Discussion Papers

Strategic Learning in Teams

Abstract:

This paper analyzes a two-player game of strategic experimentation with three-armed exponential bandits in continuous time. Players face replica bandits, with one arm that is safe in that it generates a known payoff, whereas the likelihood of the risky arms’ yielding a positive payoff is initially unknown. It is common knowledge that the types of the two risky arms are perfectly negatively correlated. I show that the efficient policy is incentive-compatible if, and only if, the stakes are high enough. Moreover, learning will be complete in any Markov perfect equilibrium with continuous value functions if, and only if, the stakes exceed a certain threshold.

Keywords: Strategic Experimentation, Three-Armed Bandit, Exponential Distribution, Poisson Process, Bayesian Learning, Markov Perfect Equilibrium.
JEL Classification Numbers: C73, D83, O32.

Full text in pdf format:

333.pdf

Infinitely Repeated Games with Public Monitoring and Monetary Transfers

Abstract:

In this paper, we study infinitely repeated games with imperfect public monitoring and the possibility of monetary transfers. We develop an effcient algorithm to compute the set of pure strategy public perfect equilibrium payoffs for each discount factor. We also show how all equilibrium payoffs can be implemented with a simple class of stationary equilibria that use stick-and-carrot punishments.

July 2010

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332.pdf

Existence of a pure-strategy Bayesian Nash equilibrium in imperfectly discriminating contests

Abstract:

We consider a general class of imperfectly discriminating contests with privately informed players. We show that findings by Athey (2001) imply the existence of a Bayesian Nash equilibrium in monotone pure strategies.

Keywords: contest, imperfectly discriminating, asymmetric information, equilibrium existence, interdependent values

JEL classification: D72, D74, D82, C72

July 2010

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331.pdf

Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs

Abstract:

The so called flat-rate bias is a well documented phenomenon caused by consumers' desire to be insured against fluctuations in their billing amounts. This paper shows that expectation-based loss aversion provides a formal explanation for this bias. We solve for the optimal two-part tariff when contracting with loss-averse consumers who are uncertain about their demand. The optimal tariff is a flat rate if marginal cost of production is low compared to a consumer's degree of loss aversion and if there is enough variation in the consumer's demand. Moreover, if consumers differ with respect to the degree of loss aversion, firms' optimal menu of tariffs typically comprises a flat-rate contract.

Keywords: Consumer Loss Aversion; Flat-Rate Tariffs; Nonlinear Pricing; Uncertain Demand

JEL classification: D11; D43; L11

July 2010

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330.pdf

Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave

Abstract:

We characterize optimal incentive contracts in a moral hazard framework extended in two directions. First, after effort provision, the agent is free to leave and pursue some ex-post outside option. Second, the value of this outside option is increasing in effort, and hence endogenous. Optimal contracts may entail properties such as inducing first-best effort and surplus, or non-responsiveness with respect to changes in verifiable parameters. Moreover, while always socially inefficient, separation might occur in equilibrium. Except for the latter, these findings are robust to renegotiation. When the outside option is exogenous instead, the standard results obtain.

Keywords: moral hazard, limited commitment, ex-post outside option, limited liability
JEL classification: D86, D82, K31, M52

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329.pdf

Commitment in R&D Tournaments via Strategic Delegation to Overoptimistic Managers

Abstract:

This paper shows that it is profitable for a firm to hire an overoptimistic manager to commit to a certain investment strategy in an R&D tournament situation. In the unique symmetric equilibrium, all firms delegate to overoptimistic managers, where the optimal degree of overoptimism depends on the riskiness of the tournament. In these situations a manager’s type may serve as a substitute for delegation via contracts. By delegating to overoptimistic managers, firms can escape the rat race nature of R&D tournaments.

JEL classification: J 32, J 33, M 12
Keywords: Strategic Delegation, Overoptimism, Tournaments

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328.pdf

Incentives, Reputation and the Allocation of Authority

Abstract:

We address the question how much authority a principal should delegate to a manager with conflicting interests and uncertain ability in a context in which the manager has both compensationbased and reputational incentives. The optimal level of authority balances the value of the manager’s decision-making expertise against the cost of ensuring that the manager uses his discretion productively. Reputational incentives reduce the necessary monetary incentives to discourage purely opportunistic behavior, but may cause the manager to pursue conservative courses of action to preserve his reputation. This undermines the benefits of delegating control, leading to decreased  managerial authority and stronger monetary incentives. When the principal can commit to long-term contracts, she eliminates this conservative bias by rewarding a successful manager with greater future compensation and authority than would be optimal in a static setting. Early in the relationship the principal may delegate additional authority in order to screen for managers of high ability.

JEL Classifications: D86, L14, L23, M52, M54
Keywords: Agency Problems; Delegation; Compensation Contracts; Job Design; Career Concerns; Managerial Conservatism

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327.pdf

Determinants and Effects of Reserve Prices in Hattrick Auctions

Abstract:

We use a unique hand collected data set of 6,258 auctions from the online football manager game Hattrick to study determinants and effects of reserve prices. We find that chosen reserve prices exhibit both very sophisticated and suboptimal behavior by the sellers. On the one hand, reserve prices are adjusted remarkably nuanced to the resulting sales price pattern. However, reserve prices are too clustered at zero and at multiples of e 50,000 as to be consistent with fully rational behavior. We recover the value distribution and simulate the loss in expected revenue from suboptimal reserve prices. Finally, we find evidence for the sunk cost fallacy as there is a substantial positive effect on the reserve price when the player has been acquired previously.

JEL Codes: D12, D44
Keywords: Reserve Price, Auction Revenue, Inattention, Price Clusters,
Sunk Cost Fallacy

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326.pdf

Heterogeneous Contestants and Effort Provision in Tournaments - an Empirical Investigation with Professional Sports Data

Abstract:

We empirically investigate if tournaments between heterogeneous contestants are less intense. To test our hypotheses we use professional sports data from the TOYOTA Handball-Bundesliga, the major handball league in Germany. Using either differences in betting odds or rankings to measure ability differences, our results support standard tournament theory as we find a highly significant negative impact of the matchup's heterogeneity on joint teame efforts. However, further analysis shows that this overall decrease in efforts is almost entirely driven by the reaction of the ex-ante favorite team.

Keywords: tournament, heterogeneity, incentives, sportseconomics

JEL Classiffcation: J24, J33, J41, M52

July 2010

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325.pdf

Separating Equilibria with Imperfect Certification

Abstract:

Viscusi (1978) shows how, in markets with quality uncertainty, perfect certification results in separation from top down due to an unraveling process similar to Akerlof (1970). De and Nabar (1991) argue that imperfect certification prevents unraveling so that equilibria with full separation do not exist. This note shows that, if one considers the buyers' buying decision explicitly, a separating equilibrium with imperfect certification does exist.

Keywords: certification, unraveling, separating equilibrium
JEL classification: D82, L15

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324.pdf

Who Should Pay for Certification?

Abstract:

Who does, and who should initiate costly certification by a third
party under asymmetric quality information, the buyer or the seller?
Our answer — the seller — follows from a non–trivial analysis revealing
a clear intuition. Buyer–induced certification acts as an inspection
device, whence seller–induced certification acts as a signalling device.
Seller–induced certification maximizes the certifier’s profit and social
welfare. This suggests the general principle that certification is, and
should be induced by the better informed party. The results are reflected
in a case study from the automotive industry, but apply also
to other markets – in particular the financial market.

JEL Codes: D40, D82, L14, L15
Keywords: asymmetric information, certification, information acquisition,
inspection, lemons, middlemen, signaling

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323.pdf

Mediated Contracts and Mechanism Design

Abstract:

This note relates the mechanisms that are based on mediated contracts of Rahman and Obara (2010) to the mechanisms of Myerson (1982). It shows that the mechanisms in Myerson (1982) are more general in that they encompass the mechanisms based on mediated contracts. It establishes an equivalence between the two classes if mediated contracts are allowed to be stochastic.

Keywords: mediatedcontract, mechanismdesign, revelationprinciple, moralhazard

May 2010

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322.pdf

On Liability Insurance for Automobiles

Abstract:

Car owners are liable for property damage inflicted on other

motorists. In most countries such liability must be insured by law. That law

may favor expensive or heavy vehicles, prone to suffer or inflict large losses.

This paper explores links between liability rules and vehicle choice. It presumes

cooperative insurance, but non-cooperative acquisition of vehicles. Thus, the

Nash equilibrium and its degree of efficiency depend on the liability regime.

JEL-Classification: C71, C72, D61, K13

Keywords: liability, mutual insurance, core, pure Nash equilibrium, anonymous games, non-atomic measure

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321.pdf

Using Forward Contracts to Reduce Regulatory Capture

Abstract:

A fully unbundled, regulated network firm of unknown efficiency level can untertake unobservable effort to increase the likelihood of low downstream prices, e.g. by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can force the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but recieves the expected value of the contracts when selling them to a competivitve financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic propability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.

Keywords: incentive regulation, regulatory capture, virtual power plants

Classification-JEL: L42, L51, K23, L94

Full text in pdf format:

320.pdf

Consumer Loss Aversion and the Intensity of Competition

Abstract:

Consider a differentiated product market in which all consumers are fully informed about match value and price at the time they make their purchasing decision. Initially, consumers become informed about the prices of all products in the market but do not know the match values. Some consumers have reference-dependent utilities—i.e., they form a reference-point distribution with respect to match value and price that will make them realize gains or losses if their eventually chosen product performs better or, respectively, worse than their reference point in both dimensions. Loss aversion in the match-value dimension leads to a less competitive outcome, while loss aversion in the price dimension leads to a more competitive equilibrium than a market in which consumers are not subject to reference dependence. Depending on the weights consumers attach to the price and the match-value dimension, a market with loss-averse consumers may be more or less competitive than a market with consumers that do not have reference-dependent utilities. We also show that consumer loss aversion tends to lead to higher prices if the market accommodates a larger number of firms.

Keywords: Loss Aversion, Reference-Dependent Utility, Behavioral Industrial Organization, Imperfect Competition, Product Differentiation

JELClassification: D83,L13,L41,M37.

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319.pdf

Hierarchical Structures and Dynamic Incentives

Abstract:

We study the optimal hierarchical structure of an organization under limited commitment. The organization cannot make a long term commitment to wages and output levels, while it can commit to its hierarchical structure. We show that the optimal hierarchical structure is horizontal when it is highly likely that the employees are efficient or inefficient.
By contrast, when such likelihood is intermediate or output does not expand very fast over time, the optimal hierarchical structure is vertical - with a vertical hierarchy, the organization can mitigate dynamic incentive problems linked to limited commitment.

JEL Classification: D82, D86

Key words: Dynamic Incentives, Organization Design

April 2010

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318.pdf

Exports and Productivity: An Empirical Analysis of German and Austrian Firm-Level Performance

Abstract:

This paper studies the relationship between export activities and firm-level productivity. Unique matching of German and Austrian micro data from 1994 to 2003 suggests that exporters are more productive by around 40 percent compared with non-exporters. Moreover, beside other analysis techniques,
instrumental variable estimations suggest that exporting causes a rise in firm-level productivity. That is, the annual average growth rate of an exporting firm's productivity is between about 1 and 1.5 percent higher than that of non-exporters. It allows the conclusion that, against other findings of existing studies, both directions hold: more productive firms self-select themselves into export markets and being active in foreign markets boosts firm-level productivity.

JEL classiffcation: D24; F13; F23; L22; L23; O47

April 2010

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317.pdf

Tariff Rates, Offshoring and Productivity: Evidence from German and Austrian Firm-Level Data

Abstract:

This paper studies the impact of trade liberalization in terms of tariff cuts within the Eastern European enlargement on German and Austrian firm productivity. Unique matching of data from 1994 to 2003 suggests that tariff reductions raise parent firm productivity significantly. A ten percentage point decrease in tariff rates can lead to total factor productivity gains of up to 2 percent. The data allow distinction between three types of tariffs: output, intra-firm and input tariff rates. The size of the results strongly depends on the type of tariff and country analyzed.

JEL classication: F12; F13; F23; L22; L23; O14

April 2010

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316.pdf

Innovation and the International Firm Structure: Theory and Evidence from German Firm-Level Data

Abstract:

This paper studies the impact of innovation on the organizational structure. The theoretical framework predicts that a larger parental pool of knowledge raises the probability of offshoring. This holds in a national as well as an international context. However, when the producer loses territorial protection, the changeover from non-integration to integration is delayed. Employing data on German firms investing in Eastern Europe finds empirical evidence for the theoretical predictions. The results are robust to different measurements and an instrumental variable regression.

JEL classification: D23; D51; F23; L14; L21; L22; L23

April 2010

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315.pdf

Information acquisition in conflicts

Abstract:

This paper considers incentives for information acquisition ahead of conflicts. First, we characterize the (unique) equilibrium of the all-pay auction between two players with one-sided asymmetric information where one player has private information about his valuation. Then, we use ou rresults to study information acquisition prior to an all-pay auction. If the decision to acquire information is observable, but not the informatio nreceived, one-sided asymmetric information can occur endogenously in equilibrium. Moreover, the cutoff values of the cost of information that determine equilibrium information acquisition are higher  than in the first best.  Thus, information  acquisition is excessive. Incontrast, with open or covert information acquisition,  the equilibrium cut-off values are as in the  first best.

Keywords: All-payauctions; Conflicts; Contests; Information acquisition;
Asymmetric information

JEL classiffcation: D72; D74; D82; D83

March 2010

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314.pdf

Centralizing Information in Networks

Abstract:

Abstract: In the dynamic game we analyze, players are the members of a fixed network. Everyone is initially endowed with an information item that he is the only player to hold. Players are offered a finite number of periods to centralize the initially dispersed items in the hands of any one member of the network. In every period, each agent strategically chooses whether or not to transmit the items he holds to his neighbors in the network. The sooner all the items are gathered by any individual, the better it is for the group of players as a whole. Besides, the agent who first centralizes all the items is offered an additional reward that he keeps for himself. In this framework where information transmission is strategic and physically restricted, we provide a necessary and suffcient condition for a group to pool information items in every equilibrium. This condition is independent of the network structure. The architecture of links however affects the time needed before items are centralized in equilibrium.

JEL Classification: D83, C72, L22

Keywords: communication network, communication dilemma, dynamic network game, strategic

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313.pdf

Pricing and Information Disclosure in Markets with Loss-Averse Consumers

Abstract:

Abstract: We develop a theory of imperfect competition with loss-averse consumers. All consumers are fully informed about match value and price at the time they make their purchasing decision. However, a share of consumers are initially uncertain about their tastes and form a reference point consisting of an expected match value and an expected price distribution, while other consumers are perfectly informed all the time. We derive pricing implications in duopoly with asymmetric firms. In particular, we show that a market may exhibit more price variation the larger the share of uninformed, loss-averse consumers. We also derive implications for firm strategy and public policy concerning firms’ incentives to inform consumers about their match value prior to forming their reference point.

Keywords: Loss Aversion, Reference-Dependent Utility, Information Disclosure,
Price Variation, Advertising, Behavioral Industrial Organization, Imperfect Competition, Product Differentiation

JEL Classification: D83, L13, L41, M37

Full text in pdf format:

312.pdf

Rent-seeking Contests under Symmetric and Asymmetric Information

Abstract:

We consider a variant of the Tullock rent-seeking contest. Under symmetric information we determine equilibrium strategies and prove their uniqueness. Then, we assume contestants to be privately informed about their costs of effort. We prove existence of a pure-strategy equilibrium and provide a sufficient condition for uniqueness. Comparing different informational settings we find that if players are uncertain about the costs of all players, aggregate effort is lower than under both private and complete information. Yet, under additional assumptions, rent dissipation is still smaller in the latter settings. Numerical examples illustrate that there is no general ranking between private and complete information. The results depend on the distribution costs are drawn from and on the exact specification of the contest success function.

JEL classification: D72, D74, D82, C72

Keywords: Rent-seeking, Contest, Asymmetric Information, Private values

March 2010

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311.pdf

A dynamic auction for multi-object procurement under a hard budget constraint

Abstract:

We present a new dynamic auction for procurement problems where payments are bounded by a hard budget constraint and money does not enter the procurer's objective function.

JEL: D21, D44, D45, D82

Keywords: Auctions, Mechanism Design, Knapsack Problem, Dominant Strategy, Budget, Procurement

March 2010

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310.pdf

Returns to Inventors

Abstract:

A key input to inventive activity is human capital. Hence it is important to understand the monetary incentives of inventors. We estimate the effect of patented inventions on individual earnings by linking data on U.S. patents and their inventors to Finnish employer-employee data. Returns are heterogeneous: Inventors get a temporary reward of 3% of annual earnings for a patent grant and for highly-cited patents a longer-lasting premium of 30% in earnings three years later. Similar medium-term premia accrue to inventors who initially hold the patent rights, although they forego earnings at the time of the grant.

JEL codes: O31, J31

Keywords: citations, effort, incentives, inventors, intellectual property, patents, performance pay, return, wages

March 2010

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309.pdf

Unique Equilibrium in Two-Part Tariff Competition between Two-Sided Platforms

Abstract:

Two-sided market models in which platforms compete via two-part tariffs, i.e. a subscription and a per-transaction fee, are often plagued by a continuum of equilibria. This paper augments existing models by allowing for heterogeneous rading behavior of agents on both sides. We show that this simple method yields a unique equilibrium even in the limit as the heterogeneity vanishes. In case of competitive bottlenecks we find that in this equilibrium platforms benefit from the possibility to price discriminate if per-transaction costs are relatively large. This is the case because two-part tariffs allow platforms to better distribute these costs among the two sides. Under two-sided single-homing price discrimination hurts platforms if per-transaction fees can be negative.

JEL classification: D43, L13
Keywords: Two-Sided Markets, Per-Transaction Fee, Subscription Fee, Two-Part
Tariffs, Unique Equilibrium

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308.pdf

Innovation Contests with Entry Auction

Abstract:

We consider procurement of an innovation from heterogeneous sellers. Innovations are random but depend on unobservable effort and private information. We compare two procurement mechanisms where potential sellers first bid in an auction for admission to an innovation contest. After the contest, an innovation is procured employing either a fixed prize or a first-price auction. We characterize Bayesian Nash equilibria such that both mechanisms are payoff-equivalent and induce the same efforts and innovations. In these equilibria, signaling in the entry auction does not occur since contestants play a simple strategy that does not depend on rivals' private information.

JEL classifications: D21, D44, D82, H57, O31, O32.

Keywords: Contest, Auction, Innovation, Research, R\&D, Procurement, Signaling

February 2010

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307.pdf

Technology Adoption, Social Learning, and Economic Policy

Abstract:

We study a two-player dynamic investment model with information externalities
and provide necessary and sufficient conditions for a unique switching equilibrium.
When the public information is sufficiently high and a social planer therefore expects an investment boom, investments should be taxed. Conversely, any positive investment tax is suboptimally high if the public information is sufficiently unfavorable.We also show that an investment tax may increase overall investment activity.

JEL classification: D62, D83
Keywords: Information Externality, Strategic Waiting, Delay, Information Cascade,
Investment Boom, Optimal Taxation

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306.pdf

Incentive Effects in Asymmetric Tournaments Empirical Evidence from the German Hockey League

Abstract:

Following tournament theory, incentives will be rather low if the contestants of  a tournament are heterogeneous. We empirically test this prediction using a  large dataset from the German Hockey League. Our results show that indeed the intensity of a game is lower if the teams are more heterogeneous. This effect can be observed for the game as a whole as well as for the ?rst and last third. When dividing the teams in the dataset into favorites and underdogs, we only observe a reduction of effort provision from favorite teams. As the number of games per team changes between different seasons, we can also investigate the effect of a changing spread between winner and loser prize. In line with theory, teams reduce effort if the spread declines. Interestingly, effort is also sensitive to the total number of teams in the league even if the price spread remains unchanged.

Keywords: Tournaments, Heterogeneity, Incentives,Effort

JELcodes: J33

January 2010

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305.pdf

Creditor Rights and Debt Allocation within Multinationals

Abstract:

We analyze the optimal debt structure of multinational corporations choosing between centralized or decentralized borrowing. We identify how this choice is affected by creditor rights and bankruptcy costs, taking into account managerial incentives and coinsurance considerations. We find that partially centralized borrowing structures are optimal with either weak or strong creditor rights. For intermediate levels of creditor rights fully decentralized (centralized) borrowing structures are optimal if managers have strong (weak) empire building dencies. Decentralized borrowing is more attractive for companies focussing on short-term profitability. Credits are rather taken in countries with better creditor rights and more efficient insolvency systems.

JEL classification: G32, F23

Keywords: Multinational corporations, capital structure, creditor rights, coinsurance, internal capital markets

November 2009

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304.pdf

Optimal Procurement Contracts with Pre–Project Planning

Abstract:

The paper studies procurement contracts with pre–project investigations in the presence of adverse selection and moral hazard. To model the procurer’s  roblem, we extend a standard sequential screening model to endogenous information acquisition with moral hazard. The optimal contract displays systematic distortions in information acquisition. Due to a rent effect, adverse selection induces too much information acquisition to prevent cost overruns and too little information acquisition to prevent false project cancelations. Moral hazard mitigates the distortions related to cost overruns yet exacerbates those related to false negatives. The optimal mechanism is a menu of option contracts that achieves the dual goal of providing incentives for information acquisition and truthful information revelation.

Keywords: Information acquisition, procurement, dynamic mechanism design
JELcodes: D82, H57

January 2010

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303.pdf

Can intentions spoil the kindness of a gift? - An experimental study

Abstract:

Consider a situation where person A undertakes acostly action that benefits person B. This behavior seems altruistic. However, if A expects a reward in return from B, then A's action may be motivated by expected rewards rather than by pure altruism. The question we address in this experimental study is how B reacts to A's intentions. We vary the probability that the second mover in a trust game can reciprocate and analyze effects on second mover behavior. Our results suggest that expected rewards do not spoil the perceived kindness of an action and the action's rewards.

Classification-JEL:C91, D03, D64

Keywords: social preferences, intentions, beliefs, psychological game theory, experiment

October 2009

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302.pdf

Market Share Dynamics in a Model with Search and Word-of-Mouth Communication

Abstract:

This paper analyzes price competition in an infinitely repeated duopoly game. In each period, consumers remember the existence and location of their previous supplier. New information is gathered via search or word-of-mouth communication. Market outcomes are history-dependent, and the Markov perfection refinement is used to narrow the set of equilibria. Firms are shown to use mixed pricing strategies in equilibrium. The resulting price dispersion generates non-trivial market share dynamics. The goal of the paper is to characterize these dynamics, and to reveal the driving forces behind them.

Classification-JEL:D43, D83, L11

Keywords: repeat purchasing, search, customer loyalty, lock-in, mixed pricing

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301.pdf

Carbon leakage: Grandfathering as an incentive device to avert relocation

Abstract:

Emission allowances are often distributed for free in an early phase of a cap-and-trade scheme (grandfathering) to reduce adverse effects on the profitability of firms. If the grandfathering scheme is phased out over time, firms may nevertheless relocate to countries with a lower carbon price once the competitive disadvantage of their home industry becomes sufficiently high. We show that this is not necessarily the case. A temporary grandfathering policy can be a sufficient instrument to avert relocation in the long run, even if immediate relocation would be profitable in the absence of grandfathering. A necessary condition for this is that the permit price triggers investments in low-carbon technologies or abatement capital.

Classification-JEL:Q55, Q58, L51

Keywords: climate policy, emissions trading, grandfathering, leakage, cap-and-trade

Full text in pdf format:

300.pdf

Group Lending versus Individual Lending in Microfinance

Abstract:

Microfinance is typically associated with joint liability of group members. However, a large part of microfinance institutions rather offers individual instead of group loans. We analyze the incentive mechanisms in both individual and group contracts. Moreover, we show that microfinance institutions offer group loans when the loan size is rather large, refinancing costs are high, and competition between microfinance institutions is low. Otherwise, individual loans are offered. Interestingly, our analysis predicts that individual lending in microfinance will gain in importance in the future if microfinance institutions continue to get better access to capital markets and if competition further rises.

Classification-JEL:G21, L13, O16

Keywords: microfinance, group loans, individual loans

August 2009

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299.pdf

Social Preferences and Competition

Abstract:

There is a general presumption that social preferences can be ignored if markets are competitive. Market experiments (Smith 1962) and recent theoretical results (Dufwenberg et al. 2008) suggest that competition forces people to behave as if they were purely self-interested. We qualify this view. Social preferences are irrelevant if and only if two conditions are met: separability of preferences and completeness of contracts. These conditions are often plausible, but they fail to hold when uncertainty is important (financial markets) or when incomplete contracts are traded (labor markets). Social preferences can explain many of the anomalies frequently observed on these markets.

Classification-JEL:C9, D5, J0

Keywords: Social preferences, competition, separability, incomplete contracts, asset markets, labor markets

December 2009

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298.pdf

Screening, Competition, and Job Design Economic Origins of Good Jobs

Abstract:

In recent decades, many firms offered more discretion to their employees, often increasing the productivity of effort but also leaving more opportunities for shirking. These “high-performance work systems” are difficult to understand in terms of standard moral hazard models. We show experimentally that complementarities between high effort discretion, rent-sharing, screening opportunities, and competition are important driving forces behind these new forms of work organization. We document in particular the endogenous emergence of two fundamentally istinct types of employment strategies. Employers either implement a control strategy, which consists of low effort discretion and little or no rent-sharing, or they implement a trust strategy, which stipulates high effort discretion and substantial rent-sharing. If employers cannot screen employees, the control strategy prevails, while the possibility of screening renders the trust strategy profitable. The introduction of competition substantially fosters the trust strategy, reduces market segmentation, and leads to large welfare gains for both employers and employees.

Classification-JEL:C91, D86

Keywords: job design, high-performance work systems, screening, reputation, competition, trust, control, social preferences, complementarities

January 2009

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297.pdf

Strategic Vertical Separation

Abstract:

The paper explores incentives for strategic vertical separation of firms in a framework of a simple duopoly model. Each firm chooses either to be a retailer of its own good (vertical integration) or to sell its good through an independent exclusive retailer (vertical separation). In the latter case a two-part tariff is applied. Retailers compete in quantities, goods are perfect substitutes and firms' cost functions are quadratic. I show that the equilibrium outcome crucially depends on the degree of (dis)economies of scale and asymmetry of costs. Two asymmetric equilibria arise, in which one firm separates while another integrates, under conditions that both firms' cost functions exhibit a sufficiently high diseconomies of scale, or extreme asymmetry of costs. Under a moderate asymmetry of costs a unique equilibrium exists in which the firm with the lower degree of diseconomies of scale separates, while its rival integrates. With the degree of diseconomies of scale low for both firms in the unique equilibrium both firms separate.

JEL classification: L22; L42

Keywords: Vertical oligopoly; Vertical Separation; Vertical Integration, Delegation

September 2009

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296.pdf

The High/Low Divide: Self- Selection by Values in Auction Choice

Abstract:

Most prior theoretical and experimental work involving auction choice has assumed bidders only find out their value after making a choice of which autcion to enter. In this paper we examine whether or not subjects knowing their value prior to making an auction choice impacts their choice decision and/or the outcome of the auctions. The results show a strong impact. Subjects with low values choose the first price sealed bid auction more often while subjects with high values choose the ascending auction more often. The average numbers of bidders in both formats ended up being on average the same, but due to the self-selection bias the ascending auction raised as much revenue on average as the first sealed bid auction. The two formats also generate efficiency levels that are roughly equivalent though the earnings of bidders are higher in the ascending auction.

Classification-JEL: C91, D44Keywords: bidder preferences, private values, sealed bid auctions, ascending auctions, endogenous entry

January 2010

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295.pdf

Buy-It-Now prices in eBay Auctions - The Field in the Lab

Abstract:

Electronic commerce has grown extraordinarily over the years, with online auctions being extremely successful forms of trade. Those auctions come in a variety of different formats, such as the Buy-It-Now auction format on eBay, that allows sellers to post prices at which buyers can purchase a good prior to
the auction. Even though, buyer behavior is well studied in Buy-It-Now auctions, as to this point little is known about how sellers set Buy-It-Now prices. We investigate into this question by analyzing seller behavior in Buy-It-Now auctions. More precisely, we combine the use of a real online auction market (the eBay platform and eBay traders) with the techniques of lab experiments. We find a striking link between the information about agents provided by the eBay market institution and their behavior. Information about buyers is correlated with their deviation from true value bidding. Sellers respond strategically to this information when deciding on their Buy-It-Now prices. Thus, our results highlight potential economic consequences of information publicly available in (online) market institutions.

JEL classifications: C72, C91, D44, D82.
Keywords: electronic markets, experience, online auctions, BIN price, buyout
price, single item auction, private value, experiment

January 2010

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294.pdf

SIGNALING IN AUCTIONS AMONG COMPETITORS

Abstract:

We consider a model of oligopolistic firms that have private information about their cost structure. Prior to competing in the market a competitive advantage, i.e., a cost reducing technology, is allocated to a subset of the firms by means of a multi-object auction. After the auction either all bids or only the prices to be paid are revealed to all firms. This provides an opportunity for signaling. Whether there exists an equilibrium in which bids perfectly identify the bidders’ costs generally depends on the type and fierceness of the market competition, the specific auction format, and the bid announcement policy.

Keywords: Auction; Oligopoly; Signaling

JEL classification: D44, L13, D43, D82, C72

January 2010

Full text in pdf format:

293.pdf

Licensing a common value innovation when signaling strength may backfire

Abstract:

This paper reconsiders the licensing of a common value innovation to a downstream duopoly, assuming a dual licensing scheme that combines a first-price license auction with royalty contracts for losers. Prior to bidding firms observe imperfect signals of the expected cost reduction; after the auction the winning bid is made public. Bidders may signal strength to their rivals through aggressive bidding, which may however backfire and mislead the innovator to set an excessively high royalty rate. We provide sufficient conditions for existence of monotone bidding strategies and for the profitability of combining auctions and royalty contracts for losers.

Keywords: Patents, licensing, auctions, royalty, innovation, R&D, mechanism design.
JEL Classifications: D21, D43, D44, D45.

January 2010

Full text in pdf format:

292.pdf

Auctioning Process Innovations when Losers’ Bids Determine Royalty Rates

Abstract:

We consider a licensing mechanism for process innovations that combines a license auction with royalty contracts to those who lose the auction. Firms’ bids are dual signals of their cost reductions: the winning bid signals the own cost reduction to rival oligopolists, whereas the losing bid influences the beliefs of the innovator who uses that information to set the royalty rate. We derive conditions for existence of a separating equilibrium, explain why a sufficiently high reserve price is essential for such an equilibrium, and show that the innovator generally benefits from the proposed mechanism.

Keywords: Patents, licensing, auctions, royalty, innovation, R&D, mechanism design.
JEL Classification: D21, D43, D44, D45.

December 2009

Full text in pdf format:

291.pdf

On and Off Contract Remedies

Abstract:

A party dissatisfied with the contractual performance of a counterparty is typically able to pursue a variety of legal recourses. Within this apparent variety lurk two fundamental alternatives. The aggrieved party may (i) “affirm” the contract and seek money damages or specific performance; or (ii) “disaffirm” the contract with the remedy of rescission and restitution. This simple dichotomy of contract remedies applies broadly in both common law and civil law practice. We show here that this remedial regime allows parties to write simple contracts that induce first-best cooperative investments.

Keywords: breach remedies, incomplete contracts, cooperative investments.
JEL-Classification: K12, L22, J41, C70.

December 2009

Full text in pdf format:

290.pdf

Insolvency and Biased Standards - The Case for Proportional Liability

Abstract:

We analyze liability rules in a setting where injurers are potentially insolvent and where negligence standards may deviate from the socially optimal level. We show that proportional liability, which sets the measure of damages equal to the harm multiplied by the probability that it was caused by an injurer’s negligence, is preferable to other existing negligence-based rules. Moreover, proportional liability outperforms strict liability if the standard of due care is not set too low. Our analysis also suggests that courts should rely on statistical evidence and bar individualized causal claims that link the harm suffered by a plaintiff to the actions of the defendant. Finally, we provide a result which might be useful to regulators when calculating minimum capital requirements or minimum mandatory insurance for different industries.

Classification-JEL: K13
Keywords: judgment proof problem, uncertain causation, court error and misperception, proportional liability, disgorgement

December 2009

Full text in pdf format:

289.pdf

Fairness: A Critique to the Utilitarian Approach

Abstract:

We address a basic diffculty with incorporating fairness into standard utilitarian
choice theories. Standard utilitarian theories evaluate lotteries according to the (weighted) utility over final outcomes and assume in particular that a lottery is never preferred over getting the most preferred underlying outcome with ertainty. While nearly universally adopted in economics (including behavioral economics) and appealing for choices among consumption goods, this approach is problematic when choices directly affect the payoffs of other individuals.
A difficulty is that randomization may in itself be valued as a desirable procedure for allocating scarce resources. We highlight this in two simple choice settings. Individuals can choose between three options: to get more money; to get less money and someo ther good; to flip a coin between these two alternatives. When the good is a regular consumption good like a coffeemug, hardly any of our subjects randomize. When the good is a social good that yields payoffs directly to some other individual,nearly a third of our subjects choose to randomize. Our results indicate that fairness concerns are conducive to behavioral anomalies that the standard utilitarian model cannot accommodate.

Classification-JEL: D81, C91, D63
Keywords: risky choice, betweenness axiom, social preferences, preference for randomness

November 2009

Full text in pdf format:

288.pdf

Wages and Productivity Growth in a Dynamic Oligopoly

Abstract:

This paper studies the innovation dynamics of an oligopolistic industry. The firms compete not only in the output market but also by engaging in productivity enhancing innovations to reduce labor costs. Rent sharing may generate productivity dependent wage differentials. Productivity growth creates intertemporal spill-over effects, which affect the incentives for innovation at subsequent dates. Over time the industry equilibrium approaches a steady state. The paper characterizes the evolution of the industry's innovation behavior and its market structure on the adjustment path.

Classification-JEL: D24, D42, D92, J31
Keywords: innovation, laborproductivity, oligopoly, wagedifferentials, productivitygrowth, industrydynamics

November 2009

Full text in pdf format:

287.pdf

Competitive Careers as a Way to Mediocracy

Abstract:

We show that incompetitive careers based on individual performance the least productive individuals may have the highest probabilities to be promoted to top positions. These individuals have the lowest fall-back positions and, hence, the highest incentives to succeed in career contests. This detrimental incentive effect exists irrespective of whether effort and talent are substitutes or complements in the underlying contest-success function. However, in case of complements the incentive effect may be be outweighed by a productivity effect that favors high    effort choices by the more talented individuals.

Key Words: career competition; contest; mediocracy
JELClassification: D72; J44; J45; M51

November 2009

Full text in pdf format:

286.pdf

Deterrence in Competition Law

Abstract:

This paper provides a comprehensive discussion of the deterrence properties of a
competition policy regime. On the basis of  the economic theory of law enforcement
we identify several factors that are likely to affect its degree of deterrence: 1)
sanctions and damages; 2) financial and human resources; 3) powers during the
investigation; 4) quality of the law; 5) independence; and 6) separation of power. We then discuss how to measure deterrence. We review the literature that use surveys to solicit direct information on changes in the behavior of firms due to the threats posed by the enforcement of antitrust rules, and the literature based on the analysis of hard data. We finally argue that the most  challenging task, both theoretically and empirically, is how to distinguish between “good” deterrence and “bad” deterrence.
 

JEL classification: K21, K42, L4

Keywords: Competition Policy, Law Enforcement, Deterrence

October 2009

Full text in pdf format:

285.pdf

Measuring the deterrence properties of competition policy: the Competition Policy Indexes

Abstract:

The aim of this paper is to describe in detail a set of newly developed indicators of the quality of competition policy, Competition Policy Indexes, or CPIs. The CPIs measure the deterrence properties of a competition policy in a jurisdiction, where for competition policy we mean the antitrust legislation, including the merger control provisions, and its enforcement. The CPIs incorporate data on how the key features of a competition policy regime score against a benchmark of generally-agreed best practices and summarise them so as to allow cross-country and cross-time comparisons. The  CPIs have been calculated for a sample of 13 OECD
jurisdictions over the period 1995-2005.

JEL classification: K21, K42, L40

Keywords: Competition Policy, Indicator, Deterrence, Competition Law

October 2009

Full text in pdf format:

284.pdf

Competition Policy and Productivity Growth: An Empirical Assessment

Abstract:

This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy asmeasured by newly created indexes. We provide several arguments and results based on instrumental variables estimators as well as non-linearities to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional setup and antitrust activities (rather than merger control). The effect is strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.

JEL classification: L4, K21, O4, C23

Keywords: Competition Policy, Productivity Growth, Institutions, Deterrence, OECD

October 2009

Full text in pdf format:

283.pdf

Breach Remedies Including Hybrid Investments

Abstract:

We show that parties in bilateral trade can rely on the default common law breach
remedy of  ‘expectation damages’ to induce simultaneously first-best relationship-specific investments of both the selfish and the cooperative kind. This can be achieved by writing a contract that specifies a suffciently high quality level. In contrast, the result by Che and Chung (1999) that ‘reliance damages’ induce the firstbest in a setting of purely cooperative investments, does not generalize to the hybrid case. We also show that if the quality specified in the contract is too low, ‘expectation damages’ do not necessarily induce the ex-post effcient trade decision in the presence of cooperative investments.

JEL-Classification: K12, L22, J41, C70.

Keywords: breach remedies, incomplete contracts, hybrid investments, cooperative investments, selfish investments.

 October 2009

Full text in pdf format:

282.pdf

Signaling an Outside Option

Abstract:

We consider the case of an upstream seller who works to
improve an asset that has been specialized to a downstream buyer's needs. The buyer then makes a take it or leave it offer to the seller about how the future surplus should be split. We assume that the seller from the outset has private information about the fraction of the surplus that he can realize on his own, and show that this leads to higher investment compared to the complete information case. This positive effect on investment is countervailed by the occurrence of inefficient separations, which result when the buyer mistakenly tries to call the seller's bluff with a low offer.

Classification-JEL:D23, D82

Keywords: ignaling, relationship-specific investment, incomplete contracts, outside options

October 2009

Full text in pdf format:

281.pdf

On the Use of Information in Repeated Insurance Markets

Abstract:

We analyze the use of information in a repeated oligopolistic insurance
market. To sustain collusion, insurance companies might refrain from
changing their pricing schedules even if new information about risks
becomes available. We therefore provide an explanation for the existence
of "unused observables" that is information which a) insurance companies
collect or could collect, b) is correlated with the risk experience, but
c) is not used by companies to set prices. Furthermore, the existence of
bulk discounts becomes rationalizable. These results also obtain if we
include communication among companies and market entry to our framework.

Classification-JEL:C72, G22, L13

Keywords: repeated games, insurance markets, oligopoly, unused observables

October 2009

Full text in pdf format:

280.pdf

Product Durability in Markets with Consumer Lock-in

Abstract:

This paper examines a two-period duopoly where consumers are locked-in by switching costs that they face in the second period. The paper's main focus is on the question of how the consumer lock-in affects the firms' choice of product durability. We show that firms may face a prisoners' dilemma situation in that they simultaneously choose non-durable products although they would have higher profits by producing durables. From a social welfare perspective, firms may even choose an inefficiently high level of product durability.

JEL Classification Numbers: L13, D21

Key words: Consumer Lock-in, Product Durability, Duopoly

October 2009

Full text in pdf format:

279.pdf

Competitive Effects of Vertical Integration with Downstream Oligopsony and Oligopoly

Abstract:

We analyze the competitive effects of backward vertical integration by a partially vertically integrated firm that competes with non-integrated firms both upstream and downstream. We show that vertical integration is procompetitive under fairly general conditions. It can be anticompetitive only if the ex ante degree of integration is relatively large. Interestingly, vertical integration is more likely to be anticompetitive if the industry is less concentrated. These results are in line with recent empirical evidence. In addition, we show that even when vertical integration is procompetitive, it is not necessarily welfare enhancing.

Keywords: Vertical Integration, Downstream Oligopsony, Downstream Oligopoly, Competition Policy, Capacity Choice

JEL-Classification: D43, L41, L42

October 2009

Full text in pdf format:

278.pdf

An Experimental study on the information structure in teams

Abstract:

Is free-riding in teams reduced when one member receives a signal on his
colleagueís performance? And how does free-riding depend on the signal's
type? We address these questions in experimental teams in which two agents
sequentially exert effort to contribute to the team output. We vary the type
of information the second mover receives prior to his effort choice and find
that agents work more when signals are available. Overall, behavior differs
from predictions of standard theory. Signals that are predicted to have no
effect are, in fact, influential and signals that are predicted to have an effect
are redundant.

Keywords: Team production, Free-riding, Experiment, Information, Signal

JEL Classification: C92, J30, M50, D82

September 2009

Full text in pdf format:

277.pdf

Licensing Complementary Patents: “Patent Trolls”, Market Structure, and “Excessive” Royalties

Abstract:

The infamous Blackberry case brought new attention to so-called “patent trolls” and began the general association of trolls with “non-practicing” patent holders. This has had important legal consequences: Namely, patent holders have been denied injunctive relief because they did not practice the patents themselves. In this paper we analyze how patent holders –– both non-practicing and vertically integrated –– choose their royalties depending on the structure of the upstream and downstream markets and the types of licensing agreements available. We show that a vertically integrated firm has an incentive to raise its rivals’ costs and to restrict entry on the downstream market; incentives that do not hold for non-integrated patent holders. An automatic presumption that a non-integrated patent holder will charge higher royalties than a vertically integrated company is therefore unfounded. Whether a company charges “excessive” royalties depends on whether there is scope for hold-up, either because of sunk investments on the part of potential licensees or because of “weak” patents held by the licensor. These factors are orthogonal to whether patent holders are practicing or not

September 2009

Full text in pdf format:

275.pdf

Complementary Patents and Market Structure

Abstract:

Many high technology goods are based on standards that require several essential patents owned by different IP holders. This gives rise to a complements and a double mark-up problem. We compare the welfare effects of two different business strategies dealing with these problems. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always benefits from entry and innovation

KEYWORDS: IP rights, complementary patents, standards, licensing, patent pool, vertical integration

JEL CLASSFICATION CODES:  L1, L4.

September 2009

Full text in pdf format:

274.pdf

Financial Constraints and the Margins of FDI

Abstract:

Recent literature on multinational firms has stressed the importance of low productivity as a barrier to the cross-border expansion of firms. But firms may also need external finance to shoulder the costs of entering foreign markets. We develop a model of multinational firms facing real and financial barriers to foreign direct investment (FDI), and we analyze their impact on the FDI decision (the extensive margin) and foreign affiliate sales (the intensive margin). We provide empirical evidence based on a detailed dataset of German multinationals which contains information on parent-level and affiliate-level financial constraints as well as on the location the foreign affiliates. We find that financial factors constrain firms’ foreign investment decisions, an effect  felt in particular by large firms. Financial constraints at the parent level matter for the extensive, but less  so for the intensive margin. For the intensive margin, financial constraints at the affiliate level are relatively more important.

Keywords: multinational firms, heterogeneity, productivity, financial constraints
JEL-classification: F2, G2

September 2009

Full text in pdf format:

272.pdf

Monopoly Distortions in Durability and Multi-Dimensional Quality

Abstract:

I show that Swan’s (1970) independence result requires a mul-
tiplicative interaction between durability and all other quality at-
tributes. Because there is no compelling argument for a multiplica-
tivity in quality, monopolists tend to distort durability, even with
constant marginal costs. Distortions in durability and other quality
aspects are aligned exactly when the marginal cost of quality do not
increase too much with durability.

Keywords: Durability, quality, monopoly
JEL Classification No.: L15

September 2009

Full text in pdf format:

271.pdf

Screening and Merger Activity

Abstract:

In our paper targets, by setting a reserve price, screen acquirers on their (expected) ability to generate merger-specific synergies. Both empirical evidence and many common merger models suggest that the difference between high- and low-synergy mergers becomes smaller during booms. This implies that the target’s opportunity cost for sorting out relatively less fitting acquirers increases and, hence, targets screen less tightly during booms, which leads to a hike in merger activity. Our screening mechanism not only predicts that merger activity is intense during economic booms and subdued during recessions but is also consistent with other stylized facts about takeovers and generates novel testable predictions.

JEL Classification Numbers: D21, D80, L11.
Key Words: Takeovers, Merger Waves, Defense Tactics, Screening

August 2009

Full text in pdf format:

270.pdf

The Effects of Entrepreneurship Education

Abstract:

Entrepreneurship education ranks highly on policy agendas in Europe and the US, but little research is available to assess its impacts. In this context it is of primary importance to understand whether entrepreneurship education raises intentions to be entrepreneurial generally or whether it helps students determine how well suited they are for entrepreneurship. We develop a theoretical model of Bayesian learning in which entrepreneurship education generates signals which help students to evaluate their own aptitude for entrepreneurial tasks. We derive predictions from the model and test them using data from a compulsory entrepreneurship course at a German university. Using survey responses from 189 students ex ante and ex post, we find that entrepreneurial propensity declined somewhat in spite of generally good evaluations of the class. Our tests of Bayesian updating provide support for the notion that students receive valuable signals and learn about their own type in the entrepreneurship course.

JEL Classification: D83, J24, L26, M13
Keywords: entrepreneurship, entrepreneurship education, Bayes’ Rule, learning, signals

August 2009

Full text in pdf format:

269.pdf

Nationalizations and effciency

Abstract:

We develop a theoretical model in which firms are either private or state-owned.
When firms become insolvent, the government can intervene with general mea-
sures, like subsidies, or by nationalizing firms. The government only intervenes
when the bankruptcy of a firm entails social costs. In a stylized model, we an-
alyze how government interventions affect allocative and productive efficiency.
Nationalization of private firms in case unprofitable investments were made,
leads to increased allocative efficiency despite private ownership. The effort
level chosen by the managers working for firms is also affected by government
intervention with an impact on productive efficiency.

JEL Codes: L33, P31, P51

Key Words: nationalization, efficiency

July 2009

Full text in pdf format:

268.pdf

How does entry regulation influence entry into selfemployment and occupational mobility?

Abstract:

We analyze how an entry regulation that imposes a mandatory educational standard affects entry into self-employment and occupational mobility. We exploit the German reunification as a natural experiment and identify regulatory effects by comparing differences between regulated occupations and unregulated occupations in East Germany with the corresponding differences in West Germany after reunification. Consistent with our expectations, we find that entry regulation reduces entry into selfemployment and occupational mobility after reunification more in regulated occupations in East Germany than in West Germany. Our findings are relevant for transition or emerging economies as well as for mature market economies requiring large structural changes after unforeseen economic shocks.

JEL: J24, J62, K20, L11, L51, M13
Keywords: Entry Regulation, Self-Employment, Occupational Mobility

July 2009

Full text in pdf format:

267.pdf

Sabotage in dynamic tournaments

Abstract:

This paper studies sabotage in a dynamic tournament. Three players compete in two rounds. In the final round, a player who is leading in the race, but not yet beyond the reach of his competitors, gets sabotaged more heavily. As a consequence, if players are at the same position initially, they do not work productively or sabotage at all in the first round. Thus sabotage is not only directly destructive, but also depresses incentives to work productively. If players are heterogeneous ex ante, sabotage activities in the first round may be concentrated against an underdog, contrary to findings from static tournaments. We also discuss the robustness of our results in a less stylized environment.

Classification-JEL:

Keywords: dynamic tournaments, contests, sabotage, heterogeneity

June 2009

Full text in pdf format:

266.pdf

On the legitimacy of coercion for the nancing of public goods

Abstract:

The literature on public goods has shown that efficient outcomes are impossible if participation constraints have to be respected. This paper addresses the question whether they should be imposed. It asks under what conditions efficiency considerations justify that individuals are forced to pay for public goods that they do not value. It is shown that participation constraints are desirable if public goods are provided by a malevolent Leviathan. By contrast, with a Pigouvian planner, efficiency can be achieved. Finally, the paper studies the delegation of public goods provision to a profit-maximizing firm. This also makes participation constraints desirable.

Keywords: Public goods, Mechanism Design, Incomplete Contracts, Regulation

JEL: D02, D82, H41, L51

May 2009

Full text in pdf format:

265.pdf

Minimum Wages and Excessive Effort Supply

Abstract:

It is well-known that, in static models, minimum wages generate
positive worker rents and, consequently, inefficiently low effort. We
show that this result does not necessarily extend to a dynamic context.
The reason is that, in repeated employment relationships, firms may
exploit workers’ future rents to induce excessively high effort.

Key Words: bonuses; limited liability; minimum wages

JEL Classification: D82; D86; J33

June 2009

Full text in pdf format:

264.pdf

Investments and the Holdup Problem in a Matching Market

Abstract:

This paper studies investment incentives in the steady state of a dynamic bi-
lateral matching market. Because of search frictions, both parties in a match are
partially locked–in when they bargain over the joint surplus from their sunk invest-
ments. The associated holdup problem depends on market conditions and is more
important for the long side of the market. In the case of investments in homoge-
nous capital only the agents on the short side acquire ownership of capital. There
is always underinvestment on both sides of the market. But when market frictions
become negligible, the equilibrium investment levels tend towards the first–best.

Keywords: Holdup Problem, Matching Market, Investments

JEL Classification No.: C78, D23, D92

June 2009

Full text in pdf format:

263.pdf

Prizes and Lemons: Procurement of Innovation under Imperfect Commitment

Abstract:

The literature on R&D contests implicitly assumes that contestants submit
their innovation regardless of its value. This ignores a potential adverse selection
problem. The present paper analyzes the procurement of innovations when the
procurer cannot commit to never bargain with innovators who bypass the contest.
We compare fixed-prize tournaments with and without entry fees, and optimal
scoring auctions with and without minimum score requirement. Our main result
is that the optimal fixed-prize tournament is more profitable than the optimal
auction since preventing bypass is more costly in the optimal auction.

 
JEL classification: C70, D44, D89, L12, O32

Keywords: innovation, contests, tournaments, auctions, bargaining, adverse
selection

June 2009

Full text in pdf format:

262_01.pdf

Signal-Jamming in a Sequential Auction

Abstract:

In a recurring auction early bids may reveal bidders’ types, which in turn
affects bidding in later auctions. Bidders take this into account and may
bid in a way that conceals their private information until the last auction is
played. The present paper analyzes the equilibrium of a sequence of first-
price auctions assuming bidders have stable private values. We show that
signal-jamming occurs and explore the dynamics of equilibrium prices.

JEL classifications: D44, D02, D43

Keywords: AUCTIONS, SIGNALING, PRICE COMPETITION

June 2009

Full text in pdf format:

261_01.pdf

Strategic Experimentation with Poisson Bandits

Abstract:

We study a game of strategic experimentation with two-armed bandits where the risky arm distributes lump-sum payoffs according to a Poisson process. Its intensity is either high or low, and unknown to the players. We consider Markov perfect equilibria with beliefs as the state variable. As the belief process is piecewise deterministic, payoff functions solve differential-difference equations.  here is no equilibrium where all players use cut-off strategies, and all equilibria exhibit an ‘encouragement effect’ relative to the single-agent optimum. We construct asymmetric equilibria in which players have symmetric continuation values at sufficiently optimistic beliefs yet take turns playing the risky arm before all experimentation stops. Owing to the encouragement effect, these equilibria Pareto dominate the unique symmetric one for sufficiently frequent turns. Rewarding the last experimenter with a higher continuation value increases the range of beliefs where players experiment, but may reduce average payoffs at more optimistic beliefs. Some equilibria exhibit an ‘anticipation effect’: as beliefs become more pessimistic, the continuation value of a single experimenter increases over some range because a lower belief means a shorter wait until another player takes over.

JEL Classification Numbers: C73, D83, O32.

Keywords: Strategic Experimentation, Two-Armed Bandit, Poisson Process,
Bayesian Learning, Piecewise Deterministic Process, Markov Perfect Equilib-
rium, Differential-Difference Equation.

May 2009

Full text in pdf format:

260.pdf

Renegotiation-Proof Relational Contracts with Side Payments

Abstract:

We study infinitely repeated two player games with perfect information, where each period consists of two stages: one in which the parties simultaneously choose an action and one in which they can transfer money to each other. We first derive simple conditions that allow a constructive characterization of all Pareto-optimal subgame perfect payoffs for all discount factors. Afterwards, we examine different concepts of renegotiation-proofness and extend the characterization to renegotiation-proof payoffs.

JEL classification: C73, L14

Keywords: renegotiation, infinitely repeated games, side payments, optimal penal codes

April 2009

Full text in pdf format:

259.pdf

Optional linear input prices in vertical relations

Abstract:

This paper examines how the option of a regulated linear input price affects vertical contracting, where a monopolistic upstream supplier sequentially offers supply contracts to two symmetric downstream firms. We find that equilibrium contracts vary with production cost and regulated price level: If the regulated price is not too high, the option allows for price discrimination, but prevents foreclosure in the intermediary market. Indeed, if both cost and optional price are rather low, non-discriminatory input prices below cost may arise. Optional input prices are socially more desirable than a flat ban on price discrimination, as consumers benefit from more intense downstream competition.

Keywords: price discrimination, vertical contracting, exclusion, regulatory outside option

JEL classification: D42, L11, L42

April 2009

Full text in pdf format:

258.pdf

Platform Standards, Collusion and Quality Incentives

Abstract:

This paper examines how quality incentives are related to the interoperability of competing platforms. Platforms choose whether to operate standardised or exclusively, prior to quality and subsequent price competition. We find that platforms choose a common standard if they can
coordinate their quality provision. The actual investment then depends on the cost of quality provision: If rather high, platforms refrain from investment; if rather low, platforms maintain vertically differentiated platforms. The latter case is socially more desirable than exclusivity where platforms do not invest. Nevertheless, quality competition of standardised platforms induces the highest investment and maximum welfare.
JEL Classification: D43, D62, L13
Keywords: two-sided markets, standards, investment in transaction quality

January 2009

Full text in pdf format:

257.pdf

On Inequity Aversion - A Reply to Binmore and Shaked

Abstract:

In this paper we reply to Binmore and Shaked’s criticism of the
Fehr-Schmidt model of inequity aversion. We put the theory and their
arguments into perspective and show that their criticism is not substantiated.
Finally, we briefly comment on the main challenges for future research on
social preferences. 
Keywords: Experiments, other-regarding preferences, inequity aversion, 
JEL Classification: B41, C90

Febuary 2009

Full text in pdf format:

256.pdf

Indirect Taxation in Vertical Oligopoly

Abstract:

This paper analyzes the effects of specific and ad valorem taxation in an indus-
try with downstream and upstream oligopoly. We find that in the short run, i.e.
when the number of firms in both markets is exogenous, the results concerning tax incidence tend to be qualitatively similar to models where the upstream market is perfectly competitive. However, both over- and undershifting are more pronounced, potentially to a very large extent. Instead, in the long run under endogenous entry and exit overshifting of both taxes is more likely to occur and is more pronounced under upstream oligopoly. As a result of this, a tax increase is more likely to be welfare reducing. We also demonstrate that downstream and upstream taxation are equivalent in the short run while this is not true for the ad valorem tax in the long run. We show that it is normally more efficient to tax downstream.
JEL classification: D43, H21, H22, L13
Keywords: Specific Tax, Ad Valorem Tax, Value-Added Tax, Tax Incidence,
Tax Efficiency, Indirect Taxation, Imperfect Competition, Vertical Oligopoly.

Febuary 2009

Full text in pdf format:

255.pdf

Subsidies, Knapsack Auctions and Dantzig’s Greedy Heuristic

Abstract:

A budget-constrained buyer wants to purchase items from a shortlisted set.
Items are differentiated by quality and sellers have private reserve prices for
their items. Sellers quote prices strategically, inducing a knapsack game.
The buyer’s problem is to select a subset of maximal quality. We propose
a buying mechanism which can be viewed as a game theoretic extension of
Dantzig’s greedy heuristic for the classic knapsack problem. We use Monte
Carlo simulations to analyse the performance of our mechanism. Finally,
we discuss how the mechanism can be applied to award R&D subsidies.
JEL classification: D21, D43, D44, D45
Keywords: Auctions, Subsidies, Market Design, Knapsack Problem

Febuary 2009

Full text in pdf format:

254.pdf

To Be Financed or Not... - The Role of Patents for Venture Capital Financing

Abstract:

This paper investigates how patent applications and grants held by new ventures improve their ability to attract venture capital (VC) financing. We argue that investors are faced with considerable uncertainty and therefore rely on patents as signals when trying to assess the prospects of potential
portfolio companies. For a sample of VC-seeking German and British biotechnology companies we have identified all patents filed at the European Patent Office (EPO). Applying hazard rate analysis, we find that in the presence of patent applications, VC financing occurs earlier. Our results also show
that VCs pay attention to patent quality, financing those ventures faster which later turn out to have high-quality patents. Patent oppositions increase the likelihood of receiving VC, but ultimate grant decisions do not spur VC financing, presumably because they are anticipated. Our empirical results
and interviews with VCs suggest that the process of patenting generates signals which help to overcome the liabilities of newness faced by new ventures.
Keywords: patents, venture capital, intellectual property rights, R&D, biotechnology
JEL classification: O30, O34, L20, L26, G24

January 2009

Full text in pdf format:

253.pdf

The Role of Experiments for the Development of Economic Theories

Abstract:

Economic experiments interact with economic theories in various
ways. First of all they are used to test economic theories. However, they can
neither confirm nor falsify them in a strict sense. They rather inform us about
the range of applicability, the robustness and the predictive power of a theory.
Furthermore, economic experiments discover and isolate phenomena and
challenge economic theorists to explain them. Finally, many economic
experiments are “material” models. They are used to analyse and predict how
changes in the environment affect economic outcomes. However, they cannot
offer an explanation for what we observe. This has to be provided by economic
theory.
Keywords: Economic experiments, economic theories, falsification,
confirmation, phenomena, models.
JEL Classification: B41, C90.

January 2009

Full text in pdf format:

252.pdf

Exit Options in Incomplete Contracts with Asymmetric Information

Abstract:

This paper analyzes bilateral contracting in an environment with contractual incompleteness and asymmetric information. One party (the seller) makes an unverifiable quality choice and the other party (the buyer) has private information about its valuation.
A simple exit option contract, which allows the buyer to refuse trade, achieves
the first–best in the benchmark cases where either quality is verifiable or the buyer’s valuation is public information. But, when unverifiable and asymmetric information are combined, exit options induce inefficient pooling and lead to a particularly simplecontract. Inefficient pooling is unavoidable also under the most general form of contracts, which make trade conditional on the exchange of messages between the parties.
Indeed, simple exit option contracts are optimal if random mechanisms are ruled out.
Keywords: Incomplete Contracts, Asymmetric Information, Exit Options
JEL Classification: D82, D86, L15

Novmber 2008

Full text in pdf format:

251.pdf

The optimal prize structure of symmetric Tullock contests

Abstract:

We show that the optimal prize structure of symmetric n-player Tullock tournaments assigns the entire prize pool to the winner, provided that a symmetric pure strategy equilibrium exists. If such an equilibrium fails to exist under the winner-take-all structure, we construct the optimal prize structure which improves existence conditions by dampening efforts. If no such optimal equilibrium exists, no symmetric pure strategy equilibrium induces positive efforts.
Keywords: Tournaments, Incentive structures, Rent seeking
JEL Classification: C7, D72, J31

November 2008

Full text in pdf format:

250.pdf

Complementary Patents and Market Structure

Abstract:

Many high technology goods are based on standards that require access to several patents that are owned by different IP holders. We investigate the royalties chosen by IP holders under different market structures. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders (or a patent pool) solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always encourages entry and innovation.

Keywords: IP rights, complementary patents, standards, licensing, patent pool, vertical integration.
JEL Classification: L15, O31, L24, O32, K11.

September 2008

Full text in pdf format:

249.pdf

Integrating with Their Feet: Cross-Border Lending at the German-Austrian Border

Abstract:

The current economic policy discussion on financial integration in the European Union concentrates on cross-border mergers. We study the impact of cross-border lending in a theoretical model where banks acquire either hard or soft information on borrowing firms and predict that the closer firms are to the border the more likely banks are to offer them cross-border loans. This hypothesis is confirmed in the ifo Business Climate Survey that reports the perceptions of German firms on banks� lending behavior between 2003 and 2006. In contrast to the policy of harmonization, differences in bank regulations may provide incentives for cross-border lending. Thus, we show that financial integration may take place from the bottom up.
Keywords: Financial Integration, SMEs, Banking Supervision, Business Surveys, Threshold Analysis
JEL classification: TG18, G21, C25
August 2008

Full text in pdf format:

248.pdf

Breach Remedies, Performance Excuses, and Investment Incentives

Abstract:

Contract law is usually perceived as a strict liability system. When a promisor fails to perform he is held liable even if he is without fault. If, however, an unusual contingency has arisen he may be excused from performing provided that he has taken reasonable precautions. For a setting with uncertain costs of and benefits from performance, it is shown that a fixed price contract is sufficient to generate efficient reliance and precautions incentives under the following legal regime. If the promisor has met the appropriate precaution standard then he is excused if performance fails to be profitable. Alternative regimes, in contrast, where he is excused if performance is inefficient or even is extremely costly distort investment incentives quite generally.
Keywords: performance excuse, impracticability doctrine, overreliance, efficient precaution
JEL classification: K12
September 2008

Full text in pdf format:

247.pdf

Collusion and Durability

Abstract:

We develop a model to show that cartels that produce goods with lower durability are easier to sustain implicitly. This observation gen- erates the following results: 1) implicit cartels have an incentive to pro- duce goods with an inefficiently low level of durability; 2) a monopoly or explicit cartel is welfare superior to an implicit cartel; 3) welfare is non-monotonic in the number of firms; 4) a regulator may demand inefficiently high levels of durability to prevent collusion.
Keywords: cartels, collusion, durability
JEL classification: L15
September 2008

Full text in pdf format:

246.pdf

Relative Performance Pay, Bonuses, and Job-Promotion Tournaments

Abstract:

Several empirical studies have challenged tournament theory by pointing out that (1) there is considerable pay variation within hierarchy levels, (2) promotion premiums only in part explain hierarchical wage differences and (3) external recruitment is observable on nearly any hierarchy level. We explain these empirical puzzles by combining job-promotion tournaments with higher-level bonus payments in a two-tier hierarchy. Moreover, we show that under certain conditions the firm implements first-best effort on tier 2 although workers earn strictly positive rents. The reason is that the firm can use second-tier rents for creating incentives on tier 1. If workers are heterogeneous, the firm strictly improves the selection quality of a job-promotion tournament by employing a hybrid incentive scheme that includes bonus payments.
Keywords: bonuses; external recruitment; job promotion; limited liability; tournaments
JEL classification: D82; D86; J33
September 2008

Full text in pdf format:

245_01.pdf

Bank Competition - When is it Good?

Abstract:

The effects of bank competition and institutions on credit markets are usually studied separately although both factors are interdependent. We study the effect of bank competition on the choice of contracts (screening versus collateralized credit contract) and explicitly capture the impact of the institutional environment. Most importantly, we show that the effects of bank competition on collateralization, access to finance, and social welfare depend on the institutional environment. We predict that firms' access to credit increases in bank competition if institutions are weak but bank competition does not matter if they are well-developed.
Keywords: Bank competition, collateralization, screening, incentives
JEL classification: D82, G21, K00
July 2008

Full text in pdf format:

244.pdf

Negatively Correlated Bandits

Abstract:

We analyze a two-player game of strategic experimentation with two-armed bandits. Each player has to decide in continuous time whether to use a safe arm with a known payoff or a risky arm whose likelihood of delivering payoffs is initially unknown. The quality of the risky arms is perfectly negatively correlated between players. In marked contrast to the case where both risky arms are of the same type, we find that learn- ing will be complete in any Markov perfect equilibrium if the stakes exceed a certain threshold, and that all equilibria are in cutoff strategies. For low stakes, the equilib- rium is unique, symmetric, and coincides with the planner's solution. For high stakes, the equilibrium is unique, symmetric, and tantamount to myopic behavior. For inter- mediate stakes, there is a continuum of equilibria.
Keywords: Strategic Experimentation, Two-Armed Bandit, Exponential Distribution, Poisson Process, Bayesian Learning, Markov Perfect Equilibrium
JEL classification: C73, D83, O32
August 2008

Full text in pdf format:

243.pdf

Standard Breach Remedies, Quality Thresholds, and Cooperative Investments

Abstract:

When investments are non-verifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling 'expectation damages' close to legal practice, we show that the default remedy of contract law induces the first best. Yet, in order to lower informational requirements of courts, parties may opt for a 'specific performance' regime which grants the breached-against buyer an option to choose 'restitution' if the tender's value falls below some (exogenously given) quality threshold. In order to implement this regime, no more information needs to be verifiable than is implicitly assumed in Che and Hausch (1999).
Keywords: breach remedies, imcomplete contracts, cooperative investments
JEL classification: K12, L22, J41, C70
July 2008

Full text in pdf format:

242.pdf

Centralized and decentralized provision of public goods

Abstract:

We model the trade-off between centralized and decentralized decision making over the provision of local public goods. Centralized decisions are made in a legislature of locally elected representatives, and this creates a conflict of interest between citizens in different jurisdictions. The legislature can be self-interested or benevolent and this can result in either efficient, excessive or misallocative provision of public goods. Decisions are inuenced by spillover effects and differences in jurisdictionalsize. Furthermore, we look at the incentives for centralization.
Keywords: decentralization, local public goods
JEL classification: H40, H70, P51
July 2008

Full text in pdf format:

241.pdf

On the Stability of Research Joint Ventures: Implications for Collusion

Abstract:

Though there is a body of theoretical literature on research joint ventures (RJV) participation facilitating collusion, empirical tests are rare. Even more so, there are few empirical tests on the general theme of collusion. This note tries to fill this gap by assuming a correspondence between the stability of research joint ventures and collusion. By using data from the US Nation Cooperation Research Act, we show that large RJVs in concentrated industries are more stable and hence more suspect to collusion.
Keywords: research joint ventures, product market collusion, empirical test
JEL classification: L24, L44, L52
March 2008

Full text in pdf format:

240.pdf

The impact of horizontal mergers on rivals: Gains to being left outside a merger

Abstract:

It is commonly perceived that firms do not want to be outsiders to a merger between competitor firms. We instead argue that it is beneficial to be a non-merging rival firm to a large horizontal merger. Using a sample of mergers with expert-identification of relevant rivals and the event-study methodology, we find rivals generally experience positive abnormal returns at the merger announcement date. Further, we find that the stock reaction of rivals to merger events is not sensitive to merger waves; hence, 'future acquisition probability' does not drive the positive abnormal returns of rivals. We then build a conceptual framework that encompasses the impact of merger events on both merging and rival firms in order to provide a schematic to elicit more information on merger type.
Keywords: rivals, mergers, acquisitions, event-study
JEL classification: G14, G34, L22, M20
June 2008

Full text in pdf format:

239.pdf

In Search of Workers' Real Effort Reciprocity - A Field and a Laboratory Experiment

Abstract:

updated version of paper no 55

We present a field experiment to assess the effect of own and peer wage variations on actual work effort of employees with hourly wages. Work effort neither reacts to an increase of the own wage, nor to a positive or negative peer comparison. This result seems at odds with numerous laboratory experiments that show a clear own wage sensitivity on effort. In an additional real-effort laboratory experiment we show that explicit cost and surplus information that enables to exactly calculate employer’s surplus from the work contract is a crucial pre-requisite for a positive wage-effort relation. This demonstrates that employee’s reciprocity requires a clear assessment of the surplus at stake.
Keywords: efficiency wage, reciprocity, fairness, field experiment, real effort
JEL classification: C91, C92, J41
June 2008

Full text in pdf format:

238.pdf

Optimal Contracts for Lenient Supervisors

Abstract:

We consider a situation where an agent's effort is monitored by a supervisor who cares for the agent's well being. This is modeled by incorporating the agent's utility into the utility function of the supervisor. The first best solution can be implemented even if the supervisor's preferences are unknown. The corresponding optimal contract is similar to what we observe in practice: The supervisor's wage is constant and independent of his report. It induces one type of supervisor to report the agent's performance truthfully, while all others report favorably independent of performance. This implies that overstated performance (leniency bias) may be the outcome of optimal contracts under informational asymmetries.
Keywords: Subjective performance evaluation, leniency, supervisor, private infrmation
JEL classification: D82, D86, J33, M52
June 2008

Full text in pdf format:

237.pdf

How to Determine whether Regional Markets are Integrated? Theory and Evidence from European Electricity Markets

Abstract:

Prices may di er between regional markets if transport capacities are limited. We develop a new approach to determine to which extent such di erences stem from limited participation in cross-border trader rather than from bottlenecks. We derive a theoretical integration benchmark for the typical case where transportation markets clear before the product markets, using Grossman's (1976) notion of a rational expectations equilibrium. We compare the benchmark to data from European electricity markets. The data reject the integration hypothesis: Capacity prices contain too little information about spot price di erential; this indicates that well informed traders do not engage in cross-border trade.
Keywords: Market integration, electricity markets, interconnector,competition policy, rational expectations equilibrium
JEL classification: G14, D84, L94
April 2008

Full text in pdf format:

236.pdf

Legal Damages for Losses of Chances

Abstract:

This paper deals with legal damages if losses of chances are at stake. In response to disparate ad hoc rules that have emerged from legal practice in Europe, the present paper proposes a unifying principle to handle such cases. Quite generally, the purpose of a damages award is to compensate the claimant and should be based on the difference in value between due performance and actual performance. To cope with limited observability, it is suggested to still award the difference though on average over the observed event. The paper calculates damages in line with this general principle. The proposed damage scheme is shown to fully compensate the victim and to provide efficient incentives for precaution, be it that multiple injurers act non-cooperatively or in concert, even if losses of chances are at stake.
Keywords: estimating legal damages, liability for torts, liability for breach of contracts, uncertain causation,difference hypothesis
JEL classification: K12, K13, D62
February 2008

Full text in pdf format:

235.pdf

Optimal Tournament Contracts for Heterogeneous Workers

Abstract:

We analyze the optimal design of rank-order tournaments with heterogeneous workers. Iftournament prizes do not differ between the workers(uniform prizes), as in the previous tournament literature, the outcome will be ineffcient. In the case of limited liability, the employer may benefit from implementing more than first-best effort. We show that the employer can use individual prizes that satisfy a self-commitment condition and induce effcient incentives at the same time, thus solving a fundamental dilemma in tournament theory. Individual prizes exhibit two major advantages - they allow the extraction of worker rents and the adjustment of individual incentives, which will be important for the employer if he cannot rely on handicaps.
Keywords: heterogenous workers, limited liability,rank-order tournaments, self commitment
JEL classification: J33,M12, M52
May 2008

Full text in pdf format:

234.pdf

Risk Taking in Winner-Take-All Competition

Abstract:

We analyze a two-stage game between two heterogeneous players. At stage one, common risk is chosen by one of the players. At stage two, both players observe the given level of risk and simultaneously invest in a winner-take-all competition. The game is solved theoretically and then tested by using laboratory experiments. We find three effects that determine risk taking at stage one - an effort effect, a likelihood effect and a reversed likelihood effect. For the likelihood effect, risk taking and investments are clearly in line with theory. Pairwise comparison shows that the effort effect seems to be more relevant than the reversed likelihood effect when taking risk.
Keywords: Tournaments, Competition, Risk-Taking, Experiment
JEL classification: M51, C91, D23
March 2008

Full text in pdf format:

233.pdf

Limited Liability and the Risk-Incentive Relationship

Abstract:

Several empirical ?ndings have challenged the traditional view on the trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empirical puzzle on the positive relationship between risk and incentives can be explained. Increasing risk leads to a less informative performance signal. Under limited liability, the principal may optimally react by increasing the weight on the signal and, hence, choosing higher-powered incentives.
Keywords: moral hazard, limited liability, risk-incentive relationship
JEL classification: D82, D86
March 2008

Full text in pdf format:

232.pdf

Expectation Damages, Divisible Contracts, and Bilateral Investment

Abstract:

This paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship-specific investment by the buyer and the seller. As demonstrated by Edlin and Reichelstein (1996), no contract that specifies only a fixed quantity and a fixed per-unit price can induce efficient investment if marginal cost is constant and deterministic. We show that this result does not extend to more general payoff functions. If both parties face the risk of breaching, the first best becomes attainable with a simple price-quantity contract.
Keywords: breach remedies, renegotiation, hold-up
JEL classification: K12, D86, L14
March 2008

Full text in pdf format:

231.pdf

Is the veil of ignorance only a concept about risk? An experiment

Abstract:

We implement the Rawlsian veil of ignorance in the laboratory. Our experimental design allows separating the effects of risk and social preferences behind the veil of ignorance. Subjects prefer more equal distributions behind than in front of the veil of ignorance, but only a minority acts according to maximin preferences. Men prefer more equal allocations mostly for insurance purposes, women also due to social preferences for equality. Our results contrast the Utilitarian's claim that behind the veil of ignorance maximin preferences necessarily imply infinite risk aversion. They are compatible with any degree of risk aversion as long as social preferences for equality are sufficiently strong.
Keywords: law and economics, incentives, crowding out, experiment
JEL classification: D63, D64, C99
February 2008

Full text in pdf format:

230.pdf

An experimental test of the deterrence hypothesis

Abstract:

Crime has to be punished, but does punishment reduce crime? We conduct a neutrally framed laboratory experiment to test the deterrence hypothesis, namely that crime is weakly decreasing in deterrent incentives, i.e. severity and probability of punishment. In our experiment, subjects can steal from another participant's payoff. Deterrent incentives vary across and within sessions. The across subject analysis clearly rejects the deterrence hypothesis: except for very high levels of incentives, subjects steal more the stronger the incentives. We observe two types of subjects: selfish subjects who act according to the deterrence hypothesis and fair-minded subjects for whom deterrent incentives backfire.
Keywords: deterrence, law and economics, incentives, crowding out, experiment
JEL classification: K42, C91, D63
February 2008

Full text in pdf format:

229.pdf

A Model of Vertical Oligopolistic Competition

Abstract:

This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall profitability of the two-tier structure while the upstream conditions mainly affect the distribution of profits. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and show when they are welfare enhancing.
Keywords: Deregulation, Free Entry, Price Competition, Product Differentiation, Successive Oligopolies, Two-Part Tariffs, Vertical Restraints
JEL classification: L13, D43, L40, L50
February 2008

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228.pdf

Corporate Hierarchies and the Size of Nations: Theory and Evidence

Abstract:

Corporate organization varies within a country and across countries with country size. The paper starts by establishing some facts about corporate organization based on unique data of 660 Austrian and German corporations. The larger country (Germany) has larger firms with flatter and more decentralized corporate hierarchies compared to the smaller country (Austria). Firms in the larger country change their organization less fast than firms in the smaller country. Over time firms have been introducing less hierarchical organizations by delegating power to lower levels of the corporation. We develop a theory which explains these facts and which links these features to the trade environment that countries and firms face. We introduce firms with internal hierarchies in a Krugman (1980) cum Melitz and Ottaviano (2007) model of trade. We show that international trade and the toughness of competition in international markets induce a power struggle in firms which eventually leads to decentralized corporate hierarchies. We offer empirical evidence which is consistent with the models predictions.
Keywords: international trade with endogenous firm organizations, endogenous congruence in the firm, corporate organization in similar countries, empirical test of the theory of the firm
JEL classification: F12, F14, L22, D23
February 2008

Full text in pdf format:

227.pdf

Opportunistic Termination

Abstract:

If a seller delivers a good non-conforming to contract, European and US warranty law allows consumers to choose between some money transfer and termination. Termination rights are, however, widely criticized, mainly for fear that the buyer may use non-conformity as a pretext for getting rid of a contract he no longer wants. We show that this possibility of 'opportunistic termination' might actually have positive effects. Under some circumstances, it will lead to redistribution in favour of the buyer without any loss of efficiency. Moreover, by curbing the monopoly power of the seller, a regime involving termination might increase welfare by enabling a more efficient output level in a setting with multiple buyers.
Keywords: contract law, warranties, breach remedies, termination, harmonization
JEL classification: K12, C7, L40, D30
August 2008

Full text in pdf format:

226_01.pdf

Domestic Rivalry and Export Performance: Theory and Evidence from International Airline Markets

Abstract:

The much-studied relationship between domestic rivalry and export performance consists of those supporting a national-champion rationale, and those supporting a rivalry rationale. While the empirical literature generally supports the positive effects of domestic rivalry, the national-champion rationale actually rests on firmer theoretical ground. We address this inconsistency by providing a theoretical framework that illustrates three paths via which domestic rivalry translates into enhanced international exports. Furthermore, empirical tests on the world airline industry elicit the existence of one particular path - an enhanced firm performance effect - that connects domestic rivalry with improved international exports.
JEL classification: L52, L40, L93
February 2008

Full text in pdf format:

225.pdf

Plaintiffs exploiting Plaintiffs

Abstract:

We consider a model of a single defendant and N plaintiffs where the total cost of litigation is fixed on the part of the plaintiffs and shared among the members of a suing coalition. By settling and dropping out of the coalition, a plaintiff therefore creates a negative externality on the other plaintiffs. It was shown in Che and Spier (2007) that failure to internalize this externality can often be exploited by the defendant. However, if plaintiffs make sequential take-it-or-leave-it settlement offers, we can show that they will actually be exploited by one of their fellow plaintiffs rather than by the defendant. Moreover, if litigation is a public good as is the case in shareholder derivative suits, parties may fail to reach a settlement even having complete information. This may explain why we observe derivative suits in the US but not in Europe.
Keywords: litigation, settlement, bargaining, contracting with externalities, derivative suits, public goods
JEL classification: K41, C7, H4
January 2008

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224.pdf

Does Interbank Borrowing Reduce Bank Risk?

Abstract:

In this paper we investigate whether banks that borrow from other banks have lower risk levels. We concentrate on a large sample of Central and Eastern European banks which allows us to explore the impact of interbank lending when exposures are long-term and interbank borrowers are small banks. The results of the empirical analysis generally confirm the hypothesis that long-term interbank exposures result in lower risk of the borrowing banks.
Keywords: interbank market, bank risk, market discipline, transition countries
JEL classification: G21, E53
November 2007

Full text in pdf format:

223.pdf

The Politician and his Banker

Abstract:

Should the European Union grant state aid through an institution like the European Investment bank? This paper evaluates the efficiency of different measures for granting state aid. We use a theoretical model with firms that differ in their creditworthiness and compare different types of subsidies with indirect subsidization through public banks. We find that, in a large parameter range, the politician prefers public banks to direct subsidies because they avoid windfall gains to entrepreneurs and they economize on screening costs. For similar reasons, they may increase social welfare relative to subsidies. One important prerequisite for this result is that public banks must not be allowed to fully compete with private banks. However, from a welfare perspective, a politician uses public banks inefficiently often.
Keywords: public bank, development bank, state aid, subsidies, governance
JEL classification: G21, G38, H25
November 2007

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222.pdf

The Dynamics of Research Joint Ventures: A Panel Data Analysis

Abstract:

The aim of this paper is to test the determinants of Research Joint Ventures’ (RJVs) group dynamics. We look at entry, exit and turbulence in RJVs that have been set up under the US National Cooperative Research Act, which allows for certain antitrust exemptions in order to stimulate firms to cooperate in R&D. Accounting for unobserved project characteristics and controlling for inter-RJV interactions and industry effects, the Tobit panel regressions show the importance of group and time features for an RJV’s evolution. We further identify an average RJV’s long-term equilibrium size and assess its determining factors. Ours is a first attempt to produce robust stylized facts about cooperational short- and long-term dynamics, an important but neglected dimension in research cooperations.
Keywords: research joint ventures, dynamics, panel data
JEL classification: C23, L24, O32
October 2007

Full text in pdf format:

221.pdf

The Actual Structure of eBay’s Feedback Mechanism and Early Evidence on the Effects of Recent Changes

Abstract:

eBay’s feedback mechanism is considered crucial to establishing and maintaining trust on the world’s largest trading platform. The effects of a user’s reputation on the probability of sale and on prices are at the center of a large number of studies. More recent theoretical work considers aspects of the mechanism itself. Yet, there is confusion amongst users about its exact institutional details, which also changed substantially in the last few months. An understanding of these details, and how the mechanism is perceived by users, is crucial for any assessment of the system. We provide a thorough description of the institutional setup of eBay’s feedback mechanism, including recent changes to it. Most importantly, buyers now have the possibility to leave additional, anonymous ratings on sellers on four different criteria. We discuss the implications of these changes and provide first descriptive evidence on their impact on rating behavior.
Keywords: eBay, reputation mechanism, strategic feedback behavior, informational content, reciprocity, fear of retaliation
JEL classification: D44, L15, L86
November 2007

Full text in pdf format:

220.pdf

Feedback in Tournaments under Commitment Problems: The-ory and Experimental Evidence

Abstract:

In this paper, we analyze a principal's optimal feedback policy in tournaments. We close a gap in the literature by assuming the principal to be unable to commit to a certain policy at the beginning of the tournament. Our analysis shows that in equilibrium the principal reveals in-termediate information regarding the agents’ previous performances if these performances are not too different. Moreover, we investigate a situation where the principal is not able to credi-bly communicate her information. Having presented our formal analysis, we test these results using data from laboratory experiments. The experimental findings provide some support for the model.
Keywords: tournament, commitment problems, feedback, experiment
JEL classification: C 91, D 83, J 33, M 52

Full text in pdf format:

219.pdf

Remedy for Now but Prohibit for Tomorrow: The Deterrence Effects of Merger Policy Tools

Abstract:

Antitrust policy involves not just the regulation of anti-competitive behavior, but also an important deterrence effect. Neither scholars nor policymakers have fully researched the deterrence effects of merger policy tools, as they have been unable to empirically measure these effects. We consider the ability of different antitrust actions – Prohibitions, Remedies, and Monitorings – to deter firms from engaging in mergers. We employ cross-jurisdiction/pan-time data on merger policy to empirically estimate the impact of antitrust actions on future merger frequencies. We find merger prohibitions to lead to decreased merger notifications in subsequent periods, and remedies to weakly increase future merger notifications: in other words, prohibitions involve a deterrence effect but remedies do not.
JEL classification: L40, L49, K21
September 2007

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218.pdf

Equal Sharing Rules in Partnerships

Abstract:

Partnerships are the prevalent organizational form in many industries. Most partnerships share profits equally among the partners. Following Kandel and Lazear (1992) it is often argued that "peer pressure" mitigates the arising free-rider problem. This line of reasoning takes the equal sharing rule as exogenously given. The purpose of our paper is to show that with inequity averse partners - a behavioral assumption akin to peer pressure - the equal sharing rule arises endogenously as an optimal solution to the incentive problem in a partnership.
Keywords: equal sharing rule, partnerships, incentives, peer pressure, inequity aversion
JEL classification: D20, D86, J54
August 2007

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217.pdf

The Effect of Bank Competition on the Bank’s Incentive to Collateralize

Abstract:

It has been argued that competing banks make inefficiently frequent use of collateralization in situations where they are better able to evaluate a project’s risk than entrepreneurs. We study the bank’s choice between screening and collateralization in a model where banks do not have this superior screening skill. In particular, we study the effect of bank competition on this choice. We find that competing banks use collateral less often than a monopolistic bank because competition will intensify if both banks collateralize. Moreover, bank competition is welfare improving if collateralization is rather costly.
Keywords: collateralization, screening, incentives, bank competition
JEL classification: D82, G21, K00
September 2007

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216.pdf

Which Reputations Does a Brand Owner Need? Evidence from Trade Mark Opposition

Abstract:

At least two: the reputation of their brand and a reputation for being tough on imitators of this brand. Sustaining a brand requires both investment in its reputation amongst consumers and the defence of the brand against followers that infringe upon it. I study the defence of trade marks through opposition at a trade mark office. A structural model of opposition and adjudication of trade mark disputes is presented. This is applied to trade mark opposition in Europe. Results show that brand owners can benefit from a reputation for tough opposition to trade mark applications. Such a reputation induces applicants to settle trade mark opposition cases more readily.
Keywords: trade marks, opposition, intellectual property rights, reputation
JEL classification: K41, L00, O31, O34
July 2007

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215.pdf

Double-Sided Moral Hazard, Efficiency Wages and Litigation

Abstract:

We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifiable performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties the pure threat of using the legal system may suffice to make the principal implement first-best effort. As is shown in the paper, this .finding is rather robust. In particular, it holds for situations where the agent is protected by limited liability, where the parties have different technologies in the litigation contest, or where the agent is risk averse.
Keywords: double-sided moral hazard, efficiency wage, litigation, contest, settlement
JEL classification: D86, J33, K41

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214.pdf

Who is Afraid of Political Risk? Multinational Firms and their Choice of Capital Structure

Abstract:

This paper investigates how multinational firms choose their capital structure in response to political risk. We focus on two choice variables, the leverage and the ownership structure of the foreign affiliate, and we distinguish different types of political risk, like expropriation, corruption and confiscatory taxation, and In our theoretical analysis we find that as political risk increases the ownership share always decreases whereas leverage can both increase or decrease, depending on the type of political risk. Using the Microdatabase Direct Investment of the Deutsche Bundesbank, we find supportive evidence for these different effects.
Keywords: multinational Terms, political risk, capital structure, leverage, ownership structure
JEL classification: F23, F21, G32
August 2007

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213.pdf

FDI and Domestic Investment: An Industry-Level View

Abstract:

Previous empirical work on the link between domestic and foreign investment provides mixed results which partly depend on the level of aggregation of the data. We argue that the aggregated home country implications of foreign direct investment (FDI) cannot be gauged using firm-level data. Aggregated data, in turn, miss channels through which domestic and foreign activities interact. Instead, industry-level data provide useful information on the link between domestic and foreign investment. We theoretically show that the effects of FDI on the domestic capital stock depend on the structure of industries and the relative importance of domestic and multinational firms. Our model allows distinguishing intra-sector competition from inter-sector linkage effects. We test the model using data on German FDI. Using panel cointegration methods, we find evidence for a positive long-run impact of FDI on the domestic capital stock and on the stock of inward FDI. Effects of FDI on the domestic capital stock are driven mainly by intrasector effects. For inward FDI, inter-sector linkages matter as well.
Keywords: foreign direct investment, domestic capital stock
JEL classification: F21, F23, E22
July 2007

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212.pdf

Allocation of Authority when a Person is not a Robot

Abstract:

We formalize a conception of authority, which is commonly defined as the right of controlling a person’s actions embedded in human assets in sociology. Due to the inalienable property of human assets, the contractible formal authority is hard to verify and enforce, while real authority usually diverges from formal authority. Inefficiency tends to arise when a task is not routine or can not be done by a robot. Using a framework of incomplete contract, we show that allocation of formal authority, as an instrument to mitigate the inefficiency, is determined by features of tasks and specificity of assets, and the relationship between the resources. Monitoring is then introduced to fine tune value of delegation.
Keywords: Transaction of human assets, real authority, formal authority, delegation, monitor
JEL classification: D23, J24, J41, L22.
July 2007

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211.pdf

Efficient Inequity–Averse Teams

Abstract:

This paper analyzes the efficiency of team production when agents exhibit other regarding preferences. It is shown that full efficiency can be sustained as an equilibrium through a budget-balancing mechanism that punishes some randomly chosen agents if output falls short of efficient level but distributes the output equally otherwise, provided that the agents are sufficiently inequity averse.
Keywords: moral hazard, team production, inequity aversion
JEL classification: C7, D7, D63, L2
May 2007

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210.pdf

Power in the Multinational Corporation in Industry Equilibrium

Abstract:

Recent theories of the multinational corporation introduce the property rights model of the firm and examine whether to integrate our outsource firm activities locally or to a foreign country. This paper focus instead on the internal organization of the multinational corporation by examining the power allocation between headquarters and subsidiaries. We provide a framework to analyse the interaction between the decision to serve the local market by exporting or FDI, market acces and the optimal mode of organization of the multinational corporation. We find that subsidiary managers are given most autonomy in their decision how to run the firm at intermediate levels of local competition. We then provide comparative statics for changes in fixed FDI entry costs and trade costs, information technology, the number of local competitors, and in the size of the local market.
Keywords: foreign direct investment, power allocation in the firm, international trade and the organization of production
JEL classification: D23; F1; F2
May 2007

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209.pdf

Short-term or long-term contracts? - A rent-seeking perspective

Abstract:

In this paper, .rms engage in rent seeking in order to be assigned a governmental contract. We analyze how a change in the contract length a¤ects the .rms. rent-seeking behavior. A longer contract leads to more rent seeking at a contract assignment stage, as the .rms value the contract higher. On the other hand, the contract has to be assigned less often, which of course leads to less rent seeking. Finally, a longer contract makes a possible cooperation between the .rms solving the rent-seeking problem more difficult to sustain.
Keywords: Contract length, rent seeking, cooperation, relational contract
JEL classification: D72, D74

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208.pdf

Competing in Organizations: Firm Heterogeneity and International Trade

Abstract:

This paper develops a theory which investigates how firms’ choice of corporate organization is affecting firm performance and the nature of competition in international markets. We develop a model in which firms’ organisational choices determine heterogeneity across firms in size and productivity in the same industry. We then incorporate these organisational choices in a Krugman cum Melitz and Ottaviano model of international trade. We show that the toughness of competition in a market depends on who - headquarters or middle managers - have power in firms. Furthermore, we propose two new margins of trade adjustments: the monitoring margin and the organizational margin. International trade may or may not lead to an increase in aggregate productivity of an industry depending on which of these margins dominate. Trade may trigger firms to opt for organizations which encourage the creation of new ideas and which are less well adapt to price and cost competition.
Keywords: international trade with endogenous firm organizations and endogenous toughness of competition, firm heterogeneity, power struggle in the firm
JEL classification: F12, F14, L22, D23
May 2007

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207.pdf

Variance analysis and linear contracts in agencies with distorted performance measures

Abstract:

Keywords: This paper investigates the role of variance analysis procedures in aligning objectives under the condition of distorted performance measurement. A riskneutral agency with linear contracts is analyzed, whereby the agent receives postcontract, pre-decision information on his productivity. If the performance measure is informative with respect to the agent’s marginal product concerning the principal’s objective, variance investigation can alleviate effort misallocation. These results carry over to a participative budgeting situation, but in this case the variance investigation procedures are less demanding.
April 2007

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206.pdf

Bonus Pools, Limited Liability, and Tournaments

Abstract:

Tournaments have been objected as resulting from ad hoc restrictions to the contracting problem which are not easily justified. Taking into account that a performance measure might not be verifiable to a third party, however, a restriction to payments which sum up to a constant may be reasonable. The paper analyzes such fixed payment schemes with regard to their optimality and the relation to the special case of tournaments. It emerges that for a group of identical risk-neutral agents, the optimal fixed payment scheme is a tournament.
Keywords: bonus pools, relative performance evaluation, subjective performance evaluation, tournaments, verifiability
JEL classification: D82, M52, M54
March 2007

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205.pdf

Performance measure congruity in linear agency models with interactive tasks

Abstract:

This note demonstrates how performance measure congruity and noise determine an agency’s total surplus within an linear agency framework with multiple tasks. It provides a decomposition of agency costs, leading back to a congruity index previously proposed in the literature. In addition, it generalizes this index to a more general cost function, thereby highlighting the context specificity of the original criterion. Finally, it suggests a redefinition of tasks under which the criterion prevails.
Keywords: incentives, multi-tasking, performance measurement
JEL classification: D82, M52
November 2006

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204.pdf

Distorted performance measurement and relational contracts

Abstract:

This paper analyzes the use of alternative performance measures in an agency model in which contracting incorporates both formal and informal agreements. It is shown that under a proper use of verifiable and unverifiable performance measures, the two types of contracts are complements, regardless of the principal’s fallback position. The analysis therefore contrasts earlier results of the literature, and provides a rationale for the application of subjective performance information, as it is frequently incorporated in strategic performance measurement systems.
November 2006

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203.pdf

Abstract:

This paper analyzes a duopoly model with stochastic demand in which firms first choose their strategy variable and compete afterwards. Contrary to the existing literature, we show that firms do not always choose a quantity which is the variable that induces a smaller degree of competition. The reason is that demand uncertainty and the degree of substitutability have countervailing effects on variable choice. Higher uncertainty favors prices, while closer substitutability favors quantities. Moreover, for intermediate values firms choose different strategy variables in equilibrium.
Keywords: competition, strategy variables, demand uncertainty
JEL classification: D43, L13
May 2007

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202.pdf

Limited Liability and the Trade-off between Risk and Incentives

Abstract:

Several empirical findings have challenged the traditional trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empirical puzzle on the positive relationship between risk and incentives can be explained.
Keywords: limited liability, piece rates, risk aversion, risk-incentives trade-off
JEL classification: D01, D82, J3, M5
April 2007

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201.pdf

Optimal Risk Taking in an Uneven Tournament Game with Risk Averse Players

Abstract:

We analyze the optimal choice of risk in a two-stage tournament game between two players that have different concave utility functions. At the first stage, both players simultaneously choose risk. At the second stage, both observe overall risk and simultaneously decide on effort or investment. The results show that those two effects which mainly determine risk taking — an effort effect and a likelihood effect — are strictly interrelated. This finding sharply contrasts with existing results on risk taking in tournament games with symmetric equilibrium efforts where such linkage can never arise. Hence, previous findings based on symmetry at the effort stage turn out to be nongeneric.
Keywords: asymmetric equilibria, rank-order tournaments, risk taking
JEL classification: C72, J3, L1, M5
April 2007

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200.pdf

License Auctions with Royalty Contracts for (Winners and) Losers

Abstract:

This paper revisits the licensing of a non–drastic process innovation by an outside innovator to a Cournot oligopoly. We propose a new mechanism that combines a restrictive license auction with royalty licensing. This mechanism is more profitable than standard license auctions, auctioning royalty contracts, fixed–fee licensing, pure royalty licensing, and two-part tariffs. The key features are that royalty contracts are auctioned and that losers of the auction are granted the option to sign a royalty contract. Remarkably, combining royalties for winners and losers makes the integer constraint concerning the number of licenses irrelevant.
Keywords: patents, licensing, auctions, royalty, innovation, R&D, mechanism design
JEL classification: D21, D43, D44, D45
April 2007

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199.pdf

Two Tales on Resale

Abstract:

In some markets vertically integrated firms sell directly to final customers hut also to independent downstream firms with whom they then compete on the downstream market. It is often argued that resellers intensify competition and benefit consumers, in particular when wholesale prices are regulated. However, we show that (i) resale may increase prices and make consumers worse off and that (ii) standard "retail minus X regulation" may increase prices and harm consumers. Our analysis suggests that this is more likely if the number of integrated firms is small, the degree of product differentiation is low, and/or if competition is spatial.
Keywords: Resale regulation, wholesale, spatial product differentiation, non-spatial product differentiation, vertical restraints
JEL classification: D43, L11, L42, L51
March 2007

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198.pdf

Adding a Stick to the Carrot? The Interaction of Bonuses and Fines

Abstract:

In this paper we report on a principal-agent experiment where the principal can choose whether to rely on an unenforcable bonus contract or to combine the bonus contract with a fine if the agent’s effort falls below a minimum standard. We show that most principals do not use the fine and that the pure bonus contract is more efficient than the combined contract. Our experiment suggests that principals who are less fair are more likely to choose a combined contract and less likely to actually pay the announced bonus. This offers a new explanation for why explicit and implicit incentives are substitutes rather than complements.
Keywords: moral hazard, bonus contract, implicit incentives, fairness, incentives
JEL classification: C7, C9, J3
January 2007

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197.pdf

Unawareness, Beliefs and Games

Abstract:

We define a generalized state-space model with interactive unawareness and probabilistic beliefs. Such models are desirable for many potential applications of asymmetric unawareness. We develop Bayesian games with unawareness, define equilibrium, and prove existence. We show how equilibria are extended naturally from lower to higher awareness levels and restricted from higher to lower awareness levels. We use our unawareness belief structure to show that the common prior assumption is too weak to rule out speculative trade in all states. Yet, we prove a generalized “No-trade” theorem according to which there can not be common certainty of strict preference to trade. Moreover, we show a generalization of the “No-agreeing-to-disagree” theorem.
Keywords: unawareness, awareness, type-space, Bayesian games, incomplete information, equilibrium, common prior, agreement, speculative trade, interactive epistemology
JEL classification: C70, C72, D80, D82
March 2007

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196.pdf

Garbled Elections

Abstract:

Majority rules are frequently used to decide whether or not a public good should be provided, but will typically fail to achieve an efficient provision. We provide a worst-case analysis of the majority rule with an optimally chosen majority threshold, assuming that voters have independent private valuations and are exante symmetric (provision cost shares are included in the valuations). We show that if the population is large it can happen that the optimal majority rule is essentially no better than a random provision of the public good. But the optimal majority rule is worst-case asymptotically efficient in the large-population limit if (i) the voters’ expected valuation is bounded away from 0, and (ii) an absolute bound for valuations is known.
October 2006

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195.pdf

Providing Public Goods Without Strong Sanctioning Institutions

Abstract:

This paper proposes a simple mechanism aimed to establish positive contributions to public goods in the absence of powerful institutions to sanction free-riders. The idea of the mechanism is to require players to commit to the public good by paying a deposit prior to the contribution stage. If all players commit in this way, those players who do not contribute their share to the public good forfeit their deposit. If there is no universal commitment, all deposits are refunded and the standard game is played. Given deposits are sufficiently high, prior commitment and full ex post contributions are part of a strict subgame perfect Nash equilibrium for the resulting game. As the mechanism obviates the need for any ex post prosecution of free-riders, it is particularly suited for situations where players do not submit to a common authority as in the case of international agreements.
Keywords: public goods, cooperation, institutions, Climate-Change Treaties
JEL classification: C72, D61
February 2007

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194.pdf

Why and How Identity Should Influence Utility

Abstract:

This paper provides an argument for the advantage of a preference for identity-consistent behaviour from an evolutionary point of view. Within a stylised model of social interaction, we show that the development of cooperative social norms is greatly facilitated if the agents of the society possess a preference for identity consistent behaviour. As cooperative norms have a positive impact on aggregate outcomes, we conclude that such preferences are evolutionarily advantageous. Furthermore, we discuss how such a preference can be integrated in the modelling of utility in order to account for the distinctive cooperative trait in human behaviour and show how this squares with the evidence.
Keywords: cognitive dissonance, fairness, identity, reciprocity, social Norms, social preferences, utility
JEL classification: A13, C70, C90, D01, Z13
January 2007

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193.pdf

The Performance of Private Equity Funds: Does Diversification Matter?

Abstract:

This paper is the first systematic analysis of the impact of diversification on the performance of private equity funds. A unique data set allows the exact evaluation of diversification across the dimensions financing stages, industries, and countries. Very different levels of diversification can be observed across sample funds. While some funds are highly specialized others are highly diversified. The empirical results show that the rate of return of private equity funds declines with diversification across financing stages, but increases with diversification across industries. Accordingly, the fraction of portfolio companies which have a negative return or return nothing at all, increase with diversification across financing stages. Diversification across countries has no systematic effect on the performance of private equity funds.
Keywords: private equity, diversification, specialization, performance, rate of return, percentage of loss
JEL classification: G11, G24, M13
June 2006

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192.pdf

Internet Peering as a Network of Relations

Abstract:

We apply results from recent theoretical work on networks of relations to analyze optimal peering strategies for asymmetric ISPs. It is shown that - from a network of relations perspective – ISPs’ asymmetry in bilateral peering agreements need not be a problem, since when these form a closed network, asymmetries are pooled and information transmission is faster. Both these effects reduce the incentives for opportunism in general, and interconnection quality degradation in particular. We also explain why bilateral monetary transfers between asymmetric ISPs (Bilateral Paid Peering), though potentially good for bilateral peering, may have rather negative effects on the sustainability of the overall peering network.
November 2006

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191.pdf

Can’t Buy Me Rights! The Contractual Structure of Asymmetrical Inter-firm Collaborations

Abstract:

The efficient allocation of control rights in inter-firm collaborations is a widely emphasized issue. In this paper, I empirically identify control rights and the allocation of these rights using a unique survey data set on collaborations between biotechnology and pharmaceutical firms. Fifteen control rights are
identified to make up the structure of deals with five rights being the items of contention in deal making (ownership of patents, production, further development of the technology, the right to manage the collaboration, and the right to market universally). I find that the assignment of control rights is related to the bargaining position of firms and incentive issues. Hence, goliaths –pharmaceutical incumbents
– subrogate critical rights to the new ventures when the final outcome of the project is depending on the venture’s effort.
Keywords: contracts, performance, inter-firm collaboration, biotechnology
JEL Classification: D23, L24, G30, M13, O32

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189.pdf

Cluster Performance reconsidered: Structure, Linkages and Paths in the German Biotechnology Industry, 1996-2003

Abstract:

This paper addresses the evolution of biotechnology clusters in Germany between 1996 and 2003, paying particular attention to their respective composition in terms of venture capital, basic science institutions and biotechnology firms. Drawing upon the significance of co-location of "money and ideas", the literature stressing the importance of a cluster's openness and external linkages, and the path dependency debate, the paper aims to analyse how certain cluster characteristics correspond with its overall performance. After identifying different cluster types, we investigate their internal and external interconnectivity in comparative manner and draw on changes in cluster composition. Our results indicate that the structure, i.e. to which group the cluster belongs, and the openness towards external knowledge flows deliver merely unsystematic indications with regard to a cluster's overall success. Its ability to change composition towards a more balanced ratio of science and capital over time, on the other hand, turns out as a key explanatory factor. Hence, the dynamic perspective proves effective illuminating cluster growth and performance, where our explorative findings provide a promising avenue for further evolutionary research.
Keywords: Cluster evolution, dynamic perspective, basic science, venture capital, biotechnology, Germany
JEL classification: O18, O32, L22
December 2006

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188.pdf

Country size and publicly provided goods

Abstract:

This paper studies the equilibrium size of countries. Individuals in small countries have greater influence over the nature of political decision making while individuals in large countries have the advantage of more public goods and lower tax rates. The model implies that (i) there exists excessive incentives to separate, though this need not be the case for all sets of secession rules studied; (ii) an exogenous increase in public spending decreases country size; (iii) countries with a presidential-congressional democracy are larger than countries with a parliamentary democracy.
Keywords: country size, public spending, structure of government
JEL classification: D7, H1, H2, H7
December 2006

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187.pdf

Collective Production and Incentives

Abstract:

We analyse incentive problems in collective production environments where contributors are compensated according to their observed and ranked efforts. This provides incentives to the contributors to choose first best efforts.
December 2006

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186.pdf

Mergers, Litigation and Efficiency

Abstract:

We consider antitrust enforcement within the adversarial model used by the United States. We show that, under the adversarial system, the Antitrust Authority may try to prohibit mergers also in those cases in which litigation is inefficient. Even if market concentration and technological disadvantages lead to a significant welfare reduction after merger, from society’s perspective the agency’s lawsuit may be inefficient. We can show that these inefficiencies may be aggravated if the takeover is hostile.
Keywords: hostile takeover; litigation contest, merger
JEL classification: D43, K21, L40
December 2006

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185.pdf

Jostling for Advantage: Licensing and Entry into Patent Portfolio Races

Abstract:

Licensing in a patent thicket allows firms to either avoid or resolve hold-up. Firms' R&D incentives depend on whether they license ex ante or ex post. We develop a model of a patent portfolio race, which allows for endogenous R&D efforts, to study firms' choice between ex ante and ex post licensing. The model shows that firms' relationships in product markets and technology space jointly determine the type of licensing contract chosen. In particular, product market competitors are more likely to avoid patent portfolio races, since the threat of hold-up increases. On the other hand, more valuable technologies are more likely to give rise to patent portfolio races. We also discuss the welfare implications of these results.
Keywords: hold-up problem, licensing, innovation, patent race, patent thicket, research joint ventures
JEL classification: L13, L49, L63
September 2006

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184.pdf

Project Finance as a Risk-Management Tool in International Syndicated Lending

Abstract:

We develop a double moral hazard model that predicts that the use of project finance increases with both the political risk of the country in which the project is located and the influence of the lender over this political risk exposure. In contrast, the use of project finance should decrease as the economic health and corporate governance provisions of the borrower’s home country improve. When we test these predictions with a global sample of syndicated loans to borrowers in 139 countries, we find overall support for our model and provide evidence that multilateral development banks act as “political umbrellas”.
Keywords: project finance, syndicated loans, political risk, double moral hazard
JEL classification: D82, F34, G21, G32
December 2006

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183.pdf

Acquisition versus greenfield: The impact of the mode of foreign bank entry on information and bank lending rates

Abstract:

Policy makers often decide to liberalize foreign bank entry but at the same time restrict the mode of entry. We study how different entry modes affect the interest rate for loans in a model in which domestic banks possess private information about their incumbent clients but foreign banks have better screening skills. Our model predicts that competition is stronger if market entry occurs through a greenfield investment and therefore domestic banks' interest rates are lower. We find empirical support for our results for a sample of banks from ten Eastern European countries for the period 1995-2003.
Keywords: banking, foreign entry, mode of entry, interest rate, asymmetric information
JEL classification: G21, D4, L31
November 2006

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182.pdf

How eBay Sellers set “Buy-it-now” prices - Bringing The Field Into the Lab

Abstract:

In this paper we introduce a new type of experiment that combines the advantages of lab and field experiments. The experiment is conducted in the lab but using an unchanged market environment from the real world. Moreover, a subset of the standard subject pool is used, containing those subjects who have experience in conducting transactions in that market environment. This guarantees the test of the theoretical predictions in a highly controlled environment and at the same time enables not to miss the specific features of economic behavior exhibited in the field. We apply the proposed type of experiment to study seller behavior in online auctions with a Buy-It-Now feature, where early potential bidders have the opportunity to accept a posted price offer from the seller before the start of the auction. Bringing the field into the lab, we invited eBay buyers and sellers into the lab to participate in a series of auctions on the eBay platform. We investigate how traders' experience in a real market environment influences their behavior in the lab and whether abstract lab experiments bias subjects' behavior.
Keywords: online auctions, experiments, buyout prices
JEL classification: C72, C91, D44, D82
November 2006

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181.pdf

Do individuals recognize cascade behavior of others? An Experimental Study

Abstract:

In an information cascade experiment participants are confronted with artificial predecessors predicting in line with the BHW model (Bikchandani et al., 1992). Using the BDM (Becker et al., 1964) mechanism we study participants' probability perceptions based on maximum prices for participating in the prediction game. We find increasing maximum prices the more coinciding predictions of predecessors are observed, regardless of whether additional information is revealed by these predictions. Individual price patterns of more than two thirds of the participants indicate that cascade behavior of predecessors is not recognized.
Keywords: information cascades, Bayes' Rule, decision under risk and uncertainty, experimental economics
JEL classification: C91, D81, D82
October 2006

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180.pdf

The Impact of ISO 9000 Diffusion on Trade and FDI: A New Institutional Analysis

Abstract:

The effects of ISO 9000 diffusion on trade and FDI have gone understudied. We employ panel data reported by OECD nations over the 1995-2002 period to estimate the impact of ISO adoptions on country-pair economic relations. We find ISO diffusion to have no effect in developed nations, but to positively pull FDI (i.e., enhancing inward FDI) and positively push trade (i.e., enhancing exports) in developing nations.
Keywords: FDI, trade, transaction costs, institutions
JEL classification: C51, F23, L31
November 2006

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179.pdf

Bankintermediation bei der Kreditvergabe an junge oder kleine Unternehmen

Abstract:

Loan financing, especially long term bank loan financing, is important for young or small firms in Germany. A large share of all small business lending in Germany originates in public financing programs and cooperative banks, (non-cooperative) private sector credit banks as well as savings banks mediate in the assignment of loans from these programs. Our empirical analyses of this loan type provide insights into the small business loan assignment behavior of the three different bank groups in general. Using various econometric techniques, observation periods and data sources – including detailed data on 6.880 firms – we find three robust, originate results: Not only recently, but already at the beginning of the 1990s credit banks played no substantial, statistically significant role in small business lending. Cooperative and savings banks have, in contrast, a strong, significant positive influence on young, small firms’ loan access. In addition, the loan assignment behavior of the two latter groups is found to be very similar. This is an important result given the ongoing controversial discussion on reforming the German savings bank sector.
Keywords: Kreditvergabeverhalten von Genossenschaftsbanken, Kreditbanken und Sparkassen, Finanzierung junger, kleiner Unternehmen, langfristige Kredite und öffentliche Förderprogramme, Reformierung des deutschen Sparkassensektors
August 2006

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178.pdf

Bailouts in a common market: a strategic approach

Abstract:

Governments in the EU grant Rescue and Restructure Subsidies to bail out ailing firms. In an international asymmetric Cournot duopoly we study effects of such subsidies on market structure and welfare. We adopt a common market setting, where consumers from the two countries form one market. We show that the subsidy is positive also when it fails to prevent the exit. The reason is a strategic effect, which forces the more efficient firm to make additional cost-reducing effort. When the exit is prevented, allocative and productive efficiencies are lower and the only gaining player is the rescued firm.
Keywords: subsidies, asymmetric oligopoly, exit, European Union
JEL classification: F13, L13, L52
October 2005

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177.pdf

Effectiveness of bailouts in the EU

Abstract:

Governments in the EU frequently bail out firms in distress by granting state aid. I use data from 86 cases during the years 1995-2003 to examine two issues: the effectiveness of bailouts in preventing bankruptcy and the determinants of bailout policy. The results are threefold. First, the estimated discrete-time hazard rate increases during the first four years after the subsidy and drops after that, suggesting that some bailouts only delayed exit instead of preventing it. The number of failing bailouts could be reduced if European control was tougher. Second, governments’ bailout decisions favored state-owned firms, even though state-owned firms did not outperform private ones in the survival chances. Third, subsidy choice is an endogenous variable in the analysis of the hazard rate. Treating it as exogenous underestimates its impact on the bankruptcy probability. Several policy implications of the results are discussed in the paper.
Keywords: State aid, European Union, Discrete-time hazard, Bivariate probit
JEL classification: K2, G3, L5
October 2006

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176.pdf

Revenue Equivalence Revisited

Abstract:

The conventional wisdom in the auction design literature is that first price sealed bid auctions tend to make more money while ascending auctions tend to be more efficient. We re-examine these issues in an environment in which bidders are allowed to endogenously choose in which auction format to participate. Our findings are that more bidders choose to enter the ascending auction than the first price sealed bid auction and this extra entry is enough to make up the revenue difference between the formats. Consequently, we find that both formats raise approximately the same amount of revenue. They also generate efficiency levels and bidder earnings that are roughly equivalent across mechanisms though the earnings in the ascending might be slightly higher. In expected utility terms though, we find that the expected utility of entering a first price sealed bid auction is greater than entering an ascending for any risk averse bidder suggesting that we are seeing “overentry” into the ascending auctions.
Keywords: bidder preferences, private values, sealed bid auctions, ascending auctions, endogenous entry
JEL classification: C91, D44
October 2006

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175.pdf

Anomalies in Auction Choice Behavior

Abstract:

Ivanova-Stenzel and Salmon (2004a) established some interesting yet puzzling results regarding bidders’ preferences between auction formats. The finding is that bidders strongly prefer the ascending to the first price sealed bid auction on a ceteris paribus basis but they are not willing to pay up to an entry price for entering into an ascending auction instead of a first price that would equalize the profits between the two. While it was found that risk aversion on the part of the bidders could resolve this anomaly the claim that risk aversion drives overbidding in first price auctions is somewhat controversial. In this study we examine two competing explanations for the observed behavior; loss aversion and “clock aversion”, i.e. a dislike for some aspect of the clock based bidding mechanism. We find that neither alternative explanation can account for bidders’ auction choice behavior leaving risk aversion as the only un-falsified hypothesis.
Keywords: bidder preferences, private values, sealed bid auctions, ascending auctions
JEL classification: C91, D44
October 2006

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174.pdf

A Soft Budget Constraint Explanation for the Venture Capital Cycle

Abstract:

We explore why venture capital funds limit the amount of capital they raise and do not reinvest the proceeds. This structure is puzzling because it leads to a succession of several funds financing each new venture which multiplies the well known agency problems. We argue that an inside investor cannot provide a hard budget constraint while a less well informed outsider can. Therefore, the venture capitalist delegates the continuation decision to the outsider by ex ante restricting the amount of capital he has under management. The soft budget constraint problem becomes the more important the higher the entrepreneur’s private benefits are and the higher the probability of failure of a project is.
Keywords: Contract Theory, Corporate Finance, Venture Capital
JEL classification: G24, G31, D82
October 2006

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173.pdf

Size and soft budget constraints

Abstract:

There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated.
Keywords: bailouts, soft-budget constraints, jurisdictional size, public goods, spillovers
JEL classification: H4, H7, R1
October 2006

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172.pdf

Causes, consequences, and cures of myopic loss aversion - An experimental investigation

Abstract:

Myopic loss aversion (MLA) has been established as one prominent explanation for the equity premium puzzle. In this paper we address two issues related to the effects of MLA on risky investment decisions. First, we assess the relative impact of feedback frequency and investment flexibility (via the investment horizon) on risky investments. Second, given that we observe higher investments with a longer investment horizon, we examine conditions under which investors might endogenously opt for a longer investment horizon in order to avoid the negative effects of MLA on investments. We find in our experimental study that investment flexibility seems to be at least as relevant as feedback frequency for the effects of myopic loss aversion. When subjects are given the choice to opt for a long or short investment horizon, there is no clear preference for either. Yet, if subjects face a default horizon (either long or short), there is rather little switching from the one to the other horizon, showing that a default might work to attenuate the effects of MLA. However, if subjects switch, they are more often willing to switch from the long to the short horizon than vice versa, suggesting a preference for higher investment flexibility.
Keywords: loss aversion, risk, investment, experiment
JEL classification: C91, D80, G11
June 2005

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171.pdf

Modeling the Duration of Patent Examination at the European Patent Office

Abstract:

We analyze the duration of the patent examination process at the European Patent Office (EPO). Our data contain information related to the patent’s economic and technical relevance, EPO capacity and workload as well as novel citation measures which are derived from the EPO’s search reports. In our multivariate analysis we estimate competing risk specifications in order to characterize differences in the processes leading to a withdrawal of the application by the applicant, a refusal of the patent grant by the examiner or an actual patent grant. Highly cited applications are approved faster by the EPO than less important ones, but they are also withdrawn less quickly by the applicant. The process duration increases for all outcomes with the application’s complexity, originality, number of references (backward citations) in the search report and with the EPO’s workload at the filing date. Endogenous applicant behavior becomes apparent in other results: more controversial claims lead to slower grants, but faster withdrawals, while relatively well-documented applications (identified by a high share of applicant references appearing in the search report) are approved faster and take longer to be withdrawn.
Keywords: patents, patent examination, survival analysis, patent citations, European Patent Office
JEL classification: C15, C41, D73, O34
October 2006

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170.pdf

Haggling for Rents, Relational Contracts, and the Theory of the Firm

Abstract:

In this paper, a formal rent-seeking theory of the firm is developed. The main idea is that integration (compared to non-integration) facilitates rent-seeking for the integrating party, but makes it harder for the integrated one. In a one-period model, this implies that the rent-seeking contest becomes more uneven and the parties rent-seek less. Here, integration is optimal. In the infinitely-repeated version of the model, it is also possible for the parties to enter a relational contract, under which each promises not to engage in rent-seeking. Such a contract must be self-enforcing, for it cannot be enforced by court. It is shown that integration makes the relational contract less easily sustainable, as, due to its cost advantage, the integrating party gains more from deviating than any party under non-integration. Hence, integration is preferred, if relational contracts are not sustainable, while, otherwise, non-integration may well be preferred. Moreover, it is shown that the model’s predictions are in line with many empirical facts on the choice of ownership structures.
Keywords: Integration, non-integration, relational contracts, rent seeking
JEL classification: D23, D72, D74, L14, L22
October 2006

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169.pdf

On the "Adverse Selection" of Organizations

Abstract:

According to New Institutional Economics, two or more individuals will found an organization, if it leads to a benefit compared to market allocation. A natural consequence will then be internal rent seeking. We discuss the interrelation between profits, rent seeking and the foundation of organizations. Typically, we expect that highly profitable firms are always founded but it is not clear whether the same is true for firms with less optimistic prospects. We will show that internal rent seeking may lead to a completely reversed result. The impact of internal rent seeking on overall investment and the implications of firm size and competition on the foundation of organizations are also addressed.
Keywords: contests, foundation of organizations, internal rent seeking
JEL classification: D2, L2, M2
October 2006

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168.pdf

Firm Size, Economic Situation and Influence Activities

Abstract:

This paper discusses the optimal firm size in the presence of influence activities, and the level of individual rent-seeking dependent on the economic situation of the firm. Since firm size has a discouraging effect on the level of individual rent-seeking but also a quantity effect as the number of rent-seekers increases, the interplay of both effects determines whether the employer chooses an inefficiently small or large firm size. In the given setting, a bad economic situation leads to both a higher probability of a substantial loss and a reduction of productivity. The productivity effect and the two other effects together determine the optimal level of individual rent-seeking.
Keywords: economic situation, firm size, influence activities, politicking, rent-seeking
JEL classification: D2, L2, M2
October 2006

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167.pdf

Procurement with Costly Bidding, Optimal Shortlisting, and Rebates

Abstract:

We consider the procurement of a complex, indivisible good when bid preparation is costly, assuming a population of heterogeneous contractors. Shortlisting is introduced to implement the optimal number of bidders, and we explore whether the procurer should reimburse the nonrecoverable cost of preparing a bid in whole or in part. We find that a reimbursement policy is profitable for the procurer only if performance and bidding costs are negatively correlated. Moreover, negative rebates (entry fees) always dominate positive rebates.
Keywords: Procurement, Auctions, Entry
JEL classification: D44, D45
September 2006

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166.pdf

Research Joint Ventures, Optimal Licensing, and R&D Subsidy Policy

Abstract:

We reconsider the justifications of R&D subsidies by Spencer and Brander (1983) and others by allowing firms to pool R&D investments and license innovations. In equilibrium R&D joint ventures are formed and licensing occurs in a way that eliminates the strategic benefits of R&D investment in the subsequent oligopoly game. Nevertheless, governments subsidize their domestic firms in order to raise their bargaining position in the joint venture. This holds true regardless of whether governments offer either unconditional or conditional subsidies. This suggests an alternative explanation of the observed proliferation of R&D subsidies.
Keywords: patent licensing, industrial organization, R&D subsidies, research joint ventures, technology policy
JEL classification: L13, O34
September 2006

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165.pdf

On the Explanatory Value of Inequity Aversion Theory

Abstract:

In a number of papers on their theory of Inequity Aversion, E. Fehr and K. Schmidt have claimed that the theory explains the behavior in many experiments. By virtue of having an infinite number of parameters the theory can predict a wide range of outcomes, from the competitive to the cooperative. Its prediction depends on values of these parameters. Fehr & Schmidt provide no explicit methodological plan for their project and as a result they repeatedly make logical and methodological errors. We look at the methodology of their explanations and find that no connection has been established between the experimental data and the behavior predicted by the theory. We conclude that the theory of inequity aversion has no explanatory value beyond its trivial capacity to predict a broad range of outcomes as a function of its parameters.
September 2006

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164.pdf

Is the Event Study Methodology Useful for Merger Analysis? A Comparison of Stock Market and Accounting Data

Abstract:

Using a sample of 167 mergers during the period 1990-2002 involving 544 firms either as merging firms or competitors, we contrast a measure of the merger’s profitability based on event studies with one based on accounting data. We find positive and significant correlations between them when using a long window around the announcement date and, for rivals, in case of anticompetitive mergers.
Keywords: Mergers, Merger Control, Event Studies, Ex-post Evaluation
JEL classification: L4, K21, G34
September 2006

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163.pdf

Reliance Investments, Expectation Damages and Hidden Information

Abstract:

A setting of reliance investments is explored where one of the parties to a contract obtains private information concerning his utility or cost function that remains hidden to the other party and to courts. As a consequence, it will be a difficult task to award expectation damages corrrectly to a party with private information who sufffers from breach of contract. While a revelation mechanism would exist that leads to the first best solution, assessing expectation damages correctly turns out to be at odds with ex post efficiency. I conclude that, under asymmetric information, the performance of expectation damages falls short of what more general mechanisms could achieve.
Keywords: reliance investments, expectation damages, breach of contract, hidden information
JEL classification: K12, D82
September 2006

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162.pdf

Exclusive vs Overlapping Viewers in Media Markets

Abstract:

This paper investigates competition for advertisers in media markets when viewers can subscribe to multiple channels. A central feature of the model is that channels are monopolists in selling advertising opportunities toward their exclusive viewers, but they can only obtain a competitive price for advertising opportunities to multi-homing viewers. Strategic incentives of firms in this setting are different than those in former models of media markets. If viewers can only watch one channel, then firms compete for marginal consumers by reducing the amount of advertising on their channels. In our model, channels have an incentive to increase levels of advertising, in order to reduce the overlap in viewership. We take an account of the differences between the predictions of the two types of models and find that our model is more consistent with recent developments in broadcasting markets. We also show that if channels can charge subscription fees on viewers, then symmetric firms can end up in an asymmetric equilibrium in which one collects all or most of its revenues from advertisers, while the other channel collects most of its revenues via viewer fees.
August 2006

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161.pdf

Legal Damages at Uncertain Causation

Abstract:

The legal notion of damages requires to compare the actual value of the creditor’s assets with the hypothetical value that would have prevailed if the debtor had met his obligation. Moreover, values and causation may be uncertain. If nature’s contribution is modelled as a random move then the interaction between debtor and nature can be described in normal form which, in turn, allows to capture causality and legal damages in a consistent way. In practice, such random moves of nature are rarely observable. Yet, statistical inference may reveal sufficient information to test for causation and to estimate legal damages on average over observable events as the present paper will establish.
Keywords: estimating legal damages, liability for torts, liability for breach of contracts
JEL classification: K13, K12, D62
August 2006

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160.pdf

Informative Voting and the Samuelson Rule

Abstract:

We study the classical free-rider problem in public goods provision in a large economy with uncertainty about the average valuation of the public good. Individual preferences over public goods are shaped by a skill and a taste parameter. We use a mechanism design approach to solve for the optimal utilitarian provision rule. The relevant incentive constraints for information aggregation ensure that individuals behave as if they were engaging in informative voting over the level of public good provision. It is shown that the use of information by an optimal provision rule is inversely related to the polarization of preferences which results from the properties of the skill distribution.
Keywords: information aggregation, informative voting, public goods, two-dimensional heterogeneity
JEL classification: H41, D71, D72, D82
July 2006

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159.pdf

Optimal Degree of Public Information Dissemination

Abstract:

Financial markets and macroeconomic environments are often characterized by positive externalities. In these environments, transparency may reduce expected welfare from an ex-ante point of view: public announcements serve as a focal point for higher-order beliefs and affect agents’ behaviour more than justified by their informational contents. Some scholars conclude that it might be better to reduce the precision of public signals or entirely withhold information. This paper shows that public information should always be provided with maximum precision, but under certain conditions not to all agents. Restricting the degree of publicity is a better-suited instrument for preventing the negative welfare effects of public announcements than restrictions on their precision are.
Keywords: Transparency, public information, private information, coordination, strategic complementarity
JEL classification: C73, D82, F31
February 2006

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158.pdf

Speculative Attacks with Multiple Sources of Public Information

Abstract:

We propose a speculative attack model in which agents receive multiple public signals. It is characterised by its focus on an informational structure which sets free from the strict separation between public information and private information. Diverse pieces of public information can be taken into account differently by players and are likely to lead to different appreciations ex post. This process defines players’ private value. The main result is to show that equilibrium uniqueness depends on two conditions: (i) signals are sufficiently dispersed (ii) private beliefs about the relative precision of these signals sufficiently differ. We derive economic policy implications of such a result.
Keywords: Speculative attack, Private value game, Multiple equilibria, Public and private information
JEL classification: F31, D82
January 2005

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157.pdf

Measuring Risk Aversion and the Wealth Effect

Abstract:

Measuring risk aversion is sensitive to assumptions about the wealth in subjects’ utility functions. Data from the same subjects in low- and high-stake lottery decisions allow estimating the wealth in a pre-specified one-parameter utility function simultaneously with risk aversion. This paper first shows how wealth estimates can be identified assuming constant relative risk aversion (CRRA). Using the data from a recent experiment by Holt and Laury (2002), it is shown that most subjects’ behavior is consistent with CRRA at some wealth level. However, for realistic wealth levels most subjects’ behavior implies a decreasing relative risk aversion. An alternative explanation is that subjects do not fully integrate their wealth with income from the experiment. Within-subject data do not allow discriminating between the two hypotheses. Using between-subject data, maximum-likelihood estimates of a hybrid utility function indicate that aggregate behavior can be described by expected utility from income rather than expected utility from final wealth and partial relative risk aversion is increasing in the scale of payoffs.
Keywords: lottery choice, risk aversion, myopic risk aversion
JEL classification: C81, C91, D81
September 2005

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156.pdf

Market Discipline, Information Processing, and Corporate Governance

Abstract:

The paper reviews and assesses our understanding of the notion of “market discipline” in corporate governance. It questions the wholesale appeal to this notion in policy discussion, which fails to provide an account of the underlying mechanisms in terms of theory and empirical analysis. Discipline that is provided by the “market” must be compared to discipline that is provided by other institutions, e.g., intermediaries acting as “delegated monitors”. The comparative assessment depends on (i) the information technology, (ii) the role of strategic interactions, and (iii) the disciplinary mechanism itself. Concerning (i), the question is whether the benefits of multiple sources of information exceed the costs. Concerning (ii), strategic interactions concern the free-rider problem in acquiring information that benefits all financiers, as well as distributive externalities involved in exploiting an information advantage to the detriment of other financiers. Concerning (iii), the question is whether investors have explicit intervention rights or whether “discipline” results from managerial acquiescence. As for the acquisition and aggregation of information in organized markets, positive welfare effects arise only if the information is put to productive use, either through improvements in real investment and managerial incentives, or through changes in corporate control. Necessary conditions for such benefits to arise are fairly restrictive, especially if the changes that occur are based on managerial acquiescence rather than the legal intervention rights of investors. The expansion of market-based managerial incentives in the nineties had little to do with these theoretical accounts. The experience of moral hazard that has accompanied this expansion, on the side of gate-keeping institutions as well as corporate management, confirms the predictions of theory about the potential for shortfalls in market discipline and the agency costs of equity finance through the open market.
Keywords: Market Discipline, Financial Institutions, Information Processing, Corporate Governance
JEL classification: G14, G20, G30
July 2006

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155.pdf

Migration and the Welfare State: The Economic Power of the Non-Voter?

Abstract:

This paper investigates the impact of emigration on the political choice regarding the size of the welfare state. Mobility has two countervailing effects: the political participation effect and the tax base effect. With emigration, the composition of the constituency changes. This increases the political influence of the less mobile part of the population. The new political majority has to take into account that emigration reduces tax revenues and thereby affects the feasible set of redistribution policies. The interaction of the two effects has so far not been analyzed in isolation. We find that the direction of the total effect of migration depends on the initial income distribution in the economy. Our results also contribute to the empirical debate on the validity of the median-voter approach for explaining the relation between income inequality and redistribution levels.
Keywords: migration, redistribution, voting
JEL classification: F22, H50, D31, D72
July 2005

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154.pdf

How Effective is European Merger Control?

Abstract:

This paper applies a novel methodology to a unique dataset of large concentrations during the period 1990-2002 to assess merger control’s effectiveness. By using data gathered from several sources and employing different evaluation techniques, we analyze the economic effects of the European Commission’s (EC) merger control decisions and distinguish between blockings, clearances with commitments (either behavioral or structural), and outright clearances. We run an event study on merging and rival firms’ stocks to quantify the profitability effects of mergers and merger control decisions. We back up our results and methodology by using alternative measures for the merger’s profitability effects based on balance sheet data and obtain consistent results. Our findings suggest that outright blockings solve the competitive problems generated by the merger. Remedies are not always effective in solving the market power concerns, at least not on average. Nevertheless, both structural (divestitures) and behavioral remedies do help restore effective competition when correctly applied to anticompetitive mergers during the first investigation phase. Yet, they are on the whole ineffective or even detrimental when applied after the second investigation phase. Finally, remedies - especially behavioral ones - seem to constitute a rent transfer from merging firms to rivals when mistakenly applied to pro-competitive mergers.
Keywords: Mergers, Merger Control, Remedies, European Commission, Event Studies, Expost Evaluation
JEL classification: L4, K21, G34, C2, L2
July 2006

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153.pdf

Entry of Foreign Banks and their Impact on Host Countries

Abstract:

Foreign bank entry is frequently associated with spillover effects for local banks and increasing competition in the local banking market. We study the impact of these effects on host countries. In particular, we ask how these effects interact and how they depend on the competitive environment of the host banking market. An increasing number of banks is more likely to have positive welfare effects the more competitive the market environment, whereas spillovers are less likely to have positive welfare effects the stronger competition. Hence, competitive effects seem to reinforce each other, while spillovers and competition tend to weaken each other.
Keywords: foreign bank entry, multinational bank, competition in banking, spillover effects
JEL classification: F37, G21, L13, O16
June 2006

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152.pdf

Sovereign Risk Premiums in the European Government Bond Market

Abstract:

This paper provides a study of bond yield differentials among EU government bonds issued between 1993 and 2005 on the basis of a unique dataset of issue spreads in the US and DM (Euro) bond market. Interest differentials between bonds issued by EU countries and Germany or the USA contain risk premiums which increase with fiscal imbalances and depend negatively on the issuer's relative bond market size. The start of the European Monetary Union has shifted market attention to debt service payments as the key measure of indebtedness and eliminated liquidity premiums in the euro area.
Keywords: asset pricing, determination of interest rates, fiscal policy, government debt
JEL classification: G12, E43, E62, H63
May 2006

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151.pdf

The design of fiscal rules and forms of governance in European Union countries

Abstract:

This paper uses a new data set on budgetary institutions in Europe to examine the impact of fiscal rules and budget procedures in EU countries on public finances. It briefly describes the main pattern of budgetary institutions and their determinants across the EU 15 member states. Empirical evidence for the time period 1985-2004 suggests that the centralisation of budgeting procedures restrains public debt. In countries with one-party governments or coalition governments where parties are closely aligned and where political competition among them is low, this is achieved by the delegation of decision-making power to the minister of finance. Fiscal contracts that require countries to set multi-year targets and that reinforce those targets increase fiscal discipline in countries with ideologically dispersed coalitions and where parties regularly compete against each other.
Keywords: public indebtedness, budgetary procedures, fiscal rules, European public finances
JEL classification: H11, H61, H62
June 2006

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150.pdf

Political Economy of Fiscal Institutions

Abstract:

We discuss two essential problems of the political economy of public finances: The principal agent problem between voters and elected politicians and the common pool problem arising from the fact that money drawn from a general tax fund is used to pay for policies targeting more or less narrow groups in society. Three institutional mechanisms exist to deal with these problems, ex-ante rules controlling the behavior of elected policy makers, electoral rules creating accountability of and competition among policy makers, and budgeting processes internalizing the common pool externality. We review recent theoretical and empirical research and discuss its implications for research and institutional design.
Keywords: electoral systems, fiscal rules, budgeting processes
JEL classification: H11, H61, H62
November 2005

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149.pdf

What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU

Abstract:

Fiscal rules, such as the Excessive Deficit Procedure and the Stability and Growth Pact (SGP), aim at constraining government behavior. Milesi-Ferretti (2003) develops a model in which governments circumvent such rules by reverting to creative accounting. The amount of this depends on the reputation cost for the government and the economic cost of sticking to the rule. We provide empirical evidence of creative accounting in the European Union. We find that the SGP rules have induced governments to use stock-flow adjustments, a form of creative accounting, to hide deficits. The tendency to substitute stock-flow adjustments for budget deficits is especially strong for the cyclical component of the deficit, as in times of recession the cost of reducing the deficit is particularly large.
Keywords: Fiscal rules, stock-flow adjustments, debt-deficit adjustments, stability and growth pact, excessive deficit procedure, ESA 95
JEL classification: E62, H61, H62, H 63, H 70
January 2006

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148.pdf

Fiscal Rules and Fiscal Performance in the EU and Japan

Abstract:

Fiscal rules specify quantitative targets for key budgetary aggregates. In this paper, we review the experience with such rules in Japan and in the EU. Comparing the performance of fiscal policy in the 1980s and 1990s until 2003, we find that the fiscal rule of the 1980s exerted some but not much disciplinary influence on Japanese fiscal policy. The fiscal rule of the Maastricht Treaty had a significant impact on political budget cycles in the EU, but did little to constrain fiscal policy in the large member states. Since the start of the European Monetary Union, the disciplinary effect of the fiscal rule in the EU has vanished. Next, we discuss the importance of budgetary institutions for the effectiveness of fiscal rules. In Europe, a number of countries adopted strong fiscal rules, i.e., a fiscal rule combined with a design of the budget process enabling governments to commit to the rule. We find that strong fiscal rules have been effective. We conclude with some suggestions for the design of a strong fiscal rule in Japan.
Keywords: Fiscal policy, political budget cycles, government budgeting
JEL classification: H11, H61, H62
June 2006

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147.pdf

Budget Processes: Theory and Experimental Evidence

Abstract:

This paper studies budget processes, both theoretically and experimentally. We compare the outcomes of bottom-up and top-down budget processes. It is often presumed that a top-down budget process leads to a smaller overall budget than a bottom-up budget process. Ferejohn and Krehbiel (1987) showed theoretically that this need not be the case. We test experimentally the theoretical predictions of their work. The evidence from these experiments lends strong support to their theory, both at the aggregate and the individual subject level.
Keywords: Budget processes, voting equilibrium, experimental economics
JEL classification: H61, C91, C92
March 2006

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146.pdf

Tournaments with Midterm Reviews

Abstract:

In many tournaments investments are made over time and conducting a review only once at the end, or also at points midway through, is a strategic decision of the tournament designer. If the latter is chosen, then a rule according to which the results of the different reviews are aggregated into a ranking must also be determined. This paper takes a first step in the direction of answering how such rules are optimally designed. A characterization of the optimal aggregation rule is provided for a two-agent two-stage tournament. In particular, we show that treating the two reviews symmetrically may result in an equilibrium effort level that is inferior to the one in which only a final review is conducted. However, treating the two reviews lexicographically by first looking at the final review, and then using the midterm review only as a tie-breaking rule, strictly dominates the option of conducting a final review only. The optimal mechanism falls somewhere in between these two extreme mechanisms. It is shown that the more effective the first-stage effort is in determining the final review’s outcome, the smaller is the weight that should be assigned to the midterm review in determining the agents’ ranking.
May 2006

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145.pdf

When queueing is better than push and shove

Abstract:

We address the scheduling problem of reordering an existing queue into its efficient order through trade. To that end, we consider individually rational and balanced budget direct and indirect mechanisms. We show that this class of mechanisms allows us to form efficient queues provided that existing property rights for the service are small enough to enable trade between the agents. In particular, we show on the one hand that no queue under a fully deterministic service schedule such as first-come, first-serve can be dissolved efficiently and meet our requirements. If, on the other hand, the alternative is service anarchy (ie. a random queue), every existing queue can be transformed into an efficient order.
Keywords: Scheduling, Queueing, Mechanism design
JEL classification: C72, D44, D82
June 2006

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144.pdf

On Seller Estimates and Buyer Returns

Abstract:

This paper revisits recent empirical research on buyer credulity in arts auctions and auctions for assets in general. We show that elementary results in auction theory can fully account for some stylized facts on asset returns that have been held to suggest that sellers of assets can exploit buyers by providing biased estimates of asset values. We argue that, rather than showing that buyers are credulous, the existing evidence can serve as an indirect test of the rationality assumptions underlying auction theory.
Keywords: Auctions, information disclosure, seller manipulation, buyer credulity
JEL classification: D44, D82, G12, G14
February 2006

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143.pdf

Allocative and Informational Externalities in Auctions and Related Mechanisms

Abstract:

We study the effects of allocative and informational externalities in (multi-object) auctions and related mechanisms. Such externalities naturally arise in models that embed auctions in larger economic contexts. In particular, they appear when there is downstream interaction among bidders after the auction has closed. The endogeneity of valuations is the main driving force behind many new, specific phenomena with allocative externalities: even in complete information settings, traditional auction formats need not be efficient, and they may give rise to multiple equilibria and strategic non-participation. But, in the absence of informational externalities, welfare maximization can be achieved by Vickrey-Clarke- Groves mechanisms. Welfare-maximizing Bayes-Nash implementation is, however, impossible in multi-object settings with informational externalities, unless the allocation problem is separable across objects (e.g. there are no allocative externalities nor complementarities) or signals are one-dimensional. Moreover, implementation of any choice function via ex-post equilibrium is generically impossible with informational externalities and multidimensional types. A theory of information constraints with multidimensional signals is rather complex, but indispensable for our study.
October 2005

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142.pdf

Mixed Bundling Auctions

Abstract:

We study multi-object auctions where agents have private and additive valuations for heterogeneous objects. We focus on the revenue properties of a class of dominant strategy mechanisms where a weight is assigned to each partition of objects. The weights influence the probability with which partitions are chosen in the mechanism. This class contains efficient auctions, pure bundling auctions, mixed bundling auctions, auctions with reserve prices and auctions with pre-packaged bundles. For any number of objects and bidders, both the pure bundling auction and separate, efficient auctions for the single objects are revenue-inferior to an auction that involves mixed bundling.
February 2006

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141.pdf

Optimal Seedings in Elimination Tournaments

Abstract:

We study an elimination tournament with heterogenous contestants whose ability is common-knowledge. Each pair-wise match is modeled as an all-pay auction where the winner gets the right to compete at the next round. Equilibrium efforts are in mixed strategies, yielding rather complex play dynamics: the endogenous win probabilities in each match depend on the outcome of other matches through the identity of the expected opponent in the next round. The designer can seed the competitors according to their ranks. For tournaments with four players we find optimal seedings with respect to three different criteria: 1) maximization of total effort in the tournament; 2) maximization of the probability of a final among the two top ranked teams; 3) maximization of the win probability for the top player. In addition, we find the seedings ensuring that higher ranked players have a higher probability to win the tournament. Finally, we compare the theoretical predictions with data from NCAA basketball tournaments.
Keywords: Elimination tournaments, Seedings, All-Pay Auctions
JEL classification: D72, D82, D44
July 2003

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140.pdf

Abstract:

We study the optimal design of organizations under the assumption that agents in a contest care about their relative position. A judicious definition of status categories can be used by a principal in order to influence the agents’ performance. We first consider a pure status case where there are no tangible prizes. Our main results connect the optimal partition in status categories to various properties of the distribution of ability among contestants. The top status category always contains an unique element. For distributions of abilities that have an increasing failure rate, a proliferation of status classes is optimal, while in other cases the optimal partition involves some coarseness. Finally, we modify the model to allow for status categories that are endogenously determined by monetary prizes of different sizes. If status is solely derived from monetary rewards, we show that the optimal partition in status classes contains only two categories.
July 2005

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139.pdf

Labour market screening with intermediaries

Abstract:

We consider a Rothschild-Stiglitz-Spence labour market screening model and employ a centralised mechanism to coordinate the efficient matching of workers to firms. This mechanism can be thought of as operated by a recruitment agency, an employment office or head hunter. In a centralised descending-bid, multi-item procurement auction, workers submitwage-bids for each job and are assigned stable jobs as equilibrium outcome. We compare this outcome to independent, sequential hiring by firms and conclude that, in general, a stable assignment can only be implemented if firms coordinate to some extent.
Keywords: Matching, Multi-item auctions, Sequential auctions, Screening
JEL classification: C78, D44, E24, J41
June 2006

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138.pdf

Sequential bargaining with pure common values

Abstract:

We study the alternating-offers bargaining problem of assigning an indivisible and commonly valued object to one of two players in return for some payment among players. The players are asymmetrically informed about the object’s value and have veto power over any settlement. There is no depreciation during the bargaining process which involves signalling of private information. We characterise the perfect Bayesian equilibrium of this game which is essentially unique if offers are required to be strictly increasing. Equilibrium agreement is reached gradually and nondeterministically. The better informed player obtains a rent.
Keywords: Sequential bargaining, Common values, Incomplete information, Repeated games
JEL classification: C73, C78, D44, D82, J12
June 2006

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137.pdf

Sequential bargaining with pure common values and incomplete information on both sides

Abstract:

We study the alternating-offer bargaining problem of sharing a common value pie under incomplete information on both sides and no depreciation between two identical players. We characterise the essentially unique perfect Bayesian equilibrium of this game which turns out to be in gradually increasing offers.
Keywords: Gradual bargaining, Common values, Incomplete information, Repeated games
JEL classification: C73, C78, D44, D82, J12
June 2006

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136.pdf

The Political Economy of Corruption and the Role of Financial Institutions

Abstract:

In many developing countries, we observe rather high levels of corruption. This is surprising from a political economy perspective, as the majority of people generally suffers from high corruption levels. We explain why citizens do not exert enough political pressure to reduce corruption if financial institutions are missing. Our model is based on the fact that corrupt officials have to pay entry fees to get lucrative positions. The mode of financing this entry fee determines the distribution of the rents from corruption. In a probabilistic voting model, we show that a lack of financial institutions can lead to more corruption as more voters are part of the corrupt system. Thus, the economic system has an effect on political outcomes. Well-functioning financial institutions, in turn, can increase the political support for anti-corruption measures.
Keywords: Corruption, Financial Markets, Institutions, Development, Voting
JEL classification: D73, D72, O17
June 2006

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135.pdf

Private Provision of a Complementary Public Good

Abstract:

For several years, an increasing number of firms are investing in Open Source Software (OSS). While improvements in such a non-excludable public good cannot be appropriated, companies can benefit indirectly in a complementary proprietary segment. We study this incentive for investment in OSS. In particular we ask how (1) market entry and (2) public investments in the public good affects the firms' production and profits. Surprisingly, we find that there exist cases where incumbents benefit from market entry. Moreover, we show the counter-intuitive result that public spending does not necessarily lead to a decreasing voluntary private contribution.
Keywords: Open Source Software, Private Provision of Public Goods, Cournot-Nash Equilibrium, Complements, Market Entry
JEL classification: C72, L13, L86
June 2006

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134.pdf

Two-Sided Markets with Pecuniary and Participation Externalities

Abstract:

The existing literature on "two-sided markets" addresses participation externalities, but so far it has neglected pecuniary externalities between competing platforms. In this paper we build a model that incorporates both externalities. In our setup differentiated platforms compete in advertising and offer consumers a service free of charge (such as a TV program) that is financed through advertising. We show that advertising can exhibit the properties of a strategic substitute or complement. Surprisingly, there exist cases in which platforms benefit from market entry. Moreover, we show that from a welfare point of view perfect competition is not always desirable.
Keywords: two-sided markets, broadcasting, advertising, market entry, digital television.
JEL classification: D43, L13, L82
June 2006

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133.pdf

Umbrella Branding and the Provision of Quality

Abstract:

Consider a two-product firm that decides on the quality of each product. Product quality is unknown to consumers. If the firm sells both products under the same brand name, consumers adjust their beliefs about quality subject to the performance of both products. We show that if the probability that low quality will be detected is in an intermediate range, the firm produces high quality under umbrella branding whereas it would sell low quality in the absence of umbrella branding. Hence, umbrella branding mitigates the moral hazard problem. We also find that umbrella branding survives in asymmetric markets and that even unprofitable products may be used to stabilize the umbrella brand. However, umbrella branding does not necessarily imply high quality; the firm may choose low-quality products with positive probability.
Keywords: Umbrella branding, reputation transfer, signaling, experience goods.
JEL classification: L14, L15, M37, D82
June 2006

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132.pdf

Observable Reputation Trading

Abstract:

Is the reputation of a firm tradable when the change in ownership is observable? We consider a competitive market in which a share of owners must retire in each period. New owners bid for the firms that are for sale. Customers learn the owner’s type, which reflects the quality of the good or service provided, through experience. After observing an ownership change they may want to switch firm. However, in equilibrium, good new owners buy from good old owners and retain high-value customers. Hence reputation is a tradable intangible asset, although ownership change is observable.
Keywords: Reputation, ownership change, intangible assets, theory of the firm.
JEL classification: D40, D82, L14, L15
June 2006

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131.pdf

Failure to Delegate and Loss of Control

Abstract:

This paper provides an explanation for the frequently observed phenomenon of “inefficient micromanagement”. I show that a supervisor may get comprehensively involved into activities of a subordinate although a better option of delegation is available. This inefficiency persists in the absence of conflict of preferences and even as the cost of delegation becomes zero. The paper also demonstrates that imposing constraints on communication with a subordinate can be beneficial for a superior.
October 2004

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130.pdf

Veto-Based Delegation

Abstract:

In a principal-agent model with hidden information and no monetary transfers, I establish the Veto-Power Principle: any incentive-compatible outcome can be implemented through veto-based delegation with an endogenously chosen default decision. This result demonstrates the exact nature of commitment powers required by the principal: (1) to design the default outcome and (2) to ensure that she has almost no formal control over the agent's decisions.
Keywords: veto power, asymmetric information, principal-agent relationship, no monetary transfers.
JEL classification: D78, D82, L22, M54
January 2005

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129.pdf

A Characterization of the Conditions for Optimal Auction with Resale

Abstract:

Zheng has proposed a seller-optimal auction for (asymmetric) independent-privatevalue environments where inter-bidder resale is possible. Zheng’s construction requires novel conditions — Resale Monotonicity, Transitivity, and Invariance — on the bidders’ value distribution profile. The only known examples of distribution profiles satisfying these conditions in environments with three or more bidders are uniform distributions. Our characterization result shows that Zheng’s conditions, while being strong, are satisfied by many non-uniform distribution profiles. A crucial step in our analysis is to show that Invariance implies Resale Monotonicity and Transitivity.
Keywords: independent private values, optimal auction, resale, inverse virtual valuation function
May 2006

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128.pdf

First-mover disadvantage

Abstract:

This note considers a bargaining environment with two-sided asymmetric information and quasilinear preferences in which parties select bargaining mechanism after learning their valuations. I demonstrate that sometimes the buyer achieves a higher ex-ante payoff if the bargaining mechanism is selected by her opponent rather than by herself. In the model, the buyer has limited wealth and in addition to acquiring one good from the seller can purchase a different good from a competitive market. The positive relation between the values of these goods is what delivers our result.
JEL classification: C72, C78, D82
October 2005

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127.pdf

When is FDI a Capital Flow?

Abstract:

In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. Frequently, foreign direct investment is financed in the host country without an international capital movement. We develop a model in which the optimal choice of financing an international investment trades off the relative costs and benefits associated with the allocation and effectiveness of control rights resulting from the financing decision. We find that the financing choice is driven by managerial incentive problems and that FDI involves an international capital flow when these problems are not too large. Our results are consistent with data from a survey on German and Austrian investments in Eastern Europe.
Keywords: Multinational firms, Firm specific capital costs, Internal capital markets, International capital flows
JEL classification: F23, F21, G32, L20, D23
June 2006

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126.pdf

Contests with multi-tasking

Abstract:

The standard contest model in which participants compete in a single dimension is well understood and documented. Multi-dimension extensions are possible but are liable to increase the complexity of the contest structure, mitigating one of its main advantages: simplicity. In this paper we propose an extension in which competition ensues in several dimensions and a competitor that wins a certain number of these is awarded a prize. The amount of information needed to run the contest is hence limited to the number of dimensions won by each player. We look at the design of this contest from the point of view of maximizing effort in the contest (per dimension and totally), and show that there will be a tendency to run small contests with few dimensions. The standard Tullock model and its results are encompassed by our framework.
Keywords: contest design, multi-tasking, effort incentives
JEL classification: D72
May 2006

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125.pdf

Business Groups in Emerging Markets - Financial Control and Sequential Investment

Abstract:

Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group’s organizational mode and the financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral hazard problem. We also find that firms may prefer not to integrate.
Keywords: Business groups, self-enforcing contract, institutions, internal capital market
JEL classification: G31, G32, G34, K49, L22
June 2006

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124.pdf

Fragmented property rights and R&D competition

Abstract:

Where product innovation requires several complementary patents, fragmented property rights can be a factor that limits firms’ willingness to invest in the development and commercialization of new products. This paper studies multiple simultaneous R&D contests for complementary patents and how they interact with patent portfolios that firms may have acquired already. We also consider how this interaction and the intensity of the contests depends on the type of patent trade regimes and the product market equilibria that result from these regimes. We solve for the contest equilibria and show that the multiple patent product involves an important hold-up problem that considerably reduces the overall contest effort.
Keywords: fragmented property rights, patents, contests, hold-up, R&D, patent pools, licensing
JEL classification: D44
June 2006

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123.pdf

Multi-battle contests

Abstract:

We study equilibrium in a multistage race in which players compete in a sequence of simultaneous move component contests. Players may win a prize for winning each component contest, as well as a prize for winning the overall race. Each component contest is an all-pay auction with complete information. We characterize the unique equilibrium analytically and demonstrate that it exhibits endogenous uncertainty. Even a large lead by one player does not fully discourage the other player, and each feasible state is reached with positive probability in equilibrium (pervasiveness). Total effort may exceed the value of the prize by a factor that is proportional to the maximum number of stages. Important applications are to war, sports, and R&D contests and the results have empirical counterparts there.
Keywords: all-pay auction, contest, race, conflict, multi-stage, R&D, endogenous uncertainty, preemption, discouragement
JEL classification: D72, D74
March 2006

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122.pdf

Equilibrium and Efficiency in the Tug-of-War

Abstract:

We characterize the unique Markov perfect equilibrium of a tug-of-war without exogenous noise, in which players have the opportunity to engage in a sequence of battles in an attempt to win the war. Each battle is an all-pay auction in which the player expending the greater resources wins. In equilibrium, contest effort concentrates on at most two adjacent states of the game, the "tipping states", which are determined by the contestants’ relative strengths, their distances to final victory, and the discount factor. In these states battle outcomes are stochastic due to endogenous randomization. Both relative strength and closeness to victory increase the probability of winning the battle at hand. Patience reduces the role of distance in determining outcomes. Applications range from politics, economics and sports, to biology, where the equilibrium behavior finds empirical support: many species have developed mechanisms such as hierarchies or other organizational structures by which the allocation of prizes are governed by possibly repeated conflict. Our results contribute to an explanation why. Compared to a single stage conflict, such structures can reduce the overall resources that are dissipated among the group of players.
Keywords: winner-take-all, all-pay auction, tipping, multi-stage contest, dynamic game, preemption, conflict, dominance
JEL classification: D72, D74
May 2006

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121.pdf

Contests with Investment

Abstract:

Perfectly discriminating contests (or all pay auction) are widely used as a model of situations where individuals devote resources to win some prize. In reality such contests are often preceded by investments of the contestants into their ability to fight in the contest. This paper studies a two stage game where in the first stage, players can invest to lower their bid cost in a perfectly discriminating contest, which is played in the second stage. Different assumptions on the timing of investment are studied. With simultaneous investments, equilibria in which players play a pure strategy in the investment stage are asymmetric, exhibit incomplete rent dissipation, and expected effort is reduced relative to the game without investment. There also are symmetric mixed strategy equilibria with complete rent dissipation. With sequential investment, the first mover always invests enough to deter the second mover from investing, and enjoys a first mover advantage. I also look at unobservable investments and endogenous timing of investments.
Keywords: contests, all pay auctions, investment
JEL classification: D44, D72
May 2006

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120.pdf

Rents, dissipation and lost treasures: comment

Abstract:

In an interesting recent paper, Dari-Mattiacci and Parisi (2005) extended Tullock.s (1980) rent-seeking game with an entry decision. The mixed strategies identified by Dari-Mattiacci and Parisi for the case of increasing returns in the contest success function (r > 2) do not constitute an equilibrium of the game they study. However, these strategies are an equilibrium if the strategy space of the game is restricted by a minimum expenditure requirement, and this minimum expenditure requirement is an element of a specific interval.
January 2006

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119.pdf

Selection Tournaments, Sabotage, and Participation

Abstract:

This paper studies sabotage in tournaments with at least three contestants, where the contestants know each other well. Every contestant has an incentive to direct sabotage specifically against his most dangerous rival. In equilibrium, contestants who choose a higher productive effort are sabotaged more heavily. This might explain findings from psychology, where victims of mobbing are sometimes found to be overachieving. Further, sabotage equalizes promotion chances. The effect is most pronounced if the production function is linear in sabotage, and the cost function depends only on the sum of all sabotage activities: in an interior equilibrium, who will win is a matter of chance, even when contestants differ a great deal in their abilities. This, in turn, has adverse consequences for who might want to participate in a tournament. Since better contestants anticipate that they will be sabotaged more strongly, it may happen that the most able stay out and the tournament selects one of the less able with probability one. I also study the case where some contestants are easy victims, i.e. easier to sabotage than others.
Keywords: tournament, contest, sabotage, selection
JEL classification: M51, J41, J29
April 2006

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118.pdf

“Ineffective” competition: a puzzle?

Abstract:

Conventionally, we think of an increase in competition as weakly decreasing prices, increasing the number of consumers served, thus increasing consumer surplus, decreasing firms profits, etc. Here, we demonstrate that, under some tame circumstances, an increase in competition may lead to a price increase in a horizontally differentiated market. We show this relationship for the petrol market in German cities.
May 2006

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117.pdf

All Nash Equilibria of the Multi-Unit Vickrey Auction

Abstract:

This paper completely characterizes the set of Nash equilibria of the Vickrey auction for multiple identical units when buyers have non-increasing marginal valuations and there at least three potential buyers. There are two types of equilibria: In the first class of equilibria there are positive bids below the maximum valuation. In this class, above a threshold value all bidders bid truthfully on all units. One of the bidders bids at the threshold for any unit for which his valuation is below the threshold; the other bidders bid zero in this range. In the second class of equilibria there are as many bids at or above the maximum valuation as there are units. The allocation of these bids is arbitrary across bidders. All the remaining bids equal zero. With any positive reserve price equilibrium becomes unique: Bidders bid truthfully on all units for which their valuation exceeds the reserve price.
Keywords: Vickrey auction, Multi-unit auction, ex-post equilibrium, reserve price, uniqueness
JEL classification: C72, D44
June 2006

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116.pdf

The Intensity of Incentives in Firms and Markets: Moral Hazard with Envious Agents

Abstract:

While most market transactions are subject to strong incentives, transactions within Firms are often not incentivized. We offer an explanation for this observation based on envy among agents in an otherwise standard moral hazard model with multiple agents. Envious agents suffer if other agents receive a higher wage due to random shocks to their performance measures. The necessary compensation for expected envy renders incentive provision more expensive, which generates a tendency towards flat-wage contracts. Moreover, empirical evidence suggests that social comparisons like envy are more pronounced among employees within Firms than among individuals who interact only in the market. Flat-wage contracts are thus more likely to be optimal in Firms than in markets.
Keywords: Envy, moral hazard, flat-wage contracts, within-Firm vs. market interactions
JEL classification: D82, J3, M5
April 2006

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115.pdf

The Effect of Reputation on Selling Prices in Auctions

Abstract:

In economic approaches it is often argued that reputation considerations influence the behavior of individuals or firms and that reputation influences the outcome of markets. Empirical evidence is rare though. In this contribution we argue that a positive reputation of sellers should have an effect on selling prices. Analyzing auctions of popular DVDs at eBay we, indeed, find support for this hypothesis. Secondary, we unmask the myth that it is promising for eBay sellers to let their auction end at the evening, when many potential buyers may be online.
Keywords: Reputation, eBay feedback system, auction
JEL classification: D44, D82, K12, L81
May 2006

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114.pdf

On Delegation under Relational Contracts

Abstract:

In this paper, a principal’s decision between delegating two tasks or handling one of the two tasks herself is analyzed. We assume that the principal uses both, formal contracts and informal agreements sustained by the value of future relationships (relational contracts) as incentive device. It is found that the principal is less likely to delegate both tasks in a dynamic setting than in a static one (where formal contracts are the only feasible incentive device), as handling one task herself enables a much wider use of relational contracts.
Keywords: Job design, relational contracts, formal contracts, delegation
JEL classification: D82, J33, L23, M52, M54
May 2006

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113.pdf

Job Promotion Tournaments and Imperfect Recall

Abstract:

In this paper, a promotion tournament is considered, where, at the beginning of the tournament, it is unknown how long the tournament lasts. Further, the promotion decision is based on the assessments of a supervisor with imperfect recall. In line with psychological research, the supervisor is assumed to either value early or recent impressions more strongly. It is shown that effort may increase or decrease, as the probability of promotion in a certain period gets higher. The single effects determining the sign of the effort change oftentimes depend on how the supervisor processes information.
Keywords: Promotion Tournament, Promotion Probability, Imperfect Recall
JEL classification: J33, M51, M52
May 2006

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112.pdf

The Importance of Equity Finance for R&D Activity – Are There Differences Between Young and Old Companies?

Abstract:

This paper analyzes the importance of equity finance for the R&D activity of small and medium-sized enterprises. We use information on almost 6000 German SMEs from a company survey. Using the intensity of banking competition at the district level as instrument to control for endogeneity, we find that a higher equity ratio is conducive to more R&D for young but not for old companies. Equity may be a constraining factor for young companies which have to rely on the original equity investment of their owners since they have not yet accumulated retained earnings and can relay less on outside financing. The positive influence is found for R&D intensity but not for the decision whether to perform R&D. Equity financing is therefore especially important for the most innovative, young companies.
Keywords: R&D activity, equity finance, small and medium-sized enterprises
JEL classification: G32, O32
February 2006

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111.pdf

Implicit Contracts: Two Different Approaches

Abstract:

In this paper, I compare two different approaches to model implicit contracting, the infinite-horizon approach typically used in the literature and afinite-horizon approach building on an adverse-selection model. I demonstrate that even the most convincing result of the infinite-horizon approach, namely that implicit contracting is improved, if the discountrate is lowered, does not carry over to the alternative modeling approach. Predictions of the first approach should therefore be handled with care and subject to athorough reinvestigation.
Keywords: Trust, finite horizon, infinite horizon, discounting, implicit contracting
JEL classification: D82, D83, J33, M52
April 2006

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110.pdf

Power Inside the Firm and the Market: A General Equilibrium Approach

Abstract:

Recent years have witnessed an enormous amount of reorganization of the corporate sector in the US and in Europe. This paper examines the role of market competition for this trend in corporate reorganization. We find that at intermediate levels of competition the CEO of the corporation decides to have less power inside the firm and to delegate control to lower levels of the firms’ hierarchy. Thus, workers empowerment and the move to flatter firm organizations emerge as an equilibrium when competition is not too tough and not too weak. The model predicts merger waves or waves of outsourcing when countries become more integrated into the world economy as the corporate sector reorganizes in response to an increase in international competition.
Keywords: monopolistic competition, international trade, corporate reorganisation, flattening firm hierarchies
JEL classification: F12, D23, L22, L1
March 2006

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109.pdf

How to Allocate R&D (and Other) Subsidies: An Experimentally Tested Policy Recommendation

Abstract:

This paper evaluates how R&D subsidies to the business sector are typically awarded. We identify two sources of ine_ciency: the selection based on a ranking of individual projects, rather than complete allocations, and the failure to induce competition among applicants in order to extract and use information about the necessary funding. In order to correct these ine_- ciencies we propose mechanisms that include some form of an auction in which applicants bid for subsidies. Our proposals are tested in a simulation and in controlled lab experiments. The results suggest that adopting our proposals may considerably improve the allocation.
Keywords: Research, Subsidies, Experimental Economics
JEL classification: D44, D45, H25, O32, O38
October 2005

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108.pdf

The Threat of Capital Drain: A Rationale for Public Banks?

Abstract:

This paper yields a rationale for why subsidized public banks may be desirable from a regional perspective in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through a public guarantee. Under some conditions, cooperative banks can perform the same function without any subsidization; however, they may be crowded out by public banks. We also discuss the impact of the political structure on the emergence of public banks in a political-economy setting and the role of interregional mobility.
Keywords: Public banks, cooperative banks, capital drain, credit rationing, financial integration, privatization.
JEL classification: G21, F36, H11, L33.
April 2006

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107.pdf

Tortious Acts Affecting Markets

Abstract:

The present paper examines an injurer causing a temporary blackout to a firm as the primary victim but also affecting customers and competitors of the firm. Reflecting existing legal practice, the paper investigates efficiency properties of the negligence rule granting recovery of private losses but to the primary victim only. The regime is shown to provide efficient incentives for precaution provided that the primary loss exceeds the social loss from accidents. The main contribution of the paper consists of an explicit analysis of markets affected by a temporary blackout of one firm. The analysis reveals that the private loss exceeds the social loss indeed if the market is less than fully competitive. Moreover, the net social loss remains positive, no matter which market structure prevails.
JEL classification: K13, K12, D62
April 2006

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106.pdf

How Licensing Resolves Hold-Up: Evidence from a Dynamic Panel Data Model with Unobserved Heterogeneity

Abstract:

In a patent thicket licensing provides a mechanism to either avoid or resolve hold-up. Firms' R&D incentives will differ depending on how licensing is used. In this paper we study the choice between ex ante licensing to avoid hold-up and ex post licensing to resolve it. Building on a theoretical model of a patent portfolio race, firms' choices of licensing contracts are modelled. We derive several hypotheses from the model and find support for these using data from the semiconductor industry. The empirical results show that firms' relationships in product markets and technology space jointly determine the type of licensing contract chosen. Implications for the regulation of licensing are discussed. We estimate a dynamic panel data model with unobserved heterogeneity and a lagged dependent variable. A method suggested by Wooldridge (2005) is employed to estimate a random effects probit model using conditional maximum likelihood.
Keywords: Hold-Up Problem, Licensing, Innovation, Patent Race, Patent Thicket
JEL Classification: L13, L49, L63
April 2006

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105.pdf

Incentives for separation and incentives for public good provision

Abstract:

In this paper I examine the incentives of regions to unite, to separate and to provide public goods. Separation allows for greater influence over the nature of political decision making while unification allows regions to exploit economies of scale in the provision of public goods. When public good provision is relatively inexpensive, separation occurs since individuals want to assert greater influence, while for intermediate costs of public good provision, separation can be explained by the desires for greater influence as well as for more public goods. Compared with the social optimum, there are excessive incentives for public good provision as well as excessive incentives for separation.
Keywords: unification, separation, public good provision, voting
JEL classification: D7, H2, H7
March 2006

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104.pdf

Optimal Ownership Structures in the Presence of Investment Signals

Abstract:

The property-rights approach to the theory of the firm is extended by introducing distorted signals of the parties.investments. Investment incentives are then given in two ways, by allocating ownership rights and by tying pay to the signal realization. Optimal incentive strength, that is, the weight that a signal is optimally given in a wage contract, depends on two distortions, namely the distortion of the signal from the realized and from the disagreement benefit. Under the optimal ownership structure, the deviations of both investments from their first-best levels are relatively small implying that the relative importance of investment matters. Further, it is shown that most of the Grossman-Hart-Moore results are not robust to an introduction of investment signals.
Keywords: Signal, Property rights, Integration, Distortion
JEL classification: D2, L2
March 2006

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103.pdf

Conditional Allocation of Control Rights in Venture Capital Finance

Abstract:

When a young entrepreneurial firm matures, it is often necessary to replace the founding entrepreneur by a professional manager. This replacement decision can be affected by the private benefits of control enjoyed by the entrepreneur which gives rise to a conflict of interest between the entrepreneur and the venture capitalist. We show that a combination of convertible securities and contingent control rights can be used to resolve this conflict efficiently. This contractual arrangement is frequently observed in venture capital finance.
Keywords: Corporate Finance, Venture Capital, Control Rights, Convertible Securities
JEL classification: D23, G24, G32
February 2006

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102.pdf

Performance Pay and Risk Aversion

Abstract:

A main prediction of agency theory is the well known risk-incentive trade-off. Incentive contracts should be found in environments with little uncertainty and for agents with low degrees of risk aversion. There is an ongoing debate in the literature about the first trade-off. Due to lack of data, there has so far been hardly any empirical evidence about the second. Making use of a unique representative data set, we find clear evidence that risk aversion has a highly significant and substantial negative impact on the probability that an employee's pay is performance contingent.
Keywords: Agency theory, GSOEP, Incentives, Pay for performance, Performance appraisal, Risk, Risk aversion
JEL classification: J33, M52, D80
March 2006

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101.pdf

Contractual Incentive Provision and Commitment in Rent-Seeking Contests

Abstract:

In this paper, we consider a symmetric rent-seeking contest, where employees lobby for a governmental contract on behalf of firms. The only verifiable information is which firm is assigned the contract. We derive the optimal wage contracts of the employees and analyze, whether commitment by determining the wage contract prior to the competitor is profitable. This is indeed the case, i.e. firms prefer to move first in the wage-setting subgame. This complements previous work on rent-seeking contests emphasizing that commitment via rent-seeking expenditures is unprofitable in symmetric contests.
Keywords: Contest, First-Mover Advantage, Commitment, Wage Contract
JEL classification: D72, M52
March 2006

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100.pdf

Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts

Abstract:

We discuss a principal-agent model in which the principal has the opportunity to include a non-compete agreement in the employment contract. We show that not imposing such an agreement can be beneficial for the principal as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent's outside option. If the principal can use an option con- tract for retaining the agent, she will never prefer a strict non-compete agreement.
Keywords: fine, incentives, incomplete contracts, non-compete agreements, option contract
JEL classification: D21, D86, J3, K1, M5
March 2006

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99.pdf

Organization of Multinational Activities and Ownership Structure

Abstract:

We develop a model in which multinational investors decide about the modes of organization, the locations of production, and the markets to be served. Foreign investments are driven by market-seeking and cost-reducing motives. We further assume that investors face costs of control that vary among sectors and increase in distance. The results show that (i) production intensive sectors are more likely to operate a foreign business independent of the investment motive, (ii) that distance may have a non-monotonous effect on the likelihood of horizontal investments, and (iii) that globalization, if understood as reducing distance, leads to more integration.
Keywords: Multinational firms, Joint ventures, Distance, Technology spillovers, Ownership structure
JEL classification: F23, L24, L22, L23, D23
February 2006

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98.pdf

Optimal Income Taxation and Public Good Provision in a Two-Class Economy

Abstract:

This paper combines the problem of optimal income taxation with the free-rider problem in public good provision. There are two groups of individuals with private information on their earning ability and their valuation of a public good. Adjustments of the transfer system are needed to discourage the more productive from exaggerating the desirability of public good provision. Similarly, the less productive need to be prevented from understating their valuation. Relative to an optimal income tax, which focuses solely on earning ability, income transfers are increased whenever a public good is installed and are decreased otherwise.
Keywords: Income Taxation, Public Good Provision, Revelation of Preferences, Two-dimensional Heterogeneity
JEL classification: D71, D82, H21, H41
January 2006

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97.pdf

License Auctions with Royalty Contracts for Losers

Abstract:

This paper revisits the standard analysis of licensing a cost reducing innovation by an outside innovator to a Cournot oligopoly. We propose a new mechanism that combines elements of a license auction with royalty licensing by granting the losers of the auction the option to sign a royalty contract. The optimal new mechanism eliminates the losses from exclusionary licensing without reducing bidders’ surplus; therefore, it is more profitable than both standard license auctions and pure royalty licensing. We also take into account that the number of licenses must be an integer, which is typically ignored in the literature.
Keywords: Patents, Licensing, Auctions, Royalty, Innovation, R&D, Mechanism Design
JEL classification: D21, D43, D44, D45
January 2006

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96.pdf

Foreign Banks in Eastern Europe: Mode of Entry and Effects on Bank Interest Rates

Abstract:

Credit markets in many Eastern European countries are now dominated by foreign-owned banks. We analyze the development for foreign ownership and its impact on lending rate in ten Eastern European countries between 1995 and 2003. Currently, the majority of loans from foreign banks is granted by acquired banks. The presence of foreign acquired banks as measured by their relative number among the banks in our dataset increased somewhat slower than that of foreign de novo banks. However, since market entry through acquisition allows acquiring a credit portfolio and a customer base, acquired banks were able to expand their market share much faster than the foreign de novo banks. Our results also show that the interest rate decreased after foreign bank entry. Moreover, while the reduction in interest rates of domestic banks is more pronounced in the case of foreign entry through a de novo investment, foreign de novo banks charge higher interest rates than foreign acquired banks.
Keywords: SME, Banking, Foreign Entry, Mode of Entry, Interest Rate
JEL classification: D4, G21
February 2006

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95.pdf

Conflict and the Social Contract

Abstract:

We consider social contracts for resolving conflicts between two
agents who are uncertain about each other's fighting potential. Appli-
cations include international conflict, litigation, and elections. Even
though only a peaceful agreement avoids a loss of resources, if this loss
is small enough, then any contract must assign a positive probability
of conflict. We show how the likelihood of conflict outbreak depends
on the distribution of power between the agents and their information
about each other.
Keywords: conflict, social contracts, asymmetric information
JEL Classification: C78, D72, D74, D82, H21, H23.

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94.pdf

Procurement of Goods and Services – Scope and Government

Abstract:

December 2005

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93.pdf

Price formation in a sequential selling mechanism

Abstract:

This paper analyzes the trade of an indivisible good within a two-stage mechanism, where a seller first negotiates with one potential buyer about the price of the good. If the negotiation fails to produce a sale, a second–price sealed–bid auction with an additional buyer is conducted. The theoretical model predicts that with risk neutral agents all sales take place in the auction rendering the negotiation prior to the auction obsolete. An experimental test of the model provides evidence that average prices and profits are quite precisely predicted by the theoretical benchmark. However, a significant large amount of sales occurs already during the negotiation stage. We show that risk preferences can theoretically account for the existence of sales during the negotiation stage, improve the fit for buyers’ behavior, but is not sufficient to explain sellers’ decisions. We discuss other behavioral explanations that could account for the observed deviations.
Keywords: auction, negotiation, combined mechanism, sequential mechanism, risk preferences, experiment
JEL classification: C72, C91, D44, D82
October 2005

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92.pdf

Courtesy and Idleness: Gender Differences in Team Work and Team Competition

Abstract:

Does gender play a role in the context of team work? Our results based on a real-effort experiment suggest that performance depends on the composition of the team. We find that female and male performance differ most in mixed teams with revenue sharing between the team members, as men put in significantly more effort than women. The data also indicate that women perform best when competing in pure female teams against male teams whereas men perform best when women are present or in a competitive environment.
Keywords: team incentives, gender, tournaments
JEL classification: C72, C73, C91, D82
September 2005

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91.pdf

Corruption in Procurement Auctions

Abstract:

We review different kinds of corruption that have been observed in procurement auctions and categorize them. We discuss means to avoid corruption, by choice of preferable auction formats, or with the help of technological tools, such as secure electronic bidding systems. Auctions that involve some soft elements, such as complex bids consisting of technical and financial proposals, are particularly prone to corruption. We do not believe that it is possible to eradicate corruption altogether in such situations, but we discuss means to make it less likely.
January 2006

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90.pdf

Research Joint Ventures, Licensing, and Industrial Policy

Abstract:

This paper reconsiders the explanation of R&D subsidies by Spencer and Brander (1983) and others by allowing firms to license their innovations and to pool their R&D investments. We show that in equilibrium R&D joint ventures are formed and licensing occurs in a way that eliminates the strategic benefits of R&D investment in the export oligopoly game. Nevertheless, national governments are driven to subsidize their own national firms in order to increase their strength in the joint venture bargaining game. Therefore, our analysis suggests an alternative explanation of the observed proliferation of R&D subsidies.
Keywords: patent licensing, industrial organization, R&D subsidies, research joint ventures, innovation policy
JEL classification: L13, O34
October 2005

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89.pdf

Bank Size and Risk-Taking under Basel II

Abstract:

We analyze the relationship between bank size and risk-taking under the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we show that the introduction of an internal ratings based (IRB) approach improves upon flat capital requirements if the approach is applied uniformly across banks and if the costs of implementation are not too high. However, the banks’ right to choose between the standardized and the IRB approaches under Basel II gives larger banks a competitive advantage and, due to fiercer competition, pushes smaller banks to take higher risks. This may even lead to higher aggregate risk-taking.
Keywords: Basel II, IRB approach, bank competition, capital requirements, SME financing
JEL classification: G21, G28, L11
February 2006

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88.pdf

Information, Coordination, and the Industrialization of Countries

Abstract:

The industrialization process of a country is often plagued by a failure to coordinate investment decisions. Using the Global Games approach we can solve this coordination problem and eliminate the problem of multiple equilibria. We show how appropriate information provision enhances efficiency. We discuss extensions of the model and argue that subsidies may be a property of a signalling equilibrium to overcome credibility problems in information provision. In addition we point out possible problems with overreaction to public information. Furthermore, we suggest a new focus for development policy.
Keywords: Information, Coordination, Industrialization, Development, Global Games, Equilibrium Refinements, Big Push
JEL classification: C72, C79, D82, F21, O12, O14
February 2006

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87.pdf

Local Public Good Provision, Municipal Consolidation, and National Transfers

Abstract:

We analyze a simple model of local public good provision in a country consisting of a large number of heterogeneous regions, each comprising two districts, a city and a village. When districts remain autonomous and local public goods have positive spillover effects on the neighboring district, there is underprovision of public goods in both the city and the village. When districts consolidate, underprovision persists in the village (and may even become more severe), whereas overprovision of public goods arises in the city as urbanites use their political power to exploit the villagers. From a social welfare point of view, inhabitants of the village have insufficient incentives to vote for consolidation. We examine how national transfers to local governments can resolve these problems.
Keywords: local public goods, municipal consolidation, voting, intergovernmental transfers
JEL classification: D7, H2, H7, R5
January 2006

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86.pdf

The Theory of Assortative Matching Based on Costly Signals

Abstract:

We study two-sided markets with a finite numbers of agents on each side, and with two-sided incomplete information. Agents are matched assortatively on the basis of costly signals. A main goal is to identify conditions under which the potential increase in expected output due to assortative matching (relative to random matching) is completely offset by the costs of signalling. We also study how the signalling activity and welfare on each side of the market change when we vary the number of agents and the distribution of their attributes, thereby displaying effects that are particular to small markets. Finally, we look at the continuous version of our two-sided market model and establish the connections to the finite version. Technically, the paper is based on the very elegant theory about stochastic ordering of (normalized) spacings and other linear combinations of order statistics from distributions with monotone failure rates, pioneered by R. Barlow and F. Proschan (1966, 1975) in the framework of reliability theory.
December 2005

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85.pdf

Technology Transfer and Spillovers in International Joint Ventures

Abstract:

It is often argued that multinationals are reluctant to transfer technology due to the fear of spillovers. We show that this need not be the case if host country policies like taxation are taken into account. Furthermore, we examine the incentives the multinational and the host country have to engage in an international joint venture. We show why a multinational may agree to enter a joint venture even though this gives rise to spillovers. Surprisingly, we find that a joint venture is sometimes not in the interest of a host country, despite the prospect of spillovers.
Keywords: Foreign Direct Investment, International Joint Ventures, Technology Transfer, Technology Spillovers, Multinational Firms
JEL classification: D43, F21, F23, L13, P31, O12
October 2005

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84.pdf

The Vanishing Barter Economy in Russia: A Test of the Virtual Economy Hypothesis? Reply to Barry Ickes

Abstract:

This paper is a reply to Barry Ickes' critique of my paper “Trust versus Illusion: What is Driving Demonetization in Russia?” in which I show that the data reject Barry Ickes' Virtual Economy explanation of barter in Russia in favor of an institutional explanation based on the lack of trust.
Keywords: imperfect input and capital markets, the virtual economy, trade credit, trust, contract enforcement
JEL classification: D20, G30, O10, P30
November 2004

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83.pdf

An Economic Approach to Article 82 - Report by the European Advisory Group on Competition Policy

Abstract:

This report argues in favour of an economics-based approach to Article 82, in a way similar to the reform of Article 81 and merger control. In particular, we support an effects-based rather than a form-based approach to competition policy. Such an approach focuses on the presence of anti-competitive effects that harm consumers, and is based on the examination of each specific case, based on sound economics and grounded on facts.
Keywords: Competition Policy, Abuse of Market Power, Article 82
JEL classification: D4
July 2005

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82.pdf

EU Merger Remedies: A Preliminary Empirical Assessment

Abstract:

Mergers that substantially lessen competition are challenged by antitrust authorities. Instead of blocking anticompetitive transitions straight away, authorities might choose to negotiate with the merging parties and allow the transactions to proceed with modifications that restore or preserve the competition in the involved markets. We study a sample of 167 mergers that were under the European Commission’s scrutiny from 1990 to 2002. We use an event study methodology to identify the potential anticompetitive effects of mergers as well as the remedial provisions on these transactions. Stock market reactions around the day of the merger’s announcement provide information on the first question, whereas the stock market reactions around the commission’s final decision day convey information about the outcome of the bargaining process between the authority and the merging parties. We first classify mergers according to their effects on competition and then we develop hypotheses on the effects that remedies are supposed to achieve depending on the merger’s competitive outcome. We isolate several stylized facts. First, we find that remedies were not always appropriately imposed. Second, the market seems to be able to predict remedies’ effectiveness when applied in phase I. Third, the market also seems able to produce a good prior to phase II’s clearances and prohibitions, but not to remedies. This can be due either to a measurement problem or related to the increased merging firms’ bargaining power during the second phase of the merger review.
Keywords: Merger Control, Remedies, European Commission, Event Studies
JEL classification: L4, K21, C12, C13
January 2006

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81.pdf

A New International Division of Labor in Europe: Outsourcing and Offshoring to Eastern Europe

Abstract:

Europe is reorganizing its international value chain. I document these changes in Europe’s international organization of production with new survey data of Austrian and German firms investing in Eastern Europe. I show estimates of the share of intrafirm trade between Austria or Germany on the one hand and Eastern Europe on the other. Furthermore, I present empirical evidence of the drivers of the new division of labor in Europe. I find among other things that falling trade costs and reduced levels of corruption as well as improvements in the contracting environment in Eastern Europe are affecting the level of intrafirm imports from that region. These factors also favor outsourcing over offshoring. In contrast, low organizational costs of hierarchies and large costs of holdup (when there are no alternative investors in Old Europe or no alternative suppliers in Eastern Europe) favor offshoring over outsourcing. Tax holidays granted by host countries in Eastern Europe also mildly affect the organizational choice.
Keywords: the empirics of global sourcing, intrafirm trade, contract enforcement, comparative advantage in Eastern Europe, empirical test of the theory of the firm
JEL classification: D23, D51, F11, L14, O11
September 2005

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80.pdf

Financial Crisis, Economic Recovery, and Banking Development in Russia, and other FSU Countries

Abstract:

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