Averting economic collapse and the solipsism bias

We study the behavior of experimental subjects who have to make a sequence of risky investment decisions in the presence of network externalities. Subjects follow a simple heuristic-investing after positive experiences and reducing their propensity to invest after a failure. This result contrasts with the theoretical findings of Jeitschko and Taylor [Jeitschko, T.D., Taylor, C., 2001. Local discouragement and global collapse: A theory of coordination avalanches. Amer. Econ. Rev. 91 (1), 208-224] in which even agents who have only good experiences eventually stop investing because they account for the fact that others with worse experiences will quit. This can trigger sudden economic collapse-a coordination avalanche-even in the most efficient Bayesian equilibrium. In the experiment, subjects follow their own experiences and disregard the possible bad experiences of others-thus exhibiting behavior that we term "solipsism bias." Solipsism results in sustained investment activity and thus averts complete collapse. (c) 2005 Elsevier Inc. All rights reserved

Merger profitability and trade policy

We study the profitability and welfare effects of merger in a strategic trade policy environment. Merger changes the strategic trade policy equilibrium. We show that merger can be profitable and welfare enhancing here, even though it is not profitable in a laissez-faire economy. A key element is the change in the governments’ incentives to give subsidies to their local firms. We apply the results to the merger between Boeing and McDonnell-Douglas, where subsidies are a constant matter of debate. Our theory explains why the merger was profitable for Boeing and McDonnell-Douglas, why Airbus Industries opposed the merger, why the US authorities agreed to the merger, and why the EU competition authorities opposed it. -- Wir betrachten die Profitabilität und die Wohlfahrtseffekte von Unternehmensfusionen in einer internationalen Welt, in der Staaten das Instrument strategischer Außenhandelspolitik nutzen. Die Rückwirkungen der Fusionen auf die Wahl der strategischen Außenhandelspolitik machen Fusionen von Unternehmen des gleichen Landes profitabel, selbst wenn diese Fusionen in einer Welt ohne Außenhandelssubventionen nicht profitabel wären. Diese Resultate können erklären, weshalb die Fusion zwischen Boeing und McDonnell-Douglas profitabel war, weshalb Airbus unter der Fusion leidet und weshalb die US-Wettbewerbsbehörde der Fusion gegenüber positiver eingestellt war als die europäische Wettbewerbsbehörde.Merger,strategic trade policy

Strategic Trade Policy and the Home Bias in Firm Ownership Structure

In this note we consider the preferences of a profit maximizing firm for international ownership in a world in which firms compete in an international Cournot oligopoly, and in which countries use strategic trade policy. We find that firms prefer national ownership and show that full indigenisation occurs in the equilibrium.strategic trade, international ownership, Cournot oligopoly, home bias

Merger and collusion in contests

Competition in some product markets takes the form of a contest. If some firms cooperate in such markets, they must decide how to allocate effort on each of their products and whether to reduce the number of their products in the competition. We show how this decision depends on the convexity properties of the contest success function, and we characterize conditions under which cooperation is profitable. -- In vielen Gütermärkten erfolgt der Wettbewerb zwischen Unternehmen nicht primär über Preise und Mengen, sondern über Verkaufsanstrengungen. Ein Beispiel hierfür ist der Kampf um Marktanteile und Kunden in Märkten mit hohen Werbeaufwendungen. Wenn Unternehmen in solchen Märkten kooperieren, müssen sie entscheiden, ob sie ihre gesamte Produktpalette beibehalten und ihre Verkaufsanstrengungen auf alle Produkte verteilen („Kollusion“) oder ob sie die Anzahl ihrer Produkte reduzieren („Fusion“). Wir zeigen, daß diese Entscheidung von den Konvexitätseigenschaften der Funktion abhängt, die den Markterfolg eines Produkts in Abhängigkeit von den Verkaufsanstrengungen für dieses Produkt bzw. für die Konkurrenzprodukte bestimmt, und untersuchen die Bedingungen, in denen Kooperation in Form von „Kollusion“ oder „Fusion“ für die kooperierenden Unternehmen profitabel ist.Contests,merger,collusion,promotional competition,Kampf um Marktanteile,Kollusion,Fusion

Profitable horizontal mergers without cost advantages: The role of internal organization, information, and market structure

Merged firms are typically rather complex organizations. Accordingly, me rger has a more profound effect on the structure of a market than simply reducing the number of competitors. We show that this may render horizontal mergers profitable and welfare – improving even if costs are linear. The driving force behind these results, which help to reconcile theory with various empirical findings, is the assumption that information about output decisions flows more freely within a merged firm. -- Unternehmensfusionen führen häufig zu komplexen Organisationen. Fusionen haben deshalb andere und tiefgründige Wirkungen auf die Marktstruktur. Sie reduzieren nicht einfach die Zahl der Wettbewerber in einem Markt, sondern durch Fusionen entstehen Wettbewerber, die sich wegen ihrer komplexen Organisationsstruktur anders verhalten als jedes der einzelnen Unternehmen vor der Fusion. Wir zeigen in dieser Arbeit, dass horizontale Fusion von Unternehmen aus diesen Gründen profitabel für die fusionierenden Unternehmen und wohlfahrtserhöhend wirken kann, selbst dann, wenn es durch die Fusion keinerlei Kostensynergien gibt. Der Schlüssel für dieses Ergebnis, das eine Theorie für eine Reihe von empirischen Befunden liefert, ist der verbesserte Informationsfluss zwischen Unternehmensteilen des durch die Fusion entstehenden Konzerns im Vergleich zum Informationsfluss zwischen unabhängigen Unternehmen.Merger,internal organizational structure,information,timing,market structure,Fusion,Organisationsstruktur,Informationsfluss,Marktstruktur

Profitable Horizontal Mergers without Cost Advantages: The Role of Internal Organization, Information, and Market Structure

Merged firms are typically rather complex organizations. Accordingly, merger has a more profound effect on the structure of a market than simply reducing the number of competitors. We show that this may render horizontal mergers profitable and welfare-improving even if costs are linear. The driving force behind these results, which help to reconcile theory with various empirical findings, is the assumption that information about output decisions flows more freely within a merged firm.Merger, internal organizational structure, information, timing, market structure

Merger in Contests

Competition in some markets is a contest. This paper studies the merger incentives in such markets. Merger can be profitable. The profitability depends on the post-merger contest st ructure, the discriminatory power of the contest and on the number of contestantsContests, merger

Beliefs and Actions in the Trust Game: Creating Instrumental Variables to Estimate the Causal Effect

In many economic contexts, an elusive variable of interest is the agent's expectation about relevant events, e.g. about other agents' behavior. Recent experimental studies as well as surveys have asked participants to state their beliefs explicitly, but little is known about the causal relation between beliefs and other behavioral variables. This paper discusses the possibility of creating exogenous instrumental variables for belief statements, by shifting the probabilities of the relevant events. We conduct trust game experiments where the amount sent back by the second player (trustee) is exogenously varied by a random process, in a way that informs only the first player (trustor) about the realized variation. The procedure allows detecting causal links from beliefs to actions under plausible assumptions. The IV estimates indicate a significant causal effect, comparable to the connection between beliefs and actions that is suggested by OLS analyses.Social capital, trust game, instrumental variables, belief elicitation

Beliefs and Actions in the Trust Game: Creating Instrumental Variables to Estimate the Causal Effect

In many economic contexts, an elusive variable of interest is the agent's expectation about relevant events, e.g. about other agents' behavior. Recent experimental studies as well as surveys have asked participants to state their beliefs explicitly, but little is known about the causal relation between beliefs and other behavioral variables. This paper discusses the possibility of creating exogenous instrumental variables for belief statements, by shifting the probabilities of the relevant events. We conduct trust game experiments where the amount sent back by the second player (trustee) is exogenously varied by a random process, in a way that informs only the first player (trustor) about the realized variation. The procedure allows detecting causal links from beliefs to actions under plausible assumptions. The IV estimates indicate a significant causal effect, comparable to the connection between beliefs and actions that is suggested by OLS analyses.social capital, trust game, instrumental variables, belief elicitation