Research

Working Papers:

Spiteful Preferences or Inequality Aversion: What drives the Relative Income Effect?

Abstract

This paper attempts to disentangle fairness preferences from relative income eff.ects. Empirical evidence suggests that self-reported happiness is decreasing in the income di.erence to relevant others.

A class of social preferences, including ones that imply utility is increasing in income inequality, is consistent with this result. I propose a simple empirical test for the relevance of the relative income e.ect against the relevance of a more general class of social preferences in a standard regression on happiness.

Using German data, I fi.nd Fehr and Schmidt (1999)-type social preferences to be better suited to explain changes in self-reported happiness than relative income. Moreover, survey participants show on average inequality averse preferences. The fi.ndings are robust to several alternative model speci.cations.

Analysis of financial transaction taxes from a regulator's perspective

Abstract

The implementation of a tax on financial transactions is often suggested as an adequate instrument to curb speculation. In modern financial markets destabilizing speculation by noise traders potentially causes capital misallocation and market instability which could wind up to long price swings and asset price bubbles. Prices can depart from fundamental values when speculation on stale information makes up a large part of the trading volume and arbitrageurs fail to correct the noise due to e.g. limits to arbitrage.

Surprisingly little is known about regulatory potential of a financial transaction tax (FTT) on preventing self-fulfilling speculative asset price bubbles. This paper presents an original approach to assessing the regulatory capabilities of the FTT in reducing long-term price volatility. The key finding is that when irrational demand shocks can trigger self-fulfilling speculative asset price bubbles, noise traders are able to exploit arbitrage attempts and dominate the market. This outcome will arise when price risk and short investment horizon limits sophisticated investors’ arbitrage and leads them to fail correcting the price disturbances originating from noise traders’ misperception.

In the framework of the model the regulatory impact of the FTT depends on the prevailing price variance. Since price variance and magnitude of asset price bubbles only decrease when the price variance is already relatively low, other regulatory instruments with unambiguous effects on long-term volatility should be considered.


Work in progress:

"Consumer choice with bidirectional cardinal interdependent preferences"

"Rural credit and Land Allocation", with Liang Bai, Camille Boudot, and Andre Butler.

"Inheritage law and structural change in the German Empire", with Natalie Obergruber and Simon Jäger.


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Johannes Eigner,
May 3, 2017, 9:54 AM
Ċ
Johannes Eigner,
Mar 21, 2016, 12:31 AM
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