Discussion Papers

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SFB/TR 15 Discussion Paper No.

530

Elena Carletti, Steven Ongena, Jan-Peter Siedlarek, Giancarlo Spagnolo
The Impact of Merger Legislation on Bank Mergers

Abstract:

We study the impact on bank merger activity of the strengthening in merger control legislation introduced in Europe between 1989 and 2004. We find that strengthening merger control increases the abnormal returns on bank target stocks in the days around the merger announcement by 7 percentage points relative to before the new legislation. We discuss several potential explanations for this effect of the change in legislation by studying changes in merger characteristics. We find a weak increase in the pre-merger profitability of target banks, a decrease in the size of acquirers and a decrease in the share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks and the stock market response of rival banks in the country appear unaffected. The evidence is consistent with legislation changes leading to transactions being undertaken that are more profitable and more pro-competitive.

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SFB/TR 15 Discussion Paper No.

529

Yanping Liu
Capital Adjustment Costs: Implications for Domestic and Export Sales Dynamics

Abstract:

Theoretical and empirical work on export dynamics has generally assumed constant marginal production cost and therefore ignored domestic product market conditions. However, recent studies have documented a negative correlation between fi…rms'’ domestic and export sales growth, suggesting that fi…rms can be capacity constrained in the short run and face increasing marginal production cost. This paper develops and estimates a dynamic model of export behavior incorporating short-term capacity constraints and endogenous capital investment. Consistent with the empirical evidence, the model features fi…rms'’ sales substitutions across markets in the short term, and generates time-varying transition paths of fi…rm responses through …rms’capital adjustments over time.

The model is fi…t to a panel of plant-level data for Colombian manufacturing industries and used to simulate how …firm responses transition following an exchange-rate devaluation. The results indicate that incorporating capital adjustment costs is quantitatively important, as shown by the length of the transition period, and the di¤erence between the short-run and long-run exchange rate elasticity of exports. Firms’' expecation on the permanence of the policy changes also matters.

 

JEL Classification: F12, L11, F14

Keywords: International trade; heterogeneous fi…rms; capacity constraints; capitaladjustment costs; …firm dynamics; fi…rm panel data.

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SFB/TR 15 Discussion Paper No.

526

Eberhard Feess, Hannah Schildberg-Hörisch, Markus Schramm, Ansgar Wohlschlegel
The impact of fine size and uncertainty on punishment and deterrence: Theory and evidence from the laboratory

Abstract:

We develop a theoretical model to identify and compare partial and equilibrium effects of uncertainty and the magnitude of fines on punishment and deterrence. Partial effects are effects on potential violators' and punishers' decisions when the other side's behavior is exogenously given. Equilibrium effects account for the interdependency of these decisions. This interdependency is important since, in the case of legal uncertainty, higher fines may reduce the willingness to punish, which in turn reduces the deterrence effect of high fines. Using a laboratory experiment, we identify these effects empirically by means of a strategy-method design in which potential violators can condition their behavior on the behavior of potential punishers and vice versa. All our experimental findings on both partial and equilibrium effects are in line with the hypotheses derived from the theory.

 

JEL classification: K12, K42, C91, D64
Keywords: Deterrence, Punishment, Uncertainty, Fi nes, Partial and Equilibrium Eff ects, Lab Experiment

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SFB/TR 15 Discussion Paper No.

523

Andreas Niedermayer
Does a Platform Monopolist Want Competition?

Abstract:

We consider a software vendor first selling a monopoly platform and then an application running on this platform. He may face competition by an entrant in the applications market. The platform monopolist can benefit from competition for three reasons. First, his profits from the platform increase. Second, competition serves as a credible commitment to lower prices for applications. Third, higher expected product variety may lead to higher demand for his application. Results carry over to non-software platforms and, partially, to upstream and downstream firms. The model also explains why Microsoft Office is priced significantly higher than Microsoft’s operating system.

 

JEL classification: D41, D43, L13, L86
Keywords: Platforms, Entry, Complementary Goods, Price Commitment, Product Variety, Microsoft, Vertical Integration, Two-Sided Markets

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SFB/TR 15 Discussion Paper No.

522

Andreas Niedermayer, Artyom Shneyerov, Pia Xu
Foreclosure Auctions

Abstract:

We develop a novel theory of real estate foreclosure auctions, which have the special feature that the lender acts as a seller for low and as a buyer for high prices. The theory yields several empirically testable predictions concerning the strategic behavior of the agents, both under symmetric and asymmetric information. Using novel data from Palm Beach County (FL, US), we nd evidence of both strategic behavior and asymmetric information, with the lender being the informed party. Moreover, the data are consistent with moral hazard in mortgage securitization: banks collect less information about the value of the mortgage collateral.

 

JEL classification: C72, D44, D82, G21
Keywords: Foreclosure Auctions, Asymmetric Information, Bunching, Discontinuous Strategies, Securitization

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SFB/TR 15 Discussion Paper No.

521

Petra Loerke, Andreas Niedermayer
Crises and Rating Agencies: On the Effect of Aggregate Uncertainty on Rating Agencies’ Incentives to Distort Ratings

Abstract:

We analyze a rating agency's incentives to distort ratings in a model with a monopolistic profit maximizing rating agency, a continuum of heterogeneous firms, and a competitive market of risk-neutral investors. Firms sell bonds, the value of a firm's bond is known to the firm and observable by the agency, but not by buyers. Firms can choose to get a rating. The rating agency can reveal a signal of arbitrary precision about the quality of the bond. In contrast to the existing literature, we allow aggregate uncertainty. As in the existing literature, one rating class is optimal. However, the rating agency does not choose a socially optimal cutoff: the agency is more likely to be too lenient if the distribution of aggregate uncertainty has a lower mean, a higher variance, and is more left skewed. It is more likely to be too strict if the opposite holds.

 

JEL classification: C72, D42, D82, G20
Keywords: Rating Agencies, Certifi cation, Aggregate Uncertainty

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SFB/TR 15 Discussion Paper No.

519

Holger Breinlich, Volker Nocke, Nicolas Schutz
Merger Policy in a Quantitative Model of International Trade

Abstract:

In a two-country international trade model with oligopolistic competition, we study the conditions on market structure and trade costs under which a merger policy designed to benefi t domestic consumers is too tough or too lenient from the viewpoint of the foreign country. Calibrating the model to match industry-level data in the U.S. and Canada, we show that at present levels of trade costs merger policy is too tough in the vast majority of sectors. We also quantify the resulting externalities and study the impact of di fferent regimes of coordinating merger policies at varying levels of trade costs.

 

JEL classification: F12, F13, L13, L44
Keywords: Mergers and Acquisitions, Merger Policy, Trade Policy, Oligopoly, International Trade

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519SFB.pdf

SFB/TR 15 Discussion Paper No.

516

Steffen Altmann, Armin Falk, Andreas Grunewald
Incentives and Information as Driving Forces of Default Effects

Abstract:

The behavioral relevance of non-binding defaults is well established. While most research has focused on decision makers’ responses to a given default, we argue that this individual decision making perspective is incomplete. Instead, a comprehensive understanding of default effects requires to take account of the strategic interaction between default setters and decision makers. We analyze theoretically and empirically which defaults emerge in such interactions, and under which conditions defaults are behaviorally most relevant. Our analysis demonstrates that the alignment of interests between default setters and decision makers, as well as their relative level of information are key drivers of default effects. In particular, default effects are more pronounced if the interests of the default setter and decision makers are more closely aligned. Moreover, decision makers are more likely to follow default options the less they are privately informed about the relevant decision environment.


JEL classification: D03, D18, D83, C92
Keywords: Default Options, Behavioral Economics, Strategic Communication, Laboratory Experiment

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SFB/TR 15 Discussion Paper No.

515

Steffen Altmann, Armin Falk, Paul Heidhues, Rajshri Jayaraman
Defaults and Donations: Evidence from a Field Experiment

Abstract:

We study how website defaults affect consumer behavior in the domain of charitable giving. In a field experiment that was conducted on a large platform for making charitable donations over the web, we exogenously vary the default options in two distinct choice dimensions. The first pertains to the primary donation decision, namely, how much to contribute to the charitable cause. The second relates to an "add-on" decision of how much to contribute to supporting the online platform itself. We find a strong impact of defaults on individual behavior: in each of our treatments, the modal positive contributions in both choice dimensions invariably correspond to the specified default amounts. Defaults, nevertheless, have no impact on aggregate donations. This is because defaults in the donation domain induce some people to donate more and others to donate less than they otherwise would have. In contrast, higher defaults in the secondary choice dimension unambiguously induce higher contributions to the online platform.


JEL classification: C93, D03, D64
Keywords: Default Options, Online Platforms, Charitable Giving, Field Experiment

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515SFB.pdf

SFB/TR 15 Discussion Paper No.

512

Stefan Weiergräber
Network Effects and Switching Costs in the US Wireless Industry

Abstract:

I develop an empirical framework to disentangle different sources of consumer
inertia in the US wireless industry. The use of a detailed data set allows me to
identify preference heterogeneity from consumer type-specific market shares and switching costs from churn rates. Identification of a localized network effect comes from comparing the dynamics of distinct local markets. The central condition for identification is that neither the characteristics defining consumer heterogeneity nor the characteristics defining reference groups are a (weak) subset of the other. Being able to separate switching costs and network effects is important as both can lead to inefficient consumer inertia, but depending on its sources policy implications may be very different. Estimates of switching costs range from US-$ 316 to US-$ 630. The willingness to pay for a 20%-point increase in an operator’s market share is on average US-$ 22 per month. My counterfactuals illustrate that both effects are important determinants of consumers’ price elasticities potentially translating into market power that helps large carriers in defending their dominant position.


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SFB/TR 15 Discussion Paper No.

511

Dietmar Harhoff, Karin Hoisl, Bruno van Pottelsbergh de la Potterie, Charlotte Vandeput
Languages, Fees and the International Scope of Patenting

Abstract:

 

This paper analyzes firms’ choices regarding the geographic scope of patent protection within the European patent system. We develop an econometric model at the patent level to quantify the impact of office fees and translation costs on firms’ decision to validate a patent in a particular country once it has been granted by the EPO. These costs have been disregarded in previous studies. The results suggest that both translation costs and fees for validation and renewals have a strong influence on the behavior of applicants.

 

JEL Classification: O30, O31, O38, O57

Keywords: patents, patent fees, patent validation, renewal fees, translation costs

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SFB/TR 15 Discussion Paper No.

499

Naoki Wakamori
Portfolio Considerations in Differentiated Product Purchases: An Application to the Japanese Automobile Market

Abstract:

Consumers often purchase more than one differentiated product, assembling a portfolio, which might potentially affect substitution patterns of demand and, as a consequence, oligopolistic firms’ pricing strategies. To study such consumers’ portfolio considerations, this paper develops and estimates a structural model that allows for flexible complementarities/substitutabilities, using Japanese household-level data on automobile purchases. My estimates suggest that complementarities arise when households purchase a combination of one small automobile and one minivan as their portfolio.

Simulation results suggest that, due to such portfolio considerations, a policy proposal of repealing the current tax subsidies for small eco-friendly automobiles would not necessarily sharply decrease the demand.

 

Keywords: Multiple Discrete Choices, Complementarities, Environmental Policy

JEL Classification: D43, L13, L62, Q58

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SFB/TR 15 Discussion Paper No.

498

Thomas Deckers, Armin Falk, Fabian Kosse, Hannah Schildberg-Hörisch
How Does Socio-Economic Status Shape a Child's Personality?

Abstract:

We show that socio-economic status (SES) is a powerful predictor of many facets of a child's personality. The facets of personality we investigate encompass time preferences, risk preferences, and altruism, as well as crystallized and fluid IQ. We measure a family's SES by the mother's and father's average years of education and household income. Our results show that children from families with higher SES are more patient, tend to be more altruistic and less likely to be risk seeking, and score higher on IQ tests. We also discuss potential pathways through which SES could affect the formation of a child's personality by documenting that many dimensions of a child's environment differ systematically by SES: parenting style, quantity and quality of time parents spend with their children, the mother's IQ and economic preferences, a child's initial conditions at birth, and family structure. Finally, we use panel data to show that the relationship between SES and personality is fairly stable over time at age 7 to 10. Personality profiles that vary systematically with SES might offer an explanation for social immobility.

 

Keywords: personality, human capital, risk preferences, time preferences, altruism, experiments with children, origins of preferences, social immobility, socio-economic status.

JEL Classification: C90, D64, D90, D81, J13, J24, J62.

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SFB/TR 15 Discussion Paper No.

497

Oleksandr Shcherbakov, Naoki Wakamori
A simple way to identify the degree of collusion under proportional reduction

Abstract:

Proportional reduction is a common cartel practice, in which cartel members reduce their output by the same percentage. We develop a simple method to quantify this reduction relative to a benchmark market equilibrium scenario. Our measure is continuous, has a simple interpretation as the “degree of collusion" and nests the earlier models in the existing literature. More importantly, by exploiting firms ex post heterogeneity and optimality conditions, Corts (1999) critique can be addressed by estimating time-varying degree of industry monopolization from a short panel of firm-level observations. We illustrate the method in Monte-Carlo simulations and in application to the data from the Joint Executive Committee railroad cartel.

 

Keywords: Cartel, Proportional Reduction, Degree of collusion.

JEL Classification: D22, L41, C36.

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SFB/TR 15 Discussion Paper No.

496

Dietmar Harhoff, Sebastian Stoll
Exploring the Opaqueness of the Patent System - Evidence from a Natural Experiment

Abstract:

One of the objectives of patent systems is to disclose information which other agents can build on in further inventions and in their decision-making. While some observers take it as given that real-world patent systems serve this objective, we argue in this article that patent systems are highly opaque and likely to be of limited value as a source of information. We use data from a natural experiment to explore this issue. Requests for accelerated examination used to be publicly observable at the European Patent Office (EPO). Starting in December 2001, the EPO started to treat these requests as confidential information. Using data on acceleration requests which were historically known only to the applicant and the EPO, and later provided to us, we test whether the change in the information regime impacted the actions of applicants and their rivals. We develop a theoretical model of acceleration requests and patent opposition to identify the extent to which the patent system is opaque. We confirm empirically that opposition and acceleration rates of high-value patents change significantly in most technological areas once acceleration requests become unobservable. We interpret these results as evidence that the system is highly opaque in many fields.

 

JEL Classification: K40, L00

Keywords: patent value; opaqueness; accelerated examination; patent opposition; European Patent Office (EPO).

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496.pdf

SFB/TR 15 Discussion Paper No.

493

Fabio Antoniou, Raffaele Fiocco, Dongyu Guo
Asymmetric price adjustments: A supply side approach

Abstract:

Using a model of dynamic price competition, this paper provides an explanation from the supply side for the well-established observation that retail prices adjust faster when input costs rise than when they fall. The opportunity of profitable storing for the next period induces competitive firms to immediately increase their prices in anticipation of higher future input costs. This relaxes competition and firms earn positive profits. Conversely, when input costs are expected to decline, firms adjust their prices only after a cost reduction materializes, and the firms' incentives for price undercutting lead to the standard Bertrand outcome.

 

Keywords: Asymmetric price adjustments, Bertrand-Edgeworth competition, Storage, Gasoline market.

JEL Classification: D4, L1.

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SFB/TR 15 Discussion Paper No.

477

Xavier D’Haultfoeuille, Isis Durrmeyer, Philippe Février
Automobile Prices in Market Equilibrium with Unobserved Price Discrimination

Abstract:

This paper deals with the estimation of structural models of demand and supply with incomplete information on prices. When the seller is able to price discriminate, or the buyer to bargain, individuals pay different prices that are usually not collected in the data. This paper explores a method to estimate the supply and demand models jointly when only posted prices are observed. We consider that heterogenous transaction prices occur due to price discrimination by firms on observable characteristics of consumers. Within this framework, the identification is secured by (i) supposing that at least one group of individuals does pay the posted prices and (ii) assuming that the marginal costs of producing and selling the goods does not depend on the characteristics of the buyers. This methodology is applied to estimate the demand in the new automobile market in France. Results suggest that discounting arising from price discrimination is important. The average discount is estimated to be 5.2%, with large variation according to the buyers’ characteristics. Our results are in line with discounts generally observed in European and American automobile markets.

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SFB/TR 15 Discussion Paper No.

473

Naoaki Minamihashi, Naoki Wakamori
How Would Hedge Fund Regulation Affect Investor Behavior? Implications for Systemic Risk

Abstract:

We estimate an investors’ demand model for hedge funds to analyze the potential impact of leverage limits in the industry. Our estimation results highlight the importance of heterogeneous investor preference for the use of leverage, i.e., 20% of investors prefer leverage usage while others do not. We then conduct a policy simulation in which regulators put a cap on allowable leverage, as proposed by the Financial Stability Board in 2012. Simulation results suggest that the 200% leverage limit would lower the total demand (assets under management) for hedge funds by 10%. In particular, the regulation would lead to lower investments in highly leveraged funds and to lower investments in risky strategies, which, in turn, would reduce systemic risk.

 

Keywords: hedge funds, demand estimation, leverage regulation, systemic risk

JEL Classification: G38, G23, L52

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SFB/TR 15 Discussion Paper No.

472

Kim P. Huynh, Philipp Schmidt-Dengler, Helmut Stix
Whenever and Wherever: The Role of Card Acceptance in the Transaction Demand for Money

Abstract:

The use of payment cards, either debit or credit, is becoming more and more widespread in developed economies. Nevertheless, the use of cash remains significant. We hypothesize that the lack of card acceptance at the point of sale is a key reason why cash continues to play an important role. We formulate a simple inventory model that predicts that the level of cash demand falls with an increase in card acceptance. We use detailed payment diary data from Austrian and Canadian consumers to test this model while accounting for the endogeneity of acceptance. Our results confirm that card acceptance exerts a substantial impact on the demand for cash. The estimate of the consumption elasticity (0.23 and 0.11 for Austria and Canada, respectively) is smaller than that predicted by the classic Baumol-Tobin inventory model (0.5). We conduct counterfactual experiments and quantify the effect of increased card acceptance on the demand for cash. Acceptance reduces the level of cash demand as well as its consumption elasticity.

 

Topics: Bank notes; Econometric and statistical methods; E-money; Financial services.

JEL Codes: E41, C35, C83.

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472.pdf

SFB/TR 15 Discussion Paper No.

471

Jan-Peter Siedlarek
Intermediation in Networks

Abstract:

I study intermediation in networked markets using a stochastic model of multilateral bargaining in which traders compete on different routes through the network. I characterize stationary equilibrium payoffs as the fixed point of a set of intuitive value function equations and study efficiency and the impact of network structure on payoffs. There is never too little trade but there may be an inefficiency through too much trade in states where delay would be efficient. With homogenous trade surplus the payoffs for players that are not essential to a trade opportunity go to zero as trade frictions vanish.

 

JEL Classification: C73, C78, L14

Keywords: bargaining, financial networks, intermediation, matching, middlemen, networks, over-the-counter markets, stochastic games

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SFB/TR 15 Discussion Paper No.

470

Anja Prummer, Jan-Peter Siedlarek
INSTITUTIONS AND THE PRESERVATION OF CULTURAL TRAITS

Abstract:

We offer a novel explanation for why some immigrant groups and minorities have persistent, distinctive cultural traits – the presence of a rigid institution. Such an institution is necessary for communities to not fully assimilate to the mainstream society. We distinguish between different types of institutions, such as churches, foreign-language media or ethnic business associations and ask what level of cultural distinction these institutions prefer. Any type of institution can have incentives to be extreme and select maximal cultural distinction from the mainstream society. If institutions choose positive cultural distinction, without being extremist, then a decrease in discrimination leads to reduced assimilation.

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SFB/TR 15 Discussion Paper No.

468

Vikram Kumar, Robert C. Marshall, Leslie M. Marx and Lily Samkharadze
Buyer Resistance for Cartel versus Merger

Abstract:

Procurement practices are affected by uncertainty regarding suppliers’ costs, the nature of competition among suppliers, and uncertainty regarding possible collusion among suppliers. Buyers dissatisfied with bids of incumbent suppliers can cancel their procurements and resolicit bids after qualifying additional suppliers. Recent cartel cases show that cartels devote considerable attention to avoiding such resistance from buyers. We show that in a procurement setting with the potential for buyer resistance, the payoff to firms from forming a cartel exceeds that from merging. Thus, firms considering a merger may have an incentive to collude instead. We discuss implications for antitrust and merger policy.

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SFB/TR 15 Discussion Paper No.

466

Raffaele Fiocco and Mario Gilli
Bargaining and collusion in a regulatory relationship

Abstract:

We investigate regulation as the outcome of a bargaining process between a regulator and a regulated firm. The regulator is required to monitor the firm’s costs and reveal its information to a political principal (Congress). In this setting, we explore the scope for collusion between the regulator and the firm, which results in the manipulation of the regulator’s report on the firm’s costs to Congress. The firm’s benefit of collusion arises from the higher price the efficient firm is allowed to charge when the regulator reports that it is inefficient. However, a higher price reduces the gains from trade the parties can share in the bargaining process. As a result of this trade-off, the efficient firm has a stake in collusion only if the regulator’s bargaining power in the regulatory relationship is relatively high. Then, we derive the optimal institutional response to collusion and characterize the conditions under which allowing collusion is desirable

 

Keywords: asymmetric information, auditing, bargaining, collusion, regulation.

JEL classification: D73, D82, L51.

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SFB/TR 15 Discussion Paper No.

465

Matthias Wibral
Identity changes and the efficiency of reputation systems

Abstract:

Reputation systems aim to induce honest behavior in online trade by providing information about past conduct of users. Online reputation, however, is not directly connected to a person, but only to the virtual identity of that person. Users can therefore shed a negative reputation by creating a new account. We study the effects of such identity changes on the efficiency of reputation systems. We compare two markets in which we exogenously vary whether sellers can erase their rating profile and start over as new sellers. Buyer trust and seller trustworthiness decrease significantly when sellers can erase their ratings. With identity changes, trust is particularly low towards new sellers since buyers cannot discriminate between truly new sellers and opportunistic sellers who changed their identity. Nevertheless, we observe positive returns on buyer investment under the reputation system with identity changes, and our evidence suggests that trustworthiness is higher than in the complete absence of a reputation system.

 

Keywords: trust; reputation; identity changes

JEL classification: C91, D02, L14

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465.pdf

SFB/TR 15 Discussion Paper No.

464

Raffaele Fiocco, Dongyu Guo
Mergers between regulated firms with unknown efficiency gains

Abstract:

In an industry where regulated firms interact with unregulated suppliers, we investigate the welfare effects of a merger between regulated firms when efficiency gains are uncertain before the merger and their realization becomes private information of the merged firm. The optimal merger policy trades off potential efficiency gains against regulatory distortions from informational problems. We show that, as a consequence of this trade-off, more intense competition in unregulated segments of the market induces a more lenient merger policy. However, the regulated firms' diversification into a competitive segment can lead to a more lenient merger policy when competition is weaker.

 

Keywords: asymmetric information, competition, efficiency gains, mergers, regulation.

JEL Classification: D82, L43, L51.

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SFB/TR 15 Discussion Paper No.

455

Raffaele Fiocco
The strategic value of partial vertical integration

Abstract:

We investigate the incentive for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when the retailers are privately informed about their production costs and engage in differentiated good price competition. Partial vertical integration entails an “information vertical effect”: the partial misalignment of pro.t objectives within a partially integrated manufacturer-retailer hierarchy involves costs from asymmetric information that reduce the hierarchy’s profitability. This translates into an opposite “competition horizontal effect”: the partially integrated hierarchy commits to a higher retail price than under full integration, which strategically relaxes competition. The equilibrium degree of vertical integration trades o¤ the benefits of softer competition against the informational costs.

 

Keywords: asymmetric information, partial vertical integration, product differentiation, vertical mergers, vertical restraints.

JEL Classification: D82, L13, L42

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SFB/TR 15 Discussion Paper No.

450

Thomas Deckers, Armin Falk, Hannah Schildberg-Hörisch
Nominal or Real? The Impact of Regional Price Levels on Satisfaction with Life

Abstract:

According to economic theory, real income, i.e., nominal income adjusted for purchasing power, should be the relevant source of life satisfaction. Previous work, however, has only studied the impact of inflation adjusted nominal income and not taken into account regional differences in purchasing power. Therefore, we use a novel data set to study how regional price levels affect satisfaction with life. The data set comprises about 7 million data points that are used to construct a price level for each of the 428 administrative districts in Germany. We estimate pooled OLS and ordered probit models that include a comprehensive set of individual level, time-varying and time-invariant control variables as well as control variables that capture district heterogeneity other than the price level. Our results show that higher price levels significantly reduce life satisfaction. Furthermore, we find that a higher price level tends to induce a larger loss in life satisfaction than a corresponding decrease in nominal income. A formal test of neutrality of money, however, does not reject neutrality of money. Our results provide an argument in favor of regional indexation of government transfer payments such as social welfare benefits.

 

Keywords: Life satisfaction, price index, neutrality of money

JEL-Codes: D60, C23, D31

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SFB/TR 15 Discussion Paper No.

449

Antoine Martin, David Skeie, Ernst-Ludwig von Thadden
The Fragility of Short-Term Secured Funding Markets

Abstract:

This paper develops an infinite-horizon model of financial institutions that borrow short-term and invest in long-term assets that can be traded in frictionless markets. Because these financial intermediaries perform maturity transformation, they are subject to potential runs. We derive distinct liquidity, collateral, and asset liquidation constraints, which determine whether a run can occur as a result of changing market expectations. We show that the extent to which borrowers can ward off an individual run depends on whether it has sufficient liquidity, collateral, and asset liquidation capacity. These determinants depend on the borrower’s (endogenous) balance sheet and on (exogenous) fundamentals. Systemic runs are possible if shocks to the valuation of collateral held by outside investors are sufficiently strong and uniform, and if the system as a whole is exposed to high short-term funding risk. The theory has policy implications for prudential regulation and lender-of-last-resort interventions.

 

Keywords: Investment banking, securities dealers, repurchase agreements,

runs, financial fragility, collateral, systemic risk.

JEL classification: E44, E58, G24

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449.pdf

SFB/TR 15 Discussion Paper No.

448

Antoine Martin, David Skeie, Ernst-Ludwig von Thadden
Repo Runs

Abstract:

The recent financial crisis has shown that short-term collateralized borrowing may be a highly unstable source of funds in times of stress. The present paper develops a dynamic equilibrium model and analyzes under what conditions such instability can be a consequence of market-wide changes in expectations. We derive a liquidity constraint and a collateral constraint that determine whether such expectations-driven runs are possible and show that they depend crucially on the microstructure of particular funding markets that we examine in detail. In particular, our model provides insights into the differences between the tri-party repo market and the bilateral repo market, which were both at the heart of the recent financial crisis.

 

Keywords: Investment banking, repurchase agreements, tri-party repo, bilateral repo, money market mutual funds, asset-backed commercial paper, bank runs.

JEL classification: E44, E58, G24

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448.pdf

SFB/TR 15 Discussion Paper No.

447

George J. Mailath, Ernst-Ludwig von Thadden
Incentive Compatibility and Differentiability: New Results and Classic Applications

Abstract:

We provide several generalizations of Mailath's (1987) result that in games of asymmetric information with a continuum of types incentive compatibility plus separation implies differentiability of the informed agent's strategy. The new results extend the theory to classic models in finance such as Leland and Pyle (1977), Glosten (1989), and DeMarzo and Duffie (1999), that were not previously covered.

 

JEL Classification: C60, C73, D82, D83, G14

Keywords: Adverse selection, separation, differentiable strategies, incentive compatibility

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SFB/TR 15 Discussion Paper No.

446

Matthieu Bouvard, Raphael Levy
Two-sided reputation in certification markets

Abstract:

We consider a market where privately informed sellers resort to certification to overcome adverse selection. There is uncertainty about the certifier's ability to generate accurate information. The profit of a monopolistic certifier is an inverted U-shaped function of his reputation for accuracy: being perceived as more precise allows to attract more good sellers but a high expected precision also deters bad sellers. Since the certifier tries to reach a balanced reputation to attract both types, reputation has a disciplining effect when the certifier is perceived as insufficiently accurate, but gives incentives to decrease precision when he is perceived as “too" accurate. The impact of competition depends on whether sellers “multihome" or “singlehome". Under singlehoming, certifiers compete to attract good sellers, which makes higher reputation more valuable. Multihoming makes higher reputations less desirable because the competitor exerts a negative externality by providing extra information. Therefore, singlehoming attenuates bad reputation effects, while multihoming exacerbates inefficiencies.

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SFB/TR 15 Discussion Paper No.

441

Malin Arve
Procurement and Predation: Dynamic Sourcing from Financially Constrained Suppliers

Abstract:

This paper studies the interaction between financially constrained and financially strong firms on a procurement market. It characterizes and discusses a procurement agency’s optimal response when faced with financially asymmetric firms. By considering a dynamic setting, both present and future consequences and incentives are taken into account.

 

JEL Classification: D82, G30, H57.

Keywords: Asymmetric information, Dual sourcing, Favoritism, Financial

constraints, Procurement.

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SFB/TR 15 Discussion Paper No.

440

Johan Hombert, Jérôme Pouyet, Nicolas Schutz
Anticompetitive Vertical Merger Waves

Abstract:

We develop a model of vertical merger waves leading to input foreclosure. When all upstream firms become vertically integrated, the input price can increase substantially above marginal cost despite Bertrand competition in the input market. Input foreclosure is easiest to sustain when upstream market shares are the most asymmetric (monopoly-like equilibria) or the most symmetric (collusive-like equilibria). In addition, these equilibria are more likely when (i) mergers generate strong synergies; (ii) price discrimination in the input market is not allowed; (iii) contracts are public; whereas (iv) the impact of upstream and downstream industry concentration is ambiguous.

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SFB/TR 15 Discussion Paper No.

439

Nicolas Schutz
Competition with Exclusive Contracts in Vertically Related Markets: An Equilibrium Non-Existence Result

Abstract:

I develop a model in the spirit of Ordover, Saloner, and Salop (1990), in which two upstream firms compete to supply a homogeneous input to two downstream firms, who compete in prices with differentiated products in a downstream market. Upstream firms are allowed to offer exclusive two-part tariff contracts to the downstream firms. I show that, under very general conditions, this game does not have a subgame-perfect equilibrium in pure strategies. The intuition is that variable parts in such an equilibrium would have to be pairwise-proof. But when variable parts are pairwise-proof, downstream competitive externalities are not internalized, and there exists a profitable deviation. I contrast this non-existence result with earlier papers that found equilibria in similar models.

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SFB/TR 15 Discussion Paper No.

436

Andras Niedermayer, Artyom Shneyerov
For-Profit Search Platforms

Abstract:

We consider optimal pricing by a profit-maximizing platform running a dynamic search and matching market. Buyers and sellers enter in cohorts over time, meet and bargain under private information. The optimal centralized mechanism, which involves posting a bid-ask spread, can be decentralized through participation fees charged by the intermediary to both sides. The sum of buyers’ and sellers’ fees equals the sum of inverse hazard rates of the marginal types and their ratio equals the ratio of buyers’ and sellers’ bargaining weights. We also show that a monopolistic intermediary in a search market  ay be welfare enhancing.

 

Keywords: Dynamic random matching, two-sided private information, intermediaries

JEL Codes: D82, D83

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SFB/TR 15 Discussion Paper No.

435

Simon Loertscher, Andras Niedermayer
Assessing the Performance of Simple Contracts Empirically: The Case of Percentage Fees

Abstract:

This paper estimates the cost of using simple percentage fees rather than the broker optimal Bayesian mechanism, using data for real estate transactions in Boston in the mid-1990s. This counterfactual analysis shows that intermediaries using the best percentage fee mechanisms with fees ranging from 5.4% to 7.4% achieve 85% or more of the maximum profit. With the empirically observed 6% fees intermediaries achieve at least 83% of the maximum profit and with an optimally structured linear fee, they achieve 98% or more of the maximum profit.

 

Keywords: brokers, simple mechanisms, percentage fees, real estate brokerage.

JEL-Classification: C72, C78, L13

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SFB/TR 15 Discussion Paper No.

434

Simon Loertscher, Andras Niedermayer
Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation

Abstract:

Mechanisms according to which private intermediaries or governments charge transaction fees or indirect taxes are prevalent in practice. We consider a setup with multiple buyers and sellers and two-sided independent private information about valuations. We show that any weighted average of revenue and social welfare can be maximized through appropriately chosen transaction fees and that in increasingly thin markets such optimal fees converge to linear fees. Moreover, fees decrease with competition (or the weight on welfare) and the elasticity of supply but decrease with the elasticity of demand. Our theoretical predictions fit empirical observations in several industries with intermediaries.

 

Keywords: brokers, applied mechanism design, linear commission fees, optimal indirect mechanisms, auction houses.

JEL-Classification: C72, C78, L13

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SFB/TR 15 Discussion Paper No.

433

Andras Niedermayer, Jianjun Wu
Breaking Up a Research Consortium

Abstract:

Inter-firm R&D collaborations through contractual arrangements have become increasingly popular, but in many cases they are broken up without any joint discovery. We provide a rationale for the breakup date in R&D collaboration agreements. More specifically, we consider a research consortium initiated by a firm A with a firm B. B has private information about whether it is committed to the project or a free-rider. We show that under fairly general conditions, a breakup date in the contract is a (secondbest) optimal screening device for firm A to screen out free-riders. With the additional constraint of renegotiation proofness, A can only partially screen out free-riders: entry by some free-riders makes sure that A does not have an incentive to renegotiate the contract ex post. We also propose empirical strategies for identifying the three likely causes of a breakup date: adverse selection, moral hazard, and project non-viability.

 

Keywords: Optimal R&D contracts, adverse selection, breakup date, R&D collaboration

JEL-Classification: C72, D82, L20

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SFB/TR 15 Discussion Paper No.

432

Salvador Navarro, Yuya Takahashi
A Semiparametric Test of Agent's Information Sets for Games of Incomplete Information

Abstract:

We propose semiparametric tests of misspecification of agent's information for games of incomplete information. The tests use the intuition that the opponent's choices should not predict a player's choice conditional on the proposed information available to the player. The tests are designed to check against some commonly used null hypotheses (Bajari et al. (2010), Aradillas-Lopez (2010)). We show that our tests have power to discriminate between common alternatives even in small samples. We apply our tests to data on entry in the US airline industry. Both the assumptions of independent and correlated private shocks are not supported by the data.

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SFB/TR 15 Discussion Paper No.

431

Naoki Wakamori, Angelika Welte
Why Do Shoppers Use Cash? Evidence from Shopping Diary Data

Abstract:

Recent studies find that cash remains a dominant payment choice for small-value transactions despite the prevalence of alternative methods of payment such as debit and credit cards. For policy makers an important question is whether consumers truly prefer using cash or merchants restrict card usage. Using unique shopping diary data, we estimate a payment choice model with individual unobserved heterogeneity (demandside factors) while controlling for merchants’ acceptance of cards (supply-side factors). Based on a policy simulation where we impose universal card acceptance among merchants, we find that overall cash usage would decrease by only 7.7 percentage points, implying that cash usage in small-value transactions is driven mainly by consumers’ preferences.

 

Keywords: Money demand, Payment methods, Consumer financial behavior

JEL Classification: G2, D1, C2

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SFB/TR 15 Discussion Paper No.

426

Tobias J. Klein, Christian Lambertz, Konrad O. Stahl
Market Transparency, Adverse Selection, and Moral Hazard

Abstract:

We study the effects of improvements in market transparency on eBay on seller exit and continuing sellers’ behavior. An improvement in market transparency by reducing strategic bias in buyer ratings led to a significant increase in buyer valuation especially of sellers rated poorly prior to the change, but not to an increase in seller exit. When sellers had the choice between exiting—a reduction in adverse selection—and improved behavior—a reduction in moral hazard—, they preferred the latter because of lower cost. Increasing market transparency improves on market outcomes.

 

JEL classification: D47, D83, L15.

Keywords: Anonymous markets, adverse selection, moral hazard, reputation building mechanisms, market transparency, market design.

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SFB/TR 15 Discussion Paper No.

424

Yuya Takahashi
Estimating a War of Attrition: The Case of the U.S. Movie Theater Industry

Abstract:

This paper provides a tractable empirical framework to analyze firm behavior in a dynamic oligopoly when demand is declining over time. I modify Fudenberg and Tirole (1986).s model of exit in a duopoly with incomplete information to a model that can be used in an oligopoly, and combine this with an auxiliary entry model to address the initial conditions problem. I estimate this model with panel data on the U.S. movie theater industry from 1949 to 1955, using variations in TV diffusion rates across households, market structure before the exit game starts, and other market characteristics to identify the parameters in the theater’s payoff function and the distribution of unobservable fixed costs. Using the estimated model, I measure strategic delays in the exit process due to oligopolistic competition and incomplete information. The delay in exit that arises from strategic interaction is 2.7 years on average. Out of these years, 3.7% of this delay is accounted for by incomplete information, while the remaining 96.3% is explained by oligopolistic competition.

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SFB/TR 15 Discussion Paper No.

423

Taisuke Otsu, Martin Pesendorfer, Yuya Takahashi
Testing for Equilibrium Multiplicity in Dynamic Markov Games

Abstract:

This paper proposes several statistical tests for finite state Markov games to examine the null hypothesis that the data are generated from a single equilibrium. We formulate tests of (i) the conditional choice probabilities, (ii) the steady-state distribution of states and (iii) the conditional distribution of states conditional on an initial state. In a Monte Carlo study we find that the chi-squared test of the steady-state distribution performs well and has high power even with a small number of markets and time periods. We apply the chi-squared test to the empirical application of Ryan (2012) that analyzes dynamics of the U.S. Portland Cement industry and test if his assumption of single equilibrium is supported by the data.

 

Keywords: Dynamic Markov Game, Multiplicity of Equilibria, Testing.

Jel Classification: C12, C72, D44.

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SFB/TR 15 Discussion Paper No.

422

Xavier D'Haultfoeuille, Isis Durrmeyer, Philippe Février
The Effect of Public Policies on Consumers' Preferences: Lessons from the French Automobile Market

Abstract:

In this paper, we investigate whether French consumers have modified their preferences towards environmentally-friendly vehicles between 2003 and 2008. We estimate a model of demand for automobiles incorporating both consumers' heterogeneity and CO2 emissions of the vehicles. Our results show that there has been a shift in preferences towards low-emitting cars, with an average increase of 367 euros of the willingness to pay for a reduction of 10 grams of carbon dioxide per kilometer. We also stress a large heterogeneity in the evolution of preferences between consumers. Rich and young people are more sensitive to environmental issues, and our results are in line with votes for the green party at the presidential elections. We relate these changes with two environmental policies that were introduced at these times, namely the obligation of indicating energy labels by the end of 2005 and a feebate based on CO2 emissions of new vehicles in 2008. Our results suggest that such policies have been efficient tools to shift consumers utility towards environmentally-friendly goods, the shift in preferences accounting for 20% of the overall decrease in average CO2 emissions of new cars on the period.

 

Keywords: environmental policy, consumers' preferences, CO2 emissions, automobiles.

JEL codes: D12, H23, L62, Q51.

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SFB/TR 15 Discussion Paper No.

416

Ilja Rudyk
Deferred Patent Examination

Abstract:

Most patent systems allow applicants to defer patent examination by some time. Deferred examination was introduced in the 1960s, first at the Dutch patent office and subsequently in many other countries, as a response to mounting backlogs of unexamined patent applications. Some applicants allow the examination option to lapse and never request examination once they learn about the value of their invention. Examination loads are reduced substantially in these systems, albeit at the cost of having a large number of pending patent applications. Economic models of patent examination and renewal have largely ignored this important feature to date. We construct a model of patent application, examination and renewal in which applicants have control over the timing of examination and study the tradeoffs that applicants face. Using data from the Canadian patent office and a simulated GMM estimator, we obtain estimates for parameter values of the value distributions and of the learning process. We use our estimates to assess the value of Canadian patents as well as applications. We find that a considerable part of the value is realized before a patent is even granted. In addition, we simulate the counterfactual impact of changes in the deferment period. The estimates we obtain for the value of one additional year of deferment are relatively high and may explain why some applicants embark on delay tactics (such as continuations or divisionals) in patent systems without a statutory deferment option.

 

Keywords: patent, patent value, value of patent applications, patent examination, deferred patent examination

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SFB/TR 15 Discussion Paper No.

415

Ilja Rudyk
The License of Right, Compulsory Licensing and the Value of Exclusivity

Abstract:

This paper uses the License of Right (LOR) provision implemented in Section 23 of the German Patent Act to answer the following questions: What is the distribution of the private value of the right to exclude others provided by a patent? What are the welfare implications of having a License of Right system? Section 23 of the German Patent Act grants a patentee a 50% reduction on the annual renewal fees if he voluntarily allows anyone to use the invention only in return for reasonable compensation. We build a parametric discrete choice model of patent renewal and LOR declaration to exploit data on granted German patent applications from 1983-1988. Our estimates show that the distribution of the value of the right to exclude others is very skewed and its relative importance rises with patent age. For most patent owners the exclusion right is very valuable. Nevertheless, for a small fraction of patents a commitment to license non-exclusively may even increase the returns from patent protection. The welfare implications of the License of Right system in Germany are twofold. It increases the private value of patent rights but lowers the patent office's revenues. Furthermore, we are able to distinguish between two motives for declaring LOR, the cost-saving and the commitment motive. The fraction of declarations made out of the cost-saving motive is relatively low for young patents but increasing with patent age. In a counterfactual experiment we simulate the impact of making LOR declarations compulsory. We show that a compulsory licensing system could deprive the

patent owners of a very substantial part of the incentives currently provided by the patent system.

 

Keywords: value of exclusivity, patent valuation, license of right, compulsory licensing, patent

renewal model

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SFB/TR 15 Discussion Paper No.

409

Christian Michel
Identification and Estimation of Intra-Firm and Industry Competition via Ownership Change

Abstract:

This paper proposes and empirically implements a framework for analyzing industry competition and the degree of joint profit maximization of merging firms in differentiated product industries. Using pre- and post-merger industry data, I am able to separate merging firms' intra-organizational pricing considerations from industry pricing considerations. The insights of the paper shed light on a long-standing debate in the theoretical literature about the consequences of organizational integration. Moreover, I propose a novel approach to directly estimate industry conduct that relies on ownership changes and input price variation. I apply my framework using data from the ready-to-eat cereal industry, covering the 1993 Post-Nabisco merger. My results show an increasing degree of joint profit maximization of the merged entities over the first two years after the merger, eventually leading to almost full maximization of joint profits. I find that between 14.3 and 25.6 percent of industry markups can be attributed to cooperative industry behavior, while the remaining markup is due to product differentiation of multi-product firms.

 

Keywords: Identification of Market Structure, Post-merger Internalization of Profits,

Conduct Estimation, Ex-post Merger Evaluation, Estimation of Synergies

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SFB/TR 15 Discussion Paper No.

408

Volker Nocke, Stephen Yeaple
Globalization and Multiproduct Firms

Abstract:

We present an international trade model with multiproduct firms. Firms are heterogeneously endowed with two types of capabilities that jointly determine the trade-off within firms between managing a large portfolio of products and producing at low marginal cost. The model can explain many of the documented cross-sectional correlations in firm performance measures, including why larger firms are more productive and more diversified, and yet more diversified firms trade at a discount. Globalization is shown to induce heterogeneous responses across firms in terms of scope and productivity, some of which are consistent with existing empirical work, while others are potentially testable.

 

Keywords: multiproduct firms, trade liberalization, diversification discount, firm heterogeneity, productivity

JEL Classification: F12, F15

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SFB/TR 15 Discussion Paper No.

366

Robert C. Schmidt, Roland Strausz
The Timing of Climate Agreements under Multiple Externalities

Abstract:

We study the potential of cooperation in global emission abatements with multiple externalities. Using a two-country model without side-payments, we identify the strategic effects under different timing regimes of cooperation. We obtain a positive complementarity effect of long-term cooperation in abatement on R&D levels that boosts potential benefit of long-term cooperation and a redistributive effect that destabilizes long-term cooperation when countries are asymmetric. We show that whether and what type of cooperation is sustainable, depends crucially on the kind rather than on the magnitude of asymmetries.

Keywords: climate treaty; timing of cooperation; multiple externalities; long-term commitment

JEL classification: D62, F53, H23, Q55

November 2011

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SFB/TR 15 Discussion Paper No.

365

Martin Peitz, Sven Rady, Piers Trepper
Experimentation in Two-Sided Markets

Abstract:

We study optimal experimentation by a monopolistic platform in a two-sided market framework. The platform provider faces uncertainty about the strength of the externality each side is exerting on the other. It maximizes the expected present value of its profit stream in a continuous-time infinite-horizon framework by setting participation fees or quantities on both sides. We show that a price-setting platform provider sets a fee lower than the myopically optimal level on at least one side of the market, and on both sides if the two externalities are of approximately equal strenght. If the externality that one side exerts is sufficiently weaker than the externality it experiences, the optimal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prives when the platform provider chooses quantities. While the optimal policy does not admin closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.
Keywords: Two-Sided Market, Network Effects, Monopoly Experimentation, Bayesian Learning, Optimal Control
JEL classification: D42, D83, L12

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SFB/TR 15 Discussion Paper No.

361

Armin Falk, David Huffman, W. Bentley Macleod
Institutions and Contract Enforcement

Abstract:

We provide evidence on how two important types of institutions – dismissal barriers, and bonus pay – affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market  outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded.

 

Keywords: incomplete contracts, bonus pay, efficiency wages, employment protection, firing costs, experiment

JEL Classification:  J41, J3, C9, D01

May 2011

 

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SFB/TR 15 Discussion Paper No.

360

Thomas Dohmen, Armin Falk
Performance Pay and Multidimensional Sorting - Productivity, Preferences and Gender

Abstract:

This paper studies the impact of incentives on worker self-selection in a controlled laboratory experiment. Subjects face the choice between a fixed and a variable payment scheme. Depending on the treatment, the variable payment is a piece rate, a tournament or a revenue-sharing scheme. We find that output is higher in the variable pay schemes (piece rate, tournament, and revenue sharing) compared to the fixed payment scheme. This difference is largely driven by productivity sorting. In addition personal attitudes such as willingness to take risks and relative self-assessment as well as gender affect the sorting decision in a systematic way. Moreover, self-reported effort is significantly higher in all variable  pay conditions than in the fixed wage condition. Our lab findings are supported by an additional analysis using data from a large and representative sample. In sum, our findings underline the importance of multi-dimensional sorting, i.e., the tendency for different incentive schemes to systematically attract people with different individual characteristics.

 

Keywords: Sorting, Incentives, Piece Rates, Tournament, Revenue-Sharing, Risk Preferences, Social Preferences, Gender, Experiment, Field Evidence

JEL Classification: J3, M52, C91, D81, J16

May 2011

 

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SFB/TR 15 Discussion Paper No.

359

Martin Brown, Armin Falk and Ernst Fehr
Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device

Abstract:

When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.

 

Keywords: Relational Contracts, Involuntary Unemployment

JEL Classification: D82, J3, J41, E24, C9

May 2011

 

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SFB/TR 15 Discussion Paper No.

358

Johannes Abeler,, Armin Falk, Lorenz Götte and David Huffman
Reference Points and Effort Provision

Abstract:

A key open question for theories of reference-dependent preferences is what determines the reference point. One candidate is expectations: what people expect could affect how they feel about what actually occurs. In a real-effort experiment, we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision. We find that effort provision is significantly different between treatments in the way predicted by models of expectation-based reference-dependent preferences: if expectations are high, subjects work longer and earn more money than if expectations are low.

 

Keywords: Reference Points, Expectations, Loss Aversion, Disappointment, Experiment

JEL Classification: C91, D01, D84, J22

May 2011

 

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SFB/TR 15 Discussion Paper No.

357

Silvia Appelt
Authorized Generic Entry prior to Patent Expiry: Reassessing Incentives for Independent Generic Entry

Abstract:

Patent holders attempt to mitigate the loss of monopoly power by authorizing generic entry prior to patent expiry (early entry). Off-patent competition may be adversely a ected if early entry substantially lowers the attractiveness of  subsequent generic entry. This study assesses the impact of early entry, examining generic entry decisions made in the course of recent patent expiries. Using micro data and accounting for the endogeneity of early entry, I estimate recursive bivariate probit models of entry. Early entry has no significant impact on the likelihood of generic entry. Rent-seeking rather than strategic entry-deterrence motives drive early entry decisions.

 

Keywords: Generic Entry, Early Entry, Anticompetitive Practices
JEL Classification: L41, I11, O34, C35

April 2010

 

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SFB/TR 15 Discussion Paper No.

356

Georg von Graevenitz, Stefan Wagner, Dietmar Harhoff
Incidence and Growth of Patent Thickets - The Impact of Technological Opportunities and Complexity

Abstract:

We investigate incidence and evolution of patent thickets. Our empirical analysis is based on a theoretical model of patenting in complex and discrete  technologies. The model captures how competition for patent portfolios and complementarity of patents affect patenting incentives. We show that lower technological opportunities increase patenting incentives in complex technologies while they decrease incentives in discrete technologies. Also, more competitors increase patenting incentives in complex technologies and reduce them in discrete technologies. To test these predictions a new measure of the density of patent thickets is introduced. European patent citations are used to construct measures of fragmentation and technological opportunity. Our empirical analysis is based on a panel capturing patenting behavior of 2074 firms in 30 technology areas over 15 years. GMM estimation results confirm the predictions of our theoretical model. The results show that patent thickets exist in 9 out of 30 technology areas. We find that decreased technological opportunities are a surprisingly strong driver of patent thicket growth.

 

Keywords: Patenting, Patent thickets, Patent portfolio races, Complexity, Technological Opportunities.

JEL Classification: L13, L20, O34.

April 2011

 

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SFB/TR 15 Discussion Paper No.

354

Thomas Duso, Klaus Gugler and Burcin B. Yurtoglu
How Effective is European Merger Control?

Abstract:

This paper applies an intuitive approach based on stock market data to a unique dataset of large concentrations during the period 1990-2002 to assess the effectiveness of European merger control. The basic idea is to relate announcement and decision abnormal returns. Under a set of four maintained assumptions, merger control might be interpreted to be effective if rents accruing due to the increased market power observed around the merger announcement are reversed by the antitrust decision, i.e. if there is a negative relation between announcement and decision abnormal returns. To clearly identify the events’ competitive effects, we explicitly control for the market expectation about the outcome of the merger control procedure and run several robustness checks to assess the role of our maintained assumptions. We find that only outright prohibitions completely reverse the rents measured around a merger’s announcement. On average, remedies seem to be only partially capable of reverting announcement abnormal returns. Yet they seem to be more effective when applied during the first rather than the second investigation phase and in subsamples where our assumptions are more likely to hold. Moreover, the European Commission appears to learn over time.

 

Keywords: Merger Control, Remedies, European Commission, Event Studies
JEL Classification: L4, K21, G34, C2, L2

April 2011

 

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SFB/TR 15 Discussion Paper No.

350

Heiko Karle, Tobias J. Klein and Konrad O. Stahl
Ownership and Control in a Competitive Industry

Abstract:

We study a differentiated product market in which an investor initially owns a controlling stake in one of two competing firms and may acquire a non-controlling or a controlling stake in a competitor, either directly using her own assets, or indirectly via the controlled firm. While industry profits are maximized within a symmetric two product monopoly, the investor attains this only in exceptional cases. Instead, she sometimes acquires a noncontrolling stake. Or she invests asymmetrically rather than pursuing a full takeover if she acquires a controlling one. Generally, she invests indirectly if she only wants to affect the product market outcome, and directly if acquiring shares is profitable per se.

 

Keywords: Differentiated products, separation of ownership and control, private benefits of control.
JEL Classification: L13, L41.
February 2011

 

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SFB/TR 15 Discussion Paper No.

349

Leonardo Felli, Johannes Koenen, Konrad O. Stahl
Competition and Trust: Evidence from German Car Manufacturers

Abstract:

We explore the determinants and effects of trust relationships between upstream suppliers and downstream producers. Using unique survey data on individual supplier-buyer relationships in the German automotive industry, we show, by means of different measures of supplier-buyertrust, tha thigher levels of trust mitigate relationship-specific underinvestment in a classical hold-up situation. Moreover, contrary to the extant literature, we show that higher levels of supplier’s trust are reflected in the buyer’s choice of a more competitive procurement strategy among potential suppliers.

 

Keywords: Trust, Hold-up problem, Competition, Specific investment, Suppliers, Car manufacturers, German automotive industry

JEL Classification: D86,D22,L22,L62

February 2011

 

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SFB/TR 15 Discussion Paper No.

343

Tomaso Duso, Lars-Hendrik Röller, Jo Seldeslachts
Collusion through Joint R&D: An Empirical Assessment

Abstract:

This paper tests whether upstream  R&D cooperation leads to downstream collusion. We consider an oligopolistic setting where firms enter in research joint ventures (RJVs) to lower production costs or coordinate on collusion in the product market. We show that a sufficient condition for identifying collusive behavior is a decline in the market share of RJV-participating firms, which is also necessary and sufficient for a decrease in consumer welfare. Using information from the US National Cooperation Research Act, we estimate a market share equation correcting for the endogeneity of RJV participation and R&D expenditures. We find robust evidence that large networks between direct competitors – created through firms being members in several RJVs at the same time – are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing.


Keywords: Research Joint Ventures, Innovation, Collusion, NCRA

JEL Classification: K21, L24, L44, D22, O32

November 2010

 

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SFB/TR 15 Discussion Paper No.

338

Erik R. Fasten, Dirk Hofmann
Two-sided Certification: The market for Rating Agencies

Abstract:

Certifiers contribute to the sound functioning of markets by reducing a symmetric information. They, however, have been heavily criticized during the 2008-09 financial crisis. This paper investigates on which side of the market a monopolistic profit-maximizing certifier offers his service. If the seller demands a rating, the certifier announces the product quality publicly, whereas if the buyer requests a rating it remains his private information. The model shows that the certifier offers his service to sellers and buyers to maximize his own profit with a higher share from the sellers. Overall, certifiers increase welfare in specific markets. Revenue shifts due to the financial crisis are also explained.

 

Keywords: Certification, Rating Agencies, Asymmetric Information, Financial Markets.
JEL Classification: G14, G24, L15, D82.

October 2010

 

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SFB/TR 15 Discussion Paper No.

337

Tomaso Duso, Klaus Guglery, Florian Szücs
An Empirical Assessment of the 2004 EU Merger Policy Reform

Abstract:

Based on a database of 326 merger cases scrutinized by the European Commission between 1990 and 2007, we evaluate the economic impact of the change in European merger legislation in 2004. We ?rst propose a general framework to assess merger policy effectiveness, which is based on standard oligopoly theory and makes use of stockmarket reactions as an external assessment of the merger and the merger control decision. We then focus on four different dimensions of effectiveness: 1) legal certainty; 2) frequency and determinants of type I and type II errors; 3) rent-reversion achieved by different merger policy tools; and 4) deterrence of anti-competitive mergers. To infer the economic impact of the merger policy reform, we compare the results of our four tests before and after its introduction. Our results suggest that the policy reform seems to have been only a modest improvement of European merger policy.

 

Keywords: merger control, regulatory reform, EU Commission, event-study

JEL Classification: L4, K21, C13, D78

October 2010

 

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SFB/TR 15 Discussion Paper No.

332

Susanne Goldluecke, Sebastian Kranz
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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SFB/TR 15 Discussion Paper No.

323

Konrad Stahl and Roland Strausz
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.

 

Keywords: asymmetric information, certification, information acquisition, inspection, lemons, middlemen, signaling

JEL Classification: D40, D82, L14, L15

June 2010

 

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SFB/TR 15 Discussion Paper No.

319

Heiko Karle, Martin Peitz
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

JEL Classification: D83,L13,L41,M37

May 2010

 

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SFB/TR 15 Discussion Paper No.

313

Jeanne Hagenbach
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.

 

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

JEL Classification: D83, C72, L22

April 2010

 

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SFB/TR 15 Discussion Paper No.

312

Heiko Karle, Martin Peitz
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

April 2010

 

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SFB/TR 15 Discussion Paper No.

309

Otto Toivanen, Lotta Väänänen
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.

 

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

JEL Classification: O31, J31

March 2010

 

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SFB/TR 15 Discussion Paper No.

301

Robert C. Schmidt
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.

 

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

JEL Classification:D43, D83, L11

 

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SFB/TR 15 Discussion Paper No.

300

Robert C. Schmidt
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.

 

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

JEL Classification: Q55, Q58, L51

 

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SFB/TR 15 Discussion Paper No.

285

Paolo Buccirossi, Lorenzo Ciari, Tomaso Duso, Giancarlo Spagnolo, Cristiana Vitale
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.
 

Keywords: Competition Policy, Law Enforcement, Deterrence

JEL Classification: K21, K42, L4

October 2009

 

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SFB/TR 15 Discussion Paper No.

284

Paolo Buccirossi, Lorenzo Ciari, Tomaso Duso, Giancarlo Spagnolo, Cristiana Vitale
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.

 

Keywords: Competition Policy, Indicator, Deterrence, Competition Law

JEL Classification: K21, K42, L40

October 2009

 

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SFB/TR 15 Discussion Paper No.

283

Paolo Buccirossi, Lorenzo Ciari, Tomaso Duso, Giancarlo Spagnolo, Cristiana Vitale
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.

 

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

JEL Classification: L4, K21, O4, C23

October 2009

 

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SFB/TR 15 Discussion Paper No.

269

Richard Weber, Georg von Graevenitz and Dietmar Harhoff
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.

 

Keywords: entrepreneurship, entrepreneurship education, Bayes’ Rule, learning, signals

JEL Classification: D83, J24, L26, M13

August 2009

 

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SFB/TR 15 Discussion Paper No.

267

Susanne Prantl and Alexandra Spitz-Oener
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.

 

Keywords: Entry Regulation, Self-Employment, Occupational Mobility

JEL Classification: J24, J62, K20, L11, L51, M13

July 2009

 

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SFB/TR 15 Discussion Paper No.

259

Sebastian Kranz and Susanne Ohlendorf
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.

 

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

JEL Classification: C73, L14

April 2009

 

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SFB/TR 15 Discussion Paper No.

255

Martin Peitz, Markus Reisinger
Indirect Taxation in Vertical Oligopoly

Abstract:

This paper analyzes the effects of specific and ad valorem taxation in an industry 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.

 

Keywords: Specific Tax, Ad Valorem Tax, Value-Added Tax, Tax Incidence, Tax Efficiency, Indirect Taxation, Imperfect Competition, Vertical Oligopoly

JEL Classification: D43, H21, H22, L13

Febuary 2009

 

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SFB/TR 15 Discussion Paper No.

253

Caroline Haeussler, Dietmar Harhoff, Elisabeth Müller
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

 

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SFB/TR 15 Discussion Paper No.

240

Jo Seldeslachts, Tomaso Duso, Enrico Pennings (C5)
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

 

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SFB/TR 15 Discussion Paper No.

239

Joseph Clougherty, Tomaso Duso (C5)
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

 

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SFB/TR 15 Discussion Paper No.

238

Heike Hennig-Schmidt, Bettina Rockenbach, Abdolkarim Sadrieh (C4)
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

 

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SFB/TR 15 Discussion Paper No.

225

Joseph A. Clougherty, Anming Zhang (C5)
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

 

 

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SFB/TR 15 Discussion Paper No.

221

Tomaso Duso, Enrico Pennings, Jo Seldeslachts (C5)
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

 

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SFB/TR 15 Discussion Paper No.

220

Tobias J. Klein, Christian Lambertz, Giancarlo Spagnolo, Konrad O. Stahl (C6)
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

 

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SFB/TR 15 Discussion Paper No.

218

Jo Seldeslachts, Joseph A. Clougherty, Pedro Pita Barros (C5)
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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SFB/TR 15 Discussion Paper No.

215

Georg von Graevenitz (C2)
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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SFB/TR 15 Discussion Paper No.

196

Aviad Heifetz, Martin Meier, Burkhard C. Schipper (C4)
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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SFB/TR 15 Discussion Paper No.

191

Steffen Lippert, Giancarlo Spagnolo (C6)
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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SFB/TR 15 Discussion Paper No.

179

Joseph A. Clougherty, Michal Grajek (C5)
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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SFB/TR 15 Discussion Paper No.

178

Susanne Prantl, Matthias Almus, Jürgen Egeln, Dirk Engel (C5)
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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SFB/TR 15 Discussion Paper No.

177

Ela Glowicka (C5)
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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SFB/TR 15 Discussion Paper No.

176

Ela Glowicka (C5)
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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SFB/TR 15 Discussion Paper No.

171

Gerlinde Fellner, Matthias Sutter (C7)
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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SFB/TR 15 Discussion Paper No.

170

Dietmar Harhoff, Stefan Wagner (C2)
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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SFB/TR 15 Discussion Paper No.

163

Tomaso Duso, Klaus Gugler, Burcin Yurtoglu (C5)
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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SFB/TR 15 Discussion Paper No.

158

Camille Cornand, Frank Heinemann (C3)
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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SFB/TR 15 Discussion Paper No.

157

Camille Cornand, Frank Heinemann (C3)
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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SFB/TR 15 Discussion Paper No.

156

Frank Heinemann (C3)
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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SFB/TR 15 Discussion Paper No.

153

Tomaso Duso, Klaus Gugler, Burcin Yurtoglu (C5)
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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SFB/TR 15 Discussion Paper No.

132

Hendrik Hakenes, Martin Peitz (B3, C6)
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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SFB/TR 15 Discussion Paper No.

131

Hendrik Hakenes, Martin Peitz (B3, C6)
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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SFB/TR 15 Discussion Paper No.

117

Andrey V. Ivanov, Florian Mueller (C6)
“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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SFB/TR 15 Discussion Paper No.

111

Elisabeth Müller, Volker Zimmermann (C2)
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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SFB/TR 15 Discussion Paper No.

087

Florian Englmaier, Markus Reisinger (C3)
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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SFB/TR 15 Discussion Paper No.

081

Tomaso Duso, Klaus Gugler, Burcin Yurtoglu (C5)
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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SFB/TR 15 Discussion Paper No.

074

Paolo Buccirossi, Giancarlo Spagnolo (C2, C6)
Leniency Policies and Illegal Transactions

Abstract:

Forthcoming in the Journal of Public Economics
We study the consequences of leniency – reduced legal sanctions for wrongdoers who spontaneously self-report to law enforcers – on sequential, bilateral, illegal transactions, such as corruption, manager-auditor collusion, or drug deals. It is known that leniency helps deterring illegal relationships sustained by repeated interaction. Here we find that - when not properly designed - leniency may simultaneously provide an effective governance mechanism for occasional sequential illegal transactions that would not be feasible in its absence.


Keywords: amnesty, corruption, collusion, financial fraud, governance, hold up, hostages, illegal trade, immunity, law enforcement, leniency, organized crime, self-reporting, whistleblowers
JEL Classification: K42, K21
September 2005

 

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SFB/TR 15 Discussion Paper No.

068

Burkhard C. Schipper (C4)
The Evolutionary Stability of Optimism, Pessimism and Complete Ignorance

Abstract:

We provide an evolutionary foundation to evidence that in some situations humans maintain optimistic or pessimistic attitudes towards uncertainty and are ignorant to relevant aspects of the environment. Players in strategic games face Knightian uncertainty about opponents’ actions and maximize individually their Choquet expected utility. Our Choquet expected utility model allows for both an optimistic or pessimistic attitude towards uncertainty as well as ignorance to strategic dependencies. An optimist (resp. pessimist) overweights good (resp. bad) outcomes. A complete ignorant never reacts to opponents’ change of actions. With qualifications we show that optimistic (resp. pessimistic) complete ignorance is evolutionary stable / yields a strategic advantage in submodular (resp. supermodular) games with aggregate externalities. Moreover, this evolutionary stable preference leads to Walrasian behavior in those classes of games.


Keywords: ambiguity, Knightian uncertainty, Choquet expected utility, neo-additive capacity, Hurwicz criterion, Maximin, Minimax, Ellsberg paradox, overconfidence, supermodularity, aggregative games, monotone comparative statics, playing the field, evolution of preferences
JEL Classification: C72, C73, D01, D43, D81, L13
November 2005

 

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SFB/TR 15 Discussion Paper No.

064

Heiko Gerlach, Thomas Rønde, Konrad O. Stahl (C2)
Labor Pooling in R&D Intensive Industries

Abstract:

We investigate firms’ incentives to locate in the same region to gain access to a large pool of skilled labor. Firms engage in risky R&D activities and thus create stochastic product and implied labor demand. Agglomeration in a cluster is more likely in situations where the innovation step is large and the probability for a firm to be the only innovator is high. When firms cluster, they tend to invest more and take more risk in R&D compared to spatially dispersed firms. Agglomeration is welfare maximizing, because expected labor productivity is higher and firms choose a more effcient, technically diversified portfolio of R&D projects at the industry level.


JEL Classification: L13, O32, R12
September 2005

 

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SFB/TR 15 Discussion Paper No.

063

Peter Dürsch, Albert Kolb, Jörg Oechssler, Burkhard C. Schipper (C4)
Rage Against the Machines: How Subjects Learn to Play Against Computers

Abstract:

We use an experiment to explore how subjects learn to play against computers which are programmed to follow one of a number of standard learning algorithms. The learning theories are (unbeknown to subjects) a best response process, fictitious play, imitation, reinforcement learning, and a trial & error process. We test whether subjects try to influence those algorithms to their advantage in a forward-looking way (strategic teaching). We find that strategic teaching occurs frequently and that all learning algorithms are subject to exploitation with the notable exception of imitation. The experiment was conducted, both, on the internet and in the usual laboratory setting. We find some systematic differences, which however can be traced to the different incentives structures rather than the experimental environment.


Keywords: learning; fictitious play; imitation; reinforcement; trial & error; strategic teaching; Cournot duopoly; experiments; internet
JEL Classification: C72, C91, C92, D43, L13
October 2005

 

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SFB/TR 15 Discussion Paper No.

062

Tobias J. Klein, Christian Lambertz, Giancarlo Spagnolo, Konrad O. Stahl (C6)
Last Minute Feedback

Abstract:

Feedback mechanisms that allow partners to rate each other after a transaction are considered crucial for the success of anonymous internet trading platforms. We document an asymmetry in the feedback behavior on eBay, propose an explanation based on the micro structure of the feedback mechanism and the time when feedbacks are given, and support this explanation by findings from a large data set. Our analysis implies that the informational content of feedback records is likely to be low. The reason for this is that agents appear to leave feedbacks strategically. Negative feedbacks are given late, in the "last minute," or not given at all, most likely because of the fear of retaliative negative feedback. Conversely, positive feedbacks are given early in order to encourage reciprocation. Towards refining our insights into the observed pattern, we look separately at buyers and sellers, and relate the magnitude of the effects to the trading partners' experience.


Keywords: eBay, reputation mechanism, strategic feedback behavior, informational content, reciprocity, fear of retaliation
JEL Classification: D44, L15, L86
March 2006

 

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SFB/TR 15 Discussion Paper No.

060

Aviad Heifetz, Martin Meier, Burkhard C. Schipper (C4)
A Canonical Model for Interactive Unawareness

Abstract:

Heifetz, Meier and Schipper (2005) introduced a generalized state-space model that allows for non-trivial unawareness among several individuals and strong properties of knowledge. We show that this generalized state-space model arises naturally if states consist of maximally consistent sets of formulas in an appropriate logical formulation.


Keywords: unawareness, awareness, knowledge, interactive epistemology, modal logic, lack of conception, bounded perception
JEL Classification: C70, C72, D80, D82
September 2005

 

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SFB/TR 15 Discussion Paper No.

059

Jürgen Eichberger, David Kelsey, Burkhard C. Schipper (C4)
Ambiguity and Social Interaction

Abstract:

We present a non-technical account of ambiguity in strategic games and show how it may be applied to economics and social sciences. Optimistic and pessimistic responses to ambiguity are formally modelled. We show that pessimism has the effect of increasing (decreasing) equilibrium prices under Cournot (Bertrand) competition. In addition the effects of ambiguity on peace-making are examined. It is shown that ambiguity may select equilibria in coordination games with multiple equilibria. Some comparative statics results are derived for the impact of ambiguity in games with strategic complements.


Keywords: Ambiguity, Optimism, Pessimism, Strategic Games, Oligopoly, Strategic Delegation, Peace-making, Strategic Complements, Choquet Expected Utility
JEL Classification: C72, D43, D62, D81
July 2005

 

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SFB/TR 15 Discussion Paper No.

055

Heike Hennig-Schmidt, Bettina Rockenbach, Abdolkarim Sadrieh (C4)
In Search of Workers' Real Effort Reciprocity - A Field and a Laboratory Experiment

Abstract:

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
July 2005

 

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SFB/TR 15 Discussion Paper No.

054

Jose Apestgeguia, Steffen Huck, Jörg Oechssler (C4)
Imitation - Theory and Experimental Evidence

Abstract:

We introduce a generalized theoretical approach to study imitation and subject it to rigorous experimental testing. In our theoretical analysis we find that the different predictions of previous imitation models are due to different informational assumptions, not to different behavioral rules. It is more important whom one imitates rather than how. In a laboratory experiment we test the different theories by systematically varying information conditions. We find significant effects of seemingly innocent changes in information. Moreover, the generalized imitation model predicts the differences between treatments well. The data provide support for imitation on the individual level, both in terms of choice and in terms of perception. But imitation is not unconditional. Rather individuals' propensity to imitate more successful actions is increasing in payoff differences.


Keywords: Evolutionary game theory; Stochastic stability; Imitation; Cournot markets; Information; Experiments; Simulations
JEL Classification: C72; C91; C92; D43; L13
April 2005

 

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SFB/TR 15 Discussion Paper No.

053

Burkhard C. Schipper (C4)
Imitators and Optimizers in Cournot Oligopoly

Abstract:

We analyze a symmetric n-firm Cournot oligopoly with a heterogeneous population of optimizers and imitators. Imitators mimic the output decision of the most successful firms of the previous round a l`a Vega-Redondo (1997). Optimizers play a myopic best response to the opponents’ previous output. Firms are allowed to make mistakes and deviate from the decision rules with a small probability. Applying stochastic stability analysis, we find that the long run distribution converges to a recurrent set of states in which imitators are better off than are optimizers. This finding appears to be robust even when optimizers are more sophisticated. It suggests that imitators drive optimizers out of the market contradicting a fundamental conjecture by Friedman (1953).


Keywords: profit maximization hypothesis, bounded rationality, learning, Stackelberg
JEL classification: C72, D21, D43, L13
March 2005

 

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SFB/TR 15 Discussion Paper No.

052

Aviad Heifetz, Martin Meier, Burkhard C. Schipper (C4)
Interactive Unawareness

Abstract:

The standard state-spaces of asymmetric information preclude non-trivial forms of unawareness (Modica and Rustichini, 1994, Dekel, Lipman and Rustichini, 1998). We introduce a generalized state-space model that allows for non-trivial unawareness among several individuals, and which satisfies strong properties of knowledge as well as all the desiderata on unawareness proposed this far in the literature.


Keywords: unawareness, awareness, knowledge, interactive epistemology, speculative trade, bounded perception.
JEL Classification: C70, C72, D80, D82
February 2005

 

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SFB/TR 15 Discussion Paper No.

043

Georg Nöldeke, Thomas Tröger (A6, C7)
A Characterization of the Distributions That Imply Existence of Linear Equilibria in the Kyle-Model

Abstract:

The existence of a linear equilibrium in Kyle's model of market making with multiple, symmetrically informed strategic traders is implied for any number of strategic traders if the joint distribution of the underlying exogenous random variables is elliptical. The reverse implication has been shown for the case in which the random variables are independent and have finite second moments. Here we extend this result to the case in which the underlying random variables are not necessarily independent and their joint distribution is determined by its moments.


Keywords: Market Microstructure, Kyle Model, Linear
JEL Classification: G14, D82
May 2005

 

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SFB/TR 15 Discussion Paper No.

038

Stuart J.H. Graham, Dietmar Harhoff (C2)
Can Post-Grant Reviews Improve Patent System Design? A Twin Study of US and European Patents

Abstract:

This paper assesses the impact of adopting a post-grant review institution in the US patent system by comparing the “opposition careers” of European Patent Office (EPO) equivalents of litigated US patents to those of a control group of EPO patents. We demonstrate several novel methods of "twinning" US and European patents and investigate the implications of employing these different methods in our data analysis. We find that EPO equivalents of US litigated patent applications are more likely to be awarded EPO patent protection than are equivalents of unlitigated patents, and the opposition rate for EPO equivalents of US litigated patents is about three times higher than for equivalents of unlitigated patents. Patents attacked under European opposition are shown to be either revoked completely or narrowed in about 70 percent of all cases. For EPO equivalents of US litigated patents, the appeal rate against opposition outcomes is considerably higher than for control-group patents. Based on our estimates, we calculate a range of net welfare benefits that would accrue from adopting a post-grant review system. Our results provide strong evidence that the United States could benefit substantially from adopting an administrative post-grant patent review, provided that the post-grant mechanism is not too costly.


Keywords: patent system, post-grant review, opposition, litigation
JEL Classification: K41, K11, L10
April 2006

 

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SFB/TR 15 Discussion Paper No.

037

Katrin Hussinger (C2)
Is Silence Golden? Patents versus Secrecy at the Firm Level

Abstract:

In the 1990s, patenting schemes changed in many respects: upcoming new technologies accelerated the shift from price competition towards competition based on technical inventions, a worldwide surge in patenting took place, and the ‘patent thicket’ arose as a consequence of strategic patenting. This study analyzes the importance of patenting versus secrecy as an effective alternative to protect intellectual property in the inventions’ market phase. The sales figure with new products is introduced as a new measure for the importance of tools to protect IP among product innovating firms. Focusing on German manufacturing in 2000, it turns out that patents are important to protect intellectual property in the market, whereas secrecy seems to be rather important for inventions that are not commercialized yet.


Keywords: Innovation, Appropriation, Patents, Secrecy
JEL Classification: C34, C35, O33, O34
March 2005

 

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SFB/TR 15 Discussion Paper No.

032

Martin Peitz, Patrick Waelbroeck (C6)
An Economist's Guide to Digital Music

Abstract:

In this guide, we discuss the impact of digitalization on the music industry. We rely on market and survey data at the international level as well as expert statements from the industry. The guide investigates recent developments in legal and technological protection of digital music and describes new business models as well as consumers' attitude towards music downloads. We conclude the guide by a discussion of the evolution of the music industry.


Keywords: Music, Internet, File-sharing, Peer-to-peer, Piracy, Digital Rights Management, Copyright, E-commerce
December 2004

 

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SFB/TR 15 Discussion Paper No.

031

Martin Peitz, Patrick Waelbroeck (C6)
File-Sharing, Sampling, and Music Distribution

Abstract:

The use of file-sharing technologies, so-called Peer-to-Peer (P2P) networks, to copy music files has become common since the arrival of Napster. P2P networks may actually improve the matching between products and buyers - we call this the matching effect. For a label the downside of P2P networks is that consumers receive a copy which, although it is an imperfect substitute to the original, may reduce their willingness-to-pay for the original - we call this the competition effect. We show that the matching effect may dominate so that a label’s profits are higher with P2P networks than without. Furthermore, we show that the existence of P2P networks may alter the standard business model: sampling may replace costly marketing and promotion. This may allow labels to increase profits in spite of lower revenues.


Keywords: file-sharing, P2P, sampling, information transmission, piracy, music
JEL Classification: L11, L82
December 2004

 

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SFB/TR 15 Discussion Paper No.

028

Steffen Lippert, Giancarlo Spagnolo (C6)
Networks of Relations

Abstract:

We model networks of relational (or implicit) contracts, exploring how sanctioning power and equilibrium conditions change under different network configurations and information transmission technologies. In our model, relations are the links, and the value of the network lies in its ability to enforce cooperative agreements that could not be sustained if agents had no access to other network members’ sanctioning power and information. We identify conditions for network stability and in-network information transmission as well as conditions under which stable subnetworks inhibit more valuable larger networks.


Keywords: Networks, Relational Contracts, Indirect Multimarket Contact, Social Capital.
JEL Classification: L13, L29, D23, D43, O17
November 2004

 

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SFB/TR 15 Discussion Paper No.

022

David-Pascal Dion (C6)
Trade, growth and geography: A synthetic

Abstract:

Economic integration affects economic development through two main channels: growth and localization of the economic activities. The theories of endogenous growth and economic geography enable us to understand these mechanisms. We study in this paper their similarities and specificities before suggesting their useful combination within a single model. Indeed, both theories are based on the same Spence-Dixit-Stiglitz monopolistic competition framework. However, they suggest two different approaches to deal with the impact of economic integration. We consider that a third path, by proposing a synthetic approach, better answers the issues raised in terms of economic convergence and divergence by these two sets of models.


Keywords: regional economic integration, endogenous growth, economic geography
JEL Classification: F12, F15, F43, O18, O30, O41, R11, R12, R13
March 2004

 

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SFB/TR 15 Discussion Paper No.

021

David-Pascal Dion (C6)
Regional integration and economic development: An empirical approach

Abstract:

This paper contributes to the empirical literature by providing a quantitative measurement of the influence of regional trade integration on productivity. For this purpose we address the link between trade and productivity thanks to knowledge spillovers in a multi-country model. The interdependence that connects countries in an international web promotes exchanges of goods, services, people, capital and hence ideas, knowledge, innovation, and technology. Economic integration encourages thus both new ideas and their diffusion. We observe that a country’s productivity depends on its own R&D efforts as well as the R&D efforts of its trading partners. These R&D spillovers can then spread across countries and sectors. Thanks to the transfer of technology allowed by bilateral trade and investment, regional trade integration has a positive impact on long-term growth.


Keywords: regional economic integration, endogenous growth, economic geography
JEL Classification: F12, F15, F43, O18, O30, O41, R11, R12, R13
March 2004

 

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SFB/TR 15 Discussion Paper No.

020

David-Pascal Dion (C6)
Regional integration and economic development: A theoretical approach

Abstract:

We use a model of combined endogenous growth and economic geography to study the impact of regional economic integration on the member and non-member countries of a regional union. Regional integration affects growth through interregional technology diffusion symbolized by knowledge spillovers generated at home and spreading to the partner countries. Spillovers flow from the leader to the follower. Following integration, the lagging country has access to a bigger stock of knowledge that fosters an increase in its rate of growth and extends the diversity of its products. Trade in goods - or in FDI - and flows of ideas are two faces of the same coin. We show that the progressive decrease in transaction costs through the phasing out of barriers to trade together with product imitation can foster growth and convergence in the member countries. However, in order to avoid eventual trade and investment diversions, the non-member should envisage to join the integrated zone.


Keywords: regional economic integration, endogenous growth, economic geography
JEL Classification: F12, F15, F43, O18, O30, O41, R11, R12, R13
March 2004

 

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SFB/TR 15 Discussion Paper No.

019

Joseph A. Clougherty (C5)
Integrating Industrial Organization and International Business to Explain the Cross-National Domestic Airline Merger Phenomenon

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

The domestic airline merger phenomenon of the late 1980s and early 1990s sparked a great deal of Industrial Organization literature; yet, that literature neglected non-US merger activity and the potential for international competitive incentives. Using an International Business perspective to complement a primarily Industrial Organization analysis, I argue that factoring international competitive gains helps explain the domestic airline merger phenomenon. A Cournot model of airline competition illustrates the international incentives behind integrating domestic with international routes and behind acquiring domestic competitors. Further, comprehensive panel data tests also support large domestic networks and actual mergers improving the international competitiveness of airlines.


Keywords: airline-mergers, imperfect-competition, international-determinants
July 2004

 

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SFB/TR 15 Discussion Paper No.

018

Simona Fabrizi, Steffen Lippert (C2)
Moral Hazard and the Internal Organization of Joint Research

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

We address the question of how the internal organization of partnerships can be affected by moral hazard behavior of their division(s)/agent(s). We explore cases where two entregreneurs, each employing one agent subject ot moral hazard, decide how to conduct a research project together. The project's success probability is affected by agent(s)' effort(s). A joint entity can take two configurations: either both, or only one agent is kept. If two agents are kept, all degrees of substitutability between agents' efforts are considered. We show that the privately optimal internal organization of the joint entity is also socially optimal, except when agents' efforts just start to duplicate each other. In this range, due to moral hazard, too few parterships keeping both agents occur as compared to what would be socially optimal. A restriction on the number of agents to be kept in a partnership would induce too few of them leading to socially worse outcomes.


Keywords: internal organization of partnerships, moral hazard, efforts' interactions, cost functions
JEL Classification: D21, D23, L23
July 2004

 

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SFB/TR 15 Discussion Paper No.

017

Wolfgang Bühler, Christian Koziol (C1)
Banking Regulation and Financial Accelerators: A One-Period Model with Unlimited Liability

Abstract:

In this paper, we analyze the consequences of bank regulation on the size of the real sector. In particular, we address the question whether exogenous shocks on the return-risk characteristics of the technology and on the equity of the real sector are intensified or damped by a value-at-risk constraint on the credit portfolio of a bank. We consider a one-period model with three risk-averse agents, an investor, a bank, and a firm. The size of the markets for deposits and loans, their prices and the size of the real sector are endogenous. We find that stricter regulation results in higher loan rates, lower deposit rates, and lower activity in the real sector. A negative shock on the return-risk position or on the risk buffer of the real sector reduces the activities in the economy. Surprisingly, the sensitivity of the real sector's activities on negative shocks is smaller for a regulated financial sector than for a non-regulated one. Therefore, in our economy, imperfections in the financial sector do not result in procyclical or acceleration effects.


June 2004

 

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SFB/TR 15 Discussion Paper No.

016

Volker Nocke, Martin Peitz, Konrad Stahl (C6)
Platform Ownership

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

We develop a general theoretical framework of trade on a platform on which buyers and sellers interact. The platform may be owned by a single large, or many small independent or vertically integrated intermediaries. We provide a positive and normative analysis of the impact of platform ownership structure on platform size. The strength of network effects is important in the ranking of ownership structures by induced platform size and welfare. While vertical integration may be welfare-enhancing if network effects are weak, monopoly platform ownership is socially preferred if they are strong. These are also the ownership structures likely to emerge.


Keywords: Two-Sided Markets, Network Effects, Intermediation, Product Diversity
JEL Classification: L10, D40
July 2004

 

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SFB/TR 15 Discussion Paper No.

007

Mathias Drehmann, Jörg Oechssler, Andreas Roider (A5, C4)
Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

We report results of an internet experiment designed to test the theory of informational cascades in financial markets (Avery and Zemsky, AER, 1998). More than 6400 subjects, including a subsample of 267 consultants from an international consulting firm, participated in the experiment. As predicted by theory, we find that the presence of a flexible market price prevents herding. However, the presence of contrarian behavior, which can (partly) be rationalized via error models, distorts prices, and even after 20 decisions convergence to the fundamental value is rare. We also report some interesting differences with respect to subjects’ fields of study. Reassuringly, the behavior of the consultants turns out to be not significantly different from the remaining subjects.


Keywords: informational cascades, herding, contrarians, experiment, internet
JEL Classification: C92, D8, G1
June 2004

 

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7.pdf

SFB/TR 15 Discussion Paper No.

006

Frank Heinemann, Rosemarie Nagel, Peter Ockenfels (C3)
Measuring Strategic Uncertainty in Coordination Games

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

This paper explores predictability of behavior in coordination games with multiple equilibria. In a laboratory experiment we measure subjects' certainty equivalents for three coordination games and one lottery. Attitudes towards strategic uncertainty in coordination games are related to risk aversion, experience seeking, gender and age. From the distribution of certainty equivalents among participating students we estimate probabilities for successful coordination in a wide range of coordination games. For many games success of coordination is predictable with a reasonable error rate. The best response of a risk neutral player is close to the global-game solution. Comparing choices in coordination games with revealed risk aversion, we estimate subjective probabilities for successful coordination. In games with a low coordination requirement, most subjects underestimate the probability of success. In games with a high coordination requirement, most subjects overestimate this probability. Data indicate that subjects have probabilistic beliefs about success or failure of coordination rather than beliefs about individual behavior of other players.


JEL Classification: C72, C91, D81, D84
May 2004

 

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SFB/TR 15 Discussion Paper No.

003

Thierry Foucault, Sophie Moinas, Erik Theissen (C7)
Does Anonymity Matter in Electronic Limit Order Markets?

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

We develop a model of limit order trading in which some traders have better information on future price volatility. As limit orders have option-like features, this information is valuable for limit order traders. We solve for informed and uninformed limit order traders’ bidding strategies in equilibrium when limit order traders’ IDs are concealed and when they are visible. In either design, a large (resp. small) spread signals that informed limit order traders expect volatility to be high (resp. low). However the quality of this signal and market liquidity are different in each market design. We test these predictions using a natural experiment. As of April 23, 2001, the limit order book for stocks listed on Euronext Paris became anonymous. For our sample stocks, we find that following this change, the average quoted and effective spreads declined significantly. Consistent with our model, we also find that the size of the spread is a predictor of future price volatility and that the strength of the association between the spread and volatility is weaker after the switch to anonymity.


Keywords: Market Microstructure, Limit Order Trading, Anonymity, Transparency, Liquidity, Volatility Forecasts
JEL Classification: G10, G14, G24
May 2004

 

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3.pdf

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