Showing papers by "Stockholm School of Economics published in 2009"
TL;DR: It is shown that reward is as effective as punishment for maintaining public cooperation and leads to higher total earnings and that human cooperation in such repeated settings is best supported by positive interactions with others.
Abstract: The public goods game is the classic laboratory paradigm for studying collective action problems. Each participant chooses how much to contribute to a common pool that returns benefits to all participants equally. The ideal outcome occurs if everybody contributes the maximum amount, but the self-interested strategy is not to contribute anything. Most previous studies have found punishment to be more effective than reward for maintaining cooperation in public goods games. The typical design of these studies, however, represses future consequences for today’s actions. In an experimental setting, we compare public goods games followed by punishment, reward, or both in the setting of truly repeated games, in which player identities persist from round to round. We show that reward is as effective as punishment for maintaining public cooperation and leads to higher total earnings. Moreover, when both options are available, reward leads to increased contributions and payoff, whereas punishment has no effect on contributions and leads to lower payoff. We conclude that reward outperforms punishment in repeated public goods games and that human cooperation in such repeated settings is best supported by positive interactions with others.
659 citations
TL;DR: In a typical leveraged buyout transaction, the private equity firm buys majority control of an existing or mature firm as mentioned in this paper. This arrangement is distinct from venture capital firms that typically invest in young or emerging companies, and typically do not obtain majority control.
Abstract: In a leveraged buyout, a company is acquired by a specialized investment firm using a relatively small portion of equity and a relatively large portion of outside debt financing. The leveraged buyout investment firms today refer to themselves (and are generally referred to) as private equity firms. In a typical leveraged buyout transaction, the private equity firm buys majority control of an existing or mature firm. This arrangement is distinct from venture capital firms that typically invest in young or emerging companies, and typically do not obtain majority control. In this paper, we focus specifically on private equity firms and the leveraged buyouts in which they invest, and we will use the terms private equity and leveraged buyout interchangeably. Leveraged buyouts first emerged as an important phenomenon in the 1980s. As leveraged buyout activity increased in that decade, Jensen (1989) predicted that the leveraged buyout organizations would eventually become the dominant corporate organizational form. He argued that the private equity firm itself combined concentrated ownership stakes in its portfolio companies, high-powered incentives for the private equity firm professionals, and a lean, efficient organization with minimal overhead costs. The private equity firm then applied performance-based managerial compensation, highly leveraged capital structures (often relying on junk bond financing), and active governance to the companies in which it invested. According to Jensen, these structures were
598 citations
TL;DR: This paper used the classical twin design to provide estimates of genetic and environmental influences on experimentally elicited preferences for risk and giving, and found strong prima facie evidence that these preferences are broadly heritable and their estimates suggest that genetic differences explain approximately twenty percent of individual variation.
Abstract: In this paper, we use the classical twin design to provide estimates of genetic and environmental influences on experimentally elicited preferences for risk and giving. Using standard methods from behavior genetics, we find strong prima facie evidence that these preferences are broadly heritable and our estimates suggest that genetic differences explain approximately twenty percent of individual variation. The results thus shed light on an important source of individual variation in preferences, a source that has hitherto been largely neglected in the economics literature.
470 citations
TL;DR: The authors studied determinants of income inequality using a newly assembled panel of 16 countries over the entire twentieth century, focusing on three groups of income earners: the rich (P99-100),...
392 citations
TL;DR: In this paper, the effect of cheap talk in a bargaining game with one-sided asymmetric information was investigated and it was found that individuals have an aversion towards lying about private information and that the aversion to lying increases with the size of the lie and the strength of the promise.
Abstract: We experimentally investigate the effect of cheap talk in a bargaining game with one-sided asymmetric information. A seller has private information about her skill and is provided an opportunity to communicate this information to a buyer through a written message. Four different treatments are compared: one without communication, one with free-form communication, and two treatments with pre-specified communication in the form of promises of varying strength. Our results suggest that individuals have an aversion towards lying about private information and that the aversion to lying increases with the size of the lie and the strength of the promise. Freely formulated messages lead to the fewest lies and the most efficient outcomes.
348 citations
TL;DR: In this article, the authors investigate the dynamics of individual portfolios in a unique data set containing the disaggregated wealth of all households in Sweden and find evidence that households rebalance toward a greater risky share as they become richer.
Abstract: This paper investigates the dynamics of individual portfolios in a unique data set containing the disaggregated wealth of all households in Sweden. Between 1999 and 2002, we observe little aggregate rebalancing in the financial portfolio of participants. These patterns conceal strong household-level evidence of active rebalancing, which on average offsets about one-half of idiosyncratic passive variations in the risky asset share. Wealthy, educated investors with better diversified portfolios tend to rebalance more actively. We find some evidence that households rebalance toward a greater risky share as they become richer. We also study the decisions to trade individual assets. Households are more likely to fully sell directly held stocks if those stocks have performed well, and more likely to exit direct stockholding if their stock portfolios have performed well; but these relationships are much weaker for mutual funds, a pattern that is consistent with previous research on the disposition effect among direct stockholders and performance sensitivity among mutual fund investors. When households continue to hold individual assets, however, they rebalance both stocks and mutual funds to offset about one-sixth of the passive variations in individual asset shares. Households rebalance primarily by adjusting purchases of risky assets if their risky portfolios have performed poorly, and by adjusting both fund purchases and full sales of stocks if their risky portfolios have performed well. Finally, the tendency for households to fully sell winning stocks is weaker for wealthy investors with diversified portfolios of individual stocks.
323 citations
TL;DR: In this article, a unique analysis of private engagements by an activist fund is presented, based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme.
Abstract: This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies targeted by its UK Focus Fund. In contrast with most previous studies of activism, we report that the fund executes shareholder activism predominantly through private interventions that would be unobservable in studies purely relying on public information. The fund substantially outperforms benchmarks and we estimate that abnormal returns are largely associated with engagements rather than stock picking.
312 citations
01 Jan 2009
TL;DR: In this paper, a review of multivariate GARCH models is presented and their properties considered, including nonparametric and semiparametric models, as well as existing specification and misspecification tests are discussed.
Abstract: This article contains a review of multivariate GARCH models. Most common GARCH models are presented and their properties considered. This also includes nonparametric and semiparametric models. Existing specification and misspecification tests are discussed. Finally, there is an empirical example in which several multivariate GARCH models are fitted to the same data set and the results compared.
286 citations
TL;DR: In this article, a panel of 60,000 firm-year observations on listed and unlisted companies in Eastern European economies was used to assess the differential impact of foreign bank lending on firm growth and financing.
Abstract: While the positive growth effects of financial integration are extensively documented, little is known of its impact on small and young firms. This paper aims to fill this void relying on a panel of 60,000 firm-year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and use of financial debt even though the effect is dampened for small firms. More strikingly, young firms benefit most from foreign bank presence, while businesses connected to domestic banks or to the government suffer. Overall, our findings suggest that foreign banks can help to mitigate connected-lending problems and to improve capital allocation.
277 citations
TL;DR: A growing empirical lit-erature documents a cross-sectional correlation between household characteristics and invest-ment mistakes as discussed by the authors, showing that richer, better educated house-holds tend to be better diversified and have a weaker disposition to hold losing and sell winning stocks.
Abstract: Many households invest in ways that are hard to reconcile with standard financial theory and that have been labelled as investment mistakes (Campbell 2006; Calvet, Campbell, and Sodini, henceforth “CCS,” 2007). There is increasing interest among household finance research-ers in the concept of financial sophistication, defined as the ability of a household to avoid making such mistakes. A growing empirical lit-erature documents a cross-sectional correlation between household characteristics and invest-ment mistakes. Richer, better educated house-holds tend to be better diversified (Marshall Blume and Irwin Friend 1975; CCS 2007; William Goetzmann and Alok Kumar 2008; Annette Vissing-Jorgensen 2003), display less inertia (Julie Agnew, Pierluigi Balduzzi, and Annika Sunden 2003; Yannis Bilias, Dimitris Georgarakos, and Michael Haliassos 2008; Campbell 2006; CCS 2009; Vissing-Jorgensen 2002), and have a weaker disposition to hold losing and sell winning stocks (CCS 2009; Ravi Dhar and Ning Zhu 2006) than other house-holds. One feature of these earlier papers is that mistakes are investigated one at a time, often
238 citations
Posted Content•
TL;DR: The authors found that approximately 25% of individual variation in portfolio risk is due to genetic variation and that these results extend to several other aspects of financial decision-making, such as financial decision making.
Abstract: Individuals differ in how they compose their investment portfolios, yet empirical models of portfolio risk typically only account for a small portion of the cross-sectional variance. This paper asks if genetic variation can explain some of these individual differences. Following a major pension reform Swedish adults had to compose a portfolio from a large menu of funds. We match data on these investment decisions with the Swedish Twin Registry and find that approximately 25% of individual variation in portfolio risk is due to genetic variation. We also show that these results extend to several other aspects of financial decision-making.
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TL;DR: In this article, the authors introduce an index designed to evaluate the short-term risks associated with the external supply of energy to the EU Member States, which combines measures of energy import diversification, political risks of the supplying country, risk associated with energy transit, and the economic impact of a supply disruption.
Abstract: The security of energy supply is one of the main objectives of EU energy policy. In this paper, we introduce an index designed to evaluate the short-term risks associated with the external supply of energy to the EU Member States. It combines measures of energy import diversification, political risks of the supplying country, risk associated with energy transit, and the economic impact of a supply disruption. We construct separate indexes for three primary energy types, oil, gas and coal, and demonstrate that Member States’ levels of supply risk exposure differ across energies. Most other studies of this kind provide aggregate indexes combining different types of energy. Our results suggest that an aggregate approach could be misleading, at least for discussions of the short-term response to risks. We discuss the implications of our findings for the common energy policy.
TL;DR: This study examined whether there is an association between financial risk preferences, elicited experimentally in a game with real monetary payoffs, and the presence of the 7-repeat allele (7R+) in the dopamine receptor D4 gene as well as the Presence of the A1 allele (A1+) inThe results found no association between the 7R+ and A1.
TL;DR: Ten arguments for taking a broad societal perspective on value, specifically to include all relevant costs, in HTA studies aimed at informing decisions about resource allocation are provided.
Abstract: Springer-Verlag 2009 Health technology assessment (HTA) is increasingly used to assist decisions about reimbursement and funding of new medical technologies, particularly drugs. This means that the economic evaluation that is part of an HTA will form the core element of an assessment used for guiding decisions on resource allocation. While HTA in general has a societal policy perspective, many HTA and reimbursement agencies advising payers take a narrow budget perspective on the impact on resource use when performing economic evaluations. Examples of such agencies are the National Institute for Health and Clinical Excellence (NICE) in England and Wales, the Canadian Agency for Drugs and Technologies in Health (CADTH) in Canada, the Pharmaceutical Management Agency (Pharmac) in New Zealand, and the reimbursement agency NIHISB in Belgium. A number of initiatives for introducing or promoting the use of use HTA for health care policy making (IQWIG, EUnetHTA) seem uncertain about where to stand on the perspective of economic evaluation. There is also an important discussion about the consequences for pharmaceutical innovation of using cost-effectiveness studies to determine which technologies should qualify for reimbursement [1]. Ignoring important costs and benefits in an economic evaluation will lead to an inefficient allocation of resources, in the short term as well as from a long-term perspective. Cost-effective drugs will not be reimbursed and incentives for innovation will be adversely affected. The role of HTA in establishing a transparent and efficient global market for medical innovations may therefore be questioned. This paper provide ten arguments for taking a broad societal perspective on value, specifically to include all relevant costs, in HTA studies aimed at informing decisions about resource allocation. The purpose is to advocate that a broad perspective on value is necessary in order for the study to provide the correct incentives for decision makers to take into account, for both static and dynamic
TL;DR: In this paper, the authors show that the pace of the process differs by type of venture as do, in line with theory-based hypotheses, the effects of certain human capital (HC) and social capital predictors.
Abstract: The central thesis in the article is that the venture creation process is different for innovative versus imitative ventures. This holds up; the pace of the process differs by type of venture as do, in line with theory-based hypotheses, the effects of certain human capital (HC) and social capital (SC) predictors. Importantly, and somewhat unexpectedly, the theoretically derived models using HC, SC, and certain controls are relatively successful explaining progress in the creation process for the minority of innovative ventures, but achieve very limited success for the imitative majority. This may be due to a rationalistic bias in conventional theorizing and suggests that there is need for considerable theoretical development regarding the important phenomenon of new venture creation processes. Another important result is that the building up of instrumental social capital, which we assess comprehensively and as a time variant construct, is important for making progress with both types of ventures, and increasingly, so as the process progresses. This result corroborates with stronger operationalization and more appropriate analysis method what previously published research has only been able to hint at.
01 Jun 2009
TL;DR: The results suggest that the electronic network of practice chosen for this study is sustained through generalized exchange, is supported by a critical mass of active members, and that members develop strong ties with the community as a whole rather than develop interpersonal relationships.
Abstract: Electronic networks of practice are computer-mediated social spaces where individuals working on similar problems self-organize to help each other and share knowledge, advice, and perspectives about their occupational practice or common interests. These interactions occur through message postings to produce an on-line public good of knowledge, where all participants in the network can then access this knowledge, regardless of their active participation in the network. Using theories and concepts of collective action and public goods, five hypotheses are developed regarding the structural and social characteristics that support the online provision and maintenance of knowledge in an electronic network of practice. Using social network analysis, we examine the structure of message contributions that produce and sustain the public good. We then combine the results from network analysis with survey results to examine the underlying pattern of exchange, the role of the critical mass, the quality of the ties sustaining participation, the heterogeneity of resources and interests of participants, and changes in membership that impact the structural characteristics of the network. Our results suggest that the electronic network of practice chosen for this study is sustained through generalized exchange, is supported by a critical mass of active members, and that members develop strong ties with the community as a whole rather than develop interpersonal relationships. Knowledge contribution is significantly related to an individual's tenure in the occupation, expertise, availability of local resources and a desire to enhance one's reputation, and those in the critical mass are primarily responsible for creating and sustaining the public good of knowledge. Finally, we find that this structure of generalized exchange is stable over time although there is a high proportion of member churn in the network.
TL;DR: In this paper, the authors introduce an index designed to evaluate the short-term risks associated with the external supply of energy to the EU Member States, which combines measures of energy import diversification, political risks of the supplying country, risk associated with energy transit, and the economic impact of a supply disruption.
TL;DR: A survey of univariate models of conditional heteroskedasticity can be found in this paper, where the classical ARCH model is mentioned and various extensions of the standard GARCH model are highlighted.
Abstract: This paper contains a survey of univariate models of conditional heteroskedasticity. The classical ARCH model is mentioned, and various extensions of the standard Generalized ARCH model are highlighted. This includes the Exponential GARCH model. Stochastic volatility models remain outside this review.
TL;DR: There was no significant effect of estrogen or testosterone on any of the studied behaviors in a double-blind randomized study of healthy postmenopausal women.
Abstract: Existing correlative evidence suggests that sex hormones may affect economic behavior such as risk taking and reciprocal fairness. To test this hypothesis we conducted a double-blind randomized study. Two-hundred healthy postmenopausal women aged 50–65 years were randomly allocated to 4 weeks of treatment with estrogen, testosterone, or placebo. At the end of the treatment period, the subjects participated in a series of economic experiments that measure altruism, reciprocal fairness, trust, trustworthiness, and risk attitudes. There was no significant effect of estrogen or testosterone on any of the studied behaviors.
TL;DR: In this article, the authors study the influence of investor protection on ownership by comparing cross-sections of firms at different times in the century and the evolution of firms incorporating at different stages of the century.
Abstract: This article is the first study of long-run evolution of investor protection and corporate ownership in the United Kingdom over the twentieth century. Formal investor protection emerged only in the second half of the century. We assess the influence of investor protection on ownership by comparing cross-sections of firms at different times in the century and the evolution of firms incorporating at different stages of the century. Investor protection had little impact on dispersion of ownership: even in the absence of investor protection, rates of dispersion of ownership were high, associated primarily with mergers. Preliminary evidence suggests that ownership dispersion in the United Kingdom relied more on informal relations of trust than on formal investor protection.
TL;DR: In this paper, the authors present a study of one public-private partnership in e-government in Sweden, Bygga Villa, that involved 16 organizations from academia, government, and industry to develop an innovative internet portal for the private construction industry.
TL;DR: This novel economic game provides new insight into the psychological mechanisms underlying social preferences for fairness and retribution in a two-player economic game where monetary allocations are made with a “trembling hand”: that is, intentions and outcomes are sometimes mismatched.
Abstract: How do people respond to others' accidental behaviors? Reward and punishment for an accident might depend on the actor's intentions, or instead on the unintended outcomes she brings about. Yet, existing paradigms in experimental economics do not include the possibility of accidental monetary allocations. We explore the balance of outcomes and intentions in a two-player economic game where monetary allocations are made with a “trembling hand”: that is, intentions and outcomes are sometimes mismatched. Player 1 allocates $10 between herself and Player 2 by rolling one of three dice. One die has a high probability of a selfish outcome, another has a high probability of a fair outcome, and the third has a high probability of a generous outcome. Based on Player 1's choice of die, Player 2 can infer her intentions. However, any of the three die can yield any of the three possible outcomes. Player 2 is given the opportunity to respond to Player 1's allocation by adding to or subtracting from Player 1's payoff. We find that Player 2's responses are influenced substantially by the accidental outcome of Player 1's roll of the die. Comparison to control conditions suggests that in contexts where the allocation is at least partially under the control of Player 1, Player 2 will punish Player 1 accountable for unintentional negative outcomes. In addition, Player 2's responses are influenced by Player 1's intention. However, Player 2 tends to modulate his responses substantially more for selfish intentions than for generous intentions. This novel economic game provides new insight into the psychological mechanisms underlying social preferences for fairness and retribution.
TL;DR: In this article, the authors investigated the extent to which different human resource management practices work better in different countries and tried to open the black box between HRM and multinational enterprise (MNE) subsidiary performance by considering mechanisms through which HRM practices affect MNE subsidiary performance.
Abstract: This paper investigates the extent to which different human resource management (HRM) practices work better in different countries. We also try to open the black box between HRM and multinational enterprise (MNE) subsidiary performance by considering mechanisms through which HRM practices affect MNE subsidiary performance. The study utilizes a unique data set consisting of subsidiaries of 241 MNEs operating in Russia, USA, and Finland. In the partial least-square analysis used to examine our hypotheses, we demonstrate that different HRM practices are preferable in different countries, and that motivation and ability are important mediating variables in the HRM–MNE subsidiary performance relationship.
TL;DR: In this article, the authors used data from the military enlistment for a large representative sample of Swedish men to assess the importance of cognitive and noncognitive ability for labor market outcomes.
Abstract: We use data from the military enlistment for a large representative sample of Swedish men to assess the importance of cognitive and noncognitive ability for labor market outcomes. The measure of noncognitive ability is based on a personal interview conducted by a psychologist. Unlike survey-based measures of noncognitive ability, this measure is a substantially stronger predictor of labor market outcomes than cognitive ability. In particular, we find strong evidence that men who fare badly in the labor market - in the sense of long-term unemployment or low annual earnings - lack noncognitive but not cognitive ability. We point to a technological explanation for this result. Noncognitive ability is an important determinant of productivity irrespective of occupation or ability level, though it seems to be of particular importance for workers in a managerial position. In contrast, cognitive ability is valuable only for men in qualified occupations. As a result, noncognitive ability is more important for men at the verge of being priced out of the labor market.
TL;DR: In this article, the authors explored interorganizational cost management practices in the exchange process and found that suppliers' management accounting is more important than recognized by prior research, and that the suppliers' managerial accounting plays a lesser role in later activities in the process during full-speed production as well as in product and manufacturing process redesign.
TL;DR: This paper explored the relationship between beauty contest behavior and cognitive ability and found that subjects with high cognitive ability exhibit behavior closer to the Nash equilibrium, while subjects with low cognitive ability exhibited behavior that did not conform to the unique Nash equilibrium.
Abstract: “Beauty contests” are well-studied, dominance-solvable games that generate two interesting results. First, most behavior does not conform to the unique Nash equilibrium. Second, there is considerable unexplained heterogeneity in behavior. In this work, we explore the relationship between beauty contest behavior and cognitive ability. We find that subjects with high cognitive ability exhibit behavior that is closer to the Nash equilibrium.
TL;DR: The authors study wealth concentration in Sweden over 130 years, from the beginning of industrialization until the present day, and find that Swedish wealth concentration was high in the agrarian state, and changed little during early industrialization.
Abstract: We study wealth concentration in Sweden over 130 years, from the beginning of industrialization until the present day. Our series are based on new evidence from estate and wealth tax data, foreign and domestic family firm-wealth, and pension wealth estimates. We find that Swedish wealth concentration was high in the agrarian state, and changed little during early industrialization. From World War I until about 1950, the richest percentile lost ground to high-income earners in the rest of the top-wealth decile. This equalization continued postwar; the entire top decile lost-out relative to the rest of the population. Around 1980, wealth compression stopped and inequality increased. We approximate the effects of international flows and find that the recent increase in wealth inequality is probably larger than what official estimates suggest.
TL;DR: In this article, the linkages among the different stock markets in the Greater China region (China, Hong Kong, and Taiwan) were explored and the empirical findings showed no indications of long-run relationships among the markets.
TL;DR: A positive link is found between job satisfaction and changes over time therein and subjective health measures (and changes therein); that is, employees with higher or improved job satisfaction levels feel healthier and are more satisfied with their health.
Abstract: This paper evaluates the relationship between job satisfaction and measures of health of workers using the German Socio-Economic Panel (GSOEP). Methodologically, it addresses two important design problems encountered frequently in the literature: (a) cross-sectional causality problems and (b) absence of objective measures of physical health that complement self-reported measures of health status. Not only does using the panel structure with individual fixed effects mitigate the bias from omitting unobservable personal psychosocial characteristics, but employing more objective health measures such as health-system contacts and disability addresses such measurement problems relating to self-report assessments of health status. We find a positive link between job satisfaction (and changes over time therein) and subjective health measures (and changes therein); that is, employees with higher or improved job satisfaction levels feel healthier and are more satisfied with their health. This observation also holds true for more objective measures of health. Particularly, improvements in job satisfaction over time appear to prevent workers from (further) health deterioration.
TL;DR: The study demonstrates that more severe IT failures result in a greater decline in firm value and that firms with a history of IT failures suffer a greater negative impact.
Abstract: IT failures abound but little is known about the financial impact that these failures have on a firm's market value. Using the resource-based view of the firm and event study methodology, this study analyzes how firms are penalized by the market when they experience unforeseen operating or implementation-related IT failures. Our sample consists of 213 newspaper reports of IT failures by publicly traded firms, which occurred during a 10-year period. The findings show that IT failures result in a 2% average cumulative abnormal drop in stock prices over a 2-day event window. The results also reveal that the market responds more negatively to implementation failures affecting new systems than to operating failures involving current systems. Further, the study demonstrates that more severe IT failures result in a greater decline in firm value and that firms with a history of IT failures suffer a greater negative impact. The implications of these findings for research and practice are discussed.