Discussion Paper No. 49
November 3, 2021
The Timing of Choice-Enhancing Policies
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Abstract:
Recent studies investigate policies motivating consumers to make an active choice as a way to protect unsophisticated consumers. We analyze the optimal timing of such choice-enhancing policies when a firm can strategically react to them. In our model, a firm provides a contract with automatic renewal. We show that a policy intending to enhance consumers’ choices when they choose a contract can be detrimental to welfare. By contrast, a choice-enhancing policy at the time of contract renewal increases welfare more robustly. Our results highlight that policies should be targeted in timing to the actual choice inefficiency.
Keywords:
active choice; automatic renewal; automatic enrollment; procrastination; consumer naivete; present bias;
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Discussion Paper No. 48
English versus Vickrey Auctions with Loss Averse Bidders
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Evidence suggests that people evaluate outcomes relative to expectations. I analyze this expectation-based loss aversion [Ko ̋szegi and Rabin (2006, 2009)] in the context of dynamic and static auctions, where the reference point is given by the (endogenous) equilibrium outcome. If agents update their reference point during the auction, the arrival of information crucially affects equilibrium behavior. Consequently, I show that—even with independent private values—the Vickrey auction yields strictly higher revenue than the En- glish auction, violating the well known revenue equivalence. Thus, dynamic loss aversion offers a novel explanation for empirically observed differences between these auction formats.
Keywords:
vickrey auction; english auction; expectation-based loss aversion; revenue equivalence; dynamic loss aversion; personal equilibrium;
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Discussion Paper No. 10
Pay What You Want as a Pricing Model for Open Access Publishing?
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We analyze “Pay What You Want” as a business model for Open Access publishing by discussing motives leading authors to make voluntary contributions, potential benefits for publishers and present results from a field experiment at one publisher. Data from the field experiment indicate authors’ willingness to voluntarily contribute.
Keywords:
gold open access; article processing charges; costumer-driven pricing; voluntary contributions; field experiment;
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Discussion Paper No. 47
Procurement with Unforeseen Contingencies
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The procurement of complex projects is often plagued by large cost overruns. One important reason for these additional costs are flaws in the initial design. If the project is procured with a price-only auction, sellers who spotted some of the flaws have no incentive to reveal them early. Each seller prefers to conceal his information until he is awarded the contract and then renegotiate when he is in a bilateral monopoly position with the buyer. We show that this gives rise to three inefficiencies: inefficient renegotiation, inefficient production and ineffi- cient design. We derive the welfare optimal direct mechanism that implements the efficient allocation at the lowest possible cost to the buyer. The direct mechanism, however, imposes strong assumptions on the buyer’s prior knowledge of possible flaws and their payoff consequences. Therefore, we also propose an indirect me- chanism that implements the same allocation but does not require any such prior knowledge. The optimal direct and indirect mechanisms separate the improvement of the design and the selection of the seller who produces the good.
Keywords:
procurement; renegotiation; auctions; design flaws; adaption costs; behavioral contract theory;
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Discussion Paper No. 43
Additional Career Assistance and Educational Outcomes for Students in Lower Track Secondary Schools
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Based on local policy variation, this paper estimates the causal effect of additional career assistance on educational outcomes for students in Lower Track Secondary Schools in Germany. We find mostly insignificant effects of the treatment on average outcomes, which mask quite heterogeneous effects. For those students, who are taking extra coursework to continue education, the grade point average is unaffected and the likelihood of completing a Middle Track Secondary School degree falls. In contrast, educational outcomes improve for students who do not take extra coursework. Hence, the treatment causes a reversal of educational plans after graduation.
Keywords:
lower track secondary schools; career guidance; educational upgrading;
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Discussion Paper No. 46
Measuring the Spillovers of Venture Capital
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We provide the first measurement of knowledge spillovers from venture capital-financed companies onto the patenting activities of other companies. On average, these spillovers are nine times larger than those generated by the R&D investment of established compa- nies. Spillover effects are larger in complex product industries than in discrete product industries. Start-ups with experienced inventors holding a patent at the time of receiv- ing the first round of investment produce the largest spillovers, indicating that venture capital fosters the commercialization of technologies. Methodologically, we contribute by developing a novel definition of the spillover pool, combining citation-based and technological proximity-based approaches.
Keywords:
venture capital; spillovers; innovation;
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Discussion Paper No. 45
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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