On the Economics of Incentives and Cooperation

The present dissertation contains essays on the economics of incentives and cooperation looking at different economic situations and using theoretical, experimental and empirical tools. In my first essay, I model a market with two firms and show under which circumstances even here - in a concentrated market and in the absence of other-regarding preferences - the efficient outcome can be established. Based on the seminal paper of Hotelling (1929) and its extension to quadratic demand by d’Aspremont et al. (1979), I introduce elastic total demand by allowing for a reservation value of the consumers. When transportation costs are increasing and/or the valuation of the product is decreasing, firms have an incentive to move towards the quartiles of the location space. This result shows that a duopoly can yield the efficient outcome under certain conditions. The analysis fills a gap in the literature on spatial demand models. In addition, the finding of a potentially efficient market in a duopoly offers new insights for regulation theory. In the second essay we use an economic experiment to test the guilt aversion hypothesis stating that individuals increase (decrease) their willingness to cooperate if they see that their co-player is (not) expecting cooperation. Recent papers often could not confirm this hypothesis in the lab. We suggest a more refined framework using a two round dictator game and find that dictators do react to other’s expectations. While reproducing the result of existing studies and rejecting the guilt aversion hypothesis in the first round, we show that first order beliefs and transfers are positively correlated if dictators experience the situation for the second time. Hence, our results suggest that the concept of guilt aversion should not be rejected but needs to be refined. In addition, the two-round setup allows us to control for individual effects representing a new general approach going well beyond this particular study. The third essay looks at cooperation from an empirical angle analyzing German prison data. In this context, cooperation can be seen as compliance with the law. Hence, it is interesting to identify conditions that reduce the likelihood of (re-)offending. In particular we test the hypothesis whether sentencing adolescents as adults influences the self-reported probability of recidivism. We first apply standard econometric models to the data and identify several social and socioeconomic factors of expected recidivism, like job expectation, social networks and age. Then, we perform a bivariate probit estimation and apply a regression discontinuity design in order to identify the effect of criminal law on juvenile offenders. Opposed to the bulk of the literature, which mainly relies on US data, we do not find that the application of criminal law increases juvenile recidivism. Rather, our results suggest that sentencing adolescents as adults reduces recidivism in Germany. In conclusion, the essays work out different aspects that can foster welfare enhancing cooperation as briefly summarized in the last chapter.