A02
Biased Beliefs in Dynamic Decisions in Competitive Markets
Discussion Papers

Discussion Paper No. 313
January 21, 2022

House Price Expectations

Author:

Niklas Gohl (DIW Berlin, University of Potsdam)
Peter Haan (FU Berlin, DIW Berlin, Netspar)
Claus Michelsen (DIW Berlin, Leuphana University Lueneburg)
Felix Weinhardt (European University Viadrina, DIW Berlin)

Abstract:

This study examines short-, medium-, and long-run price expectations in housing markets. We derive and test six hypothesis about the incidence, formation, and relevance of price expectations. To do so, we use data from a tailored household survey, past sale and rental offerings, satellites, and from an information RCT. As novel findings, we show that price expectations exhibit mean reversion in the long-run. Moreover, we do not find evidence for biases related to individual housing tenure decisions or regret aversion. Confirming existing findings, we show that local market characteristics matter for expectations throughout, as well as aggregate price information. Lastly, we corroborate existing evidence that expectations are relevant for portfolio choice.

Keywords:

housing markets; price expectations;

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Discussion Paper No. 308
December 27, 2021

The Bargaining Trap

Author:

Sebastian Schweighofer-Kodritsch (HU Berlin)

Abstract:

I revisit the Rubinstein (1982) model for the classic problem of price hag- gling and show that bargaining can become a “trap,” where equilibrium leaves one party strictly worse off than if no transaction took place (e.g., the equilibrium price exceeds a buyer’s valuation). This arises when one party is impatient about capturing zero surplus (e.g., Rubinstein’s example of fixed bargaining costs). Augmenting the protocol with unilateral exit options for responding bargainers generally removes the trap.

Keywords:

alternating offers; bargaining; time preferences; haggling costs; outside options;

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Discussion Paper No. 302
November 29, 2021

The Effects of an Increase in the Retirement Age on Health - Evidence from Administrative Data

Author:

Peter Haan (DIW Berlin, FU Berlin, Netspar)
Mara Barschkett (DIW Berlin, FU Berlin)
Johannes Geyer (DIW Berlin, Netspar)
Anna Hammerschmid (DIW Berlin)

Abstract:

This study analyzes the causal effect of an increase in the retirement age on health. We exploit a sizable cohort-specific pension reform for women using two complementary empirical approaches – a Regression Discontinuity Design and a Difference-in-Differences approach. The analysis is based on official records covering all individuals insured by the public health system in Germany and including all certified diagnoses by practitioners. This enables us to gain a detailed understanding of the multi-dimensionality in these health effects. The empirical findings reflect the multi-dimensionality but allow for deriving two broader conclusions. We provide evidence that the increase in the retirement age negatively affects health outcomes as the prevalence of several diagnoses, e.g., mental health, musculoskeletal diseases, and obesity, increases. In contrast, we do not find support for an improvement in health related to a prolonged working life since there is no significant evidence for a reduction in the prevalence of any health outcome we consider. These findings hold for both identifica- tion strategies, are robust to sensitivity checks, and do not change when correcting for multiple hypothesis testing.

Keywords:

Germany; retirement; pension reform; health; ICD-10; regression discontinuity design; difference-in-differences;

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Discussion Paper No. 273
November 10, 2021

Alcohol and Short-Run Mortality: Evidence from a Modern-Day Prohibition

Author:

Kai Barron (WZB Berlin)
Debbie Bradshaw (SAMRC, University of Cape Town)
Charles D. H. Parry (SAMRC, Stellenbosch University)
Rob Dorrington (University of Cape Town)
Pam Groenewald (SAMRC)
Ria Laubscher (SAMRC)
Richard Matzopoulos (SAMRC, University of Capetown)

Abstract:

On July 13, 2020 a complete nation-wide ban was placed on the sale and transport of alcohol in South Africa. This paper evaluates the impact of this sudden and unexpected five-week alcohol prohibition on mortality due to unnatural causes. We find that the policy reduced the number of unnatural deaths by 21 per day, or approximately 740 over the five-week period. This constitutes a 14% decrease in the total number of deaths due to unnatural causes. We argue that this represents a lower bound on the impact of alcohol on short-run mortality, and underscores the severe influence that alcohol has on society—even in the short-run.

Keywords:

alcohol; mortality; economics; health; South Africa; COVID-19; violence;

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Discussion Paper No. 257
November 9, 2021

Do Women Expect Wage Cuts for Part-Time Work?

Author:

Annekatrin Schrenker (DIW Berlin, FU Berlin)

Abstract:

Wage expectations for full- and part-time employment are key for understanding the labor supply decisions of women. However, whether women expect different wages between part-time and full-time work is not fully understood. Using German survey data, I quantify the expected full-time/part-time wage differential for a representative sample of female workers. I document that women, on average, expect only minor part-time wage penalties (1-3 percent). Comparing beliefs to selectivity-adjusted estimates of the part-time wage gap indicates that women’s mean expectations are realistic. I also show that women with children and those in managerial positions expect sizeable part-time wage cuts, with mothers overestimating the part-time wage penalty.

Keywords:

expectations; female labor supply; part-time wage gap;

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Discussion Paper No. 254

Bargaining and Time Preferences: An Experimental Study

Author:

Jeongbin Kim (National University of Singapore)
Wooyoung Lim (The Hong Kong University of Science and Technology)
Sebastian Schweighofer-Kodritsch (HU Berlin)

Abstract:

We generalize the Rubinstein (1982) bargaining model by disentangling payoff delay from bargaining delay. We show that our extension is isomorphic to generalized discounting with dynamic consistency and characterize the unique equilibrium. Using a novel experimental design to control for various confounds, we then test comparative statics predictions with respect to time discounting. All bargaining takes place within a single experimental session, so bargaining delay is negligible and dynamic consistency holds by design, while payoff delay per disagreement round is significant and randomized transparently at the individual level (week/month, with/without front-end delay). In contrast to prior experiments, we obtain strong behavioral support for the basic predictions that hold regardless of the details of discounting. Testing differential predictions of different forms of discounting, we strongly reject exponential discounting in favor of present-biased discounting.

Keywords:

alternating-offers bargaining; time preferences; present bias; laboratory experiments;

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Discussion Paper No. 218

Long-run Expectations of Households

Author:

Christoph Breuning (Emory University)
Iuliia Grabova (HU Berlin, DIW Berlin)
Peter Haan (FU Berlin, DIW Berlin)
Felix Weinhardt (HU Berlin, DIW Berlin)
Georg Weizsäcker (HU Berlin, DIW Berlin)

Abstract:

The rational expectations assumption, e.g. in life-cycle models and portfolio-choice models, prescribes agents to have model-consistent beliefs and to avoid systematic prediction errors. In reality, justi cation and identi cation of expectations are nontrivial. One way to solve this problem is to elicit expectations collecting survey data. We utilize the German SOEP Innovation Sample to analyze short-run and long-run expectations of households in three di erent domains: stock market, labor market and housing market. Our main contribution to the existing literature is that we study expectations about price developments over longer periods, which is of central relevance since many important economic decisions of households concern the long run. Previous studies have mainly focused on short-run or medium-run expectations. We document that while expectations about wages are similar to historical values, the long-run expectations about the developments of the stock market index and about house prices are strongly pessimistic. In the case of the stock market, respondents expect only a small percentage of historical growth. We also observe substantial heterogeneity of expectations by socio-economic background.

Keywords:

long-run expectations; biased beliefs; returns to education;

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Discussion Paper No. 212

Working Life and Human Capital Investment: Causal Evidence from Pension Reform

Author:

Niklas Gohl (DIW Berlin, Potsdam University)
Peter Haan (DIW Berlin, FU Berlin)
Elisabeth Kurz ()
Felix Weinhardt (DIW Berlin, CESifo, IZA, CEP/LSE)

Abstract:

In this paper we present a life-cycle model with human capital investment during working life through training and provide a novel empirical test of human capital theory. Using a sizable pension reform which shifts the retirement age between two adjacent cohorts by three years, we document causal evidence that an increase in the working life increases investment into human capital through training. We estimate this effect using a regression discontinuity design based on a large sample from the German microcensus. We discuss and test further predictions regarding the relation between initial schooling, training, and the reform effect and show that only individuals with a college degree increase human capital investment. Our results speak to a large class of human capital models as well as policies extending or shortening working life.

Keywords:

human capital; retirement policies; RDD;

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Discussion Paper No. 206

Nonparametric Regression with Selectively Missing Covariates

Author:

Christoph Breunig (Emory University)
Peter Haan (DIW Berlin, FU Berlin)

Abstract:

We consider the problem of regressions with selectively observed covariates in a nonparametric framework. Our approach relies on instrumental variables that explain variation in the latent covariates but have no direct e ffect on selection. The regression function of interest is shown to be a weighted version of observed conditional expectation where the weighting function is a fraction of selection probabilities. Nonparametric identifi cation of the fractional probability weight (FPW) function is achieved via a partial completeness assumption. We provide primitive functional form assumptions for partial completeness to hold. The identi fication result is constructive for the FPW series estimator. We derive the rate of convergence and also the pointwise asymptotic distribution. In both cases, the asymptotic performance of the FPW series estimator does not suff er from the inverse problem which derives from the nonparametric instrumental variable approach. In a Monte Carlo study, we analyze the finite sample properties of our estimator and we demonstrate the usefulness of our method in analyses based on survey data. We also compare our approach to inverse probability weighting, which can be used alternatively for unconditional moment estimation. In the empirical application, we focus on two diff erent applications. We estimate the association between income and health using linked data from the SHARE survey data and administrative pension information and use pension entitlements as an instrument. In the second application we revisit the question how income aff ects the demand for housing based on data from the Socio-Economic Panel Study. In this application we use regional income information on the residential block level as an instrument. In both applications we show that income is selectively missing and we demonstrate that standard methods that do not account for the nonrandom selection process lead to signi ficantly biased estimates for individuals with low income.

Keywords:

selection model; instrumental variables; fractional probability weighting; nonparametric identification; partial completeness; incomplete data; series estimation; income distribution; health;

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Discussion Paper No. 194

Top of the Class: The Importance of Ordinal Rank

Author:

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

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;

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