munich discussion papers in economics

Exchange rate exposure of firms diminishes when imported intermediates and exports are denominated in currencies that move together. Appreciations of the domestic currency, raising foreign currency export prices, then also reduce marginal costs, allowing firms to counter the increase in foreign prices. Using firm-level data from seven European countries I estimate a structural model showing how exchange rate pass-through into sales depends on intermediate imports and the co-movement of export and import related exchange rates. I find that operational hedging requires firms to intentionally choose export and import regions with comoving currencies. Analyzing the locational choice of firms confirms that the co-movement of currencies indeed appears to be taken into consideration

We study how foreign competition affects the composition of investments inside firms. A parsimonious model predicts that firms have an incentive to shift their investments towards more short-term assets when exposed to tougher competition. Using data on expenditures of listed US companies into various asset classes with different lifespans, we document empirical evidence that is consistent with this prediction. Over a fifteen year period between 1995 and 2009, the rise in import competition is associated with a reduction of the firm-specific asset lifespan by about 4.5% on average. We additionally exploit the Chinese WTO accession as an exogenous shock in firm expectations about future exposure to competition.

Hans Albert hat in einigen Arbeiten den apriorischen Charakter des „neoklassischen Denkstils” kritisiert und treffend als „Modellplatonismus” bezeichnet. Die apriorische Denkhaltung findet sich aber nicht nur in der von Albert kritisierten Neoklassik, sondern vielleicht noch ausgeprägterer bei vielen modellfeindlichen Theoretikern, wie etwa den Österreichern, den Ordnungstheoretikern, den Vertretern der „constitutional economics” oder manchen neueren Vertretern der sozialen Marktwirtschaft. Es erscheint mir deshalb sinnvoll, dem Begriff „Modellplatonismus” den Begriff „Ordnungsplatonismus” an die Seite zu stellen. Die folgenden Bemerkungen sollen diese Kritik etwas erläutern.

The lack of coordination in the resolution of multinational banks has led to demands for the increased centralization of resolution regimes. However, as this paper argues, the anticipation of resolution procedures affects the incentives of host countries to impose capital standards on their resident banks. Critically, it is shown that overall welfare can even be decreased by introducing a centralized resolution regime without fully centralizing capital requirements. As, in the aftermath of the financial crisis, only countries that are not part of a supranational resolution regime unilaterally and significantly increased the capital requirements for their largest resident banks, this paper can help to understand and study the heterogeneity of the observed regulatory approaches.

This paper examines how IT influences global sourcing decisions. It develops a theoretical model to study how IT determines the decisions of firms located in the high-wage North whether to offshore production to a low-wage country in the South. Offshoring to South however is subject to costly communication reflected by partially incomplete contracting. More sophisticated IT allows more efficient communication between the Northern headquarter and its Southern intermediate input supplier and alleviates contractual frictions. The model provides several predictions about the impact of IT on the organization of the global supply chain. Complex industries for which codifiability and verifiability of information is a much harder task, are more likely to source intermediate inputs in countries with more efficient IT infrastructure. Considering the mode of firm organization, more efficient IT infrastructure is expected to reduce the share of intra-firm trade in more complex industries. These predictions are examined and validated using disaggregated industry-level trade data. Most importantly, these findings are robust to controlling for well-known sources of comparative advantage and determinants of firm organization such as factor endowments, financial development and contract enforcement.

By introducing controlled-foreign-company (CFC) rules, the parent country of a multinational firm reserves the right to tax the income of the firm's foreign affiliates if the tax rate in the affiliate's host country is below a specified threshold. We identify the conditions under which binding CFC rules are part of the optimal tax mix when governments can set the statutory tax rate, a thin capitalization rule and the CFC rule. We also analyze the effects of economic and financial integration on the optimal policy mix. Our results correspond to the actual development of anti-avoidance rules in OECD countries.

We investigate with German data how the use of temporary agency work has helped establishments to manage the economic and financial crisis in 2008/09. We examine the (regular) workforce development, use of short-time work, and business performance of establishments that made differential use of temporary agency work prior to the crisis. Overall, our results suggest that establishments with a greater use of temporary agency work coped better with the sharp decline in demand and made less frequent use of government-sponsored short-time work schemes.

Evidence from studies in international relations, the politics of reform, collective action and price competition suggests that economic agents in social dilemma situations cooperate more to avoid losses than in the pursuit of gains. To test whether the prospect of losses can induce cooperation, we let experimental subjects play the traveler’s dilemma in the gain and loss domain. Subjects cooperate substantially more over losses. Our experimental design allows us to show that this treatment effect is best explained by reference-dependent risk preferences and referencedependent strategic sophistication. We discuss policy implications and relate our findings to other experimental games played in the loss domain.

Several countries have recently introduced national capital standards exceeding the internationally coordinated Basel III rules, thus suggesting a `race to the top' in capital standards. We study regulatory competition when banks are heterogeneous and give loans to firms that produce output in an integrated market. In this setting capital requirements change the pool quality of banks in each country and inflict negative externalities on neighboring jurisdictions by shifting risks to foreign taxpayers and by reducing total credit supply and output. Non-cooperatively set capital standards are higher than coordinated ones when governments care equally about bank profits, taxpayers, and consumers.

One possible determinant of overpricing on asset markets is a lack of self-control abilities of traders. Self-control is the individual capacity to override or inhibit undesired behavioral tendencies such as impulses and to refrain from acting on them. We implement the first experiment that is able to address a potential causal relationship between self-control abilities and systematic overpricing on financial markets by introducing an exogenous variation of self-control abilities. Our experimental conditions seek to detect some of the channels through which individual self-control problems could transmit into irrational exuberance on the aggregate level. We observe a strong effect of inhibited self-control abilities on market overpricing. Our findings are furthermore robust to reducing self-control abilities only for a moderate share of traders in a market. Low self-control traders engage in more speculative behavior early on, but because others imitate their trading patterns, they do not end up earning less and are not driven out of the market.

This is an electronic reprint of the second chapter of the book "On Custom in the Economy" by Ekkehart Schlicht that has been published in 1998 by the Clarendon Press, Oxford. The chapter focusses on the behavioral entailments of concluding a contract.

This is an electronic reprint of a review of the book "Cultures Merging: A Historical and Economic Critique of Culture" by Eric L. Jones, Princeton: Princeton University Press that appeared in the Journal of Institutional and Theoretical Economics 2007, vol. 163, issue 3, pages 526-529, URL \url{http://www.jstor.org/stable/40752660}.

Theoretical and empirical work on export dynamics has generally assumed constant marginal production cost and therefore ignored domestic product market conditions. However, recent studies have documented a negative correlation between firms' do- mestic and export sales growth, suggesting that firms can be capacity constrained in the short run and face increasing marginal production cost. This paper develops and estimates a dynamic model of export behavior incorporating short-term capacity con- straints and endogenous capital investment. Consistent with the empirical evidence, the model features firms' sales substitutions across markets in the short term, and generates time-varying transition paths of firm responses through firms' capital adjust- ments over time. The model is fit to a panel of plant-level data for Colombian manufacturing indus- tries and used to simulate how firm responses transition following an exchange-rate devaluation. The results indicate that incorporating capital adjustment costs is quan- titatively important, as shown by the length of the transition period, and the difference between the short-run and long-run exchange rate elasticity of exports. Firms' expeca- tion on the permanence of the policy changes also matters.

Microcredit institutions typically apply rigid and fixed repayment schedules when disbursing loans in order to reduce transaction costs, simplify procedures, and inculcate fiscal discipline for better repayment behavior. Microcredit clients, however, often have neither smooth income nor singular moments in which to make lumpy investments throughout the year. This mismatch generates a cash flow disconnect and, given the presumed liquidity constraints of the typical microcredit client, a potential welfare loss. Using data from a randomized evaluation with dairy farmers in rural India, we test the impact of flexible microcredit repayment schedules relative to "normal" inflexible, fixed repayment schedules. Although we are only able to track those who borrow, which introduces potential selection effects, we find amongst those in flexible lending groups some evidence for higher ability to absorb shocks and higher income, which seems to be driven by limited improvements in investment and higher production from milk. On the cost-side, defaults do increase for the lender. Towards the end of the study, the microcredit market encountered crisis, with mass defaults, thus it is hard to generalize with respect to the default results. We conclude with caution, that we have shown suggestive evidence that a more flexible product design, one tailored to the needs of a dairy farmer, may be welfare enhancing for the dairy farmer. Further work is needed to both validate these results, and explore how to balance any trade-off with default.

This paper studies the relationship between social class, educational attainment, and social mobility. While educational expansion has been shown to increase educational attainment and social mobility in contemporary countries, the 19th century has received little attention. The German state of Bavaria experienced an enormous expansion of secondary education in the course of the 19th century, also due to the introduction of modern secondary education (Gewerbeschule). In this context, it is asked whether educational expansion (1) led to changes in the association between social class and educational attainment, and especially so after the introduction of the Gewerbeschule; (2) weakened the link between social class of origin (father’s occupation) and class of destination (son’s occupation) and thereby increased social mobility? Employing a unique dataset based on annual school reports of 21 Bavarian cities covering the 19th century, the analysis of occupational background information on students by the use of HISCO/HISCLASS reveals that introduction of the Gewerbeschule increased self-selection of the upper class into traditional and the middle class into modern education. Even though educational expansion did not increase participation of lower social classes, the prospect of social mobility for underprivileged classes was high especially in the Gymnasium.

Although understanding preferences for privacy is of great importance to economists, businesses and politicians little is known about the factors that shape the individual willingness to share personal data. This article provides three experimental studies with a total of 470 participants that help characterizing individual preferences for sharing personal data varying the characteristics of potential recipients. We find that participants’ willingness to share personal data with anonymous recipients decreases with the number of recipients. However, social distance to the recipients and the extent of personal data a single recipient receives do not decrease the willingness to share personal data. Further, we provide a methodological insight by showing that verification of personal data is essential when eliciting privacy preferences.

In my view, globalization is a process that has taken place episodically since approximately the beginning of the 16th century. Previously, there were a number of attemps at globalization, which however failed to attain the precondition of regular commercial and communicative relationships among the parts of the globe; nor did they lead to the kind of stable multilateral interdependence that later took place (Osterhamme/Petersson). In chronologically sequenced chapters, I briefly present the driving forces and the consequences of globalization. In the respective chapters, Chinas highly variegated role is explored: from the first attempt at globalization in the 14/15 centuries, which was of an expansive nature; in the first push at globalization from 1500, China was increasingly in retreat; during the surge of globalization in the 19th century, China was an almost insignificant push‐toy of the European powers; and in the current situation China may be characterized as a tardive beginner, yet then advancing to a leadership role. In concluding I undertake a framework for understanding the so‐called "Chinese Economic Miracle," for which the German term Wirtschaftswunder may readily be substituted. The highly differential significance of China for these various phases of globalization is an arresting example for my hypothesis that globalization may not unreasonably be regarded as a market‐driven and invariably politically‐fashioned process.

How do alternative job opportunities affect teacher quality? We provide the first causal evidence on this question by exploiting business cycle conditions at career start as a source of exogenous variation in the outside options of potential teachers. Unlike prior research, we directly assess teacher quality with value-added measures of impacts on student test scores, using administrative data on 33,000 teachers in Florida public schools. Consistent with a Roy model of occupational choice, teachers entering the profession during recessions are significantly more effective in raising student test scores. Results are supported by placebo tests and not driven by differential attrition.

This note proposes a growth model that is derived from the standard Solow growth model by replacing the neoclassical production function with Kaldor’s technical progress function while maintaining a marginalist theory of factor prices in the spirit suggested by von Weizsäcker (1966, 1966b). The hybrid model so obtained accounts for balanced growth in a way that appears less arbitrary than the Solow model, especially because it directly accounts for Harrod neutral technical change, without any need for further assumptions.

Do international trade and technological change influence how firms create incentives for human capital? I present a model that incorporates agency problems into a framework with firm heterogeneity and human capital. My model indicates that trade liberalizations and skill-biased technological change alter the way how the largest firms in an economy incentivize their managers. Increases in managerial reservation wages lead to a reduction in corporate governance investments and a rise in performance compensation since monitoring managers becomes less efficient. Using data on CEO compensation and entrenchment opportunities in public industrial firms in the U.S., I document strong empirical regularities in support of the model predictions. Firms allow for more managerial entrenchment and offer larger CEO compensation when their industries become more open to trade or when production becomes more I.T. intensive.