nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2006‒06‒03
twelve papers chosen by
Marco Novarese
Universita del Piemonte Orientale

  1. Complexity in decision-making - the case of Maasvlakte - Connecting decisions, arenas and actors in spatial decision-making By Marcel Van Gils; Erik-Hans Klijn
  2. Laboratory Bilateral Gift Exchange: The Impact of Loss Aversion By Dennis A.V. Dittrich; Anthony Ziegelmeyer
  3. Cooperative Networks: Theory and Experimental Evidence By Katinka Pantzy; Anthony Ziegelmeyer
  4. Institutions, Firms and Economic Growth By Jane Frances
  5. Conformity and Indifference: The Structure of Frequency-Dependent Social Learning By Charles Efferson; Rafael Lalive; Peter J. Richerson,; Richard McElreath; Mark Lubell
  6. Overconfident but yet well-calibrated and underconfident: A research note on judgmental miscalibration and flawed self-assessment* By Andersson, Patric
  7. The motives of organizational justice By Nadisic, Thierry
  8. Motivation and the theory of the firm By Gottschalg, Oliver; Zollo, Maurizio
  9. Unemployment and Psychological Well-Being By Nick Carroll
  10. The uses of the past By Axel Leijonhufvud
  11. Trust, Honesty, and Corruption: Reflection on the State-Building Process By Susan Rose-Ackerman
  12. Materialism on the March: From Conspicuous Leisure to Conspicuous Consumption? By Paul Frijters; Andrew Leigh

  1. By: Marcel Van Gils; Erik-Hans Klijn
    Abstract: Decision-making about infrastructure is very complex. Decisions to develop the Rotterdam harbour are being taken in a network of local, regional and national actors and influenced by international actors (firms, NGO’s etc.) both public and private. This decision-making process shows a lot of uncertainty and complexity and the outcomes are of great importance for the development of the harbour. Network theory has been widely used to indicate, explain and manage uncertainty in decision-making processes. The theory is well equipped for empirical research and has shown many applicable results. The attention for influences from outside the network to decision-making inside the network is however still poorly developed. In the case of decision-making with a strong international component this is a handicap. In this paper the relation between influences from outside and decision-making inside networks is studied both theoretically and empirically. A distinction is made between locally bound and non-locally bound networks to theorise the complex decision-making process. The well-known scientific concept of space of flows versus space of places from Manuel Castells is used as an inspiration to describe the relation between the locally and non-locally bounded networks of decision making. The locally bounded network is formed by the formal decision making process between the governmental and non-governmental organisations in countries, regions and municipalities. The non-locally bounded networks exist of organizations that are footloose and act globally mainly according to economic principals. The concept of inclusion is used to analyse the various actors in the decision-making process. The paper starts with the description of the external influences in port areas in general. The balance between the influence of local and non-local bounded networks depends on the multiple-inclusion of the different actors in the decision-making process in both networks. In areas in which many actors are included in the place-bounded networks, the external influences can be expected to be marginal. The port area of Rotterdam is a node in international networks and so the hypothesis can be set that in the Rotterdam port area the influence of actors mainly included in non-place bounded networks is significant in decision making networks. To explore this assumption various networks, which are relevant for decision-making about spatial issues in the Rotterdam port are identified and the differences in inclusion of the relevant actors is analysed. By means of the analysis of perceptions of the various actors (locally bound or non-locally bound) and their strategic choices and decisions we show that notions on international port development are being interpreted and transformed quite differently by the various actors. This first part of analysis highlights the possible gap between the awareness of the various actors of the non-locally bounded networks and their translation into their strategies in local bounded networks. We also trace difference of perceptions and strategies between actors who solely operate in locally bound networks and actors who are both included in locally and non-locally bound networks (like shipping firms etc). This second part of analysis indicates if there are differences in what the actors use as input for their respective positions in the decision-making networks. The paper shows that the influence of external developments in non-locally bound networks manifests itself in locally bound networks but is transformed and interpreted in many ways by the different actors. The paper ends with some conclusions about decision-making on large ports and the possibilities to influence this complex decision-making process that takes place in locally bound and non-locally bounded networks at the same time.
    Date: 2005–08
  2. By: Dennis A.V. Dittrich; Anthony Ziegelmeyer
    Abstract: We present a systematic robustness test of the persistence of gift-exchanges in the laboratory. Our data clearly establish that the effect of social forces is dramatically crowded out by loss aversion. This was not observed before, as in other studies that allow for nominal losses participants were endowed with a substantial lump sum payment. We did not endow our participants with some initial wealth (they also got no show-up fee). Instead, participants were required to sign an agreement before the start of the experimental session in which they agreed to cover losses by either incomes from future participation in experimental sessions or by their own money. We conjecture that by providing some initial endowment to their participants, previous experimental studies have clearly failed to investigate the impact of losses on the level of gift exchange reported. Further, we observe a considerable between treatment variability in the effort-wage relation. Small lump-sum payments to the first-mover reduce the effort-wage slope significantly. A reduction in the profitability of effort increases the effort-wage slope.
    Date: 2006–05
  3. By: Katinka Pantzy; Anthony Ziegelmeyer
    Abstract: We consider a modified pure public good game characterized by a pre-play negotiation stage, on which pairs of players can form binding cooperation commitments. As the introduced mechanism only supports pairwise rather than more inclusive commitments, it does not implement the efficient outcome. We theoretically derive the incentive compatible and efficient cooperative networks and evaluate the behavioral efficacy of the suggested mechanism to promote and stabilize cooperation. We present the results of two separate experiments. The first experiment serves to provide necessary methodological prerequisites and establishes that neither repetition with an unknown end nor voluntary costly monitoring are behaviorally sufficient to induce cooperative outcomes. In the second experiment we introduce the pairwise commitment mechanism. We show that the mechanism induces aggregate cooperation rates not only beyond the rates observed under the voluntary contribution mechanism operationalized in the first experiment, but also beyond the rate which is supported by the formation of incentive compatible networks. We observe a large heterogeneity between groups: while some groups converge to full cooperation by managing to coordinate on the formation of efficient networks over time, both networks and cooperation rates unravel in other groups. An extended version of our theoretical setting with inequity averse players in the form suggested by Fehr and Schmidt (1999) captures the stylized facts of both experiments.
    Keywords: Strategic formation of networks, Social dilemma, Positive externalities, Experiments
    JEL: C92 D85 H41 Z13
    Date: 2006–05
  4. By: Jane Frances (New Zealand Treasury)
    Abstract: This paper reviews the literature on institutions and explores the ways in which institutions can influence economic growth, with a particular focus on how institutions affect the use that firms make of human capital to improve their productivity. It discusses the influence of underlying institutions, such as law and order and secure property rights, on the general environment within which the economic activities of production and exchange takes place. It also explores the influence of activity-specific institutions, such as labour market institutions, on firm decisions about resource use and innovation and through these on economic activity and economic growth.
    Keywords: institutions; human capital; regulation; norms; firms; economic growth; New Zealand
    JEL: D00 D20 J24 K00 L51 O40 P00 Z13
    Date: 2004–09
  5. By: Charles Efferson; Rafael Lalive; Peter J. Richerson,; Richard McElreath; Mark Lubell
    Abstract: We conducted an experiment to describe precisely how social learners use information about the distribution of behaviors in a relevant social group. Players chose between two technologies repeatedly. Payoffs were random, but one technology was better in the sense that its expected payoff was higher. Players were divided into two groups: 1) individual learners who knew their realized payoffs after each choice and 2) social learners who had information about the relative frequencies of the two technologies among the individual learners but no private feedback about their own payoffs. For a subset of the social learners, a theoretical model of conformity matches the data very closely. The remaining social learners, however, made choices without responding to the social information provided. This kind of heterogeneity among social learners has received little theoretical attention with respect to aggregate behavioral dynamics.
    Keywords: social learning, conformity, gene-culture coevolution, laboratory experiment
    JEL: C92 O31 Z13
    Date: 2006–05
  6. By: Andersson, Patric (Sonderforschungsbereich 504, Universität Mannheim & Center for Economic Psychology, Stockholm School of Economics)
    Abstract: The present paper addresses the question whether overconfidence is an individually stable phenomenon. A within-subjects design was used to investigate whether judgmental miscalibration also reflects tendency to make flawed self-assessments. While the former notion refers to the tendency of individuals to put unrealistic beliefs in their judgments, the latter concerns the tendency of individuals to make inaccurate evaluations of their abilities and performance. On the whole, the paper finds little support that those two tendencies should be related. Depending on the employed measurement, the participants were found to be simultaneously overconfident, well-calibrated, and underconfident.
    Date: 2005–09–30
  7. By: Nadisic, Thierry
    Abstract: The article proposes an answer to the question of why people care about justice in the workplace.
    Keywords: models of organizational justice; material benefits; relational benefits; the fair process effect; the fair outcome effect; the interactive effect; the fairness preference effect; motives of organizational justice; controlled and cognitively driven justice judgements; automatic and emotionally driven justice judgments.
    JEL: D23 O15
    Date: 2006–01–01
  8. By: Gottschalg, Oliver; Zollo, Maurizio
    Abstract: This paper proposes to revisit the debate on the theory of the firm using motivation theory as the primary analytical tool.
    Keywords: theory of the firm; motivation theory
    JEL: L21 L25
    Date: 2006–02–08
  9. By: Nick Carroll
    Abstract: Who records the largest drops in life satisfaction when they move into unemployment? Do men experience a larger drop in life satisfaction than women? Do Australians and Americans record a larger drop than Europeans? Using an Australian panel data-set (the Household Income and Labour Dynamics Survey of Australia), this paper finds that the unemployed in Australia report lower life satisfaction than observationally equivalent employed people (holding current income constant). Being currently unemployed is estimated to be equivalent to the loss of $42,100 annual income for men and $86,300 annual income for women. Thus, the drop in life satisfaction, after controlling for unobserved time invariant characteristics, associated with unemployment is larger for women than men. The impact of unemployment on life satisfaction is large compared to the drops in life satisfaction associated with changes in income and disability status. It is found that unemployment is less painful for men in Australia than for men in Germany and the United Kingdom. The paper hypothesises that the large fall in life satisfaction may be the result of a drop in life-time earnings, as well as a ‘psychological’ effect.
    Keywords: well-being, happiness, unemployment
    JEL: I31 J64
    Date: 2005–07
  10. By: Axel Leijonhufvud
    Date: 2006
  11. By: Susan Rose-Ackerman (Yale Law School)
    Abstract: Trust implies confidence, but not certainty, that some person or institution will behave in an expected way. A trusting person decides to act in spite of uncertainty about the future and doubts about the reliability of others' promises. The need for trust arises from human freedom. As Piotr Sztompka (1999: 22) writes, "facing other people we often remain in the condition of uncertainty, bafflement, and surprise."Honesty is an important substantive value with a close connection to trust. Honesty implies both truth-telling and responsible behavior that seeks to abide by the rules. One may trust another person to behave honestly, but honesty is not identical to trustworthiness. A person may be honest but incompetent and so not worthy of trust. Nevertheless, interpersonal relationships are facilitated by the belief that the other person has a moral commitment to honesty or has an incentive to tell the truth. Corruption is dishonest behavior that violates the trust placed in a public official. It involves the use of a public position for private gain.I focus on honesty and trust as they affect the functioning of the democratic state and the market. I am interested in informal interactions based on affect-based trust only insofar as they substitute for, conflict with, or complement the institutions of state and market. The relationship between informal connections and formal rules and institutions is my central concern. The institutions of interest are democratic political structures, bureaucracies, law and the courts, and market institutions.As Mark Warren points out, governments are needed in just those situations in which people cannot trust each other voluntarily to take others' interests into account. The state is a way of managing inter-personal conflicts without resorting to civil war. Yet, this task is much more manageable if the citizenry has a degree of interpersonal trust and if the state is organized so that it is trusted by its citizens, at least, along some dimensions. The state may be able to limit its regulatory reach if interpersonal trust vitiates the need for certain kinds of state action (Offe 1999). Conversely, if the state is reliable and even-handed in applying its rules, that is, if people trust it to be fair, state legitimacy is likely to be enhanced (Offe 1999, Sztompka 1999: 135-136). Thus, there are three interrelated issues. First, do trust and reliability help democracy to function, and if so, how can they be produced? Second, do democratic governments help create a society in which trustworthiness and honesty flourish? Third, given the difficulty of producing trustworthiness and honesty, how can institutional reform be used to limit the need for these virtues?This paper provides a framework for thinking about these broad questions. Section I organizes the research on trust especially as it applies to the relationship between trust and government functioning. With this background, section II discusses the mutual interaction between trust and democracy. The alternative of limiting the need for trust leads, in section III, to a discussion of corruption in government and commercial dealings. Corruption occurs when dishonest politicians and public officials help others in return for payoffs. Because their actions are illegal, they need to trust their beneficiaries not to reveal their actions. Corrupt officials are also, of course, betraying the public trust insofar as their superiors are concerned. Reforms here can involve a reorganization of government to limit the scope for lucrative discretionary actions. Conversely, one might focus on changing the attitudes of both officials and private actors so that existing discretion is exercised in a fairer and more impartial manner.This paper analyzes the interactions between trust and democracy at a general level. However, its initial aim was to provide a context for a workshop at the Collegium Budapest on honesty, trust, and corruption in post-socialist countries. My companion paper in Kyklos makes that link explicit by bringing in survey evidence on public attitudes and behavior. Here, I conclude in section IV with some thoughts on the special character of the transition process. I highlight the tensions between interpersonal trust and trust in public institutions in the context of the transition to democracy and a market economy.
  12. By: Paul Frijters; Andrew Leigh
    Abstract: This paper inserts Veblen’s (1898) concepts of conspicuous leisure and conspicuous consumption into a very simple model. Individuals have the choice to either invest their time into working, leading to easily observable levels of consumption, or into conspicuous leisure, whose effect on utility depends on how observable leisure is. We let the visibility of leisure depend positively on the amount of time an individual and her neighbors have lived in the same area. Individuals optimize across conspicuous leisure and conspicuous consumption. If population turnover is high, individuals are made worse off, since the visibility of conspicuous leisure then decreases and the status race must be played out primarily via conspicuous consumption. Analyzing interstate mobility in the US, we find strong support for our hypothesis: a 1 percentage point rise in population turnover increases the average work week of non-migrants by 7 minutes. The negative externality of population turnover on the visibility of conspicuous leisure is an argument for higher transport taxes.
    Keywords: conspicuous leisure, conspicuous consumption, mobility, labour supply, status races
    JEL: J22 J61 D10 D60 B15
    Date: 2005–09

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