Discussion Paper No. 267
November 10, 2021
Focusing Climate Negotiations on a Uniform Common Commitment Can Promote Cooperation
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International cooperation on the reduction of greenhouse gas emissions, disarmament, or free trade needs to be negotiated. The success of such negotiations depends on how they are designed. In the context of international climate change policy, it has been proposed [e.g., Weitzman J of the Association of Environmental and Resource Economists (2014)] that shifting the negotiation focus to a uniform common commitment (such as a uniform minimum carbon price) would lead to more ambitious cooperation. Yet, a proof-of-concept for this important claim is lacking. Based on game theoretical analyses, we present experimental evidence that strongly supports this conjecture. In our study, human subjects negotiate contributions to a public good. Subjects differ in their benefits and costs of cooperation. Participation in the negotiations and all commitments are voluntary. We consider treatments in which agreements are enforceable, and treatments in which they have to be self-enforcing. In both situations, negotiating a uniform common commitment is more successful in promoting cooperation than negotiating individual commitments (as in the Paris agreement) and complex common commitments that tailor the commitment to the specific situation of each party (as attempted with the Kyoto protocol). Furthermore, as suggested by our model, a uniform common commitment benefits most from being enforced.
Keywords:
cooperation; negotiation design; common commitment; reciprocity; climate policy;
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Discussion Paper No. 266
A Model United Nations Experiment on Climate Negotiations
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Weitzman (2014) proposed that focusing international climate negotiations on a uniform carbon price is more effective than Paris style negotiations in achieving ambitious climate action. We put this hypothesis to an experimental test by simulating international negotiations on climate change in collaboration with Model United Nations associations. This novel experimental format combines some of the advantages of lab and field experiments. Our results show that negotiating a common commitment on a uniform carbon price yields significantly higher emissions reductions, more participation, and more equal contributions than individual commitments to a non-binding common goal à la Paris.
Keywords:
climate negotiations; negotiation design; model united nations; uniform carbon price;
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Discussion Paper No. 238
November 9, 2021
Selling Dreams: Endogenous Optimism in Lending Markets
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We propose a simple model of borrower optimism in competitive lending markets with asymmetric information. Borrowers in our model engage in self-deception to arrive at a belief that optimally trades off the anticipatory utility benefits and material costs of optimism. Lenders’ contract design shapes these benefits and costs. The model yields three key results. First, the borrower’s motivated cognition increases her material welfare, regardless of whether or not she ends up being optimistic in equilibrium. Our model thus helps explain why wishful thinking is not driven out of markets. Second, in line with empirical evidence, a low cost of lending and a booming economy lead to optimism and the widespread collateralization of loans. Third, equilibrium collateral requirements may be inefficiently high.
Keywords:
optimal expectations; motivated cognition; wishful thinking; financial crisis; lending markets; screening;
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Discussion Paper No. 209
Delegation, Promotion, and Manager Selection
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Promotions serve two purposes. They ought to provide incentives for employees and to select the best employee for a management position. However, if non-contractible managerial decision rights give rise to private benefits and preference misalignment between managers and the firm, these two purposes are in conflict. This is because the worker with the largest private benefit as a manager has the strongest incentives to work hard to get promoted. This article shows how the interplay of managerial decision rights and performance-based promotions leads to a situation often referred to as the Peter principle: employees that create lower expected profits as managers have yet better promotion prospects. That finding still holds when the firm owner optimally chooses the promotion rule, the degree of delegation, and wage payments to both employees and managers. To optimize organizational design, the firm balances better worker incentivization but worse manager selection by using performance-based promotions and restricting managerial decision rights.
Keywords:
peter principle; promotion; delegation of decision rights; incentives; manager selection; organizational design;
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Discussion Paper No. 197
Decision Making under Uncertainty: An Experimental Study in Market Settings
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We design and implement a novel experimental test of subjective expected utility theory and its generalizations. Our experiments are implemented in the laboratory with a student population, and pushed out through a large-scale panel to a general sample of the US population. We find that a majority of subjects’ choices are consistent with maximization of some utility function, but not with subjective utility theory. The theory is tested by gauging how subjects respond to price changes. A majority of subjects respond to price changes in the direction predicted by the theory, but not to a degree that makes them fully consistent with subjective expected utility. Surprisingly, maxmin expected utility adds no explanatory power to subjective expected utility. Our findings remain the same regardless of whether we look at laboratory data or the panel survey, even though the two subject populations are very different. The degree of violations of subjective expected utility theory is not affected by age nor cognitive ability, but it is correlated with financial literacy.
Keywords:
uncertainty; subjective expected utility; maxmin expected utility; revealed preference;
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Discussion Paper No. 168
November 8, 2021
Meta-Analysis of Present-Bias Estimation Using Convex Time Budgets
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We examine 220 estimates of the present-bias parameter from 28 articles using the Convex Time Budget protocol. The literature shows that people are on average present biased, but the estimates exhibit substantial heterogeneity across studies. There is evidence of modest selective reporting in the direction of overreporting present-bias. The primary source of the heterogeneity is the type of reward, either monetary or non-monetary reward, but the effect is weakened after correcting for potential selective reporting. In the studies using the monetary reward, the delay until the issue of the reward associated with the "current" time period is shown to influence the estimates of present bias parameter.
Keywords:
present bias; structural behavioral economics; meta-analysis; selective reporting;
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Discussion Paper No. 133
Bayesian Implementation and Rent Extraction in a Multi-Dimensional Procurement Problem
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We consider a multi-dimensional procurement problem in which sellers have private information about their costs and about a possible design flaw. The information about the design flaw is necessarily correlated. We solve for the optimal Bayesian procurement mechanism that implements the efficient allocation under the constraint that sellers are protected by limited liability. We show that the rents obtained from reporting costs truthfully can be used to reduce the rents sellers must get for reporting the flaw. We compare the optimal Bayesian mechanism to the optimal ex post incentive compatible mechanism that is informationally less demanding.
Keywords:
auctions; correlated types; inefficient renegotiation; multidimensional screening; procurement;
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Discussion Paper No. 120
November 5, 2021
Communicating Subjective Evaluations
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Consider managers evaluating their employees' performances. Should managers justify their subjective evaluations? Suppose a manager's evaluation is private information. Justifying her evaluation is costly but limits the principal's scope for distorting her evaluation of the employee. I show that the manager justifies her evaluation if and only if the employee's performance was poor. The justification assures the employee that the manager has not distorted the evaluation downwards. For good performance, however, the manager pays a constant high wage without justification. The empirical literature demonstrates that subjective evaluations are lenient and discriminate poorly between good performance levels. This pattern was attributed to biased managers. I show that these effects occur in optimal contracts without any biased behavior.
Keywords:
communication; justification; subjective evaluation; centrality; leniency; disclosure;
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Discussion Paper No. 109
Consumer Exploitation and Notice Periods
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Firms often set long notice periods when consumers cancel a contract, and sometimes do so even when the costs of changing or canceling the contract are small. We investigate a model in which a firm offers a contract to consumers who may procrastinate canceling it due to naive present-bias. We show that the firm may set a long notice period to exploit naive consumers.
Keywords:
notice periods; procrastination; present bias; time inconsistency; consumer naivete;
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Discussion Paper No. 103
Approximate Expected Utility Rationalization
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We propose a new measure of deviations from expected utility, given data on economic choices under risk and uncertainty. In a revealed preference setup, and given a positive number e, we provide a characterization of the datasets whose deviation (in beliefs, utility, or perceived prices) is within e of expected utility theory. The number e can then be used as a distance to the theory. We apply our methodology to three recent large-scale experiments. Many subjects in those experiments are consistent with utility maximization, but not expected utility maximization. The correlation of our measure with demographics is also interesting, and provides new and intuitive findings on expected utility.
Keywords:
expected utility; revealed preference;
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