The mutual promise to work harder is credible because the team breaks up after an agent has not kept this promise – which leads to individual underproduction in the future and hence a reduction of future utility.
Keywords:
self-control problems; teamwork; relational contracts;
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Discussion Paper No. 41
The Commitment Role of Equity Financing
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Existing theories of a firm’s optimal capital structure seem to fail in explaining why many healthy and profitable firms rely heavily on equity financing, even though benefits associated with debt (like tax shields) appear to be high and the bankruptcy risk low. This holds in particular for firms that show a strong commitment towards their workforce and are popular among employees. We demonstrate that such financing behavior may be driven by implicit arrangements made between a firm and its managers/employees. Equity financing generally strengthens a firm’s credibility to honor implicit promises. Debt, however, has an adverse effect on the enforceability of these arrangements because too much debt increases the firm’s reneging temptation, as some of the negative consequences of breaking implicit promises can be shifted to creditors. Our analysis provides an explanation for why some firms only use little debt financing. Predictions made by our theory are in line with a number of empirical results, which seem to stay in contrast to existing theories on capital structure.
Keywords:
relational contracts; capital structure; corporate finance; debt financing;
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Discussion Paper No. 40
Gender Differences in Willingness to Compete: The Role of Public Observability
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A recent literature emphasizes the importance of the gender gap in willingness to compete as a partial explanation for gender differences in labor market outcomes. However, whereas experiments investigating willingness to compete typically do so in anonymous environments, real world competitions often have a more public nature, which introduces potential social image concerns. If such image concerns are important, we should expect public observability to further exacerbate the gender gap. We test this prediction using a laboratory experiment that varies whether the decision to compete, and its outcome, is publicly observable. Across four different treatments, however, all treatment effects are close to zero. We conclude that the public observability of decisions and outcomes does not exert a significant impact on male or female willingness to compete, indicating that the role of social image concerns related to competitive decisions may be limited.
Keywords:
gender differences; competitiveness; social image; experiment;
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Discussion Paper No. 39
Trading under Market Impact
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We use a model with agency frictions to analyze the structure of a dealer market that faces competition from a crossing network. Traders are privately informed about their types (e.g. their portfolios), which is something the dealer must take into account when engaging his counterparties. Instead of participating in the dealer market, the traders may take their business to a crossing network. We show that the presence of such a network results in more trader types being serviced by the dealer and that, under certain conditions, the book's spread shrinks. We allow for the pricing on the dealer market to determine the structure of the crossing network and show that the same conditions that lead to a reduction of the spread imply the existence of an equilibrium book or crossing network pair.
Keywords:
asymmetric information; crossing networks; dealer markets; non-linear pricing; principal-agent games;
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Discussion Paper No. 38
Time Preferences and Bargaining
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This paper presents an analysis of general time preferences in the canonical Rubinstein (1982) model of bargaining, allowing for arbitrarily history-dependent strategies. I derive a simple sufficient structure for optimal punishments and thereby fully characterize (i) the set of equilibrium outcomes for any given preference profile, and (ii) the set of preference profiles for which equilibrium is unique. Based on this characterization, I establish that a weak notion of present bias—implied, e.g., by any hyperbolic or quasi-hyperbolic discounting—is sufficient for equilibrium to be unique, stationary and efficient. Conversely, I demonstrate how certain violations of present bias give rise to multiple (non-stationary) equilibria that feature delayed agreement under gradually increasing offers.
Keywords:
time preferences; dynamic inconsistency; alternating offers; bargaining; optimal punishments; delay;
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Discussion Paper No. 37
Does Financial Education Impact Financial Literacy and Financial Behavior, and if so, When?
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In a meta-analysis of 126 impact evaluation studies, we find that financial education significantly impacts financial behavior and, to an even larger extent, financial literacy. These results also hold for the subsample of randomized experiments (RCTs). However, intervention impacts are highly heterogeneous: Financial education is less effective for low- income clients as well as in low and lower-middle income economies. Specific behaviors, such as the handling of debt, are more difficult to influence and mandatory financial education tentatively appears to be less effective. Thus, intervention success depends crucially on increasing education intensity and offering financial education at a “teachable moment".
Keywords:
financial education; financial literacy; financial behavior; meta-analysis; meta-regression; impact evaluation;
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Discussion Paper No. 36
Knowing Me, Imagining You: Projection and Overbidding in Auctions
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Overbidding in auctions has been attributed to e.g. risk aversion, loser regret, level-k, and cursedness, relying on varying identifying assumptions. I argue that “type projection” organizes these findings and largely captures observed behavior. Type projection formally models that people tend to believe others have object values similar to their own—a robust psychological phenomenon that naturally applies to auctions. First, I show that type projection generates the main behavioral phenomena observed in auctions, including increased sense of competition (“loser regret”) and broken Bayesian updating (“cursedness”). Second, re-analyzing data from seven experiments, I show that type projection explains the stylized facts of behavior across private and common value auctions. Third, in a structural analysis relaxing the identifying assumptions made in earlier studies, type projection consistently captures behavior best, in-sample and out-of-sample. The results reconcile bidding patterns across conditions and have implications for behavioral and empirical analyses as well as policy.
Keywords:
auctions; overbidding; projection; risk aversion; cursed equilibrium; depth of reasoning;
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Discussion Paper No. 35
Discrete Choice with Presentation Effects
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Experimenters have to make theoretically irrelevant decisions concerning user inter- faces and ordering or labeling of options. Such presentation decisions affect behavior and cause results to appear contradictory across experiments, obstructing utility esti- mation and policy recommendations. The present paper derives a model of choice allowing analysts to control for both presentation effects and stochastic errors in econometric analyses. I test the model in a comprehensive re-analysis of dictator game experiments. Controlling for presentation effects, preference estimates are con- sistent across experiments and predictive out-of-sample, highlighting the fundamen- tal role of presentation for choice, and this notwithstanding the possibility of reliable estimation and prediction.
Keywords:
discrete choice; presentation effects; utility estimation; counterfactual predictions; laboratory experiment;
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