Discussion Paper No. 33
November 3, 2021
Motivated Health Risk Denial and Preventative Health Care Investments
Author:
Abstract:
People deny health risks, invest too little in disease prevention, and are highly sensitive to the price of preventative health care, especially in developing countries. Moreover, private sector R&D spending on developing-country diseases is almost non-existent. To explain these empirical observations, I propose a model of motivated belief formation, in which an agent’s decision to engage in health risk denial balances the psychological benefits of reduced anxiety with the physical cost of underprevention. I use the model to study firms’ price-setting behaviour and incentive to innovate. I also show that tax-funded prevention subsidies are welfare enhancing.
Keywords:
health risk denial; optimal expectations; motivated beliefs; disease prevention; self-protection;
JEL-Classification:
Download:
Discussion Paper No. 34
Bonus Taxes and International Competition for Bank Managers
Author:
Abstract:
We analyze the competition in bonus taxation when banks compensate their managers by means of fixed and incentive pay and bankers are internationally mobile. Banks choose bonus payments that induce excessive managerial risk-taking to maximize their private benefits of existing government bailout guarantees. In this setting the international competition in bonus taxes may feature a ‘race to the bottom’ or a ‘race to the top’, depending on whether bankers are a source of net positive tax revenue or inflict net fiscal losses on taxpayers as a result of incentive pay. A ‘race to the top’ becomes more likely when governments’ impose only lax capital requirements on banks, whereas a ‘race to the bottom’ is more likely when bank losses are partly collectivized in a banking union.
Keywords:
bonus taxes; international tax competition; migration;
JEL-Classification:
Download:
Discussion Paper No. 32
Deterministic Mechanisms, the Revelation Principle, and Ex-Post Constraints
Author:
Abstract:
This note establishes a revelation principle in terms of payoff for deterministic mech- anisms under ex-post constraints: the maximal payoff implementable by a feasible deterministic mechanism can also be implemented by a feasible deterministic direct mechanism.
Keywords:
mechanism design; revelation principle; ex-post contraints;
JEL-Classification:
Download:
Discussion Paper No. 31
Competition and Incentives
Author:
Abstract:
We report on two experiments that identify non-monetary incentive effects of competition. As the number of competitors increases, monetary incentives to engage in cost reduction tend to decrease. We test the hypothesis that there are non-monetary incentive effects of competition going in the opposite direction. In the experiments we change the number of competitors exogenously keeping the monetary incentives to spend effort constant. The first experiment shows that subjects spend significantly more effort in duopolistic and oligopolistic markets than in a monopoly. The second experiment focuses on so- cial comparisons as one potential mechanism for this effect. It shows that competition turns the effort decisions of competing managers into strategic complements.
Keywords:
incentive effects of competition; behavioral industrial organization;
JEL-Classification:
Download:
Discussion Paper No. 30
The Capital Gains Tax: A Curse but Also a Blessing for Venture Capital Investment
Author:
Abstract:
Our study analyzes the effect of the capital gains tax on the individual investment decisions of venture capitalists. By doing so, we are able to study the decisions for a sample of 76,852 funding rounds in 32 countries from 2000 to 2012. Our results support the predictions of the theoretical model that higher capital gains tax rates are associated with fewer start- ups financed and a lower probability of receiving follow-up funding. However, the results concerning the effect on the probability of success of start-ups show that a higher tax burden is associated with a higher probability of eventual start-up success.
Keywords:
venture capital; capital gains tax; selection effect; follow-up funding; innovation;
JEL-Classification:
Download:
Discussion Paper No. 29
The Organization of Knowledge in Multinational Firms
Author:
Abstract:
This paper provides the first in-depth study of the organization of knowledge in multi- national firms. In the theory, knowledge is a costly input for firms that they can acquire at their headquarters or their production plants. Communication costs impede the ac- cess of the plants to headquarter knowledge. The model shows that multinational firms systematically acquire more knowledge at both their foreign and domestic plants than non-multinationals if their foreign plants face higher communication costs with head- quarters than their domestic plants. This theoretical prediction helps understand why multinational firms pay higher wages to workers than non-multinational firms, and why their sales decrease across space. The empirical analyses show that higher communication costs indeed decrease multinational firms’ foreign sales. Consistent with model-specific comparative statics, the decrease is stronger in sectors with less predictable production processes. Novel data on corporate transferees allow shedding light on one tool of multi- national firms’ organization of knowledge.
Keywords:
multinational firm; knowledge hierarchy; organization; geography of FDI; multinational wage premium; corporate transferees;
JEL-Classification:
Download:
Discussion Paper No. 28
Order Exposure and Liquidity Coordination: Does Hidden Liquidity Harm Price Efficiency?
Author:
Abstract:
We show that the excessive use of hidden orders causes artificial price pressures and abnormal asset returns. Using a simple game-theoretical setting, we demonstrate that this effect naturally arises from mis-coordination in trading schedules between traders, when suppliers of liquidity do not sufficiently disclose their trade intentions. As a result, hid- den liquidity can increase trading costs and induce excess price fluctuations unrelated to information. Using NASDAQ order book data, we find strong empirical support and illus- trate that hidden liquidity is higher if bid-ask spreads are smaller and relative tick sizes are higher.
Keywords:
hidden liquidity; trade synchronization; trading frictions; counterparty attraction; limit order book;
JEL-Classification:
Download:
Discussion Paper No. 27
Ex-Post Optimal Knapsack Procurement
Author:
Abstract:
We consider a budget-constrained mechanism designer who selects an optimal set of projects to maximize her utility. Projects may differ in their value for the designer, and their cost is private information. In this allocation problem, the quantity of procured projects is endogenously determined by the mechanism. The designer faces ex-post constraints: The participation and budget constraints must hold for each possible outcome, while the mechanism must be strategy proof. We identify settings in which the class of optimal mechanisms has a deferred acceptance auction representation which allows an implementation with a descending-clock auction. Only in the case of symmetric projects do price clocks descend synchronously such that the cheapest projects are implemented. The case in which values or costs are asymmetrically distributed features a novel tradeoff between quantity and quality. The reason is that guaranteeing allocation to the most favorable projects under strategy proofness comes at the cost of a diminished expected number of conducted projects.
Keywords:
mechanism design; knapsack; budget; procurement; auction; deferred acceptance auctions;
JEL-Classification:
Download:
Discussion Paper No. 26
Can a Bonus Overcome Moral Hazard? An Experiment on Voluntary Payments, Competition, and Reputation in Markets for Expert Services
Author:
Abstract:
Interactions between players with private information and opposed interests are often prone to bad advice and inefficient outcomes, e.g. markets for financial or health care services. In a deception game we investigate experimentally which factors could improve advice quality. Besides advisor competition and identifiability we add the possibility for clients to make a voluntary payment, a bonus, after observing advice quality. We observe a positive effect on the rate of truthful advice when the bonus creates multiple opportunities to reciprocate, that is, when the bonus is combined with identifiability (leading to several client-advisor interactions over the course of the game) or competition (allowing one advisor to have several clients who may reciprocate within one period).
Keywords:
asymmetric information; principal-agent; expert services; deception game; sender-receiver game; reciprocity; reputation; experiments; voluntary payment; competition;
JEL-Classification:
Download:
Discussion Paper No. 20
The Employment Effects of Countercyclical Infrastructure Investments
Author:
Abstract:
We estimate the causal impact of a sizable German infrastructure investment program on employment at the county level. The program focused on improving the energy efficiency of school buildings, making it possible to use the number of schools as an instrument for investments. We find that the program was effective, creating one job for one year for each €25’000 of investments. The employment gains reached their peak after nine months and dropped to zero quickly after the program’s completion. The reductions in unemployment amounted to two-thirds of the job creation, and employment grew predominately in the construction and non-tradable industries.
Keywords:
infrastructure investments; job creation; employment dynamics; countercyclical fiscal policy;
JEL-Classification: