Essays in Applied Microeconomics and Management [Elektronische Ressource] / Daniel Müller. Rechts- und Staatswissenschaftliche Fakultät

Essays in Applied Microeconomics and Management [Elektronische Ressource] / Daniel Müller. Rechts- und Staatswissenschaftliche Fakultät

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Essays in Applied Microeconomicsand ManagementInaugural-Dissertationzur Erlangung des Grades eines Doktorsder Wirtschafts- und Gesellschaftswissenschaftendurch dieRechts- und Staatswissenschaftliche Fakultat¨der Rheinischen Friedrich-Wilhelms-Universita¨tBonnvorgelegt von¨Daniel Mulleraus BonnBonn 2010II Essays in Applied Microeconomics and ManagementDekan: Prof. Dr. Christian HillgruberErstreferent: Prof. Dr. Urs SchweizerZweitreferent: Prof. Dr. Matthias Kr¨akelTag der mu¨ndlichen Pru¨fung: 12.02.2010AcknowledgementsIn preparing this thesis I received support from many people to whom I am grateful.First and foremost, I want to thank Urs Schweizer for being a great supervisor. More askepticthananproponentofbehavioraleconomics,itwasUrsSchweizerwhotaughtmesome of the most important lessons about how to write a behavioral paper. Secondly,I want to thank Matthias Kr¨akel for acting as a referee on my thesis committee andfor countless helpful comments on all chapters gathered in this thesis.I am particularly grateful to Fabian Herweg. While jointly preparing for the microfinal during our first year in the Bonn Graduate School of Economics, we realized thatwe had a knack for understanding each other—which should become one of the mostvaluable assets in the ensuing cooperation. Our joint research over the past four yearshas been a fruitful, usually fun, and inspiring activity.

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Publié le 01 janvier 2010
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Essays in Applied Microeconomics
and Management
Inaugural-Dissertation
zur Erlangung des Grades eines Doktors
der Wirtschafts- und Gesellschaftswissenschaften
durch die
Rechts- und Staatswissenschaftliche Fakultat¨
der Rheinischen Friedrich-Wilhelms-Universita¨t
Bonn
vorgelegt von
¨Daniel Muller
aus Bonn
Bonn 2010II Essays in Applied Microeconomics and Management
Dekan: Prof. Dr. Christian Hillgruber
Erstreferent: Prof. Dr. Urs Schweizer
Zweitreferent: Prof. Dr. Matthias Kr¨akel
Tag der mu¨ndlichen Pru¨fung: 12.02.2010Acknowledgements
In preparing this thesis I received support from many people to whom I am grateful.
First and foremost, I want to thank Urs Schweizer for being a great supervisor. More a
skepticthananproponentofbehavioraleconomics,itwasUrsSchweizerwhotaughtme
some of the most important lessons about how to write a behavioral paper. Secondly,
I want to thank Matthias Kr¨akel for acting as a referee on my thesis committee and
for countless helpful comments on all chapters gathered in this thesis.
I am particularly grateful to Fabian Herweg. While jointly preparing for the micro
final during our first year in the Bonn Graduate School of Economics, we realized that
we had a knack for understanding each other—which should become one of the most
valuable assets in the ensuing cooperation. Our joint research over the past four years
has been a fruitful, usually fun, and inspiring activity. Chapters I, II, and IV of this
thesis are testament to this cooperation and friendship.
I am indebted to Philipp Weinschenk, who also contributed to Chapter II. Our
views on how to put things verbally often diverged, which gave rise to many heated
debates about how the paper should be written or structured. Nevertheless, I believe
we managed to strike a balance more often than not and that both of us are happy
with the form the paper finally took.
I am grateful to J¨org Budde, whose topics course on the theory of incentives was—in
a sense—the place of birth of Chapter II of this thesis.
IowethankstoPaulHeidhues, whoseinterestandexpertiseinthefieldofbehavioral
economics had major impact on Chapters I and II of this thesis.
The Bonn Graduate School of Economics (BGSE) provided not only financial sup-
port but also, and more importantly, a stimulating environment with many young re-
searchers. Iwouldliketothankallpeoplewhohavecontributedtothisorganization,in
particularUrsSchweizer—henotonlydoesagreatjobastheBGSE’sdirector/speaker,
but also encouraged me to apply for the BGSE in the first place.
I want to thank both former and present members of the Chair of Personnel Eco-
nomics at the University of Bonn, in particular Matthias Krakel, Oliver Gurtler, Anja¨ ¨
Schottner, Petra Nieken, Judith Przemeck, Sebastien Kronisch, Simon Dato, and Wei¨IV Essays in Applied Microeconomics and Management
Ding. They have been great and very supportive colleagues, working with whom has
always been fun.
Moreover, I owe thanks to Daniel G¨oller, Botond K˝oszegi, Daniel Kra¨mer, Sebastian
“Reinhard”Kranz,MatthiasLang,SusanneOhlendorf,ThomasRieck,AndreasRoider,
Patrick Schmitz, Nora Szech, Philipp Wichardt, and many other people.
I am very much indebted to my family and friends. In particular my parents were
always supportive in every respect, even though it was probably them who bore the
brunt of the negative externalities associated with a graduate student’s life.
Finally, I want to thank Andrea Bedersdorfer. First, I owe her thanks for once in a
while reminding me to think of subscriptsi and j not as mere indices but as what they
stand for—individuals, real people. Second, I am grateful to her, as well as our cats
Luna and Athos, for so much more.Contents
I. Performance of Procrastinators: On the Value of Deadlines 17
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2. The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3. The Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4. Comparison of the Naive and the Sophisticated Agent . . . . . . . . . . 26
5. Deadlines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
II. Binary Payment Schemes: Moral Hazard and Loss Aversion 39
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2. The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3. Preliminary Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4. The Optimal Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.1. Pure Risk Aversion . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.2. Pure Loss Aversion . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.3. The General Case: Loss Aversion and Risk Aversion . . . . . . 55
5. Implementation Problems and Stochastic Contracts . . . . . . . . . . . 56
6. Alternative Notions of Loss Aversion and Related Literature . . . . . . 59
7. Closing Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
III.On Horns and Halos: Confirmation Bias and Job Rotation 65
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
2. Confirmation Bias . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
3. Supervision and Job Allocation . . . . . . . . . . . . . . . . . . . . . . 73
4. Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
5. An Alternative Interpretation . . . . . . . . . . . . . . . . . . . . . . . 84
6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87VI Essays in Applied Microeconomics and Management
IV.Price Discrimination in Input Markets: Downstream Entry and Welfare 91
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
2. A Model of Separate Markets . . . . . . . . . . . . . . . . . . . . . . . 94
3. The Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
3.1. Optimal Wholesale Pricing . . . . . . . . . . . . . . . . . . . . . 96
3.2. Welfare Implications of Banning Price Discrimination . . . . . 98
4. More Efficient Entrant . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
5. Downstream Competition . . . . . . . . . . . . . . . . . . . . . . . . . 103
6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
A. Appendices 111
1. Appendix to Chapter I . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
1.1. Proofs of Propositions and Lemmas . . . . . . . . . . . . . . . . 111
1.2. Partial Naivet´e . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
2. Appendix to Chapter II . . . . . . . . . . . . . . . . . . . . . . . . . . 126
2.1. Proofs of Propositions and Lemmas . . . . . . . . . . . . . . . . 126
2.2. Validity of the First-Order Approach . . . . . . . . . . . . . . . 136
2.3. The General Case: Loss Aversion and Risk Aversion . . . . . . 138
3. Appendix to Chapter III . . . . . . . . . . . . . . . . . . . . . . . . . . 143
4. Appendix to Chapter IV . . . . . . . . . . . . . . . . . . . . . . . . . . 146
4.1. Proofs of Propositions and Lemmas . . . . . . . . . . . . . . . . 146
4.2. Downstream Competition . . . . . . . . . . . . . . . . . . . . . 149List of Figures
III.1.Perception of signals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
III.2.Timing of events. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
IV.1.Welfare comparison with separate markets and a less efficient entrant. . 98
IV.2.Welfare comparison with separate markets and linear demand. . . . . . 102
IV.3.Downstream market structure with competition. . . . . . . . . . . . . . 106
IV.4.Welfare comparison with downstream competition. . . . . . . . . . . . 107VIII Essays in Applied Microeconomics and ManagementIntroduction
Having spent most of my time and energy over the past four years on writing this
doctoral thesis, I find myself somewhat reluctant to spend the pages of this introduc-
tion exclusively on emphasizing the importance and relevance of the insights I gained
throughout this process for people both inside and outside the economic profession. A
minor reason for this reluctance, I guess, is that I hope that my co-authors and I have
convincingly done that already in the introductory sections of the papers collected in
this thesis. A second more substantial reason, which is not that much rooted in the
desire to avoid doing the same work twice, is that—in my opinion—much would be
lost when focusing on the final output alone. Therefore, at this point, I want to pause,
take stock, and take a look back at how this thesis came to be.
Three of four chapters gathered in this thesis are settled in the realms of“behavioral
economics”, which I first became aware of during a 10-month stay at the University
of Berkeley. Over that time, it was the enthusiasm of a certain Professor Matthew
Rabin, when talking about how insights from psychological research may enrich eco-
nomic modeling, that drew my interest toward this relatively young but nevertheless
fascinating area of economic research. So what, in a nutshell, is behavioral economics,
also known as“economics and psychology”?
The core model used in orthodox economic theory posits that individuals make
choicesinordertomaximizetheexpectedvalueofautilityfunction,usingandcorrectly
processingalltheavailableinformation. Moreover,individuals’preferencesareassumed
to depend only on own payoffs, to be unaffected by the framing of the decision, and to
be time consistent. A growing body of evidence documents, however, that aspects of
behavior deviate from the forecasts of standard theory both in laboratory experiments
aswellasactualmarketenvironments, therebycastingseriousdoubtontheunderlying
assumptions. For a very recent survey, see DellaVigna (2009). The research in behav-
ioraleconomicssuggeststhatindividualsdeviatefromthecoremodelinseveralrespects
and offers various modifications to the orthodox economic conception of human choice
inordertomakethismodelmorerealistic. FollowingtheclassificationinRabin(1999),
the first important class of deviations is nonstandard preferences, the most prominent2 Essays in Applied Microeconomics and Management
examples of which are reference dependence and social preferences. Roughly spoken,
nonstandard preferences advocate a modification of the utility function that allows for
an individual’s utility to depend not only on the absolute level of the own final payoff
but also on changes in outcomes relativeto a referencelevel as well as the payoffs other
individuals receive. The second class of deviations from the standard model, which
considers biases in judgment under uncertainty, allows for individuals making errors
when attempting to maximize their utility function, thereby presenting a more drastic
challenge to the familiar economic setup. These inferential errors are acknowledged to
come in various forms, with the tendency to infer too much from too little evidence
as well as the propensity to misread contradicting evidence as confirming a previously
held hypothesis being among the most widely known manifestations of such biases in
judgment. An even more radical critique of the economics model is posed by the third
class of deviations, which posits that people have tremendous difficulties in evaluating
their own preferences and, in particular, in forecasting their own future preferences.
These difficulties, which inter alia can be rooted in overprojection of current tastes on
future tastes, different evaluation modes or only partial awareness of a taste for im-
mediate gratification, can give rise to phenomena such as habit formation, preference
reversals or self-control problems. While careful modeling and incorporation of these
deviations into formal economic analysis definitely is a challenging and perhaps even
daunting task, the reward seems promising: Over the past decade there have been
numerous contributions to a wide variety of fields of economic interest, ranging from
industrial organization over labor economics to finance, that adopted the behavioral
approach sketched above and thereby helped to reconcile theoretical predictions with
actuallyobservedbehavior in situationswhere the standardeconomicsmodelwas hard
pressed in explaining the evidence in question. Thus, with one of the proclaimed goals
ofbehavioraleconomicsbeingtheimprovementofbehavioralrealismofeconomicmod-
els, it seems only appropriate that most of the ideas that led to the chapters of this
dissertation popped up while I stumbled through life with my eyes open—perhaps a
little bit wider open than before encountering Professor Matthew Rabin.
The first chapter of this dissertation, which is based on a joint paper with Fabian
Herweg, inquires into the effects of the imposition of binding deadlines on the perfor-
mance of an individual with time-inconsistent preferences. With time-inconsistency
giving rise to self-control problems, this chapter draws on the third class of deviations
from the standard model according to the above classification. The idea of thinking
abouttheincentiveeffectofdeadlinescametomewhiletalkingtooneofmycolleagues.
It was shortly after the first semester of grim coursework in the Bonn Graduate School
of Economics, that I found myself dodging work and instead talking to Daniel Enge-