Working Papers 2013

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17-13 Golden Parachutes and the Wealth of Shareholders
 
Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang

Published in: Journal of Corporate Finance, Volume 25, April 2014, Pages 140–154

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Working Paper #17-13
Golden Parachutes and the Wealth of Shareholders
 
Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang
Golden parachutes have attracted substantial attention from investors and public officials for more than two decades. We find that golden parachutes are associated with higher expected acquisition premiums, and that this association is at least partly due to the effect of golden parachutes on executive incentives. However, we find that firms that adopt a golden parachute experience a reduction in their industry-adjusted Tobin’s Q, as well as negative abnormal stock returns both during and subsequent to the inter-volume period of adoption. This finding raises the possibility that, despite their facilitating some value-increasing acquisitions, golden parachutes have, on average, an overall negative effect on shareholder wealth; this effect could be due to GPs weakening the force of the market for control and thereby increasing managerial slack and/or providing executives with incentives to go along also with some value-decreasing acquisitions that do not serve shareholders’ long-term interests. Our findings have significant implications for ongoing debates on golden parachutes and suggest the need for additional work identifying the type of GPs that drive the correlation between GPs and reduced shareholder value.

Published in: Journal of Corporate Finance, Volume 25, April 2014, Pages 140–154
Jel Nos.: D23, G32, G38, J33, J44, K22, M14.
Keywords: Golden parachute, executive compensation, corporate governance, acquisitions, takeovers, acquisition likelihood, acquisition premiums, agency costs, managerial slack, Tobin’s Q, Dodd-Frank.

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16-13 Are Post-Crisis Capital Inflows to Emerging Market Economies this Time Different?

Leonardo Leiderman

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Working Paper #16-13
Are Post-Crisis Capital Inflows to Emerging Market Economies this Time Different?
 
Leonardo Leiderman
This paper deals with the stylized facts of post-crisis capital inflows to EEM. A salient feature of the recent global crisis is that it has originated in advanced countries such as those in the Eurozone and the US. Another important characteristic has been the very low nominal and real interest rates prevailing in world financial markets. Given the relatively resilience of EEM throughout the crisis, and the risk-and-return apetite by global investors, there has been a quick recovery of capital inflows to EEM from their fall in 2008-09. Moreover, the process of capital account liberalization has continued, in spite of the adoption of capital controls by some countries. After dealing with the facts, the paper draws policy implications for the future of capital account reforms and liberalization.

15-13 Welfare Stigma Re-examined
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka

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Working Paper #15-13
Welfare Stigma Re-examined
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka
We dissect welfare stigma into two types: traditional and statistical, and show that the latter can be employed as a desirable form of a welfare ordeal, as its costs are positively correlated with ability.

Jel Nos.: H2, D6, J1
Keywords: Stigma, Welfare Ordeal, Social Norms.

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14-13 A Case for Maximum Wage
 
Tomer Blumkin, Efraim Sadka and Yotam Shem-Tov

Published in: Economics Letters, Volume 120, Issue 3, September 2013, Pages 374–378

 

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Working Paper #14-13
A Case for Maximum Wage
 
Tomer Blumkin, Efraim Sadka and Yotam Shem-Tov
In this paper we demonstrate that supplementing the optimal non-linear income tax system with a binding maximum wage rule attains a Pareto improvement, by serving to mitigate the mimicking incentives of the high-skill individuals without entailing distortions.

Published in: Economics Letters, Volume 120, Issue 3, September 2013, Pages 374–378
Jel Nos.: D6, H2, H5
Keywords: redistribution, maximum wage

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13-13 Migration to the Cloud Ecosystem: Ushering in a New Generation of Platform Competition
 
Chaim Fershtman and Neil Gandal

Published in: Communications & Strategies, Special Issue on Cloud Ecosystem and Platform Competition (2012), Vol. 85(1), pp. 109-124.

 

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Working Paper #13-13
Migration to the Cloud Ecosystem: Ushering in a New Generation of Platform Competition
 
Chaim Fershtman and Neil Gandal
Cloud computing is defined to be Internet based computing technology, where the term `cloud` simply means Internet - and cloud computing refers to services that are accessed directly over the Internet. There are essentially three categories of cloud computing. (i) Iaas (Infrastructure as a Service) - number crunching, data storage and management services (computer servers), (ii), SaaS (Software as a Service) - `web based` applications, and (iii) PaaS (Platform as a Service) - essentially an operating system in the cloud. Much of the attention and literature has focused on the revolution in Iaas services provided via the cloud. Despite the major changes in technology in IaaS services, estimates indicate that more than 90 of the cloud computing market (in terms of revenues) will involve (virtual) operating systems and applications software services (i.e., PaaS and SaaS services.) In this paper, we examine how several key economic factors will likely affect competition in SaaS/PaaS services in the cloud.

Published in: Communications & Strategies, Special Issue on Cloud Ecosystem and Platform Competition (2012), Vol. 85(1), pp. 109-124.
Keywords: cloud computing, platform competition, network effects, two-sided markets.

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12-13 Rise to the Challenge or Not Give a Damn: Differential Performance in High vs. Low Stakes Tests
 
Yigal Attali, Zvika Neeman and Analia Schlosser
 

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Working Paper #12-13
Rise to the Challenge or Not Give a Damn: Differential Performance in High vs. Low Stakes Tests
 
Yigal Attali, Zvika Neeman and Analia Schlosser
We study how different demographic groups respond to incentives by comparing their performance in “high” and “low” stakes situations. The high stakes situation is the GRE examination and the low stakes situation is a voluntary experimental section that examinees solved after the GRE. Males exhibit a larger difference in performance between the high and low stakes examinations than females, and Whites exhibit a larger difference in performance relative to Asians, Blacks, and Hispanics. The larger differential performance between high and low stakes tests among men and whites is partially explained by lower effort invested in the low stake test.

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11-13 Worker Matching and Firm Value
 
Espen R. Moen and Eran Yashiv
 

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Working Paper #11-13
Worker Matching and Firm Value
 
Espen R. Moen and Eran Yashiv
This paper studies the hiring and firing decisions of firms and their effects on firm value. This is done in an environment where the productivity of workers depends on how well they match with their co- workers and the firm acts as a coordinating device. Match quality derives from a production technology whereby workers are randomly located on the Salop circle, and depends negatively on the distance between the workers. It is shown that a workers contribution in a given firm changes over time in a nontrivial way as co-workers arereplaced with new workers. The paper derives optimal hiring and replacement policies, including an optimal stopping rule, and characterizes the resulting equilibrium in terms of employment, firm output and the distribution of firm values. The paper stresses the role of horizontal differences in worker productivity, as opposed to vertical, assortative matching issues. Simulations of the model reveal a rich pattern of worker turnover dynamics and their connections to the resulting firm value and age distributions.

      
Jel Nos.: E23, J62, J63
Keywords: firm value, complementarity, worker value, Salop circle, hiring, firing, match quality, optimal stopping.

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10-13 Does Information about Arbitrators Win/Loss Ratios Improve Their Accuracy?
 
Alon Klement and Zvika Neeman

Published in: The Journal of Legal Studies, Vol. 42, No. 2, June 2013

 

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Working Paper #10-13
Does Information about Arbitrators Win/Loss Ratios Improve Their Accuracy?
 
Alon Klement and Zvika Neeman
This paper examines how providing litigants with information about arbitrators’ Win/Loss ratios affects arbitrators’ incentives in deciding the cases before them in an impartial and unbiased manner. We show that if litigants are informed about arbitrators past decisions then arbitrators might want to make an incorrect decision when a correct decision would raise the suspicion that they are biased. Therefore, providing information about arbitrators’ past decisions might create adverse incentive effects and reduce the accuracy of arbitration. We compare the accuracy of arbitrators’ decisions under different arbitrator selection procedures and discuss the implications for the design of arbitration rules by arbitration and dispute resolution providers and by court administered arbitration programs.

Published in: The Journal of Legal Studies, Vol. 42, No. 2, June 2013

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9-13 Gender Ratios at Top PhD Programs in Economics
 
Galina Hale and Tali Regev

Published in: Economics of Education Review, Volume 41, August 2014, Pages 55–70.

 

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Working Paper #9-13
Gender Ratios at Top PhD Programs in Economics
 
Galina Hale and Tali Regev
Analyzing university faculty and graduate students data for ten of the top U.S. economics departments between 1987 and 2007, we find persistent differences in the gender compositions of both faculty and graduate students across departments. There is a positive correlation between the share of female faculty and the share of women in the PhD class graduating 6 years later. Using instrumental variable analysis, we find robust evidence that this relation is causal. These results contribute to our understanding of the persistent under-representation of women in economics, as well as for the persistent segregation of women in the labor force.

Published in: Economics of Education Review, Volume 41, August 2014, Pages 55–70.
Jel Nos.: J16, J71, I23, M51
Keywords: : gender, segregation, economists, gender bias, affirmative action, minority.

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8-13 Who Cares about Unemployment Insurance?
 
Avihai Lifschitz, Ofer Setty and Yaniv Yedid-Levi
 

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Working Paper #8-13
Who Cares about Unemployment Insurance?
 
Avihai Lifschitz, Ofer Setty and Yaniv Yedid-Levi
How is the optimal level of unemployment insurance affected when accounting for skill differences? We analyze this question using a general equilibrium model that has a number of key elements: (i) a search and matching friction in the labor market; (ii) workers who have the ability to save and cannot perfectly insure idiosyncratic risks; and (iii) ex-ante heterogeneity in unemployment risk and labor income. Considering a proportional tax and replacement rate UI system, our model suggests an optimal replacement rate of 32, while a model without ex-ante heterogeneity calls for a much lower replacement rate (12). We show that both dimensions of heterogeneity are responsible for these results. Specifically, we argue that income differences induce an incentive to redistribute consumption across skill groups. However, given the UI system, such redistribution is feasible only when there are differences in unemployment risk.

      
Jel Nos.: C78; J63; J64; J65.
Keywords: Redistribution, Search and Matching, Unemployment risk, Unemployment Insurance.

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7-13
Reference Dependence and Labor-Market Fluctuations
 
Kfir Eliaz and Ran Spiegler
 

Published in: NBER macroeconomics annual 2013, vol. 28

 

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Working Paper #7-13
Reference Dependence and Labor-Market Fluctuations
 
Kfir Eliaz and Ran Spiegler
We incorporate reference-dependent worker behavior into a search-matching model of the labor market, in which firms have all the bargaining power and productivity follows a log-linear AR(1) process. Motivated by Akerlof (1982) and Bewley (1999), we assume that existing workers’ output falls stochastically from its normal level when their wage falls below a ``reference point``, which (following Koszegi and Rabin (2006)) is equal to their lagged-expected wage. We formulate the model game-theoretically and show that it has a unique subgame perfect equilibrium that exhibits the following properties: existing workers experience downward wage rigidity, as well as destruction of output following negative shocks due to layoffs or loss of morale; newly hired workers earn relatively flexible wages, but not as much as in the benchmark without reference dependence; marke tightness is more volatile than under this benchmark. We relate these ?ndings to the debate over the “Shimer puzzle” (Shimer (2005)).

Published in: NBER macroeconomics annual 2013, vol. 28

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6-13 Response Time and Decision Making:A “Free” Experimental Study
 
Ariel Rubinstein
 

Published in: Judgement and Decision Making, 8 (2013), 540-551

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Working Paper #6-13
Response Time and Decision Making:A “Free” Experimental Study
 
Ariel Rubinstein
Response time is used to interpret choice in decision problems. It is first establishes that there is a correlation between short response time and choices that are clearly a mistake. It is then determines whether a correlation also exists between response time and behavior that is inconsistent with some standard theories of decision making. The lack of such a correlation is interpreted to imply that such behavior does not reflect a mistake. It is also shown that a typology of slow and fast responders may, in some cases, be more useful than standard typologies.

Published in: Judgement and Decision Making, 8 (2013), 540-551

Keywords: Response Time, Reaction Time, Decision problems, Allais Paradox, mistakes, Neuro-economics.

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5-13 No-Betting Pareto Dominance
 
Itzhak Gilboa, Larry Samuelson, and David Schmeidler

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Working Paper #5-13
No-Betting Pareto Dominance
 
Itzhak Gilboa, Larry Samuelson, and David Schmeidler
We argue that, in the presence of uncertainty, the notion of Pareto dominance is not as compelling as under certainty. In particular, voluntary trade that is based on differences in tastes is commonly accepted as favorable, because no agent involved in it can be wrong about her tastes. By contrast, voluntary trade that is based on incompatible beliefs may indicate that at least one agent is wrong about her beliefs. We propose a weaker, No-Betting, notion of Pareto domination, which requires, on top of unanimity of preference, the existenceof shared beliefs that can rationalize such preference for each agent.

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4-13 Analogies and Theories: The Role of Simplicity and the Emergence of Norms
 
Gabrielle Gayer and Itzhak Gilboa

Published in: Games and Economic Behavior, Volume 83, January 2014, Pages 267–283

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Working Paper #4-13
Analogies and Theories: The Role of Simplicity and the Emergence of Norms
 
Gabrielle Gayer and Itzhak Gilboa
We consider the dynamics of reasoning by general rules (theories) and by speci.c cases (analogies). When an agent faces an exogenous process, we show that, under mild conditions, if reality happens to be simple, the agent will converge to adopt a theory and discard analogical thinking. If, however, reality is complex, the agent may rely on analogies more than on theories. By contrast, when the agent is a player in a large population coordination game, and the process is generated by all players. predictions, convergence to a theory is much more likely. This may explain how a large population of players selects an equilibrium in such a game, and how social norms emerge. Mixed cases, involving noisy endogenous processes are likely to give rise to complex dynamics of reasoning, switching between theories and analogies.

Published in: Games and Economic Behavior, Volume 83, January 2014, Pages 267–283

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 #3-13 Bureaucracy in Quest for Feasibility
 
Herve Cres, Itzhak Gilboa, and Nicolas Vieille

 

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Working Paper #3-13
Bureaucracy in Quest for Feasibility
 
Herve Cres, Itzhak Gilboa, and Nicolas Vieille
The head of an organization is viewed as dealing with an optimization problem under a variety of constraints. The bureaucracy, by contrast, is viewed as dealing with the constraints alone: it has to make a multitude of low-level decisions, in such a way that no constraint is violated. However, even the feasibility problem is computationally hard. Hence bureaucracies often try to rely on past cases, in the hope of making decisions that are feasible. We study the way that past cases might affect current choices, and show that, under certain conditions, the bureaucracy will guarantee feasibility only if it mimics its behavior in a single past case.

      
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2-13 Economic Models as Analogies
 
Itzhak Gilboa, Andrew Postlewaite, Larry Samuelson and David Schmeidler
 

Published in: The Economic Journal, Volume 124, Issue 578, pages F513–F533, August 2014.

 

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Working Paper #2-13
Economic Models as Analogies
 
Itzhak Gilboa, Andrew Postlewaite, Larry Samuelson and David Schmeidler
People often wonder why economists analyze models whose as sumptions are known to be false, while economists feel that they learn a great deal from such exercises. We suggest that part of the knowledge generated by academic economists is case-based rather than rule-based. That is, instead of o_ering general rules or theories that should be contrasted with data, economists often analyze models that are heoretical cases``, which help understand economic problems by drawing analogies between the model and the problem. According to this view, economic models, empirical data, experimental results and other sources of knowledge are all on equal footing, that is, they all provide cases to which a given problem can be compared. We of- fer complexity arguments that explain why case-based reasoning may sometimes be the method of choice and why economists prefer simple cases.

Published in: The Economic Journal, Volume 124, Issue 578, pages F513–F533, August 2014.

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#1-13 Competitive Framing
 
Ran Spiegler

Published in: American Economic Journal: Microeconomics (2013) 6, 35-58.

 

 

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Working Paper #1-13
Competitive Framing
 
Ran Spiegler
I present a simple framework for modeling two-firm market competition when consumer choice is “frame-dependent”, and firms use costless “marketing messages” to influence the consumer’s frame. This framework embeds several recent models in the “behavioral industrial organization” literature. I identify a property that consumer choice may satisfy, which extends the concept of Weighted Regularity due to Piccione and Spiegler (2012), and provide a characterization of Nash equilibria under this property. I use this result to analyze the equilibrium interplay between competition and framing in a variety of applications.

Published in: American Economic Journal: Microeconomics (2013) 6, 35-58.

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