Relative Sectoral Prices and Population Ageing: A Common Trend
Max Groneck and Christoph Kaufmann
University of Cologne, Working Paper Series in Economics No. 69, 2014
JEL codes: J11, F41, E39
Keywords: Demographic change, Relative price of non-tradables, Real ex- change rate
Demographic change raises demand for non-tradable old-age related services relative to tradable commodities. This demand shift increases the relative price of non-tradables and thereby causes real exchange rates to appreciate. We claim that the change in demand affects prices via imperfect intersectoral factor mobility. Using a sample of 15 OECD countries between 1970 and 2009, we estimate a robust increase of relative prices due to population ageing. Further findings confirm the relevance of imperfect factor mobility: Countries with more rigid labour markets experience stronger price effects.
Relative Sectoral Prices and Population Ageing: A Common Trend
A Monetary Analysis of Balance Sheet Policies
Markus Hörmann and Andreas Schabert
University of Cologne, Working Paper Series in Economics No. 68, 2013
JEL codes: E32, E52, E58
Keywords: Unconventional monetary policy, collateralized lending, quantitative easing, liquidity premium, zero lower bound
We augment a standard macroeconomic model to analyze the effects and limitations of balance sheet policies. We show that the central bank can stimulate real activity by changing the size or the composition of its balance sheet, when interest rate policy is ineffective. Specifically, the central bank can stabilize the economy by increasing money supply against eligible assets even when the policy rate is at the zero lower bound. By changing the composition of its balance sheet, it can affect interest rates and, for example, neutralize increases in firms’ borrowing costs, which is not possible under a single instrument regime. We further analyze the limitations of balance sheet policies and show that they are particularly useful under liquidity demand shocks.
A Monetary Analysis of Balance Sheet Policies
Fiscal Policy, Sovereign Default, and Bailouts
Falko Juessen and Andreas Schabert
University of Cologne, Working Paper Series in Economics No. 67, 2013
JEL codes: E32, H21, H63
Keywords: Discretionary fiscal policy, overborrowing, sovereign default, bailout loans, conditionality
This paper examines fiscal policy without commitment and the effects of conditional bailout loans. The government relies on distortionary taxation and decides between full debt repayment and costly default. It tends to overborrow due to myopia, which induces default to be a relevant policy option and provides a rationale to constrain sovereign borrowing. We consider a lump-sum balanced fund that others loans at a favorable price and conditional upon minimum primary surpluses. While the government prefers defaulting in the most adverse states, we find that it is willing to accept conditional loans in close-to-default states. These bailouts can lead to an increase in the mean debt price and a lower default probability that are associated with enhanced household welfare. Yet, these outcomes can be reversed when bailouts are too generous, while public debt never decreases in the long-run when bailout loans are available.
Fiscal Policy, Sovereign Default, and Bailouts
Non-binding Defaults and Voluntary Contributions to a Public Good – Clean Evidence from a Natural Field Experiment
Felix Ebeling
University of Cologne, Working Paper Series in Economics No. 66, 2013
JEL codes: D03, D12, Q4
Keywords: Framing, Defaults, Public Goods, Randomized Field Experiments
We conducted a large scale field experiment to test whether framing a voluntary contribution decision with different non-binding defaults affect people’s behavior. On an electricity provider’s website, we manipulated non-binding green energy defaults in electricity contract offers. The default was either green or non-green. Buying green is costly and protects the environment. Hence, it is a voluntary contribution to a public good. Our core results are: First, defaults have a strong effect on contributions. 69% of new customer buy green, when the default was green, but only 7% when the default was nongreen. Second, the fraction of website visitors signing an electricity contract is similar across treatments. Third, regional election results affect green energy choice of customers.
Endogenous Grids in Higher Dimensions: Delaunay Interpolation and Hybrid Methods
Alexander Ludwig and Matthias Schön
University of Cologne, Working Paper Series in Economics No. 65, 2014
JEL codes: C63, E21
Keywords: dynamic models, numerical solution, endogenous gridpoints method, delaunay interpolation
This paper investigates extensions of the method of endogenous gridpoints (ENDGM) introduced by Carroll (2006) to higher dimensions with more than one continuous endogenous state variable. We compare three different categories of algorithms: (i) the conventional method with exogenous grids (EXOGM), (ii) the pure method of endogenous gridpoints (ENDGM) and (iii) a hybrid method (HYBGM). ENDGM comes along with Delaunay interpolation on irregular grids. Comparison of methods is done by evaluating speed and accuracy. We and that HYBGM and ENDGM both dominate EXOGM. In an infinite horizon model, ENDGM also always dominates HYBGM. In a finite horizon model, the choice between HYBGM and ENDGM depends on the number of gridpoints in each dimension. With less than 150 gridpoints in each dimension ENDGM is faster than HYBGM, and vice versa. For a standard choice of 25 to 50 gridpoints in each dimension, ENDGM is 1:4 to 1:7 times faster than HYBGM in the finite horizon version and 2:4 to 2:5 times faster in the infinite horizon version of the model.
Endogenous Grids in Higher Dimensions: Delaunay Interpolation and Hybrid Methods
The curse of uninformed voting: An experimental study
Jens Großer and Michael Seebauer
University of Cologne, Working Paper Series in Economics No. 64, 2013
We study majority voting over two alternatives in small groups. Individuals have identical preferences but are uncertain about which alternative can better achieve their common interest. Before voting, each individual can get informed, to wit, buy a valuable but imperfect signal about the better alternative. Voting is either voluntary or compulsory. In the compulsory mode, each individual can vote for either of the two alternatives, while in the voluntary mode they can also abstain. An uninformed random vote generates negative externalities, as it may override informative group decisions in pivotal events. In our experiment, participants in groups of three or seven get informed more often with compulsory than voluntary voting, and in this way partly counteract the curse of uninformed voting when they cannot avoid it by abstaining. Surprisingly, uninformed voting is a common phenomenon even in the voluntary mode! A consequence of substantial uninformed voting is poor group efficiency in all treatments, indicating the need to reconsider current practices of jury and committee voting.
The curse of uninformed voting: An experimental study
A Life-Cycle Model with Ambiguous Survival Beliefs
Max Groneck, Alexander Ludwig and Alexander Zimper
University of Cologne, Working Paper Series in Economics No. 63, 2013
JEL codes: D91, D83, E21
Keywords: Cumulative prospect theory, Choquet expected utility, Dynamic inconsistency, Life-cycle hypothesis, Saving puzzles
On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is embedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold longer on to their assets than their rational expectations counterparts who correctly assess survival probabilities. Our ambiguity- driven model therefore simultaneously accounts for three important empirical findings on household saving behavior.
A Life-Cycle Model with Ambiguous Survival Beliefs
Human Capital, Polarization, and Pareto-Improving Activating Walfare
Peter Funk
University of Cologne, Working Paper Series in Economics No. 62, 2015
JEL codes: D91, H21, I30
Human capital not only generates market income but is a direct source of utility as well. The interaction between the non-economic motive for effort and the standard economic motive can generate multiple stationary solutions for individual household optimization. Depending on the initial distribution of skills, this multiplicity divides each group of otherwise identical households into two perpetually separated groups: one rich and educated, one poor and uneducated. If the rich have an interest in the education of the poor, polarized equilibria are typically Pareto-inefficient. While unconditional transfers only reduce the incentive of the uneducated to accumulate skills, there exist activating tax-transfer systems that Pareto-dominate any non-redistributing system. Transfers are transitory and there is a negative marginal income tax on household income below a certain threshold.
Human Capital, Polarization, and Pareto-Improving Activating Walfare
Surprising Gifts - Theory and Laboratory Evidence
Kiryl Khalmetski, Axel Ockenfels and Peter Werner
University of Cologne, Working Paper Series in Economics No. 61, 2013
JEL codes: C91, D64
Keywords: guilt aversion, surprise seeking, dictator game, consensus effect
People do not only feel guilt from not living up to others’ expectations (Battigalli and Dufwenberg (2007)), but may also like to exceed them. We propose a model that generalizes the guilt aversion model to capture the possibility of positive surprises when making gifts. A model extension allows decision makers to care about others’ attribution of intentions behind surprises. We test the model in two dictator game experiments. Experiment 1 shows a strong causal effect of recipients’ expectations on dictators’ transfers. Moreover, in line with our model, the correlation between transfers and expectations can be both, positive and negative, obscuring the effect in the aggregate. Experiment 2 shows that dictators care about what recipients know about the intentions behind surprises.
Surprising Gifts - Theory and Laboratory Evidence
Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation
Dirk Krueger and Alexander Ludwig
University of Cologne, Working Paper Series in Economics No. 60, 2013
JEL codes: E62, H21, H24
Keywords: progressive taxation, capital taxation, optimal taxation
In this paper we characterize quantitatively the optimal mix of progressive income taxes and education subsidies in a model with endogenous human capital formation, borrowing constraints, income risk and incomplete financial markets. Progressive labor income taxes provide social insurance against idiosyncratic income risk and redistributes after tax income among ex-ante heterogeneous households. In addition to the standard distortions of labor supply progressive taxes also impede the incentives to acquire higher education, generating a non-trivial trade-off for the benevolent utilitarian government. The latter distortion can potentially be mitigated by an education subsidy. We find that the welfare-maximizing social policy is indeed characterized by a substantially progressive labor income tax code and a positive subsidy for college education. Both the degree of tax progressivity and the education subsidy are larger than in the current U.S. status quo.