Life cycle saving: Insights from the perspective of bounded rationality

This paper provides a new life cycle model that takes into account key elements of bounded rationality. The paper shows that the model can account for patterns in the data that are hard to explain by the standard life cycle model. Among other patterns, the model predicts that, typically, the young either hold no equity or their equity portfolio share is rather low and then increases over working life. The analytical solution of the model demonstrates its high degree of tractability.     

Seize the Moment: Financial Crisis and the Making of the Finnish Competition State

In this paper we examine how Finnish Governments dismantled the Nordic welfare state paradigm from the 1990s onwards and adopted Schumpeterian ideas of a competitive workfare state. In the early 1990s, Finland went through a financial crisis that was the most severe in OECD countries since the Second World War and came to play a major role in the paradigm change. In the crisis, the Ministry of Finance gained a central role as a consensus-building power broker, and formulated a political strategy of national competitiveness, which was adopted as a rationale of power for consensual governments and has been maintained since. We suggest that financial crises can become formative moments in which new ideas are adopted and policies are reformulated. They can also become moments which provide opportunity to overcome citizen opinion. In Finland, the wide popular and party support for the Nordic welfare model was not reflected in the new paradigm.     

Heterogeneous Mortgage Markets: Implications for Business Cycles and Welfare in the EMU

This paper evaluates business cycle effects of asymmetric cross‐country mortgage market developments in a monetary union. By employing a two‐country New Keynesian DSGE model with collateral constraints tied to housing values, we show that a change in institutional characteristics of mortgage markets, such as the loan‐to‐value (LTV) ratio, is an important driver of asymmetric developments in housing markets and economic activity. Our analysis suggests that the home country where credit standards are lax booms, while the rest of European Monetary Union faces a negative output gap. Overall welfare is lower if LTV ratios are higher.     

Correcting for the Missing Rich: An Application to Wealth Survey Data

It is a well‐known criticism that if the distribution of wealth is highly concentrated, survey data are hardly reliable when it comes to analyzing the richest parts of society. This paper addresses this criticism by providing a general rationale of the underlying methodological problem as well as by proposing a specific methodological approach tailored to correcting the arising bias. We illustrate the latter approach by using Austrian data from the Household Finance and Consumption Survey. Specifically, we identify suitable parameter combinations by using a series of maximum‐likelihood estimates and appropriate goodness‐of‐fit tests to avoid arbitrariness with respect to the fitting of the Pareto distribution. Our results suggest that the alleged non‐observation bias is considerable, accounting for about one quarter of total net wealth in the case of Austria. The method developed in this paper can easily be applied to other countries where survey data on wealth are available.     

Austrian exporters: unique or alike? New insights and missing puzzle pieces

In this paper we provide detailed evidence on the performance of exporters compared to non-exporters in Austrian manufacturing industries based on firm-level data. The centrepiece of the study is the issue of the export premium, i.e. the size and productivity advantages of exporting firms compared to their purely domestic peers. We present evidence for the existence of sales, labour productivity and wage premia. These results are largely in line with the results found for other European countries. Furthermore we document the existence of large differences in these premia across industries and provide explanations for this finding. Our results are robust with regards to including additional firm control variables such as employment and R&D-related variables though the magnitudes of the export premia become much smaller. We also propose a new interpretation of the export premium estimation with firm fixed effects which we interpret as a result on export switchers. Finally, we employ a probit model to document the importance of sunk export costs for the decision to export.     

A Perpetual Race to Stay Ahead

This paper presents a model of dynamic competition between two firms that repeatedly engage in an innovative activity. The state of competition—measured by the difference between the number of innovations introduced by the firms—evolves stochastically according to their effort level. The structure of Markov perfect equilibria is identified. It is generally not true that competition is fiercest when firms are closest. Rather, firms invest under two distinct circumstances: while sufficiently ahead, to outstrip their rival and secure a durable leadership; while behind, to regain leadership and prevent the situation from worsening to the point where their rival outstrips them.     

Information Sharing in Contests

We study the incentives to share private information ahead of contests, such as markets with promotional competition, procurement contests, or research and development (R&D). We consider the cases where firms have (i) independent values and (ii) common values of winning the contest. In both cases, when decisions to share information are made independently, sharing information is strictly dominated. With independent values, an industry‐wide agreement to share information can arise in equilibrium. Expected effort is lower with than without information sharing. With common values, an industry‐wide agreement to share information never arises in equilibrium. Expected effort is higher with than without information sharing.     

Allocative efficiency of rural water supply – a globally flexible SGM cost frontier

This contribution investigates the efficiency of water suppliers in rural areas of East and West Germany. A non-radial measure of input specific allocative inefficiency is used to reduce the distributional dependency with respect to the inefficiency parameters. It is based on the demand system of a flexible cost function for the variable inputs labour, energy and chemicals modelled by applying a modified symmetric generalized McFadden functional form. Concavity restrictions, as required by economic theory, are imposed. The analysis reveals that efforts towards increasing suppliers’ allocative efficiency should focus on the relatively inefficient usage of the input chemicals. The input specific allocative model specification was found to be superior to the overall allocative specification.

Expectation formation and regime switches

Economic agents often have to make decisions in environments affected by regime switches but expectation formation has hardly been explored in this context. We report about a laboratory experiment whose participants judgmentally forecast three time series subject to regime switches. The participants make forecasts without context knowledge and without support from statistical software. Their forecasts are only based on the previous realizations of the time series. Our interest is the explanation of the average forecasts with a simple model, the bounds & likelihood heuristic. In previous studies it was shown that this model can explain average forecasting behavior very well given stable and stationary time series. We find that the forecasts after a structural break are characterized by a higher variance and less accuracy over several periods. Considering this transition phase in the model, the heuristic performs even slightly better than the Rational Expectations Hypothesis.