"This paper examines the impact of a public credit registry on the repayment behavior of borrowers. We implement an experimental credit market in which loannrepayment is not third-party enforceable. We compare market outcome with a credit registry to that without a credit registry. This experiment is conducted forntwo market environments: first a market in which interactions between borrowers and lenders are one-off and, second, a market in which borrowers and lenders cannchoose to trade repeatedly with each other. In the market with one-off interactions the credit market collapses without a credit registry as lenders rightly fear that borrowers will default. The introduction of a registry in this environment significantlynraises repayment rates and the credit volume extended by lenders. In the market where repeat transactions are possible a credit registry is not necessary to sustain high market performance. In such an environment relationship banking enforces repayment even when lenders cannot share information, so that there is little valuenadded of a public credit registry."
Awards in the form of orders, medals, decorations and titles are ubiquitous in monarchies andnrepublics, private organizations, not-for-profit and profit-oriented firms. Nevertheless, economists have disregarded this kind of non-material extrinsic incentive.nThe demand for awards relies on an individual’s desire for distinction, and the supply ofnawards on the provision of incentives. Relative price and income effects are shown to benidentifiable and strong. A number of empirically testable propositions are formulated. Asnawards are (at least so far) impossible to measure adequately, empirical tests are carried outnusing the technique of analytic narratives.
In this note we show that no solution to coalition formation games can satisfy a set of axioms that we propose as reasonable. Our result points out that “solutions” to the coalition formation cannot be interpreted as predictions of what would be “resting points” for a game in the way stable coalition structures are usually interpreted.
We ask whether offering a menu of unemployment insurance contracts is welfare improving in a heterogeneous population. We adopt a repeated moral-hazard framework as in Shavell/Weiss (1979) supplemented by unobservednheterogeneity about agents’ job opportunities. Our main theoretical contribution is an analytical characterizationnof the sets of jointly feasible entitlements that renders annefficient computation of these sets feasible. Our main economicnresult is that optimal contracts for ”bad” searchers tend to be upward-sloping due to an adverse-selection effect.nThis is in contrast to the well-known optimal decreasingntime-profile of benefits in pure moral hazard environmentsnthat continue to be optimal for ”good” searchers in our model.
We propose an extended PAYG social security system that conditions pension benefits on the aggregate wage sum and on the wage of one’s children. The latter increases parents’ incentives to provide their children with good within-familyneducation. However, since wages depend stochastically on parents’ unobservable investment in their children’s human capital, some insurance against the productivity risk of one’s children is provided because retirement income still depends on aggregate wages. We analyze the effects of such a social security system on the endogenousndistribution of human capital and compare it to real world systems which typically do not condition benefits on the wages of one’s children. Our approach suggests a novel role for a well-designed social security system: it can foster human capital accumulation and act as an intra-generational insurance against productivitynrisk.
Right-wing extremism is a serious problem in many societies. A prominent hypothesis states that unemployment plays a crucial role for the occurrence of right-wing extremist crime. In this paper we empirically test this hypothesis. We use a previously not used data set which includes all officially recorded right-wing criminal acts in Germany. These data are recorded by the German Federal Criminal Police Office on a monthly and state level basis. Our main finding is that there is in fact a significant positive relation between unemployment and right-wing criminal activities. We show further that the big difference in right-wing crime between East and West German states can mostlynbe attributed to differences in unemployment. This finding reinforces the importance of unemployment as an explanatory factor for right-wing crime and questions explanations based solely on the different socialization in former communist East Germany and the liberal West German states. Our data furthernallow us to separate violent from non-violent right-wing crimes. We show that unemployment is closelynrelated to both types of crimes, but that the association with non-violent crimes is much stronger. Since right-wing crime is committed particularly by relatively young males, we also explore whethernthe youth unemployment rate is a better predictor for right-wing crime than total unemployment. This hypothesis can be rejected: given total unemployment, a higher share of youth unemployment does not affect right-wing extremist crime rates.
Base-rate neglect is a robust experimental finding that individuals do not update their prior beliefs according to the Bayes' rule and, typically, underestimate their posterior probabilities. Another empirical finding is that individuals often do not acquire information even when there are no strategic considerations and the cost of new information is justifiableneconomically. This paper combines these two different fields of research. Specifically, it is demonstrated that base-rate neglect may lead to imperfectninformation acquisition. An application to the pricing of new financial assets as well as general implications for the socially optimal pricing of information are discussed.
Risk management and asset pricing benefit from simple functional descriptions of the distribution of real asset returns. Recently, several authors have proposed that asset returns in real stock markets are distributed according to a hyperbolic distribution. While asset returns are generated by trades over time, the natural question is: What does economic theory imply concerning return distributions? We propose a simple model of price formation and, thus, return distribution which is based on economic reasoning. The market’s behavior is represented by a pair consisting of a time-constant strategy and a dynamical trading strategy generating a flow between funds. Simulations of the price dynamics generate returns with fat-tail behavior in line with that of a hyperbolic distribution, and also volatility clustering, which is a mayor stylized fact of asset returns.
This paper proposes a new model that explains the violations of expected utility theory throughnthe role of random errors. The paper analyzes decision making under risk when individuals makenrandom errors when they compute expected utilities. Errors are drawn from the normal distribution, which is truncated so that the stochastic utility of a lottery cannot be greater (lower) than the utility of the highest (lowest) possible outcome. The standard deviation of random errors is higher for lotteries with a wider range of possible outcomes. It converges to zero for lotteries converging to a degenerate lottery. The model explains all major stylized empirical facts such as the Allais paradox and the fourfold pattern of risk attitudes. The model fits the data from tennwell-known experimental studies at least as good as cumulative prospect theory.
It is well known that ex-ante randomization can improve uponnsecond best contracts in principal-agent problems. In this note, we show that even the first-best can be dominated by a random contract. Our example isncast in a standard textbook set-up with two effort levels and two states of nature.
