nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2005‒11‒19
fourteen papers chosen by
Marco Novarese
Universita del Piemonte Orientale

  1. The Economics of Fairness, Reciprocity and Altruism ? Experimental Evidence and New Theories By Fehr, Ernst; Schmidt, Klaus M.
  2. The Role of Equality and Equity in Social Preferences By Fehr, Ernst; Näf, Michael; Schmidt, Klaus M.
  3. Fairness and Contract Design By Ernst Fehr; Alexander Klein; Klaus M. Schmidt
  4. Social norms and social choice By Anabela Botelho; Glenn W. Harrison; Lígia Pinto; Elisabet E. Rutstrom
  5. Labour regulation, corporate governance and legal origina: a case of institutional complementarity? By Simon Deakin; Beth Ahlering
  6. The Emergence of Local Norms in Networks By Mary Burke; Gary Fournier
  7. Hierarchy and opportunism in teams By Potters,Jan; Sefton,Martin; Heijden,Eline van der
  8. Emergence in multi-agent systems:Cognitive hierarchy, detection, and complexity reduction By Jean Louis Dessalles; Denis Phan
  9. Male and Female Competitive Behavior: Experimental Evidence By Nabanita Datta Gupta; Anders Poulsen; AMarie-Claire Villeval
  11. Group Decision-Making and Voting in Ultimatum Bargaining: An Experimental Study By Alexander Elbittar; Andrei Gomberg; Laura Sour
  12. Agent-Based Computational Laboratories for the Experimental Study of Complex Economic Systems By Leigh Tesfatsion
  13. Evolution with Individual and Social Learning in an Agent-Based Stock Market By Ryuichi YAMAMOTO
  14. The Case for Mindless Economics By Faruk Gul; Wolfgang Pesendorfer

  1. By: Fehr, Ernst; Schmidt, Klaus M.
    Abstract: This paper surveys recent experimental and field evidence on the impact of concerns for fairness, reciprocity and altruism on economic decision making. It also reviews some new theoretical attempts to model the observed behavior.
    JEL: J3 D0 C9 C7
    Date: 2005–06
  2. By: Fehr, Ernst; Näf, Michael; Schmidt, Klaus M.
    Abstract: Engelmann and Strobel (AER 2004) question the relevance of inequity aversion in simple dictator game experiments claiming that a combination of a preference for efficiency and a Rawlsian motive for helping the least well-off is more important than inequity aversion. We show that these results are partly based on a strong subject pool effect. The participants of the E&S experiments were undergraduate students of economics and business administration who self-selected into their field of study (economics) and learned in the first semester that efficiency is desirable. We show that for non-economists the preference for efficiency is much less pronounced. We also find a non-negligible gender effect indicating that women are more egalitarian than men. However, perhaps surprisingly, the dominance of equality over efficiency is unrelated to political attitudes.
    JEL: D64 D63 C92 C91 C7
    Date: 2005–02
  3. By: Ernst Fehr (Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland, email: and Collegium Helveticum, Schmelzbergstrasse 25, CH-8092 Zürich, Switzerland); Alexander Klein (Department of Economics, University of Munich, Ludwigstrasse 28, D-80539 Muenchen, Germany); Klaus M. Schmidt (Department of Economics, University of Munich, Ludwigstrasse 28, D-80539 Muenchen, Germany, email:
    Abstract: We show experimentally that fairness concerns may have a decisive impact on the actual and optimal choice of contracts in a moral hazard context. Bonus contracts that offer a voluntary and unenforceable bonus for satisfactory performance provide powerful incentives and are superior to explicit incentive contracts when there are some fair-minded players. But trust contracts that pay a generous wage upfront are less efficient than incentive contracts. The principals understand this and predominantly choose the bonus contracts. Our results are consistent with recently developed theories of fairness, which offer important new insights into the interaction of contract choices, fairness and incentives.
    Keywords: Moral Hazard, Incentives, Bonus Contract, Trust Contract, Fairness, Inequity Aversion
    JEL: C7 C9 J3
    Date: 2005–11
  4. By: Anabela Botelho (NIMA, Universidade do Minho); Glenn W. Harrison; Lígia Pinto (NIMA, Universidade do Minho); Elisabet E. Rutstrom (University of South Carolina)
    Abstract: Experiments can provide rich information on behavior conditional on the institutional rules of the game being imposed by the experimenter. We consider what happens when the subjects are allowed to choose the institution through a simple social choice procedure. Our case study is a setting in which sanctions may or may not be allowed to encourage "righteous behavior". Laboratory experiments show that some subjects in public goods environments employ costly sanctions against other subjects in order to enforce what appears to be a social norm of contribution. We show that this artificial society is not an attractive place to live, by any of the standard social choice criteria. If it came about because of evolutionary forces, as speculated, then The Blind Watchmaker was having one of his many bad days at the workbench. In fact, none of our laboratory societies with perfect strangers matching ever chose to live in such a world. Our findings suggest that the conditions under which a group or a society would choose a constitution that is based on voluntary costly sanctions are very special.
    Date: 2005–11
  5. By: Simon Deakin; Beth Ahlering
    Abstract: We explore the finding of La Porta et al. that differences in Ôlegal originÕ account for part of cross-national diversity in labour regulation and corporate governance. We suggest that the finding needs a better historical grounding and that a mechanism which might explain it has not been adequately spelled out. In search of an explanation we focus on the role of complementarities between legal and economic institutions, and in particular the part played by the distinctive Ôlegal culturesÕ of the common law and civil law in setting national systems on separate pathways to economic development.
    Keywords: legal origin, complementarities, legal cultures, labour law, corporate governance.
    JEL: G38 K22 K31 J53 J83
  6. By: Mary Burke; Gary Fournier
    Abstract: We develop an explanation of the emergence of local norms, and the associated phenom- enon of geographical variation in behavior. Individuals are assumed to interact locally with neighbors in an environment with a network externality. Although many patterns of behavior are possible, the dispersed interactive choices of agents are shown to select behavior that is locally uniform but globally diverse. The range of applications of the theory includes regional variation in the practice of medicine, technology choice, and corruption. The framework is also useful for further developing our understanding of important phenomena like lock-in, critical thresholds, and contagion
    Keywords: Social norms, networks, geographical variation
    JEL: C73
    Date: 2005–11–11
  7. By: Potters,Jan; Sefton,Martin; Heijden,Eline van der (Tilburg University, Center for Economic Research)
    Abstract: We use experiments to compare two institutions for allocating the proceeds of team production. Under revenue-sharing, each team member receives an equal share of team output; under leader-determined shares, a team leader has the power to implement her own allocation. Both arrangements are vulnerable to opportunistic incentives: under revenuesharing team members have an incentive to free-ride, while under leader-determined shares leaders have an incentive to seize team output. We find that most leaders forego the temptation to appropriate team output and manage to curtail free-riding. As a result, compared to revenue-sharing, the presence of a team leader results in a significant improvement in team performance.
    Keywords: team production;leadership;opportunism;experiments
    JEL: C9 D2 H4 J3 L2
    Date: 2005
  8. By: Jean Louis Dessalles (CREM CNRS UMR 6211 University of Rennes I,); Denis Phan
    Abstract: This paper provides a formal definition of emergence, operative in multi-agent framework and which make sense from both a cognitive and an economics point of view. The first part discuses the ontological and epistemic dimension of emergence and provides a complementary set of definitions. Following Bonabeau, Dessalles, emergence is defined as an unexpected decrease in relative algorithmic complexity. The relative algorithmic complexity of a system measures the complexity of the shortest description that a given observer can give of the system, relative to the description tools available to that observer. Emergence occurs when RAC abruptly drops by a significant amount, i.e. the system appears much simpler than anticipated. Following Muller, we call strong emergence a situation in which the agents involved in the emerging phenomenon are able to perceive it. Strong emergence is particularly important in economic modelling, because the behaviour of agents may be recursively influenced by their perception of emerging properties. Emerging phenomena in a population of agents are expected to be richer and more complex when agents have enough cognitive abilities to perceive the emergent patterns. Our aim here is to design a minimal setting in which this kind of “strong emergence†unambiguously takes place. In part II, we design a model for strong emergence as an extension of Axtell et al. In the basic model, agents tend to correlate their fellows’ behaviour with fortuitous visible but meaningless characteristics. On some occasions, these fortuitous tags turn out to be reliable indicators of dominant and submissive behaviour in an iterative Nash bargaining tournament. One limit of this model is that dominant and submissive classes remain implicit within the system. As a consequence, classes only emerge in the eye of external observers. In the enhanced model, Individuals may deliberately choose to display a tag after observing that they are regularly dominated by other agents who display that tag. Tag display is constrained by the fact that displaying agents must endure a cost. Agents get an explicit representation of the dominant class whenever that class emerges, thus implementing strong emergence. This phenomenon results from a double-level emergence. As in the initial model, dominant and submissive strategies may emerge through amplification of fortuitous differences in agents’ personal experiences. We add the possibility of a second level in emergence, where a tag is explicitly used by agents to announce their intention to adopt a dominant strategy. Costly signalling (Spence, Zahavi et al. Gintis, Smith, Bowles) is an essential feature of this extended model. Qualities are not objective, but correspond to an emerging de facto ranking of individuals. Without strong emergence, endogenous signalling allows possible inversion in the class regime, while with strong emergence class behaviour may became a stochastically stable regim
    Keywords: adaptive complex systems, agent based computational economics, behavioural learning in games, cognitive hierarchy, complexity, detection, emergence, population games, signalling, stochastic stability
    JEL: B41 C73 C88 D83
    Date: 2005–11–11
  9. By: Nabanita Datta Gupta (Danish National Institute of Social Research and IZA Bonn); Anders Poulsen (University of East Anglia); AMarie-Claire Villeval (GATE (CNRS, University Lumière Lyon, ENS) and IZA Bonn)
    Abstract: Male and female choices differ in many economic situations, e.g., on the labor market. This paper considers whether such differences are driven by different attitudes towards competition. In our experiment subjects choose between a tournament and a piece-rate pay scheme before performing a real task. Men choose the tournament significantly more often than women. Women are mainly influenced by their degree of risk aversion, but men are not. Men compete more against men than against women, but compete against women who are thought to compete. The behavior of men seems primarily to be influenced by social norms whose nature and origin we discuss.
    Keywords: competition, tournament, piece rate, gender, risk-aversion, relative ability, experiment
    JEL: C70 C91 J16 J24 J31 M52
    Date: 2005–11
  10. By: Rainer Andergassen (Economics Università di Bologna); Franco Nardini
    Abstract: This paper attempts to generalise some results obtained in previous work showing the conditions under which paradigm setters emerge. We distinguish two different but definitely complementary and overlapping ways through which searching and learning occur. The first exploits the spillover potential that lies in a firm's network and thanks to which gathering innovation-useful information is actually possible. The second rests with the autonomous capacity that a firm possesses in order to carry out in-house innovative search. While these two searching processes not only coexist but are also reciprocally sustaining, we find it expedient to separate them by integrating a knowledge diffusion mechanism that propagates technological capabilities with an independent stochastic process capturing innovation arrivals due to internal R.&D. A network's evolution depends on how firms assess their performance in terms of innovation-enabling spillovers. In a bounded rationality framework, firms normally explore a limited part of the firms' space and require a protocol to target their information gathering efforts. The paper addresses this issue by designing a routinised behaviour according to which firms periodically reshape the neighbourhood that they observe to glean information by reassessing other firms' contributions to their own capability. The way the specific neighbour-choosing routine is accordingly organised determines in a significant way firms' average innovative capability. This feature is modelled by changing the span of network observation from a very broad setting, the whole economy, to a very narrow one, namely the most proximate neighbourhood membership. The economy is further portrayed as a collection of cognitively heterogeneous agents possessing firm specific knowledge and, thus, firm specific innovative capability. We also find it expedient to classify this assumed population according to their capability to capture broadcast information. This procedure implies viewing the economy as an ensemble of areas of cognitive exchange within which knowledge spillovers flow with equal ease. This approach to modelling interaction bears an important implication: the choice of new neighbours poses the problem of a trade-off between easily obtainable information, yet carrying low innovation empowering content, and hard to acquire, because cognitively distant, information but possibly conveying high capability contributions. To keep the model mathematically tractable, we formalise the features stated above by means of a linear system in which technological capabilities are made to depend on a matrix of interaction with evolving neighbours as well as on a vector of in-house generated knowledge. The model is then simulated to determine the emergent properties of neighbourhood formation and stability together with average capability
    Keywords: Paradigm setters, Netwoks, Technical Change, Bounded Rationality
    JEL: L14 O33
    Date: 2005–11–11
  11. By: Alexander Elbittar (; Andrei Gomberg (; Laura Sour (
    Abstract: Many rent-sharing decisions in a society result from a bargaining process between groups of individuals (such as between the executive and the legislative branches of government, between legislative factions, between corporate management and shareholders, etc.). We conduct a laboratory study of the effect of different voting procedures on group decision-making in the context of ultimatum bargaining. Earlier studies have suggested that when the bargaining game is played by unstructured groups of agents, rather than by individuals, the division of the payoff is substantially affected in favor of the ultimatum-proposers. Our theoretical arguments suggest that one explanation for this could be implicit voting rules within groups. We explicitly structure the group decision-making as voting and study the impact of different voting rules on the bargaining outcome. The observed responder behavior is consistent with preferences depending solely on payoff distribution. Furthermore, we observe that proposers react in an expected manner to changes in voting rule in the responder group.
    Keywords: Bargaining games, group decision making and experimental design.
    JEL: C92 D44 D82
    Date: 2005–11–14
  12. By: Leigh Tesfatsion (Economics Iowa State University)
    Abstract: Computational laboratories (CLs) are computational frameworks that facilitate the study of complex system behaviors by means of controlled and replicable experiments. CLs permit students to engage in open-ended creative research, to explore interesting questions of their own devising for which answers are not known in advance. Students can tweak key parameters and get immediate run-time feedback of results through tables, charts, and other forms of graphical visualization with no original programming required. Moreover, students with programming backgrounds can modify and extend CL features to adapt them more closely to their desired applications. This talk will discuss the development of CLs as computer-based instructional materials for an agent-based computational economics (ACE) course, Econ 308, offered each Spring as part of the undergraduate economics curriculum at Iowa State University. ACE is the computational study of economies modeled as dynamic systems of interacting agents. Topics covered in this ACE course include: the complexity of decentralized market economies; learning and the embodied mind; network economics; and the experimental study of specific types of market processes (labor, financial, electricity, and general auction markets). CLs have been successfully used in this ACE course for take-home exercises, for in-class exercises, and as the basis for student course projects. REFERENCES: On-Line Syllabus for ACE Course (Econ 308): L. Tesfatsion, "Computational Laboratories for the Experimental Exploration of Complex System Behaviors: Phase II," Preliminary Project Report for LASCAS Grant, October 2004, available at lRep2.pdf
    Keywords: Computational laboratory; Agent-based; Complex economic systems; Computer-aided instruction
    JEL: A20 B4 C6
    Date: 2005–11–11
  13. By: Ryuichi YAMAMOTO (International Business School Brandeis University)
    Abstract: Recent research has shown a variety of computational techniques to describe evolution in an artificial stock market. One can distinguish the techniques based on at which level the learning of agents is modeled. The previous literature describes learning at either individual or social level. The level of learning is exogenously given, and agents involve only a particular level of learning when they update their rules. But such a setting doesn’t say anything about why agents choose a particular level of learning to update their trading rules. This paper introduces a learning mechanism which allows agents to choose one rule at each period among a set of ideas updated through both individual and social learning. A trading strategy performed well in the past is more likely to be selected by agents regardless it is created at individual or social level. This framework allows agents to choose a decision rule endogenously among a wider set of ideas. With such evolution, the following two questions are examined. First, since agents who have a wider set of ideas to choose are more intelligent, a question would arise if the time series from an economy with intelligent agents would converge to a rational expectation equilibrium (REE). Previous literature like LeBaron (2000) and Arthur et al. (1996) investigates the convergence property to the REE by looking at different time-horizons. It finds that the more information from the market agents get before updating their rules, the market is more likely to converge to the REE. But this paper investigates the convergence property by looking at different degrees of intelligence given a time horizon. The second investigates which level of learning is likely to dominate in the market. This is analyzed by investigating who chooses which level of learning and what proportion of the agents often uses individual or social learning. We analyze a hypothesis that wealthy agents often choose an idea from a set of her private ideas (from individual learning) while some with less wealth frequently imitate ideas from others (from social learning). The result eventually indicates that the agent-based stock market in this paper would possibly explain the mechanism of herding behavior which is often observed in financial markets
    Keywords: Individual learning; Social learning; Evolution; Asset pricing; Financial time series
    JEL: G12 G14 D83
    Date: 2005–11–11
  14. By: Faruk Gul; Wolfgang Pesendorfer
    Date: 2005–11–13

This nep-cbe issue is ©2005 by Marco Novarese. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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