Project A1:

Individuals´ support for social and political reforms




Prof. Axel Börsch-Supan, Ph.D./ Prof. Dr. Hans Peter Grüner





The main purpose of the project has been to provide an in-depth analysis of reform-making preferences of individuals and their reform expectations. The plan was also to collect data about individuals’ uncertainty about reform outcomes. The project dealt with reform preferences on the individual level. It focused on labour market and pension reforms in Germany.

The work programme has been divided into the following five modules:

(a) Constructing political indifference curves,

(b) Information availability,

(c) Benefits, costs and risks of pension reform packages,

(d) Monetary compensation and information rents,

(e) Analysing status quo bias.

Research related to module (a) of the project should provide new insights into the design of reforms and reform packages that are acceptable for a majority of the population. The research was supposed to be based on the SFB Internet panel. The objective has been to deviate from the conventional formats and apply a method which forces respondents to make choices among reform packages under realistic restrictions.

The research in module (b) should investigate how the acceptance of reform proposals depends on the knowledge about the economic system and the information provided to citizens.

The research in module (c) was supposed to use simulation models on the aggregate level to compute internally consistent parameters of reform packages.

The role of module (d) has been to collect data on the willingness to accept monetary transfers as a compensation for losses that arise due to efficiency-enhancing reforms. The particular focus of this research was on the measurement of information rents that arise when voters’ willingness to accept is private information.

The role of module (e) has been to exploit the power of the data collected and the methodologies developed in modules (a) through (d) to understand the extent and the sources for a status quo bias.

It took longer than expected to set up the Internet panel that was key for the work on module (a). This is why the research group initially concentrated on the other four modules.


Modules (a), (b), (c) and (e):
One key
question was whether financial losses or unemployment experiences during the crisis changed the balance between pay-as-you-go and funded pensions as the preferred pension system. While we found that the payas- you-go actually suffered more from the wage decline during the economic crisis than the returns of Riester pensions during the financial crisis, preferences changed to pay-as-you-go systems rather than funded pensions, reflecting changed perceptions and preferences against financial risks and a distinct status-quo bias (module e). We also showed that such biases are related to cognitive abilities and financial literacy (Bucher-Koenen and Ziegelmeyer 2011).

Module (d):

The purpose of the empirical work in this part of project A1 has been to measure the willingness to accept compensatory payments for policy reforms. In the first funding period we have collected data with two online surveys as part of the GIP and one offline survey. Two of the surveys study preferences for the abolishment of state subsidies for specific sectors: agriculture and culture (opera houses and theatres). The third survey studies the support for two labour market reforms that have been proposed by the German council of economic advisors (Sachverständigenrat) and by the Ifo Institute.

One of the objectives of project A1 was to run offline surveys on the willingness to accept sector-specific reforms. The empirical paper by Hans Peter Grüner and Daniel Müller (2013) measures empirically the size of political information rents in the agricultural sector. The paper develops a method to estimate political information rents of losers of a reform, which explicitly accounts for the reluctance of reform winners to reveal their willingness to accept. We apply our approach to the case of the 2003/2005 European agricultural reform using uniquely gathered survey data from farmers in Lower Saxony, Germany.

As a textbook example of a reform that most economists would consider being efficiency enhancing, the European agricultural reform seems to be of interest on its own but it is also particularly relevant in our context. It gives us a unique setting to study ex-post an efficiency-enhancing reform that was actually successfully implemented. The key aspect of the reform was the replacement of output- and quantity-orientated agricultural subsidies by a flat premium, paid per hectare cultivated. From an efficiency point of view this is a desirable adjustment of agricultural politics since the incentives to overproduction are minimised and prices of agricultural products will be closer to their distortion-free equilibrium level.

The paper by Grüner and Müller points out that the European Union has been successful in compensating its farmers for the 2005 agricultural reform. The paper has been published in the CEPR Discussion paper series in 2013.

The labour market reform proposal that is currently studied by Hans Peter Grüner and Daniel Müller in the context of part (d) of the project is a change of the tax on labour income of long-term unemployed in Germany (recipients of Arbeitslosengeld II). This reform has been proposed by the German council of economic advisors and it is supported by many German economists. We have chosen to investigate this reform proposal because it has received very little support from the two largest German political parties. Our main hypothesis is that low-skilled workers reject the reform because they expect it to increase low-skilled labour supply and so decrease wages in this segment of the labour market.
The data for this part of the project have just been collected with the second wave of the GIP during the 2013 summer. Hence, the research is not finished yet.

Framing effects that may arise in surveys were another research topic that has been covered during the first funding period. Andreas Bernecker (2013) investigated the role of framing in survey responses regarding individuals’ willingness to pay/willingness to accept. Using reform suggestions regarding performing arts subsidies (to operas, theatres, and the like), he shows, first, that people exhibit strong status quo bias towards reforms and, second, that up to one half of this tendency to stick to the status quo can be explained by psychological anchoring effects. This illustrates how important are framing effects, and anchoring effects in particular, in shaping people’s stated responses in policy preferences surveys, and how relevant is more research on reliable information elicitation in stated preferences methods.

Project-related publications of the investigators

a) Peer reviewed, books:

Friedrichsen, J. and P. Zahn (2014). Political Support in Hard Times: Do People Care About National Welfare? European Journal of Political Economy 35 (3).

Gasche, M., A. Börsch-Supan, and M. Ziegelmeyer (2010). Auswirkungen der Finanzkrise auf die private Altersvorsorge. Perspektiven der Wirtschaftspolitik 11(4): 383–406.

b) Other publications:
Bernecker, A. (2014). Is Status Quo Bias Explained by Anchoring? Evidence from Survey Experiments. University of Mannheim.

Brückner, M. and H. P. Grüner (2010). Economic Growth and the Rise of Political Extremism: Theory and Evidence. First version was published as CEPR Discussion Paper 7723, March 2010 (latest version June 2013). *

Bucher-Koenen, T. and M. Ziegelmeyer (2011). Who Lost The Most? Financial Literacy, Cognitive Abilities, and the Financial Crisis. MEA Discussion Paper 234-11.

Coppola, M. and B. Lamla (2012). Sparen und Vorsorgeverhalten: Neue Daten für bessere Antworten- Jahresbericht der Max-Planck-Gesellschaft 2012, Max-Planck-Gesellschaft.

Gasche, M. and M. Ziegelmeyer (2010). Hat die Finanz- und Wirtschaftskrise Verbreitung und Volumen der Riester-Rente beeinflusst?. Wirtschaftsdienst 90. Jahrgang, Heft 4: 255–261.

Grüner, H. P. and D. Müller (2013). Measuring Political Information Rents: Evidence from the European Agricultural Reform. CEPR Discussion Paper 9452.

Hessami, Z. (2013). Heterogeneous Effects of European Monetary Integration on Labor Market Reform.

Hessami, Z. (2013). Package Deals in Swiss Direct Legislation: Do They Hinder or Facilitate Political Reforms?”

Hessami, Z. and T. Baskaran (2012). Monetary integration, soft budget constraints, and the EMU sovereign debt crises.