This paper aims at showing the relevance of procedural utility for economics: people do not only care about outcomes, as usually assumed in economics, they also value the processes and conditions leading to outcomes. The psychological foundations of procedural utility are outlined and it is discussed how the concept differs from other related approaches in economics, like outcome utility, outcome fairness or intentions. Institutions at the level of society and fair procedures are shown to be sources of procedural utility, and novel empirical evidence on the role of procedural utility in important areas of the economy, polity and society is presented.
I give necessary and sufficient conditions for the uniqueness of the equilibrium in a wide class of Rubinstein bargaining models. The requirements encompass a class of non-convex or disconnected payoff sets with discontinuous Pareto frontiers. The equilibrium of the non-cooperative game is unique if the objective function of the corresponding Nash-bargaining game has a unique maximum. I extend the analysis to games where the time between offers is not constant.
There is abundant evidence that many individuals violate the rationality assumptionsnroutinely made in economics. However, powerful evidence also indicates that violations ofnindividual rationality do not necessarily refute the aggregate predictions of standard economicnmodels that assume full rationality of all agents. Thus, a key question is how the interactions between rational and irrational people shape the aggregate outcome in markets and other institutions. We discuss evidence indicating that strategic complementarity and strategic substitutability are decisive determinants of aggregate outcomes. Under strategic complementarity, a small amount of individual irrationality may lead to large deviations from the aggregate predictions of rational models, whereas a minority of rational agents may suffice to generate aggregate outcomes consistent with the predictions of rational models under strategic substitutability.
We consider a regulator providing deposit insurance to a bank with private information about its investment portfolio. As typical in practice, we assume that the regulator does not commit to auditing afternany risk report from the bank. We first show that the optimal contract can be implemented through a direct revelation mechanism. We also show that, at the optimal contract, a high risk bank has incentivesnto misreport. We thus establish that extraction of truthful riskninformation, as done in current regulatory practice, is not compatible with the maximization of social welfare.
When the performance of a risky asset is frequently assessed, the probability of detecting a loss is high, which averts the loss averse investors. This effect is known as myopic loss aversion (MLA). This paper reexamines several recent experimental studies documenting the existence of MLA. A closer look at the experimental data reveals that the effect of MLA is largely neutralized by the overweighting of small probabilities and the underweighting of moderate and high probabilities. Remarkably, the two effects exactly balance each other out for conventional parameterizations of cumulative prospect theory. MLA alone cannot explain the observed investment decisions.
The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects’ reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects’ reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may furthernexplain why employers often increase workers' wages after an increase in the minimum wagenby an amount exceeding that necessary for compliance with the higher minimum. At a morengeneral level, our results suggest that economic policy may affect people’s behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.
The main interest of this paper is to compare the value of education systems of differentncountries. For this reason I use data on workers who have completed their education beforenimmigrating to Switzerland to estimate a country specific return to education. I estimatenthe standard Mincer-equation with the extension that I additionally allow for country specific returns to education. Results show that there are important differences between the returns to different education systems within Switzerland in the value of the basic education on the one hand and the return to an additional year of education on the other hand.
Consider the problem of testing s hypotheses simultaneously. The usual approach tondealing with the multiplicity problem is to restrict attention to procedures that controlnthe probability of even one false rejection, the familiar familywise error rate (FWER). Innmany applications, particularly if s is large, one might be willing to tolerate more than onenfalse rejection if the number of such cases is controlled, thereby increasing the ability of thenprocedure to reject false null hypotheses One possibility is to replace control of the FWERnby control of the probability of k or more false rejections, which is called the k-FWER.nWe derive both single-step and stepdown procedures that control the k-FWER in finitensamples or asymptotically, depending on the situation. Lehmann and Romano (2005a)nderive some exact methods for this purpose, which apply whenever p-values are availablenfor individual tests; no assumptions are made on the joint dependence of the p-values. Inncontrast, we construct methods that implicitly take into account the dependence structurenof the individual test statistics in order to further increase the ability to detect false nullnhypotheses. We also consider the false discovery proportion (FDP) defined as the numbernof false rejections divided by the total number of rejections (and defined to be 0 if therenare no rejections). The false discovery rate proposed by Benjamini and Hochberg (1995)ncontrols E(FDP).
We propose an a±ne term structure model which accommodates non-linearities in the drift andnvolatility function of the short-term interest rate. Such non-linearities are a consequence of discrete beta-distributed regime shifts constructed on multiple thresholds. We derive iterative closed-form formulanfor the whole yield curve dynamics that can be estimated using a linearized Kalman filter. Fitting the model on US data, we collect empirical evidence of its potential in estimating conditional volatilitynand correlation across yields.
"We study the causal effects of changes in parental leave provisions on fertility and return-to-work behavior. We exploit a policy change that took place in 1990 in Austria which extended the maximum duration of parental leave from the child’s first to the child’s second birthday. As parental leave benefits can be automatically renewed when a new mother is still on leave from a previous child, this created a strong incentive to ”bunch” the time of work in case of multiple planned children and/or to increase fertility. We study the quantitative effect of this incentive using an empirical strategy which resembles a true experimental set-up very closely. In particular, assignment to treatment is random and treated and controls face (almost) identical environmental conditions. We find that treated mothers have a 4.9 percentage points (or 15 percent) higher probability to get an additional child within the following three years; and a 3.9 percentage points higher probability in the following ten years. Thisnsuggests that not only the timing but also the number of children were affected by the policy change. We also find that parental leave rules have a strong effect on mothers’ return-to-work behavior. Pernadditional months of maximum parental leave duration, mothers’ time of work is reduced by 0.4 to 0.5 months. The effects of a subsequent policy change in 1996 when maximum parental leave duration was reduced from the child’s second birthday to the date when the child became 18 months old brought about no change in fertility behavior, but a labor supply effect that is comparable in magnitude to thenone generated by the 1990 policy change. This can be rationalized by the incentives created throughnautomatic benefit renewal."
