Discussion Paper No. 323
April 13, 2022
Inattention and the Taxation Bias
Authors:
Boccanfuso, Jérémy (University of Bologna)Ferey, Antoine (LMU Munich)
Abstract:
Keywords:
inattention; misperceptions; optimal taxation; policy distortionsJEL-Classification:
D03; H21Download:
Open PDF fileDiscussion Paper No. 318
February 14, 2022
Taxing Mobile and Overconfident Top Earners
Authors:
Haufler, Andreas (LMU Munich and CESifo)Nishimura, Yukihiro (Osaka University and CESifo)
Abstract:
Keywords:
overconfidence; bonus taxes; tax competition; migrationJEL-Classification:
H20; H87; G28Download:
Open PDF fileDiscussion Paper No. 312
January 20, 2022
Intertemporal Consumption and Debt Aversion: A Replication and Extension
Authors:
Ahrens, Steffen (FU Berlin)Bosch-Rosa, Ciril (TU Berlin)
Meissner, Thomas (Maastricht University)
Abstract:
Keywords:
debt aversion; replication; experimentJEL-Classification:
C91; D84; G11; G41Download:
Open PDF fileDiscussion Paper No. 290
October 31, 2021
Regulatory and Bailout Decisions in a Banking Union
Authors:
Haufler, Andreas (LMU Munich and CESifo)Abstract:
Keywords:
banking union; bank regulation; bailout policiesJEL-Classification:
G28; F33; H87Download:
Open PDF fileDiscussion Paper No. 283
May 26, 2021
Overconfidence and the Political and Financial Behavior of a Representative Sample
Authors:
Ahrens, Steffen (FU Berlin)Bosch-Rosa, Ciril (TU Berlin)
Kassner, Bernhard (LMU Munich)
Abstract:
We study the relationship between overconfidence and the political and financial behavior of a nationally representative sample. To do so, we introduce a new method of eliciting overconfidence that is simple to understand, quick to implement, and captures respondents' excess confidence in their own judgment. Our results show that, in line with theoretical predictions, an excessive degree of confidence in one's judgment is correlated with lower portfolio diversification, larger stock price forecasting errors, and more extreme political views. Additionally, we find that overconfidence is correlated with voting absenteeism. These results appear to validate our method and show how overconfidence is a bias that permeates several aspects of peoples' life.
Keywords:
overconfidence; soep; surveyJEL-Classification:
C83; D91; G41Download:
Open PDF fileDiscussion Paper No. 256
September 7, 2020
Coordination under Loss Contracts
Author:
Ahrens, Steffen (TU Berlin)
Bitter, Lea (TU Berlin)
Bosch-Rosa, Ciril (TU Berlin)
Abstract:
In this paper we study the effects that loss contracts—prepayments that can be clawbacked later—have on group coordination when there is strategic uncertainty. We compare the choices made by experimental subjects in a minimum effort game. In control sessions, incentives are formulated as a classic gain contract, while in treatment sessions, incentives are framed as an isomorphic loss contract. Our results show that loss contracts reduce the minimum efforts of groups and worsen coordination between group members, both leading to lower payoffs. However, these results depend strongly on the group’s gender composition; groups with a larger proportion of women are better at coordinating and exert more effort.
Keywords:
strategic uncertainty; loss aversion; coordination; contract design; framing; experiment
JEL-Classification:
C91; D84; G11; G41
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Discussion Paper No. 210
December 9, 2019
Risk-Taking under Limited Liability: Quantifying the Role of Motivated Beliefs
Author:
Bosch-Rosa, Ciril (TU Berlin)
Gietl, Daniel (LMU Munich)
Heinemann, Frank (TU Berlin)
Abstract:
This paper investigates whether limited liability affects risk-taking through motivated beliefs. To do so, we run a within-subject experiment in which subjects invest in a risky asset under full or limited liability. In both cases, before the investment is made, subjects observe a noisy signal that indicates whether the investment will succeed or fail. They then state the likelihood of the investment's success and decide how much to invest. Our results show a strong effect of limited liability on both the investment decision and the formation of motivated beliefs. Compared to subjects under full liability, subjects under limited liability not only invest larger amounts but are also significantly more optimistic about the success of their investments. Finally, we show that more than one-third of the increase in investment under limited liability can be explained through motivated beliefs.
Keywords:
limited liability; motivated beliefs; experiment
JEL-Classification:
C91; D84; G11; G41
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Discussion Paper No. 162
June 26, 2019
Heads We Both Win, Tails Only You Lose: the Effect of Limited Liability On Risk-Taking in Financial Decision Making
Authors:
Ahrens, Steffen (TU Berlin)
Bosch-Rosa, Ciril (TU Berlin)
Abstract:
One of the reasons for the recent crisis is that financial institutions took "too much risk" (Brunnermeier, 2009; Taylor et al., 2010). Why were these institutions taking so much risk is an open question. A recent strand in the literature points towards the "cognitive dissonance" of investors who, because of the limited liability of their investments, had a distorted view of riskiness (e.g., Barberis (2013); Benabou (2015)). In a series of laboratory experiments we show how limited liability does not affect the beliefs of investors, but does increase their willing exposure to risk. This results points to a simple explanation for the over-investment of banks and hedge-funds: When incentives are not aligned, investors take advantage of the moral hazard opportunities.
Keywords:
moral hazard; cognitive dissonance; behavioral finance
JEL-Classification:
C91; D84; G11; G41
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Discussion Paper No. 161
June 26, 2019
Price Dynamics and Trader Overconfidence
Authors:
Ahrens, Steffen (TU Berlin)
Bosch-Rosa, Ciril (TU Berlin)
Roulund, Rasmus (Danmarks Nationalbank)
Abstract:
Overconfidence is one of the most important biases in financial markets and commonly associated with excessive trading and asset market bubbles. So far, most of the finance literature takes overconfidence as a given, "static" personality trait. In this paper we introduce a novel experimental design which allows us to track different measures of overconfidence during an asset market bubble. The results show that overconfidence co-moves with asset prices and points towards a feedback loop in which overconfidence adds fuel to the flame of existing bubbles.
Keywords:
overconfidence; experiment; asset markets
JEL-Classification:
C91; D84; G11; G41
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Discussion Paper No. 135
December 27, 2018
Sunspots in Global Games: Theory and Experiment
Authors:
Heinemann, Frank (TU Berlin)
Moradi, Homayoon (WZB Berlin)
Abstract:
We solve and test experimentally a global-games model of speculative attacks where agents can choose whether to read, at a cost, a payoff irrelevant (sunspot) announcement. Assuming that subjects exogenously believe some others to follow sunspots, we provide conditions for a unique equilibrium where agents follow a sunspot announcement depending on the realization of an informative private signal. Although most groups converge to classical global-game strategies that neglect sunspots, we find that about one-third of groups are eventually coordinating on sunspots, which is inconsistent with the standard theory. In line with the assumption of subjects expecting others to follow sunspots, subjects overestimate the number of subjects who follow sunspots by about 100% on average. We conclude that in environments with high strategic uncertainty, payoff irrelevant signals can affect behavior even if they are costly to obtain and not expected to be publicly observed.
Keywords:
creditor coordination; global games speculative attack; sunspots
JEL-Classification:
C09; D82; F31; G12