Working Papers

[1] Competitive Markets and Boundedly Rational Expectations [pdf]

We analyze the trade of differentiated products when firms set both base and potentially hidden add-on prices. Boundedly rational consumers mistakenly believe that their action (product choice or substitution effort) has no effect on the probability of paying add-on prices, but all consumers correctly anticipate their equilibrium expenses. The model is thus applicable to markets for high-frequency products or markets where firms wish to avoid “surprise charges” due to reputational concerns. Shrouding equilibria with inefficient trade exist in this setting, but only if the market is sufficiently competitive. The presence of boundedly rational consumers can generate innovation incentives that improve welfare relative to the rational consumer benchmark. For credit/debit card markets the model explains why informational interventions have only minor effects on behavior, while add-on price regulation increases consumer surplus.

[2] Consumer Loss Aversion and Scale-Dependent Psychological Switching Cost, joint with Heiko Karle and Rune Vølund [pdf]

We consider a model of product differentiation where consumers are uncertain about the qualities and prices of firms’ products. They can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, buying products of varying quality and price creates disutility from gain-loss sensations. Even at modest degrees of loss aversion they may refrain from inspecting all products and choose an individual default that is strictly dominated in terms of surplus. Firms’ strategic behavior exacerbates the scope for this effect. The model generates “scale-dependent psychological switching costs” that increase in the value of the transaction. They imply that making switching easier or costless for consumers would not motivate more switching. We find empirical evidence for the predicted association between switching behavior and loss aversion in new survey data.

[3] Social Preferences of Young Professionals and the Financial Industry, joint with Andrej Gill, Matthias Heinz and Matthias Sutter [pdf] [Online Appendix]

Trust is an important element of many financial transactions. Yet, the financial industry has been struggling with public mistrust. One explanation for this could be the selection of individuals who wish to work in and get job offers from the financial industry. In this paper, we examine the selection into the financial industry based on social preferences. We identify the social preferences of business and economics students, and, for more than six years, follow up on their early career choices as well as on their job placement after graduation. Students eager to work in the financial industry behave in a substantially less trustworthy manner and show less willingness to cooperate than those with other career plans. The job market does not alleviate this selection. Those subjects who find their first permanent job in finance behave in significantly less trustworthy manner than those working in other industries.

%d Bloggern gefällt das: