Essays in Applied Microeconomics

This dissertation consists of three self-contained chapters of original research – two of which are single-authored and one with a fellow PhD student – and contributes predominantly to behavioral economics and experimental economics, with one chapter also in cultural economics. Chapter 1, "Retelling and Memory", investigates whether biased retelling of previously encountered information makes memory of the original information biased, too. In a randomized controlled experiment, participants first evaluated hypothetical products based on brief descriptions. They were then instructed to retell these descriptions either accurately or in an overly optimistic way (between-subjects treatment variation). One day later, all participants were asked to retell the original descriptions accurately and to recall their initial ratings. Both the day-2 ratings and the day-2 retellings (as assessed by two independent human coders) revealed a large and highly significant treatment effect. That is, subjects who had retold the descriptions in an overly optimistic way on day 1 also provided exaggerated ratings and retellings on day 2 even though incentives at that point required accuracy. A robustness experiment tested whether this bias was already present immediately after the first retelling, thus assessing whether the effect reflects a genuine memory distortion. While a statistically significant average treatment effect immediately after retelling was found, it was (i) substantially smaller in magnitude, (ii) more sensitive to outliers, and (iii) not accompanied by significant distributional differences. This study provides causal evidence that biased retelling distorts memory, contributing a novel insight to the economics literature. The findings suggest that in contexts where people are likely to retell past experiences or information in a biased manner, even memory recalled under accuracy incentives may be systematically distorted. Such effects may be particularly relevant in financial, labor market or discrimination-related settings. Chapter 2, "Illusion of Control in a Complex Environment", examines whether people believe desirable outcomes are more likely when they are more engaged in a process, even when this engagement is only pseudo-relevant. Specifically, it is tested whether the method of generating a random outcome (via a physical die vs. a computer) affects beliefs about winning a board game. To cleanly identify effects, beliefs are elicited not only from the players but also from an independent observer. Such a tendency – known as illusion of control – has been studied extensively in psychology (beginning with Langer, 1975), but has received comparatively less attention in economics. While the psychology literature consistently finds evidence for illusion of control (Presson and Benassi, 1996; Stefan and David, 2013), findings in economics have been more mixed. The results of this chapter align with the latter: in several specifications, no treatment effect for the main incentivized belief about winning the board game is observed (insignificant and point estimates close to zero), casting doubt on the robustness of the illusion-of-control findings in psychology. There is borderline significant evidence that participants who used a physical die perceived skill as more important (relative to luck), but this pattern is not limited to players and is also present among observers. Chapter 3, "Parents' Beliefs About Cultural Transmission" (co-authored with Paul Behler), presents a dedicated survey of parents and offers two main contributions. The first part of the chapter presents detailed descriptive evidence on, for example, which agents or institutions parents believe matter for which traits at different ages, which traits they prefer to shape, and what goals and methods they pursue in this shaping. This addresses an important gap, as little is known about parents' beliefs and preferences concerning the non-genetic shaping of children's attitudes and character traits. Second, the chapter engages with the literature in cultural economics by testing two key assumptions: imperfect empathy and substitutability (Bisin and Verdier, 2001, 2011). We empirically assess whether parents indeed evaluate their children's choices using their own (the parents') preferences (imperfect empathy) and whether they invest more effort in cultural transmission when their goals are misaligned with their child's social environment (substitutability). We find robust evidence that approximately 60% of parents exhibit imperfect empathy. In contrast, we do not find support for substitutability: parents' transmission effort is not significantly affected by whether the environment is aligned, and the extremeness of their choices, if anything, moves in an anti-substitutability direction. That is, they tend to align with the perceived environment rather than compensating for it, particularly among liberal parents.