Knowledge that Transforms

This paper explains why payment card networks charge fees that are proportional to the transaction values instead of charging fixed per-transaction fees. We show that, when card networks and merchants both have market power, card networks earn higher profits by charging proportional fees. It is also shown that competition among merchants reduces card networks' gains from using proportional fees relative to fixed per-transaction fees. Merchants are found to earn lower profits under proportional fees, whereas consumer utility and social welfare are higher. Our welfare results are then evaluated with respect to the current regulatory policy debates.

This paper studies the impact of incentives on worker self-selection in a controlled laboratory experiment. Subjects face the choice between a fixed and a variable payment scheme. Depending on the treatment, the variable payment is a piece rate, a tournament, or a revenue-sharing scheme. We find that output is higher in the variable-payment schemes compared to the fixed-payment scheme. This difference is largely driven by productivity sorting. In addition, different incentive schemes systematically attract individuals with different attitudes, such as willingness to take risks and relative self-assessment as well as gender, which underlines the importance of multidimensional sorting.

While leading figures in the early history of economics conceived of it as inseparable from philosophy and other humanities, there has been movement, especially in recent decades, towards its becoming an essentially technical field with narrowly specialized areas of inquiry. Certainly, specialization has allowed for great progress in economic science. However, recent events surrounding the financial crisis support the arguments of some that economics needs to develop forums for interdisciplinary interaction and to aspire to broader vision.

Volunteering is a significant component of economic activity, especially for environmental organizations. Environmental organizations that rely on volunteers communicate with them using a variety of media, such as newsletters. This is a field experiment investigating whether tailoring the content of these communications to the stated motivations of a volunteer has a positive effect on the number of hours he/she volunteers. For the non-profit in our study, we find that such tailoring has an effect only for volunteers motivated primarily by career concerns. We also find this to be robust to the volunteers being aware that the tailoring is occurring.

This is a reply to “Stationary Concepts for Experimental 2 X 2 Games: Comment” by Brunner, Camerer, and Goeree which corrects some computational errors in Selten and Chmura (2008) and extends the comparison of five stationary concepts to data from previous experimental studies. We critically discuss their new findings and relate them to the data of Selten and Chmura (2008). We conclude that the parametric concepts of action-sampling equilibrium and payoff-sampling equilibrium perform better than quantal response equilibrium, and that the non-parametric concept of impulse-balance equilibrium performs at least as well as quantal response equilibrium.

In this paper, we share our experience with merger simulations using a Random Coefficient Logit model on the demand side and assuming a static Bertrand game on the supply side. Drawing largely from our work in Knittel and Metaxoglou (2008), we show that different demand estimates obtained from different combinations of optimization algorithms and starting values lead to substantial differences in post-merger market outcomes using metrics such as industry profits, and change in consumer welfare and prices.

This paper investigates the degree to which choice inconsistencies documented in the context of Medicare Part D plan choice vary across consumers and geographic regions. Our main finding is that there is surprisingly little variation: regardless of age, gender, predicted drug expenditures or the predictability of drug demand consumers underweight out of pocket costs relative to premiums and fail to consider the individualized consequences of plan characteristics; as a result, they frequently choose plans which are dominated in the sense that an alternative plan provides better risk protection at a lower cost. We find limited evidence that the sickest individuals had more difficulty with plan choice, and we document that much of the variation in potential cost savings across states comes from variation in choice sets, not variation in consumers' ability to choose.

Members of a rock and roll band are endowed with different amounts of creativity. They match, compose songs, and share credit. The presence of more creative members increases the probability of success, but those more creative members may also claim a larger share of the pie. In our theoretical model, the nature of matching as well as the covariation between the probability of success and the allocation of credit among individual members are a function of the completeness of contracting. The data show that rock bands tend to enter into incomplete contracts and positive assortative matching.

In this paper we study the causal impact of police on crime, looking at what happened to crime and police before and after the terror attacks that hit central London in July 2005. The attacks resulted in a large redeployment of police officers to central London as compared to outer London. During this time, crime fell significantly in central relative to outer London. The instrumental variable approach we use uncovers an elasticity of crime with respect to police of approximately -0.3 to -0.4, so that a 10 percent increase in police activity reduces crime by around 3 to 4 percent. JEL: K42

American Economic Association Universal Academic Questionnaire Summary Statistics by Charles E. Scott and John J. Siegfried. Published in volume 101, issue 3, pages 664-67 of American Economic Review, May 2011