In binary choice between discrete outcome lotteries, an individual may prefer lottery L1 tonlottery L2 when the probability that L1 delivers a better outcome than L2 is higher than thenprobability that L2 delivers a better outcome than L1. Such a preference can be rationalizednby three standard axioms (solvability, convexity and symmetry) and one less standard axiom (a fanning-in). A preference for the most probable winner can be represented by a skewsymmetric bilinear utility function. Such a utility function has the structure of a regret theory when lottery outcomes are perceived as ordinal and the assumption of regret aversion isnreplaced with a preference for a win. The empirical evidence supporting the proposed systemnof axioms is discussed.
In view of recent corporate scandals, it is argued that corporate governance can learnnfrom public governance. Institutions devised to control and discipline the behavior of executives in the political sphere can give new insights into how to improve the governance of firms. Proposals in four specific areas are discussed: manager compensation, the division of power within firms, rules of succession in top positions, and institutionalized competition in core areas of the corporation.
Most previous studies on intertemporal labor supply found very small or insignificantnsubstitution effects. It is not clear, however, whether these results are due to institutionalnconstraints on workers’ labor supply choices or whether the behavioral assumptions of thenstandard life cycle model with time separable preferences are empirically invalid. We conducted a randomized field experiment in a setting in which workers were free to choose their working times and their efforts during working time. We document a large positive wage elasticity of overall labor supply and an even larger wage elasticity of labor hours, which implies that the wage elasticity of effort per hour is negative.nWhile the standard life cycle model cannot explain the negative effort elasticity, we show that a modified neoclassical model with preference spillovers across periods and a model withnreference dependent, loss averse preferences are consistent with the evidence. With the help of anfurther experiment we can show that only loss averse individuals exhibit a significantly negativeneffort response to the wage increase and that the degree of loss aversion predicts the size of the negative effort response.
This paper argues that endogenous restructuring processes within firms towards analytical and interactive non-routine tasks (like problem-solving and organizational activities, respectively), triggered by advances in information and communication technologies (ICT) and rising supply of educated workers, are associated with an increase of wage inequality within education groups. We show that this may be accompanied by a decline or stagnation of between-group wage dispersion. The mechanisms proposed in this research are not only consistent with the evolution of the distribution of wages in advanced countries, but also with the evolution of task composition in firms and a frequently confirmed complementarity between skill-upgrading, new technologies and knowledge-based work organization.
The consequences of international outsourcing in traditional models of trade are already well understood. However, with regard to empirical research there seem to be still some important shortcomings. Empirical studies on the labor market effects of outsourcing are mainly based on the same techniques that have been used for years. In terms of the adopted econometric specifications, one assumption is typical and – as we will show – critical in this regard. Practically all studies we are aware of assume independence between industries and neglect any spillover and feedback effects across industries. In fact, this is at odds with multi-sector general equilibrium models of trade. It is this paper's focus to relax this restrictive assumption and to suggest the use of different econometric methods. We consider national input–output linkages and cross industrial flows of workers as two important channels of inter-industrial spillovers in labor market effects. We focus on these transmission channels in an Austrian panel data set of 21 two-digit industries in the 1990s and find that industrial interdependencies induce a multiplier effect for changes in industry-specific variables such as international outsourcing. Disregarding spillover effects, therefore, leads to a substantial underestimation of the labor market implications of international outsourcing.
This paper assesses the determinants of European outward and inward processing trade. Thereby, it distinguishes between size, relative factor endowment, (other) cost factors and infrastructure variables. Using a large panel of bilateral processing trade flows of the EU12 countries at the aggregate level over the period 1988–1999, we find that infrastructure variables, relative factor endowments and other cost variables are important determinants for the EU's outward processing trade. Costs also play a key role for the EU's inward processing trade.
We examine the relationship between the supply of skilled labor, technological change and relative wages. In accounting for the role of skilled labor in both production activities and productivity- enhancing "support" activities we derive the following results. First, an increase in the supply of skilled labor raises the employment share of non-production labor within firms, without lowering relative wages. Second, new technologies raise wage inequality only in so far as they give incentives to firms to reallocate skilled labor towards non-production activities. In contrast, skill-biased technological change of the sort usually considered in the literature does not affect wage inequality.
Industrial delicensing which began in 1985 in India marked a discrete break from a past of centrally planned industrial development. Similar liberalization episodes are taking place across the globe. We develop a simple Schumpeterian growth model to understand how firms respond to the entry threat imposed by liberalization. The model emphasises that firm responses, even within the same industrial sector, are likely to be heterogeneous leading to an increase in within industry inequality. Technologically advanced firms and those located in regions with pro-business institutions are more likely to respond to the threat of entry by investing in new technologies and production processes. Empirical analysis using a panel of 3-digit state-industry data from India for the period 1980-1997 confirms that delicensing led to an increase in within industry inequality in industrial performance.
This article presents a tractable dynamic general equilibrium model explaining cross-country data on geographical mobility, unemployment, and labor market institutions. Rational forward-looking agents vote on unemployment insurance (UI). Agents with higher moving costs (larger attachment to their location) prefer more generous UI. Attachment is assumed to increase with the duration of residence. UI mitigates incentives for moving and increases, therefore, the fraction of attached agents and the political support for UI. This self-reinforcing mechanism can yield two steady-states: one "European" and one "American." The former (latter) features high (low) unemployment, low (high) geographical mobility, and high (low) UI.
Trust pervades human societies. Trust is indispensable in friendship, love, families and organizations, and plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down. In the absence of trust in a country's institutions and leaders, political legitimacy breaks down. Much recent evidence indicates that trust contributes to economic, political and social success. Little is known, however, about the biological basis of trust among humans. Here we show that intranasal administration of oxytocin, a neuropeptide that plays a key role in social attachment and affiliation in non-human mammals, causes a substantial increase in trust among humans, thereby greatly increasing the benefits from social interactions. We also show that the effect of oxytocin on trust is not due to a general increase in the readiness to bear risks. On the contrary, oxytocin specifically affects an individual's willingness to accept social risks arising through interpersonal interactions. These results concur with animal research suggesting an essential role for oxytocin as a biological basis of prosocial approach behaviour.
