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In a series of experiments, we provide evidence that people pay special attention to the probability of losing. We first analyze this behavior in the typically used one-shot choice tasks. We then extend our analysis to repeated decisions in choice tasks, as well as allocation and investment tasks. Additionally, we test both decision making under risk and under gradually removed uncertainty, as with decisions from experience. Our findings of explicit attention to loss probabilities contradict the predictions of normative and descriptive decision theories, such as Expected Utility Theory and (Cumulative) Prospect Theory. We suggest a value function with a jump rather than a kink at the reference point, which separates gains and losses.

We study optimal employment contracts for present-biased employees if firms cannot commit to long-term contracts. Assuming that an employee's effort increases his chances to obtain a future benefit, we show that individuals who are naive about their present bias will actually be better off than sophisticated or time-consistent individuals. Moreover, firms might benefit from being ignorant about the extent of an employee's naivet'e. Our results also indicate that naive employees might be harmed by policies such as employment protection or a minimum wage, whereas sophisticated employees are better of

Employees with relevant knowledge and skills for digitalization have become increasingly important for the competitiveness of MNCs. However, the shortage of such digital human capital in many host countries is putting pressure on MNC subsidiaries to prevent these employees from leaving. We theorize that the retention of digital human capital in MNC subsidiaries does not merely depend on salaries but crucially on the learning opportunities that subsidiaries offer. By integrating mechanisms from the literature on subsidiary-specific advantages into theoretical models explaining voluntary mobility constraints of employees, we reason that the opportunities for acquiring new skills in subsidiaries with advanced digital expertise will reduce the odds of losing these valuable employees. We test our theoretical predictions for 11,598 employees with digital human capital working for 866 foreign MNC subsidiaries in Denmark observed between 2002 and 2012. We find that digital expertise helps retaining digital human capital. The effect is stronger if subsidiaries have an internationally diverse workforce and when they possess patented technologies. Both factors provide distinct learning opportunities from digital expertise. The effect is weaker if the subsidiary is located in regional clusters of digital expertise since alternative employers may offer similar learning opportunities.

States have increasingly started to terminate and renegotiate their bilateral investment treaties (BITs). Dominant explanations have however overlooked the underlying bargaining dynamic of investment treaty negotiations. This paper argues that while states initially in a weaker negotiating position have the strongest incentives to change their existing BITs, their ability to do so is constrained by their bargaining power. Such states become more likely to demand renegotiation or exit dissatisfying BITs if they have experienced sufficient changes in their bargaining power in relation to the treaty partner. This paper identifies observable implications of the weaker states’ incentives and bargaining power constraints for adjusting their bilateral investment treaty commitments. Leveraging a panel dataset on 2,623 BITs ranging from 1962 to 2019, interaction effects between bargaining power and incentives stemming from rationalist and bounded rationality assumptions about states’ decision-making are analyzed in relation to the occurrence of renegotiations and terminations. The paper finds that change in bargaining power in relation to the treaty partner is an important factor underlying the weaker states’ ability to terminate or renegotiate BITs, contributing to the study of investment regime reform and exit from international institutions.

Workers’ occupational skill sets play a crucial role in successfully handling digital transformation. We investigate whether and how different types of occupational skill sets benefit from digital transformation. We theoretically and empirically analyze wage returns of workers in occupations with more or less specialized skill sets and with more or less social skills when IT increases in their industry. Applying natural language processing methods to the texts of occupational training curricula, we develop measures for occupational specialization and social skills. We use vocational education and training curricula from Switzerland because they cover approx. two-thirds of the working population. Using curricula, industry-level IT data and individual-level administrative wage data, our individual fixed-effects analyses show that IT progress leads to higher wage returns for workers in highly specialized occupations but not for workers in more general occupations. In addition, we find that high levels of social skills cannot make up for this difference when IT advances. However, our results indicate that for workers with high specialization, a combination with high social skills generates additional benefits when IT advances. Overall, our results suggest that, contrary to typical assumptions in educational policy debates, workers with specialized occupational skill sets—possibly in combination with high social skills—appear to be the ones who are particularly well prepared to cope with digital transformation.

Conditional heteroskedasticity of the error terms is a common occurrence in financial factor models, such as the CAPM and Fama-French factor models. This feature necessitates the use of heteroskedasticity consistent (HC) standard errors to make valid inference for regression coefficients. In this paper, we show that using weighted least squares (WLS) or adaptive least squares (ALS) to estimate model parameters generally leads to smaller HC standard errors compared to ordinary least squares (OLS), which translates into improved inference in the form of shorter confidence intervals and more powerful hypothesis tests. In an extensive empirical analysis based on historical stock returns and commonly used factors, we find that conditional heteroskedasticity is pronounced and that WLS and ALS can dramatically shorten confidence intervals compared to OLS, especially during times of financial turmoil.

This article demonstrates that low bank capital carries a negative externality because it amplifies local shock spillovers. We exploit a natural disaster that is transmitted to firms in nondisaster areas via their banks. Firms connected to a strongly disaster-exposed bank with lowest-quartile capitalization significantly reduce their total borrowing by 6.6% and tangible assets by 6.9% compared to similar firms connected to a well-capitalized bank. These findings translate to negative regional effects on GDP and unemployment. Additionally, following a disaster event, banks reduce their exposure to currently unaffected but generally disaster-prone areas.

We assess the quantitative implications of collateral re-use on leverage, volatility, and welfare within an infinite-horizon asset-pricing model with heterogeneous agents. In our model, the ability of agents to reuse frees up collateral that can be used to back more transactions. Re-use thus contributes to the buildup of leverage and significantly increases volatility in financial markets. When introducing limits on re-use, we find that volatility is strictly decreasing as these limits become tighter, yet the impact on welfare is non-monotone. In the model, allowing for some re-use can improve welfare as it enables agents to share risk more effectively. Allowing re-use beyond intermediate levels, however, can lead to excessive leverage and lower welfare. So the analysis in this paper provides a rationale for limiting, yet not banning, re-use in financial markets.

Using a difference-in-differences approach and relying on conftdential supervisory data and an unique proprietary data set available at the European Central Bank related to the 2016 EU-wide stress test, this paper presents novel empirical evidence that supervisory scrutiny associated to stress testing has a disciplining effect on bank risk. We ftnd that banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise. Relying on new metrics for supervisory scrutiny that measure the quantity, potential impact, and duration of interactions between banks and supervisors during the stress test, we find that the disciplining effect is stronger for banks subject to more intrusive supervisory scrutiny during the exercise.

https://ssrn.com/abstract=3202916; We show that banker bonuses cannot be understood exclusively as incentive contracts, but also incorporate a significant risk sharing dimension between bank shareholders and bank employees. This contrasts with the conventional view whereby diversified shareholders fully insure risk averse employees. However, financial frictions imply that shareholder value is concave in a bank's cash reserves---making shareholders effectively risk averse. The optimal contract between shareholders and employees then involves some degree of risk sharing. Using extensive payroll data on 1.26 million bank employee years in the Austrian, German, and Swiss banking sectors, we show that the structure of bonus pay within and across banks is compatible with an economically significant risk sharing motive, but difficult to rationalize based on incentive theories of bonus pay only.

This paper studies the impact of a key feature of competitive markets on moral behavior: the possibility that a competitor will step in and conclude the deal if a conscientious market actor forgoes a profitable business opportunity for ethical reasons. We study experimentally whether people employ the argument "if I don't do it, someone else will" to justify taking a narrowly self-interested action. Our data reveal a clear pattern. Subjects do not employ the "replacement excuse" if a social norm exists that classifies the selfish action as immoral. But if no social norm exists, subjects are more inclined to take a selfish action in situations where another subject can otherwise take it. By demonstrating the importance of social norms of moral behavior for limiting the power of the replacement excuse, our paper informs the long-standing debate on the effect of markets on morals.

Despite being one of the world's major internationally traded services, tourism remains neglected within debates on European integration and growth models. We highlight the rise of tourism-led growth in Southern Europe. We argue that the process of European integration has been a double-edged sword, simultaneously incentivizing and forcing Southern European economies to reap their comparative advantage in tourism. While European integration has created the preconditions for the expansion of intra-European tourism, monetary integration preempts macroeconomic management. Since the Eurozone crisis, internal devaluation and fiscal austerity have suppressed domestic growth drivers, inducing these governments towards an export-led growth strategy. We document the emergence of unprecedented tourism-related current account surpluses in Southern Europe, driven strongly by tourism imports from the EMU-core countries and the UK. Thus, while different types of export-led growth strategies now coexist in the EMU, Southern Europe’s excessive reliance on international tourism for growth comes with severe pitfalls.

Robert Nozick’s Anarchy, State and Utopia contains one of the earliest and best-known criticisms of John Rawls’s theory of justice in general and the difference principle in particular. The discussion of Nozick’s critique of Rawls in the literature has focused on his argument against “patterned” conceptions of justice, of which the difference principle as Nozick understands it constitutes merely one version among others. In this article I consider the objection Nozick raises against the difference principle specifically, namely that it unfairly favors the “worse endowed” over the “better endowed” members of society. I argue that Nozick’s charge of unfairness against the difference principle is ambiguous between two distinct interpretations of the difference principle and as such divides into two distinct objections, the pre-cooperative and the cooperative fairness objection. I then argue that neither of these two interpretations of the difference principle represents the actual, Rawlsian difference principle accurately and that, more fundamentally, Nozick lacks the concept of politics as the distinctive moral category implicitly at work in Rawls’s theory of justice. Not as much of Nozick’s charge of unfairness against the difference principle therefore remains on reflection as may have appeared at first sight.

There are substantial differences across countries regarding climate policy stringency. Banks react to a stricter climate policy at home by increasing their cross-border lending to countries with laxer climate policies. The evidence is consistent with the adverse effect of transitional climate risks on firms, possibly reducing banks' domestic loan portfolio performance. Global coordination in climate policies is needed to prevent race-to-the-bottom behavior

Recent literature has documented substantial arbitrage opportunities in markets for cryptocurrencies. Given these rather surprising findings, we re-examine the exchange rates of four cryptocurrencies on 21 exchanges with data from October 2018 to June 2019. Our results first provide evidence that price differences exist based on our created arbitrage indices, however, at only a fraction of values reported in previous literature. We then analyze the drivers of these price differences, identifying exchange-specific factors to have the most important role. Based on this, we test actual arbitrage strategies for specific cryptocurrency and fiat currency pairs, finding, in contrast to previous literature, that arbitrage opportunities hardly exist.

Fintech and big tech companies are making rapid inroads into credit markets. We hand construct a global database of fintech and big tech lending volumes for 79 countries over 2013-2018. Using a panel regression analysis, we find these new forms of digital lending are larger in countries with higher GDP per capita (albeit at a declining rate), where banking sector mark-ups are higher, and where banking regulation is less stringent. We also find that these alternative forms of credit are more developed where the ease of doing business is greater, investor protection disclosure and the efficiency of the judicial system are more advanced, and where bond and equity markets are more developed. Overall, fintech and big tech credit seem to complement other forms of credit, rather than substitute for them.

We consider a real discrete pricing problem in network revenue management for FlixBus. We improve the company's current pricing policy by an intermediate optimization step using booking limits from standard deterministic linear programs. We pay special attention to computational efficiency. FlixBus' strategic decision to allow for low-cost refunds might encourage large group bookings early in the booking process. In this context, we discuss counter-intuitive findings comparing booking limits with static bid price policies. We investigate the theoretical question whether the standard deterministic linear program for network revenue management does provide an upper bound on the optimal expected revenue if customer's willingness to pay varies over time.

Theories suggest that asset encumbrance, the ring-fencing of certain assets for protected debtholders, can affect banks’ risk taking and lead to funding instability. We test these hypotheses using a unique, hand-collected dataset on outstanding covered bonds issued by a sample of listed European banks. Our results suggest that the effect of asset encumbrance on risk depends on the proportion of debtholders exerting market discipline and on the bank’s liquidity buffers. We deal with concerns regarding omitted variables and reverse causality using several fixed effects estimations and an instrumental variables approach.

We adapt the design of four experimental studies on retirement decision-making and conduct replications with a larger online sample from the broader population. We replicate most of the main effects of the original studies. In particular, we confirm that consumption decisions are less efficient when subjects need to borrow from the future than when they need to save from the present. When subjects collect retirement benefits as lump sum instead of annuities, they choose to retire later, as suggested by the original study. We also confirm that savings are higher when they are incentivized with matching contributions than when incentivized with tax rebates. However, when faced with varying survival risks, subjects in our replication make only partial adjustments to spending paths when ambiguity is reduced. We also propose a further experimental research agenda in related topics and discuss practical issues on subject recruitment, attrition, and redesign of complex tasks.

In a controlled laboratory experiment we investigate whether time pressure influences voting decisions, and in particular the degree of strategic (insincere) voting. We find that participants under time constraints are more sincere when using the widely-employed Plurality Voting method. That is, time pressure might reduce strategic voting and hence misrepresentation of preferences. However, there are no effects for Approval Voting, in line with arguments that this method provides no incentives for strategic voting.

When confronted with new information, rational decision makers should update their beliefs through Bayes’ rule. In economics, however, new information often includes win-loss feedback (profits vs. losses, success vs. failure, upticks vs. downticks). Previous research using a well-established belief-updating paradigm shows that, in this case, reinforcement learning (focusing on past performance) creates high error rates, and increasing monetary incentives fails to elicit higher performance. But do incentives fail to increase effort, or rather does effort fail to increase performance? We use pupil dilation to show that higher incentives do result in increased cognitive effort, but the latter fails to translate into increased performance in this paradigm. The failure amounts to a “reinforcement paradox:” increasing incentives makes win-loss cues more salient, and hence effort is often misallocated in the form of an increased reliance on reinforcement processes. Our study also serves as an example of how pupil-dilation measurements can inform economics.

The literature on the natural resource curse is well known – countries with abundant natural resources fail to transform that advantage into favourable development outcomes (see Badeeb, Lean, and C...

We assess the cleansing effects of the recent banking crisis. In U.S. regions with higher levels of supervisory forbearance on distressed banks during the crisis, there is less restructuring in the real sector and the banking sector remains less healthy for several years after the crisis. Regions with less supervisory forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Supervisory forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks, while recapitalisation of distressed banks through TARP does not facilitate cleansing.

We discuss when law-invariant convex functionals “collapse to the mean”. More precisely, we show that, in a large class of spaces of random variables and under mild semicontinuity assumptions, the expectation functional is, up to an affine transformation, the only law-invariant convex functional that is linear along the direction of a nonconstant random variable with nonzero expectation. This extends results obtained in the literature in a bounded setting and under additional assumptions on the functionals. We illustrate the implications of our general results for pricing rules and risk measures. © 2021 The Author(s)

We provide an introduction to the estimation of discrete choice models when choice sets are heterogeneous and unobserved to the econometrician. We survey the two most popular approaches: “integrating over” and “differencing out” unobserved choice sets. Inspired by Chamberlain (1980)’s original idea of constructing sufficient statistics from observed choices, we introduce the term “sufficient set” to refer to any combination of observed choices that lies within the true but unobserved choice set. The concept of sufficient set helps to unify notation and organize our thinking, to map econometric assumptions onto economic models, and to implement both methods in practice.

Economic theories posit conflicting hypotheses on how wealth inequality affects entrepre-neurial dynamism. We investigate the impact of wealth inequality on business dynamics by constructing local measures of household wealth inequality based on financial rents, home equity, and 1880 farmland. We then identify the effect of wealth inequality on entrepre-neurship by instrumenting it with land distribution under the 1862 Homestead Act. Wealth inequality decreases firm entry and exit, and the proportion of high-tech businesses across metropolitan statistical areas. Wealth inequality also lowers the supply of public goods, such as education. Growth in income per capita consequently lags.

Populist and authoritarian leaders are increasingly coming to power in large countries. They often have a climate sceptic approach and do away with mitigation policies when coming to power. Increasing impacts of extreme meteorological events linked to climate change could lead to a situation where the supporters of the populist leader or elites crucial for the survival of an authoritarian regime are pushing to do something to address climate change. In order not to lose power, the leader may look for quick and cheap solutions. In such a context, solar radiation modification (SRM), for example, by stratospheric aerosol injection (SAI), will become very attractive as it is likely to have low costs and rapid effects. Populist or authoritarian governments are unlikely to care for negative impacts of SRM abroad as they often act nationalistically with an explicit disdain for multilateral solutions. We discuss the incentive structure and political economy that populist and authoritarian leaders may face regarding unilateral use of SRM and elaborate how the international community could try to prevent or at least ‘contain’ such unilateral uses of SRM. Unfortunately, such ‘containment’ is contingent on the most powerful states not being populist or authoritarian regimes.

Do credit ratings help enforce market discipline on banks? Analyzing a uniquely comprehensive data set consisting of 1,081 rating change announcements for 154 international financial institutions between January 2004 and December 2015, we find that rating downgrades for internal reasons, such as adverse changes in the operating performance or capital structure of banks, are associated with a significant credit default swap spread widening. However, this widening only occurs for banks that are not perceived as to be Too-Big-to-Fail (TBTF). Our findings question the reliability of credit ratings as a tool to discipline TBTF banks and suggest that regulatory monitoring should remain the main mechanism for disciplining these banks.

The classic preference reversal phenomenon, where monetary evaluations contradict risky choices, has been argued to arise due to a focus on outcomes during the evaluation of alternatives, leading to overpricing of long-shot options. Such an explanation makes the implicit assumption that attentional shifts drive the phenomenon. We conducted an eye-tracking study to causally test this hypothesis by comparing a treatment based on cardinal, monetary evaluations with a different treatment avoiding a monetary frame. We find a significant treatment effect in the form of a shift in attention toward outcomes (relative to probabilities) when evaluations are monetary. Our evidence suggests that attentional shifts resulting from the monetary frame of evaluations are a driver of preference reversals.

Small and micro-enterprises are usually majority-owned by entrepreneurs. Using a unique sample of loan applications from such firms, we study the role of owners’ gender in bank credit decisions and post-credit-decision firm outcomes. We find that, ceteris paribus, female entrepreneurs are more prudent loan applicants than are males because they are less likely to apply for credit or to default after loan origination. The relatively more aggressive behavior of male applicants pays off, however, in terms of higher average firm performance after loan origination.

Although there has been much interest in British public opinion on Brexit, much less is known about how EU-27 Europeans view the Brexit negotiations. This is surprising, because Brexit confronts the EU-27 with difficult choices. Whereas accommodating the UK carries the risk of encouraging further countriesto leave the EU, an uncompromising negotiation stance increases the economic and social costs of Brexit. Using original survey data from 39,000 respondents in all EU-27 countries collected between the start of the Brexit negotiations and December 2018, this article shows that exposure to the economic risks of Brexit makes respondents more willing to accommodate the UK, whereas a positive opinion of the EU decreases their willingness to compromise. Moreover, many Europeans face an accommodation dilemma that moderates these preferences. Overall, the EU-27 public unsentimentally supports a Brexit negotiation line that safeguards their own interests best.

This paper analyzes a dynamic stochastic equilibrium model of an asset market based on behavioral and evolutionary principles. The core of the model is a non-traditional game-theoretic framework combining elements of stochastic dynamic games and evolutionary game theory. Its key characteristic feature is that it relies only on objectively observable market data and does not use hidden individual agents’ characteristics (such as their utilities and beliefs). A central goal of the study is to identify an investment strategy that allows an investor to survive in the market selection process, i.e., to keep with probability one a strictly positive, bounded away from zero share of market wealth over an infinite time horizon, irrespective of the strategies used by the other players. The main results show that under very general assumptions, such a strategy exists, is asymptotically unique and easily computable. The paper resolves long-standing open problems that remained open for about a decade.

This essay examines three potential arguments against high-frequency trading and offers a qualified critique of the practice. In concrete terms, it examines a variant of high-frequency trading that is all about speed—low-latency trading—in light of moral issues surrounding arbitrage, information asymmetries, and systemic risk. The essay focuses on low-latency trading and the role of speed because it also aims to show that the commonly made assumption that speed in financial markets is morally neutral is wrong. For instance, speed is a necessary condition for low-latency trading’s potential to cause harm in “flash crashes.” On the other hand, it also plays a crucial role in a Lockean defense against low-latency trading being wasteful developed in this essay. Finally, this essay discusses the implications of these findings for related high-frequency trading techniques like futures arbitrage or latency arbitrage—as well as for an argument as to why quote stuffing is wrong. Overall, the qualifications offered in this essay act as a counterbalance to overblown claims about trading at high speeds being wrong.

This paper empirically evaluates whether adopting a common currency has changed the level of consumption smoothing of euro area member states. We construct a counterfactual dataset of macroeconomic variables through the synthetic control method. We then use the output variance decomposition of Asdrubali, Sorensen and Yosha (1996) on both the actual and the synthetic data to study if there has been a change in risk sharing and through which channels. We find that the euro adoption has reduced risk sharing and consumption smoothing. We further show that this reduction is mainly driven by the periphery countries of the euro area who have experienced a decrease in risk sharing through private credit.

Profound knowledge of the behavioural response to sponsorship messages is sparse. In an effort to provide a better understanding of the relationship between sponsorship investments and the consumer...

This paper studies fictitious play in networks of noncooperative two-person games. We show that continuous-time fictitious play converges to the set of Nash equilibria if the overall n-person game is zero-sum. Moreover, the rate of convergence is 1/T, regardless of the size of the network. In contrast, arbitrary n-person zero-sum games with bilinear payoff functions do not possess the continuous-time fictitious-play property. As extensions, we consider networks in which each bilateral game is either strategically zero-sum, a weighted potential game, or a two-by-two game. In those cases, convergence requires a condition on bilateral payoffs or, alternatively, that the network is acyclic. Our results hold also for the discrete-time variant of fictitious play, which implies, in particular, a generalization of Robinson's theorem to arbitrary zero-sum networks. Applications include security games, conflict networks, and decentralized wireless channel selection. Revised version, June 2019

In the wake of the financial crisis of 2007–2009, by means of a major Western state-led initiative in tax cooperation designed to eliminate tax evasion in the world, offshore financial centers were...