A02
Biased Beliefs in Dynamic Decisions in Competitive Markets
Discussion Papers

Discussion Paper No. 194
October 23, 2019

Top of the Class: The Importance of Ordinal Rank

Author:

Murphy, Richard, (UT Austin)
Weinhardt, Felix (DIW Berlin)

Abstract:

This paper establishes a new fact about educational production: ordinal academic rank during primary school has lasting impacts on secondary school achievement that are independent of underlying ability. Using data on the universe of English school students, we exploit naturally occurring differences in achievement distributions across primary school classes to estimate the impact of class rank. We find large effects on test scores, confidence, and subject choice during secondary school, even though these students have a new set of peers and teachers who are unaware of the students’ prior ranking in primary school. The effects are especially pronounced for boys, contributing to an observed gender gap in the number of STEM courses chosen at the end of secondary school. Using a basic model of student effort allocation across subjects, we distinguish between learning and non-cognitive skills mechanisms, finding support for the latter.

Keywords:

rank; non-cognitive skills; peer effects; productivity

JEL-Classification:

I21; J24

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Discussion Paper No. 191
October 16, 2019

Deutschland: ein Land der Mieter? Die Rolle von Erwartungen über zukünftige Immobilienpreisentwicklungen

Author:

Gohl, Niklas (DIW Berlin and University of Potsdam)
Haan, Peter (DIW Berlin and FU Berlin)
Michelsen, Claus (DIW Berlin)
Weinhardt, Felix (DIW Berlin, HU Berlin, CEP, IZA and CESifo)

Abstract:

Mehr als die Hälfte aller Haushalte in Deutschland wohnen zur Miete – ein im internationalen Vergleich sehr hoher Wert. Bisherige Studien haben vor allen Dingen den regulatorischen Rahmen des Immobilienmarkts hervorgehoben, der Mietwohnungen in Deutschland systematisch begünstigt. Allerdings gibt es keine Studien, die diese Erklärungen empirisch eindeutig untermauern können: einige Arbeiten betonen die Bedeutung von fundamentalen Marktdaten wie die Einkommensentwicklung, demographische Faktoren oder den Zuzug in eine Region. Diese Studie greift einen Aspekt auf, der bislang nicht in der Literatur diskutiert wurde. Untersucht wird, ob und zu welchem Anteil die geringe Eigentümerquote in Deutschland durch pessimistische Erwartungen bezüglich zukünftiger Immobilienpreisentwicklungen erklärt werden kann – erwarten Mieter keine oder nur geringe Preissteigerungen, so sinkt die Attraktivität einer Investition in die eigenen vier Wände. Für die empirische Analyse werden Daten aus einer neuen, repräsentativen Befragung, erhoben im Rahmen des SOEP-IS, ausgewertet. Befragte ausländischer Herkunft sind optimistischer hinsichtlich der Immobilienpreisentwicklung. Sie erwarten langfristig einen signifikant höheren Preisanstieg. Dies legt nahe, dass die erheblich pessimistischeren Preiserwartungen der einheimischen Bevölkerung auch dazu führen, dass sie sich seltener als die Bevölkerung in anderen Ländern für selbstgenutztes Wohneigentum entscheiden.

Keywords:

Wohneigentumsquote; Preiserwartungen; Immobilieninvestition

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Discussion Paper No. 189
September 30, 2019

Optimal Social Assistance and Unemployment Insurance in a Life-Cycle Model of Family Labor Supply and Savings

Author:

Haan, Peter (DIW Berlin)
Prowse, Victoria (Purdue University)

Abstract:

We empirically analyze the optimal mix and optimal generosity of unemployment insurance and social assistance programs. To do so, we specify a structural life-cycle model of the labor supply, savings, and social assistance claiming decisions of singles and married couples. Partial insurance against wage and employment shocks is provided by social programs, savings, and the labor supplies of all adult household members. We show that the optimal policy mix is dominated by moderately generous social assistance, which guarantees a permanent universal minimum household income, with only a minor role for temporary earnings-related unemployment insurance. The optimal amount of social assistance is heavily influenced by income pooling in married households. This pooling provides partial insurance against negative economic shocks, reducing the optimal generosity of social assistance.

Keywords:

unemployment insurance; social assistance; design of benefi t programs; life-cycle labor supply; family labor supply; intra-household insurance; household savings; employment risk; added worker e ffect

JEL-Classification:

J18; J68; H21; I38

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Discussion Paper No. 188
September 30, 2019

Insurance, Redistribution, and the Inequality of Lifetime Income

Author:

Haan, Peter (DIW Berlin)
Kemptner, Daniel (DIW Berlin)
Prowse, Victoria (Purdue University)

Abstract:

Individuals vary considerably in how much they earn during their lifetimes. We study how the tax-and-transfer system o sets inequalities in lifetime earnings, which would otherwise translate into di erences in living standards. Based on a life-cycle model, we fi nd that redistribution by taxes and transfers off sets 54% of the inequality in lifetime earnings that is due to heterogeneous skill endowments. Meanwhile, taxes and transfers insure 45% of lifetime earnings risk. Taxes would provide more insurance if based on lifetime instead of annual earnings. Requiring wealthy individuals to repay social assistance received when younger would strengthen the insurance and redistributive functions of social assistance.

Keywords:

lifetime earnings; lifetime income; tax-and-transfer system; taxation; unemployment insurance; disability benefi ts; social assistance; inequality; redistribution; insurance; endowments; risk; dynamic life-cycle models

JEL-Classification:

D63; H23; I24; I38; J22; J31

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Discussion Paper No. 174
August 5, 2019

Immigration and the Evolution of Local Cultural Norms

Authors:

Schmitz, Sophia (Federal Ministry of Finance)
Weinhardt, Felix (DIW Berlin)

Abstract:

We study the local evolution of cultural norms in West Germany in reaction to the sudden presence of East Germans who migrated to the West after reunification. These migrants grew up with very high rates of maternal employment, whereas West German families followed the traditional breadwinner-housewife model. We find that West German women increase their labor supply and that this holds within household. We provide additional evidence on stated gender norms, West-East friendships, intermarriage, and childcare infrastructure. The dynamic evolution of the local effects on labor supply is best explained by local cultural learning and endogenous childcare infrastructure.

Keywords:

cultural norms; local learning; gender; immigration

JEL-Classification:

J16; J21; D01

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Discussion Paper No. 171
July 30, 2019

The Standard Portfolio Choice Problem in Germany

Authors:
Breunig, Christoph (HU Berlin)
Huck, Steffen (WZB Berlin and UCL)
Schmidt, Tobias (QuantCo)
Weizsäcker, Georg (HU Berlin and DIW Berlin)
Abstract:

We study an investment experiment with a representative sample of German households. Respondents invest in a safe asset and a risky asset whose return is tied to the German stock market. Experimental investments correlate with beliefs about stock market returns and exhibit desirable external validity at least in one respect: they predict real-life stock market participation. But many households are unresponsive to an exogenous increase in the risky asset's return. The data analysis and a series of additional laboratory experiments suggest that task complexity decreases the responsiveness to incentives. Modifying the safe asset's return has a larger effect on behaviour than modifying the risky asset's return.

Keywords:
stock market expectations; stock market participation; portfolio choice; financial literacy; complexity
JEL-Classification:
D01; D14; D84; G11
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Discussion Paper No. 170
July 30, 2019

Belief Updating: Does the ‘Good-News, Bad-News’ Asymmetry Extend to Purely Financial Domains?

Author:
Barron, Kai (WZB Berlin)
Abstract:

Bayes' statistical rule remains the status quo for modeling belief updating in both normative and descriptive models of behavior under uncertainty. Some recent research has questioned the use of Bayes' rule in descriptive models of behavior, presenting evidence that people overweight 'good news' relative to 'bad news' when updating ego-relevant beliefs. In this paper, we present experimental evidence testing whether this 'good-news, bad-news' effect is present in a financial decision making context (i.e. a domain that is important for understanding much economic decision making). We find no evidence of asymmetric updating in this domain. In contrast, in our experiment, belief updating is close to the Bayesian benchmark on average. However, we show that this average behavior masks substantial heterogeneity in individual updating. We find no evidence in support of a sizeable subgroup of asymmetric updators.

Keywords:
economic experiments; bayes' rule; belief updating; belief measurement; proper scoring rules; motivated beliefs
JEL-Classification:
C11; C91; D83
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Discussion Paper No. 169
July 30, 2019

Confidence and Career Choices: An Experiment

Authors:
Barron, Kai (WZB Berlin)
Gravert, Christina (University of Copenhagen)
Abstract:

Confidence is often seen as the key to success. Empirical evidence about how such beliefs about one's abilities causally map into actions is, however, sparse. In this paper, we experimentally investigate the causal effect of an increase in confidence about one's own ability on two central choices made by workers in the labor market: choosing between jobs with different incentive schemes, and the subsequent choice of how much effort to exert within the job. An exogenous increase in confidence leads to an increase in subjects' propensity to choose payment schemes that depend heavily on ability. This is detrimental for low ability workers. Policy implications are discussed.

Keywords:
overconfidence; experiment; beliefs; real-effort; career choices
JEL-Classification:
C91; D03; M50; J24
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Discussion Paper No. 159
June 24, 2019

Magnitude Effect in Intertemporal Allocation Tasks

Authors:

Sun, Chen (HU Berlin)
Potters, Jan (Tilburg University)

Abstract:

We investigate how intertemporal allocation of monetary rewards is influenced by the size of total budget, with a particular interest in the channels of influence. We find a significant magnitude effect: the budget share allocated to the later date increases with the size of the budget. At the aggregate level as well as at the individual level, we find magnitude effects both on the discount rate and on intertemporal substitutability (i.e. utility curvature). The latter effect is consistent with theories in which the degree of asset integration is increasing in the stake.

Keywords:

time preference; magnitude effect; convex time budget method

JEL-Classification:

C91; D12; D91

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Discussion Paper No. 151
April 8, 2019

Obviousness Around the Clock

Authors:
Breitmoser, Yves (Bielefeld University)
Schweighofer-Kodritsch, Sebastian (HU Berlin and WZB Berlin)
Abstract:

Li (2017) supports his theoretical notion of obviousness of a dominant strategy with experimental evidence that bidding is closer to dominance in the dynamic ascending-clock than the static second-price auction (private values). We replicate his experimental study and add three intermediate auction formats to decompose this behavioral improvement into cumulative effects of (1) seeing an ascending-price clock (after bid submission), (2) bidding dynamically on the clock and (3) getting drop-out information. Li's theory predicts dominance to become obvious through (2) dynamic bidding. We find no significant behavioral effect of (2). However, both (1) and (3) are highly significant.

Keywords:
JEL-Classification:
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