Discussion Paper No. 463
November 24, 2023
Robust Decision-Making under Risk and Ambiguity
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Abstract:
Economists often estimate economic models on data and use the point estimates as a stand-in for the truth when studying the model’s implications for optimal decision-making. This practice ignores model ambiguity, exposes the decision problem to misspecification, and ultimately leads to post-decision disappointment. Using statistical decision theory, we develop a framework to explore, evaluate, and optimize robust decision rules that explicitly account for estimation uncertainty. We show how to operationalize our analysis by studying robust decisions in a stochastic dynamic investment model in which a decision-maker directly accounts for uncertainty in the model’s transition dynamics.
Keywords:
decision-making under uncertainty; robust Markov decision process;
JEL-Classification:
D81; C44; D25;
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Discussion Paper No. 462
Industrialization, Returns, Inequality
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How does revolutionary technological change impact wealth inequality? We turn to the mother of all technological shocks–the Industrial Revolution–and analyze its role for wealth concentration both empirically and theoretically. Based on a novel dataset on wealth shares at the level of Prussian counties, we provide causal evidence on the positive effect of industrialization on the top percentile's wealth share and the inequality among top fortunes. We show that this relationship between industrialization, wealth concentration, and tail fattening is consistent with both cross-country data on national wealth distributions and with a new individual-level dataset of Prussian millionaires. We disentangle the mechanisms underlying the observed wealth concentration and tail fattening by introducing a dynamic two-sector structure into an overlapping generations model with heterogeneous returns to capital. In particular, we study the role of sector-specific scale dependence, i.e. the positive correlation of rates of return and wealth in industry, and dynastic type dependence in returns, i.e., the gradual one-directional transition of wealth-holders from the low-return traditional to the high-return industrial sector. The simulations suggest that the combination of these two features explains about half of the total increase of the top-1% share, while the other half resulted from the general increase and higher dispersion of returns induced by the emerging industrial sector.
Keywords:
rates of return; wealth inequality; industrialization; technology; simulation;
JEL-Classification:
D31; E21; N13; O14;
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Discussion Paper No. 461
Loss Aversion
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Abstract:
Loss aversion postulates that people prefer avoiding losses over acquiring gains of equal size. It is a central part of prospect theory and, according to Daniel Kahneman, “the most significant contribution of psychology to behavioral economics” (Kahneman, 2011, p. 300). It has powerful implications for decision theory and has been fruitfully applied in many subfields of economics. However, because the reference point is often not well defined and loss aversion interacts with other behavioral biases, there is some controversy about the concept.
Keywords:
loss aversion; reference point; prospect theory; endowment effect; decision theory; risk;
JEL-Classification:
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Discussion Paper No. 460
November 21, 2023
Cournot Meets Bayes-Nash: A Discontinuity in Behavior in Finitely Repeated Duopoly Games
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We conduct a series of Cournot duopoly market experiments with a high number of repetitions and fixed matching. Our treatments include markets with (a) complete cost symmetry and complete information, (b) slight cost asymmetry and complete information, and (c) varying cost asymmetries and incomplete information. For the case of complete cost symmetry and complete information, our data confirm the well-known result that duopoly players achieve, on average, partial collusion. However, as soon as any level of cost asymmetry or incomplete information is introduced, observed average individual quantities are remarkably close to the static Bayes-Nash equilibrium predictions.
Keywords:
Cournot; Bayesian game; Bayes-Nash equilibrium; repeated games; collusion; cooperation; experimental economics;
JEL-Classification:
D43; L13; C72; C92;
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Discussion Paper No. 459
Revisiting the Trade-Creating Effects of Non-Tariff Barriers
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Modern regional trade agreements focus on promoting bilateral exchange mostly by lowering non-tariff barriers to trade. But do existing regional trade agreements actually deliver what they promise? This paper argues that existing results in the literature are upward biased because of measurement error in a crucial control variable: tariff rates. Using a novel data set of high-quality tariff information, the paper shows that, on average, non-tariff barriers reductions in deep regional trade agreements boost services trade but not goods trade. Estimating separate non-tariff barrier effects for each regional trade agreement reveals strong heterogeneity: only 23 percent of all regional trade agreements seem to lower non-tariff barriers. For most regional trade agreements, we fail to find any significant effect, while 9 percent appear to reduce trade, possibly because a more balanced regulation evens out comparative advantages. The trade agreements that foster trade the most include non-discriminatory trade policy changes.
Keywords:
RTAs; non-tariff barriers; trade policy; tariffs;
JEL-Classification:
F13; F14;
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Discussion Paper No. 458
Missing Tariffs
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Many studies use tariffs to measure changes in trade policy. This paper shows that standard sources for tariffs suffer from substantial measurement error due to misreporting and the resulting false imputation: Countries fail to report tariffs every year and missing data are more prevalent for preferential than for most favored nation (MFN) tariffs. WITS, the main data provider for tariffs, falsely interpolates missing preferential tariffs with MFN tariffs. This practice leads to artificial spikes in bilateral time series data and, hence, induces massive measurement error. I introduce a new global tariff dataset at the six-digit product level for 197 countries and 30 years that combines five different sources for tariffs and proposes a new interpolation algorithm taking the misreporting into account. Lastly, I show using gravity that correcting for the messy data increases the estimates of the trade elasticity by 2.89 times.
Keywords:
tariffs; MFN; preferences; trade elasticity;
JEL-Classification:
F13; F14;
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Discussion Paper No. 457
Promotion Prospects and Within-level Wage Growth: A Decomposition of the Part-time Penalty for Women
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I study the life-cycle pattern of part-time employment and its impact on wage growth in female careers. I show that the part-time wage penalty consists of two essential components: i) a penalty for promotions and ii) a within-career-level wage penalty. Using dynamic structural modeling, I quantify the relative importance of the channels. The penalty for working half a day for two consecutive years in one's early thirties is one Euro per hour. 70% of it is due to slowdowns in experience accumulation within career levels. A part-time spell of four years marks the point at which forgone chances of promotion and within-level wage losses contribute to the wage penalty to an equal degree. Counterfactual simulations demonstrate that financial incentives to increase the time spent working can be well complemented by policies which ensure that experienced young women are promoted early in their careers.
Keywords:
wage growth; female labor supply; part-time employment; promotions;
JEL-Classification:
J21; J21; J24; J31;
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Discussion Paper No. 456
Demand and Supply Side Linkages in Exporting Multiproduct Firms
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Products produced by a multiproduct firm can be linked through demand linkages or supply linkages. On the demand side, changes in the price of one product can affect the demand for a firm's other products through shifts in consumer expenditures. This is commonly referred to as the cannibalization effect. On the supply side, joint inputs can create a dependency of one product's marginal costs on the output of other products. The existence of these linkages is important for how firms respond to shocks and has major implications for several performance measures, such as productivity and markups. This paper provides first empirical evidence for the existence of cannibalization linkages in presence of supply linkages, which is implied evidence for market power.
Keywords:
multiproduct firms; cannibalization effect; demand linkages; supply linkages; anti-dumping tariffs; quality; mark-ups;
JEL-Classification:
D21; D24; F12; F13; F14; L11; L15; L25;
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Discussion Paper No. 455
Measuring Science: Performance Metrics and the Allocation of Talent
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We study how performance metrics affect the allocation of talent. We exploit the introduction of a new measure of scientific performance: citation metrics. For technical reasons, the first citation database only covered citations from certain journals and years. Thus, only a subset of citations became visible, while others remained invisible. We identify the effects of citation metrics by comparing the predictiveness of visible to invisible citations. Citation metrics increased assortative matching between scientists and departments. We also find that highly-cited scientists in lower-ranked departments (“hidden stars”) benefited from citation metrics, while minorities did not. Citation metrics also affected promotion decisions.
Keywords:
performance metrics; allocation of talent; citations; scientists;
JEL-Classification:
J62, O31, J45; O31; J45;
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Discussion Paper No. 454
November 18, 2023
Decomposing Trust
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Trust is an important condition for economic growth and other economic outcomes. Previous studies suggest that the decision to trust is driven by a combination of risk attitudes, distributional preferences, betrayal aversion, and beliefs about the probability of being reciprocated. We compare the results of a binary trust game to the results of a series of control treatments that by design remove the effect of one or more of these components of trust. This allows us to decompose variation in trust behavior into its underlying factors. Our results imply that beliefs are a key driver of trust, and that the additional components only play a role when beliefs about reciprocity are sufficiently optimistic. Our decomposition approach can be applied to other settings where multiple factors that are not mutually independent affect behavior. We discuss its advantages over the more traditional approach of controlling for measures of relevant factors derived from separate tasks in regressions, in particular with respect to measurement error and omitted variable bias.
Keywords:
trust; omitted-variable bias; measurement error;
JEL-Classification:
C90; D90;