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.     

When general recommendations fail: how to search in single innovation project settings

External sources are main elements of a firm's search strategy as they positively influence a firm's innovation activities. While previous research has almost exclusively focused on search patterns on firm level, we focus on search mechanisms in single innovation project settings. Based on an inductive case study of eight cross‐industry innovation projects, we present a theoretical framework of three archetypes. In our research, we transfer the concept of breadth and depth from firm to project level and present decisive criteria. We provide evidence that search on project level is not only influenced by breadth and depth, but the character of search represented by its level of abstraction plays a major role. Furthermore, we show that at least in our context and contrary to firm level, not always high levels of breadth and depth are required. In addition, our research contributes to an enhanced operation of search in firms applying our archetypes.     

Non-rating revenue and conflicts of interest

Rating agencies produce ratings used by investors, but obtain most of their revenue from issuers, leading to a conflict of interest. We employ a unique data set on the use of non-rating services, and the associated payments, in India, to test if this conflict affects ratings quality. Agencies rate issuers that pay them for non-rating services higher (than agencies not hired for such services). Such issuers also have higher default rates. Both effects are increasing in the amount paid. These results suggest that issuers which hire agencies for non-rating services receive higher ratings despite having higher default risk.     

Reallocating Water Resources in the Middle East through Market Mechanisms

The growing demand for water by countries in the eastern Mediterranean raises the need to explore ways and means to ameliorate water scarcity. Economists have for some time proposed methods of more efficient exploitation of existing water supplies. Specifically, by employing m arket incentive mechanisms to encou rage voluntary water sharing among countries and regions is likely to lead to greater efficiency in water utilization. This paper explores the efficiency gains associated with re-allocating fresh water resources in the eastern Mediterranean through water rights markets. The results suggest that all parties involved might benefit to a greater or lesser degree from trading in water rights.     

Cohort-specific rural-urban migration in Africa

"Rural-urban migration has been modeled by both demographers and economists since the 1960s. Little regard has been given by either discipline for the other's models.... The purpose of this paper is to address this void in the African context. We examine three hypotheses: (1) that variables explaining the net urban in-migration rates vary with the age of the migrants; (2) that changes in the availability of services in urban areas [are] a factor in migration; and (3) that cohort structures (age pyramids) are also part of the explanation."