B07
Regulation and Taxation of Financial Markets
Discussion Papers

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Discussion Paper No. 323
April 13, 2022

Inattention and the Taxation Bias

Authors:
Boccanfuso, Jérémy (University of Bologna)
Ferey, Antoine (LMU Munich)
Abstract:
This paper shows that agent inattention to taxes generates a time-inconsistency problem in the choice of tax policy. In equilibrium, inattention leads to inefficiently high tax rates and a taxation bias emerges. Combining structural and sufficient statistics approaches, we quantify the magnitude and the welfare effects of this policy distortion for US income tax rates, and find that the taxation bias is large, alters the progressivity of income taxes, and significantly reduces social welfare. Overall, our findings shed new light on the policy and welfare implications of inattention and misperceptions.
Keywords:
inattention; misperceptions; optimal taxation; policy distortions
JEL-Classification:
D03; H21
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Discussion 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:
We set up a simple model of tax competition for mobile, highly-skilled and overconfident managers. Firms endogenously choose the compensation scheme for managers, which consists of a fixed wage and a bonus payment in the high state. Managers are overconfident about the probability of the high state and hence of receiving the bonus, whereas firms and governments are not. When governments maximize tax revenues, we show that overconfidence unambiguously reduces the bonus tax rate that governments set in the non-cooperative tax equilibrium, while increasing tax revenues. When the government objective incorporates the welfare of resident managers, however, bonus taxes also serve a corrective role and may rise in equilibrium when overconfidence is increased.
Keywords:
overconfidence; bonus taxes; tax competition; migration
JEL-Classification:
H20; H87; G28
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Discussion 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:
We replicate Meissner (2016) where debt aversion was reported for the first time in an intertemporal consumption and saving problem. While Meissner (2016) uses a German sample, our subjects are US undergraduate students. All of the main findings from the original study replicate with similar effect sizes. Additionally, we extend the original analysis by correlating a new individual index of debt aversion on individual characteristics such as gender, cognitive ability, and risk aversion. The findings suggest that gender and risk aversion are not correlated with debt aversion. However, cognitive ability is positively correlated with debt aversion. Overall, this paper confirms the importance of debt aversion in intertemporal consumption problems and validates the approach of Meissner (2016).
Keywords:
debt aversion; replication; experiment
JEL-Classification:
C91; D84; G11; G41
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Discussion Paper No. 290
October 31, 2021

Regulatory and Bailout Decisions in a Banking Union

Authors:
Haufler, Andreas (LMU Munich and CESifo)
Abstract:
We model a banking union of two countries whose banking sectors differ in their average probability of failure and externalities between the two countries arise from cross-border bank ownership. The two countries face (i) a regulatory (super- visory) decision of which banks are to be shut down before they can go bankrupt, and (ii) a bailout decision of who pays for banks that have failed despite regu- latory oversight. Each of these choices can either be taken in a centralized or in a decentralized way. In our benchmark model the two countries always agree on a centralized regulation policy. In contrast, bailout policies are centralized only when international spillovers from cross-border bank ownership are strong, and banking sectors are highly profitable.
Keywords:
banking union; bank regulation; bailout policies
JEL-Classification:
G28; F33; H87
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Discussion 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; survey
JEL-Classification:
C83; D91; G41
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Discussion 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

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