Volume 12, Issue 1

Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. This paper provides conditions such that no success bonus induces the agent to exert more effort and the optimal contract is independent of success. Moreover, success bonuses may even reduce effort and thus the probability of success. The reason is that bonuses increase the perceived income of the agent and can hence reduce his willingness to exert effort. This perceived income effect has to be weighed against the incentive effect of the bonus. The tradeoff is determined by the marginal effect of effort on the success probability in relation to this probability itself (success hazard-rate of effort). The paper also discusses practical implications of the finding.

In this article, we evaluate underpricing of initial public offerings at the Berlin Stock Exchange between 1870 and 1896. In contrast to modern data, first-day returns were extraordinary low and averaged less than 5%, even during the speculative period of the early 1870s. Moreover, standard underpricing theories based on asymmetric information, signalling mechanisms or litigation risk cannot explain underpricing. In contrast to modern markets, underpricing was higher during hot issue markets. Finally, we show that cash-flow relevant information contained in the corporate charter was readily factored in the first market price. Thus, the historical capital market differed from today’s market, but seems to have been efficient.

This paper analyses the evolution of inflation and of consumers’ inflation perceptions in the aftermath of the euro cash changeover. It finds that the cross-country variation of food product inflation was dependent on the complexity of conversion rates, with statistically significant and economically sizeable effects especially for low-priced items sold in mid-priced stores. The paper also shows that cross-country differences in the mismatch of perceived and actual inflation were linked to differences in the complexity of conversion rates. These results are in line with theories of finite information-processing capacities on the side of consumers.

We examine the optimal tax and education policy in the case of a dual income tax. Incorporating an educational sector and endogenous capital taxation, we show that the results in Nielsen and Sørensen’s study are vulnerable with respect to assumptions on the elasticity of unskilled labor supply. Tax progressivity results residually, whereas educational policy guarantees an optimal tax wedge on, but not necessarily efficiency in, educational investment. The less elastic are the unobservable educational investment and skilled labor (the latter relative to unskilled labor supply), and the more educational policy cares about the skilled labor supply, the more progressive the tax system will be. Education will be subsidized on a net basis if the complementarity effect on the skilled labor supply is strong and important; however, there is also an offsetting substitutability effect of the unskilled labor supply at play.

This research note uses two German datasets - the large-scale German Socioeconomic Panel and unique data from own student questionnaires - to analyse the relationship between risk aversion and the choice for public sector employment. Main results are (1) more risk-averse individuals sort into public sector employment, (2) the impact of career-specific and unemployment risk attitudes is larger than the impact of general risk attitudes and (3) risk taking is rewarded with higher wages in the private but not in the public sector.

We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs (IT P ), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability (IT A ). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e., a disclosure contract offered to the agent after the principal announced the result of IT P , and a concealment contract where the agent exerts effort before IT P is checked. We find that concealment is superior whenever the quality of IT P is sufficiently low. Then, IT P is almost worthless under a disclosure contract, while it can still be exploited to reduce the agent’s information rent under concealment. If the quality of IT P improves, disclosure can be superior as it allows to adjust the agent’s effort to the updated expected quality of the project. However, even for a highly informative IT P , concealment can be superior as it mitigates the adverse selection problem.

This paper examines whether government ideology influenced the allocation of public expenditures on education and cultural affairs in the West German states in the 1974-2006 period. I explicitly consider the allocation of policy responsibilities between the federal and the states’ governments. The results suggest that leftist governments slightly increased public spending for schooling, whereas right wing governments spent somewhat more on universities and cultural affairs. This spending pattern appears to be in line with the preferences of the governing parties’ constituencies and indicates political competition in a time of declining electoral cohesion.