Working Papers

[1] Equilibrium Contracts and Boundedly Rational Expectations, joint with Heidi Christina Thysen [pdf]

We study a principal-agent framework in which the agent forms beliefs based on a misspecified subjective model of the principal’s project. She fits this model to the objective probability distribution to predict output under alternative actions. Misspecifications in the subjective model may lead to biased beliefs. However, under mild restrictions, the agent has correct beliefs on the equilibrium path so that the optimal contract is non-exploitative. This allows for a behavioral version of the informativeness principle: The optimal contract conditions on an additional variable only if it is informative about the action according to the agent’s subjective model. We further characterize when misspecifications affect the optimal contract. One implication of this characterization is that the scope for belief biases depends on the agent’s job, e.g., her position in the hierarchy.

[2] Consumer Search and the Uncertainty Effect, joint with Heiko Karle and Rune Vølund [pdf]

We consider a model of Bertrand competition where consumers are uncertain about the qualities and prices of firms‘ products. Consumers can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, a purchase plan, which involves buying products of varying quality and price with positive probability, creates scale-dependent disutility from gain-loss sensations. Even if their degree of loss aversion is modest, they may refrain from inspecting all products and choose an individual default that is first-order stochastically dominated. Firms‘ strategic behavior can exacerbate the scope for this uncertainty effect, and sellers of inferior products may earn positive profits despite Bertrand competition. We find suggestive evidence for the predicted association between consumer behavior and loss aversion in new survey data.

[3] Money or Meaning? Labor Supply Responses to Work Meaning of Employed and Unemployed Individuals, joint with Iris Kesternich, Bettina Siflinger, and Stefan Schwarz [pdf]

We analyze to what extent work meaning – the significance of a job for others or for society –  increases the willingness of employed and unemployed individuals to accept a job. To this end, we elicit reservation wages for a one-hour job and randomly vary its description as having either high or low meaning. Our subjects participate in the Panel Study of Labour Market and Social Security (PASS), which comprises a random draw from the German population and a random draw of unemployed individuals from the unemployment register. We can thus link subjects’ experimental behavior to rich survey data and control for selection into the experiment. For subjects who consider work meaning as very important (around one third of PASS respondents), high-meaning reduces the reservation wage by around 18 percent. By contrast, among unemployed individuals, work meaning increases the reservation wage by around 14 percent. We discuss how work meaning can have both positive and negative effects on labor supply when it interacts with fairness concerns or work norms.

[4] Reservation Wages and Labor Supply, joint with Iris Kesternich, Bettina Siflinger, and Franziska Valder [pdf]

Survey measures of the reservation wage reflect both the consumption-leisure trade-off and job search concerns (the arrival rate of job offers and the wage distribution). We examine what a survey measure of the reservation wage reveals about labor supply when search concerns are absent. To this end, we combine the reservation wage measure from a large labor market survey with the reservation wage for a one-hour job that we elicit in an online experiment. The two measures show a strong positive association. For unemployed individuals, the experimental reservation wage increases on average by around one Euro for every Euro increase in the survey measure. For employed individuals, the association between the two measures is weaker, but still positive and statistically significant. We show that these results are robust to selection into the experiment, and that demographic variables have a similar influence on both reservation wage measures.

[5] Trustworthiness in the Financial Industry, joint with Andrej Gill, Matthias Heinz, and Matthias Sutter [pdf] [Online Appendix]

The financial industry has been struggling with widespread misconduct and public mistrust. Here we argue that the lack of trust into the financial industry may stem from the selection of subjects with little, if any, trustworthiness into the financial industry. We identify the social preferences of business and economics students, and follow up on their first job placements. We find that during college, students who want to start their career in the financial industry are substantially less trustworthy. Most importantly, actual job placements several years later confirm this association. The job market in the financial industry does not screen out less trustworthy subjects. If anything the opposite seems to be the case: Even among students who are highly motivated to work in finance after graduation, those who actually start their career in finance are significantly less trustworthy than those who work elsewhere.