A02
Biased Beliefs in Dynamic Decisions in Competitive Markets
Discussion Papers

Discussion Paper No. 212
November 9, 2021

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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Discussion Paper No. 191

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

Author:

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

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

Author:

Peter Haan (DIW Berlin)
Victoria Prowse (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 benefit programs; life-cycle labor supply; intra-household insurance; household savings; employment risk; added worker effect;

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Discussion Paper No. 188

Insurance, Redistribution, and the Inequality of Lifetime Income

Author:

Peter Haan (DIW Berlin)
Daniel Kemptner (DIW Berlin)
Victoria Prowse (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; unemeployment insurance; disability benefits; redistribution; insurance; endowment; risk; dynamic life-cycle models;

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Discussion Paper No. 174
November 8, 2021

Immigration and the Evolution of Local Cultural Norms

Author:

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

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;

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Discussion Paper No. 171

The Standard Portfolio Choice Problem in Germany

Author:

Christoph Breunig (HU Berlin)
Steffen Huck (WZB Berlin, UCL)
Tobias Schmidt (QuantCo)
Georg Weizsäcker (HU Berlin, 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;

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Discussion Paper No. 170

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

Author:

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;

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Discussion Paper No. 169

Confidence and Career Choices: An Experiment

Author:

Kai Barron (WZB Berlin)
Christina Gravert (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;

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