Essays in Applied Econometrics and Behavioral Economics Inaugural-Dissertation zur Erlangung des Grades eines Doktors der Wirtschafts- und Gesellschaftswissenschaften durch die Rechts- und Staatswissenschaftliche Fakult¨at der Rheinischen Friedrich-Wilhelms-Universit¨at Bonn vorgelegt von Thomas Deckers aus Bonn Bonn 2014 Dekan: Prof. Dr. Klaus Sandmann Erstreferent: Prof. Dr. Armin Falk Zweitreferent: Prof. Dr. Thomas Dohmen Tag der m¨undlichen Pr¨ufung:18.08.2014 Acknowledgments I would not have been able to complete this thesis without the help of numerous people to which I want to express my deepest gratitude. First of all to my supervisor Armin Falk: You have been an enormous source of inspira- tion for my work. I could always count on your advice when I needed it, be it in scientific or \general" questions. It has always been very motivating talking to you or working together with you, but even more importantly, it has also been a lot of fun. I have learned heaps from you which I benefit from even outside the scientific world. Thank you very much for being my supervisor for the last four years! To my second supervisor Thomas Dohmen: Your initials, your hometown and the city you have studied in made you an obvious choice for being my second supervisor. But definitely more importantly, I benefited a lot from having a supervisor who also has a passion for econometrics and with whom I could engage in exciting discussions about the econometric parts of this thesis. And, of course, the same as for Armin applies to you as well: Working with you was certainly always fun. Thank you very much! To my co-authors Anke Becker, Fabian Kosse, Christoph Hanck and Hannah Schildberg- H¨orisch: You are great people and I enjoyed working together with you a lot. Moreover, you are also friends which I reckon is the best you can say about your co-authors. Thank you so much! To the BGSE, especially to Silke Kinzig, Pamela Mertens and Urs Schweizer for making the BGSE such a nice place to study and work at and for being supportive in any kinds of questions. Also to the whole team of the institute for applied micro which was a great team to work in. Especially to Birgit Jendrock and Stephanie Sauter who supported me in numerous ways, from getting signatures to cutting marble lanes. I am also grateful to Sebastian Kube, Matthias Wibral, Steffen Altmann, Hans-Martin von Gaudecker, Pia iii Pinger and Katarina Kuss for helpful discussions. To the whole 2008/2009 BGSE cohort with special thanks to the best office mate Harun: All of you have made the time at Bonn University to an unforgettable experience and of course we have been the best year! Last but not least, to Meike, Mats and Luk: You have certainly made clear that there is more important stuff to do than writing this thesis. It was always good to have that perspective and good to have all of you. And finally to family for supporting me in whatever I do. Thanks to all of you! iv Contents List of Figures viii List of Tablesx Introduction1 1 Variable Selection in Cross-Section Regressions4 1.1 Introduction....................................4 1.2 Problem and methods..............................7 1.3 Monte Carlo study................................ 18 1.4 Empirical growth models revisited........................ 28 1.5 Conclusion..................................... 38 A1 Appendix to Chapter 1.............................. 40 A1.1 Bootstrap procedure........................... 40 A1.2 Additional simulation results....................... 42 A1.3 Additional empirical results....................... 55 A1.4 MP data set................................ 59 2 The Relationship Between Economic Preferences and Psychological Per- sonality Measures 62 2.1 Introduction.................................... 62 2.2 Data and Measures................................ 67 2.2.1 Experimental Data............................ 68 2.2.2 Representative Experimental Data................... 73 2.2.3 Representative Panel Data........................ 73 2.3 Research Strategy................................. 75 v 2.4 Results....................................... 76 2.4.1 Correlation Structure........................... 76 2.4.2 Explanatory Power for Life Outcomes.................. 81 2.5 Discussion..................................... 84 A2 Appendix to Chapter 2.............................. 87 3 Nominal or Real? The Impact of Regional Price Levels on Satisfaction with Life 97 3.1 Introduction.................................... 97 3.2 Data........................................ 100 3.3 Empirical Strategy................................ 105 3.4 Results....................................... 106 3.4.1 Results for overall satisfaction with life................. 106 3.4.2 Results for satisfaction with household income and satisfaction with standard of living............................. 109 3.5 Discussion..................................... 111 A3 Appendix to Chapter 3.............................. 113 4 How Does Socio-Economic Status Shape a Child's Personality? 116 4.1 Introduction.................................... 116 4.2 The data...................................... 119 4.2.1 The sample................................ 119 4.2.2 Description of experiments and IQ tests................ 121 4.3 Estimation strategy................................ 128 4.4 Results....................................... 130 4.4.1 The relationship between parental socio-economic status and a child's personality................................. 130 4.4.2 How does a child's environment differ by parental socio-economic sta- tus?.................................... 133 4.4.3 Which differences in a child's environment translate into differences in a child's personality?......................... 135 4.4.4 Related literature............................. 138 4.5 Discussion..................................... 140 A4 Appendix to Chapter 4.............................. 144 vi B4 Additional Figures................................ 144 C4 Additional Tables................................. 145 D4 Additional Information on Explanatory Variables............... 145 Bibliography 163 vii List of Figures 1.1 Test statistics and critical values for the FLS/Sala-i-Martin(1997) data... 13 1.2 Log predictive scores............................... 33 1.3 Histogram of the Regressor Correlation Matrix of Section 1.4......... 42 1.4 Rejection Rates Bootstrap Method|Krolzig and Hendry(2001) DGP.... 51 2.1 Adjusted R2 for Life Outcomes......................... 82 2.2 Kernel-weighted local linear polynomial regressions using experimental data. 91 2.3 Kernel-weighted local linear polynomial regressions using SOEP data.... 92 2.4 Correlation Coefficients Between Preference Measures and Life Outcomes Using SOEP Data................................. 93 2.5 Correlation Coefficients Between Personality Measures and Life Outcomes Using SOEP Data................................. 94 3.1 Regional Price Index............................... 113 4.1 Distribution of Saving Decisions (Histogram).................. 122 4.2 Distribution of Risk Decisions.......................... 123 4.3 Share of Altruistic Children........................... 125 4.4 Distribution of Fluid IQ Scores (Histogram).................. 126 4.5 Distribution of Crystallized IQ Scores (Histogram)............... 126 4.6 Distribution of IQ Scores (Histogram)...................... 127 4.7 Arrangement of Presents............................. 144 viii List of Tables 1.1 Number of decisions when testing k null hypotheses..............9 1.2 Implied population R2's of DGP (1.6)...................... 19 1.3 Monte Carlo results: 25 False hypotheses.................... 21 1.4 Monte Carlo results: 10 False hypotheses.................... 22 1.5 Monte Carlo results: 5 False hypotheses.................... 23 1.6 Results for the FLS/Sala-i-Martin(1997) data set............... 30 1.7 Log predictive scores............................... 34 1.8 Linear regression model with 5 false hypotheses................ 43 1.9 Linear regression model with 10 false hypotheses................ 44 1.10 Linear regression model with 25 false hypotheses................ 45 1.11 Linear regression model with random correlation matrix, truncated normal r.v.......................................... 46 1.12 Linear regression model with random correlation matrix, beta r.v....... 47 1.13 Size and power properties of the bootstrap under heteroscedasticity..... 48 1.14 Linear regression model with 5 false hypotheses: FDP control........ 49 1.15 Eicher, Papageorgiou, and Raftery(2011) DGP................ 50 1.16 Krolzig and Hendry(2001) DGP for α = γ = 0:01............... 52 1.17 Krolzig and Hendry(2001) DGP for α = γ = 0:05............... 53 1.18 Krolzig and Hendry(2001) DGP for α = γ = 0:1................ 54 1.19 Results for the FLS/Sala-i-Martin(1997) data set............... 55 1.20 Results for the FLS data set using the wild bootstrap............. 56 1.21 Results for the FLS data set using HC2 standard errors............ 57 1.22 Results for the FLS data set using HC3 standard errors............ 58 1.23 MP data set.................................... 60 ix 1.24 Comparison MP data set............................. 61 2.1 Overview of the experimental measures in data set from laboratory experi- ments amon university students......................... 69 2.2 Pearson correlation structure experimental data set.............. 77 2.3 Pearson correlation structure representative experimental data........ 79 2.4 Pearson correlation structure between personality measures and economic preferences