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Dissertation Committee:
Andreas Ortmann (chair)
Peter Katuščák
Libor Dušek
Dirk Engelmann
Sergey Slobodyan

Abstract:

This Ph.D. dissertation focuses on a central question about regulation in the EU and US electricity markets: the effects of vertical integration of generation and transmission and distribution networks. I focus on the forms of vertical integration where the generation and network firms are partly separated, such as in a legal or organizational form. Such form of separation is called unbundling. In the first two papers, I develop theoretical models to analyze the economic effects of vertical integration under legal unbundling (firms are legally separated entities and have the same owner) relative to ownership unbundling (firms are legally separated entities and have different owners). Both papers have policy implications for the regulation of the EU and US electricity markets, and make new contributions to auction theory, especially toehold auctions. In the first paper I consider the legal unbundling of the network activities; in the second paper I consider the legal unbundling of both the network activities and the generation activity. In both papers I find theoretical evidence that, in terms of efficiency, legal unbundling gives results inferior to ownership unbundling. Furthermore, I find solutions for several cases of toehold auctions that have not been solved before and that I believe to be interesting. In the third paper, I study the factors that have driven the choice and speed of implementation of different forms of unbundling. I find tentative evidence that questionable (corrupt?) practices may have played a role in selecting less stringent unbundling regimes.

Full Text: “Essays on the Unbundling of Electricity Networks in the EU and the USA: Theory and Empirics” by Silvester van Koten

Dissertation Committee:
Andreas Ortmann (chair)
Ralph Hertwig
Dmitry Ryvkin
Peter Katuščák

Abstract:

The first chapter offers a theoretical model that suggests an alternative explanation to the so-called unskilled-and-unaware problem—the unskilled overestimate their skills while the skilled underestimate (but less than the unskilled). The unskilled-and-unaware problem was experimentally identified about a decade ago and numerous authors have elaborated on this problem since. We propose that the alleged unskilled-and-unaware problem, rather than being one of biased judgments, is a signal extraction problem that differs for the skilled and the unskilled. The model is based on two assumptions. First, we assume that skills are distributed according to a J-distribution, which can be regarded as an approximation of the very right tail of the IQ distribution. This assumption is reasonable given the typical subject pool used in the experimental studies of overconfidence – students from prominent US universities. Second, we assume an error term in own-ability perception, which is a common assumption in psychology models. Our simple model generates, by means of analytical computations, patterns similar to those identified in the previous experimental literature. We also discuss conditions under which the unskilled-and-unaware problem should disappear.

The second chapter reports the results of three experiments (one field, two laboratory) through which we tested the theoretical model and some informal extensions. Specifically, we examine the impact of general information and specific information (feedback) on the quality of absolute and relative self-assessment (“calibration”) in various tasks (microeconomics exam, skill-oriented task, and general-knowledge oriented task). In our experiments, we used a specific subject pool—CERGE-EI preparatory semester students who are competitively selected students from their home universities around Central and Eastern Europe. Overconfidence behavior initially prevails in almost all settings. We find a strong positive effect of general information on calibration. We also show that calibration improves more when feedback is provided. Moreover, our results suggest that the absolute self-assessment is more responsive to information. In our experiments we also show that it is the unskilled who improve their calibration the most. Based on the results, we conclude that information plays an important role in the absolute as well as the relative self-assessment and that the unskilled-and-unaware problem arises mostly due to the lack of information.

The third chapter reviews, categorizes, and evaluates experimental studies on overconfidence and self-assessment in business, economics, and finance. First, we review the main results of experimental research in psychology and highlight the main issues in psychology as well as current issues in economics. Then we create a non-opportunistic set of experimental studies from business, economics, and finance concerning overconfidence or self-assessment. We identify nine paradigms (General-knowledge questions, Confidence intervals, Forecasting, Market-entry games, Auctions, Willingness to sell/buy, Information, Assessment of others, Self-awareness questions) and categorize the experimental studies according to those paradigms. For each paradigm we then review the corresponding studies and point out the shortcomings of each study, paying attention to issues identified in psychology as well as to issues already known in economics. Finally, we discuss the existing research for each paradigm and, based on the review, make suggestions for further research.

Full Text: “Overconfidence in Business, Economics, Finance, and Psychology: How Much of a Problem is It?” by Marian Krajč

Dissertation Committee:
Andreas Ortmann (chair)
Junghun Cho
Peter Katuščák
Avner Shaked

Abstract:

This dissertation studies two quality assurance mechanisms know from markets with unobservable quality characteristics—certification and self-regulation. Certification is a mechanism based on a third party who tests producers and issues, for a fee, a certificate to those who meet the required quality standard. Self-regulation is a mechanism, where producers, rather than relying on a certifier, form a club, set standards, and monitor each other. In the first chapter, I compare certification and self-regulation. I show that if the testing technology is perfect and costless, the choice of standards and fees by the certifying organization (CO) is welfare inferior, while the self-regulatory organization (SRO) chooses a welfare optimal fee, and I identify conditions under which the SRO also chooses optimal standards. If the testing technology is costly and imperfect, this result is not necessarily valid and depends on the difference between the costs of the testing technology available to the CO and SRO. In the second chapter, Tomáš Konečný and I study an example of certification system - Fair Trade scheme. One of the arguments against the Fair Trade scheme is that the guaranteed minimum price tends to depress world prices and thus the incomes of non-participating farmers (e.g. The Economist, 2006). We develop a model that distinguishes between the impact of the introduction of a Fair Trade market per se and the effect of minimum price policies given that a Fair Trade market actually exists. The model suggests that the introduction of a Fair Trade market reduces information asymmetries between the trading parties and dampens the market power of middlemen. Improved matching and lower margins of the middlemen have the capacity to increase the incomes of both participating and non-participating farmers. The minimum FT contracting price, however, reduces farmers' payoffs relative to the free-contracting alternative. The minimum price also paradoxically increases the profits of the middlemen whose local monopsony power the Fair Trade scheme originally aimed to retrench. Furthermore, the total surplus generated by Fair Trade cooperatives declines. In the third chapter, I study markets in which consumers form their expectations about the quality based on the outcome of voluntary imperfect certification. I analyze how the certification fee impacts the decisions of the producers to apply for a certificate and whether to supply goods of the required quality. I find that there are both separating (only high quality producers apply for the certificate) and pooling (both high and low-quality producers apply) equilibria. Pooling equilibrium exists when the certification fee is low, while the separating equilibrium requires high certification fees. Since the pooling equilibrium is not welfare optimal, low certification fee is not always beneficial. This result complements Strausz (2005) who shows that high certification fees are required to prevent corruption of the certifier.

Full Text: “Essays on Quality Assurance Mechanisms” by Jan Mysliveček