The assumption that payoff-relevant information is observable but not verifiable is important for many core results in contract, organizational and institutional economics. However, subgame-perfect implementation (SPI) mechanisms - which are based on off-equilibrium arbitration clauses that impose fines for lying and the inappropriate use of arbitration - can be used to render payoff-relevant observable information verifiable. Thus, if SPI mechanisms work as predicted they undermine the foundations of important economic results based on the observable but non-verifiable assumption. Empirical evidence on the effectiveness of SPI mechanisms is, however, scarce. In this paper we show experimentally that SPI mechanisms have severe behavioral limitations. They induce retaliation against legitimate uses of arbitration and thus make the parties reluctant to trigger arbitration. The inconsistent use of arbitration eliminates the incentives to take first-best actions and leads to costly disagreements such that individuals - if given the choice - opt out of the mechanism in the majority of the cases. Incentive compatible redesigns of the mechanism solve some of these problems but generate new ones such that the overall performance of the redesigned mechanisms remains low. Our results indicate that there is little hope for SPI mechanisms to solve verifiability problems unless they are made retaliation-proof and, more generally, robust to other-regarding preferences.
We examine mortgage pricing before and after Switzerland was the first country to activate the Counter-Cyclical Capital Buffer of Basel III. Observing multiple mortgage offers per request, we obtain three core findings. First, capitalconstrained and mortgage-specialized banks raise their rates relatively more. Second, risk-weighting schemes supposed to discriminate against more risky borrowers do not amplify the effect of higher capital requirements. Third, CCB-subjected banks and CCB-exempt insurers raise mortgage rates, but insurers raise rates by on average 8.8 bp more. To conclude, lenders welcome the opportunity to increase mortgage rates, but stricter capital requirements do not discourage banks from risky mortgage lending.
How does our brain choose the best course of action? Choices between material goods are thought to be steered by neural value signals that encode the rewarding properties of the choice options. Social decisions, by contrast, are traditionally thought to rely on neural representations of the self and others. However, recent studies show that many types of social decisions may also involve neural value computations. This suggests a unified mechanism for motivational control of behaviour that may incorporate both social and non-social factors. In this Review, we outline a theoretical framework that may help to identify possible overlaps and differences between the neural processes that guide social and non-social decision making.
Cason and Plott (J Polit Econ, 122(6):1235–1270, 2014) show that subjects’ misconception about the incentive properties of the Becker-DeGroot-Marschak (BDM) value elicitation procedure can generate data patterns that look like—and might thus be misinterpreted as evidence for—preferences constructed from endowments or reference points. We test whether game form misconceptions are necessary to produce willingness-to-pay (WTP) vs. willingness-to-accept (WTA) gaps in a valuation experiment in which subjects are randomly assigned to the role of either buyer or seller. We employ a design that allows us to identify whether a subject understood the incentive properties of a price-list version of the BDM mechanism. We find a robust WTP-WTA gap, even among subjects whose elicited valuations for a good of induced and known monetary value and whose ability to identify the payoffs resulting from their choices indicate an understanding of the incentive properties of the BDM mechanism. We conclude that game form misconceptions are not a necessary condition for the emergence of WTP-WTA gaps.
A pervasive, yet little acknowledged feature of international migration to developed countries is that newly arriving immigrants are increasingly highly skilled. This paper analyses the factors affecting the change in the skill composition of immigrants in Switzerland between 1980 and 2010 using a framework suggested by Grogger & Hanson (2011). Our findings suggest that improved schooling in origin countries of immigrants and a shift in the relative demand for highly educated workers in destinations stand out as the two most important drivers. Yet, while improved schooling would predict only a modest increase in the share of highly educated immigrants and a large increase of middle educated immigrants, we show that demand shifts associated with computerisation are crucial to understand why the share of highly educated immigrants increased sharply while the share of middle educated workers merely stabilised. Additionally, our framework allows evaluating the effect of changes in immigration policy. We find that the recent abolition of quotas for workers from European countries through a bilateral agreement with the EU in 2002 had a small but negative effect on the educational quality of immigrants.
Path forecasts, defined as sequences of individual forecasts, generated by vector autoregressions are widely used in applied work. It has been recognized that a profound econometric analysis often requires, besides the path forecast, a joint prediction region that contains the whole future path with a prespecified coverage probability. The forecasting literature offers several different methods for computing joint prediction regions, where the existing methods are either bootstrap based or rely on asymptotic results. The aim of this paper is to investigate the finite-sample performance of three methods for constructing joint prediction regions in various scenarios via Monte Carlo simulations.
When we are learning to associate novel cues with outcomes, learning is more efficient if we take advantage of previously learned associations and thereby avoid redundant learning. The blocking effect represents this sort of efficiency mechanism and refers to the phenomenon in which a novel stimulus is blocked from learning when it is associated with a fully predicted outcome. Although there is sufficient evidence that this effect manifests itself when individuals learn about their own rewards, it remains unclear whether it also does when they learn about others' rewards. We employed behavioral and neuroimaging methods to address this question. We demonstrate that blocking does indeed occur in the social domain and it does so to a similar degree as observed in the individual domain. On the neural level, activations in the medial prefrontal cortex (mPFC) show a specific contribution to blocking and learning-related prediction errors in the social domain. These findings suggest that the efficiency principle that applies to reward learning in the individual domain also applies to that in the social domain, with the mPFC playing a central role in implementing it.
Negative symptoms in schizophrenia have been grouped into the 2 factors of apathy and diminished expression, which might be caused by separable pathophysiological mechanisms. Recently, it has been proposed that apathy could be due to dysfunctional integration of reward and effort during decision making. We asked whether apathy in particular is associated with stronger devaluation ("discounting") of monetary rewards that require physical effort. Thirty-one patients with schizophrenia and 20 healthy control participants performed a computerized effort discounting task in which they could choose to exert physical effort on a handgrip to obtain monetary rewards. This procedure yields an individual measure for the strength of effort discounting. The degree of effort discounting was strongly correlated with apathy, but not with diminished expression. Importantly, the association between apathy and effort discounting was not driven by cognitive ability, antipsychotic medication, or other clinical and demographic variables. This study provides the first evidence for a highly specific association of apathy with effort-based decision making in patients with schizophrenia. Within a translational framework, the present effort discounting task could provide a bridge between apathy as a psychopathological phenomenon and established behavioral tasks to address similar states in animals.
We study the implications of offshoring on innovation, technology, and wage inequality in a Ricardian model with directed technical change. Profit maximization determines both the extent of off-shoring and the direction of technological progress. A fall in the offshoring cost induces technical change with an ambiguous factor bias. When the initial cost of offshoring is high, an increase in offshoring opportunities causes a fall in the real wages of unskilled workers in industrial countries, skill-biased technical change and rising skill premia. When the offshoring cost is sufficiently low, instead, offshoring induces technical change biased in favor of the unskilled workers.
