The Economics of Power

Selected events

Workshop: Behavioral foundations of corruption and unethical behavior (28-29 May 2015)

Workshop: Political economy, economic history, and religion (17 October 2013)

Selected papers and abstracts

Adena, Maja (2016): Nonprofit Organizations, Free Media and Donor’s Trust. Journal of Economics, 118 (3), 2016, pp. 239-263.

Abstract: Nonprofit organizations (NPOs) solicit donations from individuals and in turn offer goods and services whose quality cannot be (easily) ascertained by the donors. This creates incentives for “bad” NPOs to enter the market and free ride on donor trust. This paper presents a model in which the media helps to reduce the problem of asymmetric information in the market for NPOs. This occurs through two channels. On the one hand, the media can, with some probability, uncover a “bad” organization if it has entered the market. On the other hand, the media reduces the incentives for bad types to enter the market in the first place. Overall, the media enhances the trust of the donors and increases the level of donations and the amount of public good produced.

Simon, Jenny/Valasek, Justin Mattias (2016): "Centralized Fiscal Spending by Supranational Unions". In: Economica, advance access, 08.04.2016.

Abstract: We study fiscal spending by supranational unions, where participation is voluntary and countries bargain over contributions to and the allocation of a central budget. Since decisions are made by unanimity, bargaining power over the allocation becomes a function of contributions, which generically causes inefficiency in the presence of income asymmetry between member nations. This link between the budget allocation and contributions explains patterns of inefficient spending in the EU, e.g. why resources are diverted to low-productivity projects in high-income countries: the option of veto creates a trade-off between efficiency on the contributions margin and efficiency on the allocation margin.

Ensthaler, Ludwig/Huck, Steffen/Leutgeb, Johannes (2016): Games Played through Agents in The Laboratory. A Test of Prat & Rustichini's Model. WZB Discussion Paper SP II 2016-305. Berlin: WZB.

Abstract: From the regulation of sports to lawmaking in parliament, in many situations one group of people ("agents") makes decisions that affect payoffs of others ("principals") who are inactive. As the principals have a stake in the agents' decisions they face an incentive to offer payments in order to sway their decisions. Prat and Rustichini (2003) characterize pure-strategy equilibria of such Games Played Through Agents, in which principals commit to action-contingent transfers to agents. Specifically, they predict the equilibrium outcome in pure strategies to be efficient under some conditions. With field data hard to come by, we test the theory in a series of experimental treatments with human principals and computerized agents. The theory explains the data remarkably well. Subjects predominantly offer payments that implement efficient outcomes. In some treatments offers fall short of equilibrium predictions though. These minor deviations from equilibrium behavior are explored in a quantal response equilibrium framework.

Adena, Maja/Enikolopov, Ruben/Petrova, Maria/Santarosa, Veronica/Zhuravskaya, Ekaterina (2015): "Radio and the Rise of the Nazis in Prewar Germany". In: The Quarterly Journal of Economics, Vol. 130, No. 4, S. 1885-1939.

Abstract: How do the media affect public support for democratic institutions in a fragile democracy? What role do they play in a dictatorial regime? We study these questions in the context of Germany of the 1920s and 1930s. During the democratic period, when the Weimar government introduced progovernment political news, the growth of Nazi popularity slowed down in areas with access to radio. This effect was reversed during the campaign for the last competitive election as a result of the pro-Nazi radio broadcast following Hitler’s appointment as chancellor. During the consolidation of dictatorship, radio propaganda helped the Nazis enroll new party members. After the Nazis established their rule, radio propaganda incited anti-Semitic acts and denunciations of Jews to authorities by ordinary citizens. The effect of anti-Semitic propaganda varied depending on the listeners’ predispositions toward the message. Nazi radio was most effective in places where anti-Semitism was historically high and had a negative effect in places with historically low anti-Semitism.

Huck, Steffen/Weizsäcker, Georg (2015): Markets for Leaked Information. WZB Discussion Paper SP II 2015-305r. Berlin: WZB.

Abstract: We study markets for sensitive personal information. An agent wants to communicate with another party but any revealed information can be intercepted and sold to a third party whose reaction harms the agent. The market for information induces an adverse sorting effect, allocating the information to those types of third parties who harm the agent most. In equilibrium, this limits information transmission by the agent, but never fully deters it. We also consider agents who naively provide information to the market. Their presence renders traded information more valuable and, thus, harms sophisticated agents by increasing the third party's demand for information. Halfbaked regulatory interventions may hurt naive agents without helping sophisticated agents. Comparing monopoly and oligopoly markets, we find that oligopoly is often better for the agent: it requires a higher value of traded information and therefore has to grant the agent more privacy.

Valasek, Justin Mattias (2015): Reforming an Institutional Culture of Corruption. A Model of Motivated Agents and Collective Reputation. WZB Discussion Paper SP II 2015-303. Berlin: WZB.

Abstract: State capacity is optimized when public institutions are staffed by individuals with public-service motivation. However, when motivated agents value the collective reputation of their place of employment, steady-state equilibria with both high and low aggregate motivation (reputation) in the mission-oriented sector exist. Reforming a low-motivation institution requires a non-monotonic wage path: since the effect of higher wages on motivation is negative for a high-reputation institution, but positive for a low-reputation institution, a transition to a high-reputation steady state requires an initial wage increase to crowd  motivated workers in, followed by a wage decrease to crowd non-motivated workers out.

Konrad, Kai A./Cusack, Thomas R. (2013): Hanging Together or Being Hung Separately. The Strategic Power of Coalitions where Bargaining Occurs with Incomplete Information. WZB Discussion Paper SP II 2013-202. Berlin: WZB.

Abstract: What is the strategic role of membership in an intergovernmental group with unanimity requirements if the group negotiates with an external player in a setting with incomplete information? Being in such a group has a strategic effect compared to negotiating as a stand-alone player and reduces the demands of the outside player: being in a group lends additional bargaining power. Negotiating as a group may also cause more inefficiencies due to bargaining failure, and this might harm the intergovernmental group. We uncover the role of preference alignment and preference independence between members of the coalition group for equilibrium payoffs and welfare effects. In this analysis we also distinguish between coalition groups with and without side payments. Overall, coalition groups tend to perform well for the members of the coalition group in comparison to fully decentralized negotiations, particularly if the objectives of the members of the coalition group are not always perfectly aligned.

Midjord, Rune/Rodríguez Barraquer, Tomás/Valasek, Justin (2013): Over-Caution of Large Committees of Experts. WZB Discussion Paper SP II 2013-313. Berlin: WZB.

Abstract: We provide an explanation for why committees may behave over-cautiously. A committee of experts makes a decision on a proposed innovation on behalf of ‘society’. Each expert’s signal about the innovation’s quality is generated by the available evidence and the best practices of the experts’ common discipline, which is only indirectly related to the true state of the world. In addition to a payoff linked to the adequateness of the committee’s decision, each expert receives a disesteem payoff if he/she voted in favor of an ill-fated innovation. No matter how small the disesteem payoffs are, information aggregation fails in large committees: under any majority rule, the committee rejects the innovation almost surely.

Rothenhäusler, Dominik/Schweizer, Nikolaus/Szech, Nora (2013): Institutions, Shared Guilt, and Moral Transgression. WZB Discussion Paper SP II 2013-305. Berlin: WZB.

Abstract: We study how institutional design influences moral transgression. People are heterogeneous in their feelings of guilt and can share guilt with others. Institutions determine the number of supporters necessary for immoral outcomes to occur. With more supporters required, every supporter can share guilt more easily. This facilitates becoming a supporter. Conversely, an institution requiring more supporters must rely on people who have higher individual moral standards. We analyze individual thresholds for agreeing to a transgression, depending on the available options for sharing guilt by institutional design. On the aggregate level, we study how institutions affect the likelihood of immoral outcomes.

Valasek, Justin M. (2012): "Get out the Vote. How Encouraging Voting Changes Political Outcomes". In: Economics and Politics, Vol. 24, No. 3, S. 346–373.

Abstract: How do measures to increase turnout affect election outcomes? I use a novel approach to analyze how these measures influence both voter turnout and the candidates' political positions. In general, lowering the net expense of voting reduces political polarization. If the net expense of voting is made very low, then candidates no longer have an incentive to take partisan positions to motivate turnout and will converge at the median voter's ideal point. For small changes in the net expense of voting, however, decreasing the cost of voting and penalties for not voting (two common measures) can result in drastically different political outcomes. Counter intuitively, measures that make voting cheaper might not increase turnout: since these measures decrease the difference between the candidates' political positions, they also decrease the benefit of voting.