nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒06‒23
fifteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Allocation of scarce resources when rationality is one of them: some consequences of cognitive inequalities for theory and policy By Pelikan, Pavel
  2. The Referendum Incentive Compatibility Hypothesis:Some New Results Using Information Messages By Gianluca Stefani; Riccardo Scarpa
  3. Board structures around the world: An experimental investigation By Ann B. Gillette; Thomas H. Noe; Michael J. Rebello
  4. Are Women Asking for Low Wages? Gender Differences in Wage Bargaining Strategies and Ensuing Bargaining Success By Säve-Söderbergh, Jenny
  5. Group polarization in the team dictator game reconsidered By Wolfgang Luhan; Martin Kocher; Matthias Sutter
  6. Mental Accounting and Remittances: A Study of Malawian Households By Davies, Simon; Easaw, Joshy; Ghoshray, Atanu
  7. The cost of lying By Lundquist, Tobias; Ellingsen, Tore; Gribbe, Erik; Johannesson, Magnus
  8. Trust and truth By Ellingsen, Tore; Johannesson, Magnus; Lilja, Jannie; Zetterqvist, Henrik
  9. Inconsistent Choices in Lottery Experiments: Evidence from Rwanda By Sarah Jacobson; Ragan Petrie
  10. Friendship Selection By Javier Rivas
  11. Environmental and Pro-Social Norms: Evidence from 30 Countries By Benno Torglor
  12. The Signalling Power of Sanctions in Collective Action Problems By Joel van der Weele
  13. A land of milk and honey with streets paved with gold: Do emigrants have over-optimistic expectations about incomes abroad? By David McKenzie; John Gibson; Steven Stillman
  14. On Punishment and Well-being By Jordi Brandts; María Fernanda Rivas
  15. Is There A Plausible Theory for Risky Decisions? By James C. Cox; Vjollca Sadiraj; Bodo Vogt; Utteeyo Dasgupta

  1. By: Pelikan, Pavel
    Abstract: "Rationality" is understood in the empirical sense of cognitive abilities of human brains for solving economic problems, and consequently recognized bounded in individually unequal ways. This is shown to require treating it as a unique scarce resource, used for deciding on its own uses. This uniqueness disturbs axiomatic economics by a tangled hierarchy, and implies that rationality-allocation can approach efficiency only by means of an institutionally shaped trial-and-error evolution. Applied to the markets vs. government issue, a comparative institutional analysis of rationality-allocation yields novel insights with non-standard policy implications, and thus demonstrates that rationality-allocation matters.
    Keywords: unequally bounded rationality; rationality-allocation; tangled hierarchy; institutionally shaped evolution; comparative institutional analysis
    JEL: P5 D6 H1 D72
    Date: 2007–05
  2. By: Gianluca Stefani (University of Firenze); Riccardo Scarpa (University of Waikato)
    Abstract: We report results from a laboratory experiment that allows us to test the incentive compatibility hypothesis of hypothetical referenda used in CV studies through the public or private provision of information messages. One of the main methodological issues about hypothetical markets regards whether people behave differently when bidding for a public good through casting a ballot vote than when they are privately purchasing an equivalent good. This study tried to address the core of this issue by using a good that can be traded both as private and public: information messages. This allows the elimination of confounding effects associated with the specific good employed. In our case information dispels some of the uncertainty about a potential gain from a gamble. So, the approximate value of the message can be inferred once the individual measure of risk aversion is known. Decision tasks are then framed in a systematic manner according to the hypothetical vs real nature of the decision and the public vs private nature of the message. A sample of 536 university students across three countries (I, UK and NZ) participated into this lab experiment. The chosen countries reflect diversity in exposure to the practice of advisory (NZ) and abrogative (Italy) referenda, with the UK not having any exposure to it. Under private provision the results show that the fraction of participants unwilling to buy information is slightly higher in the real treatment than in the hypothetical one. Under public provision, instead, there is no statistical difference between real and hypothetical settings, confirming in part the finding of previous researchers. A verbal protocol analysis of the thought processes during choice highlights that public provision of information systematically triggers concerns and motivations different from those arising under the private provision setting. These findings suggest that the incentive compatibility of public referenda is likely to rely more on affective and psychological factors than on the strategic behaviour assumptions theorised by economists.
    Keywords: Contingent Valuation ; Incentive Compatibility ; Experimental Economics;
    JEL: Q50 H40 C91
    Date: 2007–06–13
  3. By: Ann B. Gillette; Thomas H. Noe; Michael J. Rebello
    Abstract: We model and experimentally examine the board structure–performance relationship. We examine single-tiered boards, two-tiered boards, insider-controlled boards, and outsider-controlled boards. We find that even insider-controlled boards frequently adopt institutionally preferred rather than self-interested policies. Two-tiered boards adopt institutionally preferred policies more frequently, but tend to destroy value by being too conservative, frequently rejecting good projects. Outsidercontrolled single-tiered boards, both when they have multiple insiders and only a single insider, adopt institutionally preferred policies most frequently. In those board designs where the efficient Nash equilibrium produces strictly higher payoffs to all agents than the coalition-proof equilibria, agents tend to select the efficient Nash equilibria.
  4. By: Säve-Söderbergh, Jenny (Swedish Institute for Social Research, Stockholm University)
    Abstract: Men and women’s labor market outcomes differ along pay, promotion and competitiveness. This paper contributes by uncovering results in a related unexplored field using unique data on individual wage bargaining. We find striking gender differences. Women, like men, also bargain, but they submit lower wage bids and are offered lower wages than men. The adjusted gender wage gap is lower with posted-wage jobs than with individual bargaining, although less is ascribable to the term associated with discrimination. Both women and men use self-promoting, or competitive bargaining strategies, but women self-promote at lower levels. Employers reward self-promotion but the larger the self-promotion, the larger is the gender gap in bargaining success. Women therefore lack the incentives to self-promote, which helps to explain the gender disparities.
    Keywords: Individual Wage Bargaining; Competitiveness; Bargaining strategies; Self-promoting Bargaining Strategies; Gender Wage Gap; and Discrimination.
    JEL: J16 J31 M51 M52
    Date: 2007–05–18
  5. By: Wolfgang Luhan; Martin Kocher; Matthias Sutter
    Abstract: While most papers on team decision-making find that teams behave more selfishly, less trustingly and less altruistically than individuals, Cason and Mui (1997) report that teams are more altruistic than individuals in a dictator game. Using a within-subjects design we re-examine group polarization by letting subjects make individual as well as team decisions in an experimental dictator game. In our experiment teams are more selfish than individuals, and the most selfish team member has the strongest influence on team decisions. Various explanations for the different findings in Cason and Mui (1997) and in our paper are discussed.
    Keywords: Experiment, dictator game, team behavior, social preferences
    JEL: C72 C91 C92 D70
    Date: 2007–07
  6. By: Davies, Simon; Easaw, Joshy; Ghoshray, Atanu
    Abstract: In this paper we use a behavioural approach to studying household consumption behaviour in Malawi. In particular we are interested to know whether households use mental accounting when consuming different categories of good. It is useful for assessing the impact of remittances on household consumption behaviour. We use 1998 cross-sectional data to find the following key results: (i) mental accounting systems are in operation. Remittance income exhibits a high marginal propensity to save, (ii) household income influences consumption habits, (iii) receipt of remittance income impacts on saving and spending habits. This is in line with the theory of remittances and corresponding mental accounting theory, and, finally, (iv) both remittances and loans are used for consumption smoothing and investment purposes.
    Keywords: Remittances; Household Behaviour; Consumer Economics; Economic Development; Africa; Malawi
    JEL: D12 D1 O15
    Date: 2006–10
  7. By: Lundquist, Tobias (Dept. of Economics, Stockholm School of Economics); Ellingsen, Tore (Dept. of Economics, Stockholm School of Economics); Gribbe, Erik (Dept. of Economics, Stockholm School of Economics); Johannesson, Magnus (Dept. of Economics, Stockholm School of Economics)
    Abstract: We experimentally investigate the effect of cheap talk in a bargaining game with one-sided asymmetric information. A seller has private information about his or her skill and is provided an opportunity to communicate this information to a buyer through a written message. Four different treatments are compared; one without communication, one with free-form communication, and two treatments with pre-specified communication in the form of promises of varying strength. Our results suggest that lying about private information is costly and that the cost of lying increases with the size of the lie and the strength of the promise. Freely formulated messages lead to the fewest lies and the most efficient outcomes.
    Keywords: Deception; Communication; Lies; Promises; Experiments
    JEL: C91 D82
    Date: 2007–06–12
  8. By: Ellingsen, Tore (Dept. of Economics, Stockholm School of Economics); Johannesson, Magnus (Dept. of Economics, Stockholm School of Economics); Lilja, Jannie (Department of Peace and Conflict Research, Uppsala University); Zetterqvist, Henrik (Hilti)
    Abstract: In a laboratory experiment, we create relationships between pairs of anonymous subjects through a Prisoners' dilemma game. Thereafter the same subjects play a private values (sealed-bid double auction) bargaining game with or without communication. Communication substantially increases bargaining efficiency among subjects who cooperated in the Prisoners' dilemma, but has no significant effect on bargaining outcomes when one subject defected. Subjects who cooperated in the Prisoners' dilemma bid more aggresively if their opponent defected. Cooperators also lie more about their valuations when their opponent defected: Compared to the case of mutual cooperation, the cooperators' rate of honest revelation decreases from 64% to 6% and the rate of outright deception increases from 7% to 53%. Our results provide qualitatively new evidence that many people are strong recipricators: They are willing to bear private costs in order to reward good behavior and punish bad behavior, even when the rewards and punishments are unobservable.
    Keywords: Bargaining; Communication; Honesty; Trust; Strong reciprocity
    JEL: C91 D74 Z13
    Date: 2006–11–01
  9. By: Sarah Jacobson; Ragan Petrie
    Abstract: Lottery experiments have been performed in many contexts to test theories of risk aversion and to measure risk preferences. People are typically offered a series of lotteries with increasing expected payoffs and variances. A person with a concave utility function should switch from risky bets to safer bets at some point and never switch back. Switching back implies preferences inconsistent with a concave utility function. Our experiment, conducted with a population of adults in Rwanda, presents respondents with a series of binary-choice lotteries over gains and losses. We observe that 54-55% of subjects made at least one inconsistent choice over gains or losses, and 7-13% made at least two inconsistent choices. This holds for both hypothetical and real lottery payoffs. Inconsistent choices were less common when stakes were higher, and women are more likely to be inconsistent. While risk aversion alone is not correlated with actual economic outcomes, such as membership in savings (tontines) and insurance groups and holding a larger number of bank accounts, inconsistency is.
    Date: 2007–04
  10. By: Javier Rivas
    Abstract: We model the formation of friendships as repeated cooperation within a set of heterogeneous players. The model builds around three of the most important facts about friendship: friends help each other, there is reciprocity in the relationship and people usually have few friends. In our results we explain how similarity between people affects the friendship selection. We also characterize when the friendship network won’t depend on the random process by which people meet each other. Finally, we explore how players’ patience influences the length of their friendship relations. Our results match and explain empirical evidence reported in social studies on friendship. For instance, our model explains why troublesome subjects have few friends.
    Keywords: Friendship, cooperative game, grim trigger strategy, social networks
    JEL: C72 C73 Z13
    Date: 2007
  11. By: Benno Torglor
    Abstract: The paper investigates the relationship between pro-social norms and its implications for improved environmental outcomes, an area which has been neglected in the environmental economics literature. We provide empirical evidence, demonstrating a strong link between perceived environmental cooperation (reduced public littering) and increased voluntary environmental morale, using European Values Survey (EVS) data for 30 Western and Eastern European countries. The robust results suggest that environmental morale and perceived environmental cooperation, as well as identifying the factors that strengthen these relationships, potentially bring about better environmental outcomes.
    Keywords: environmental preferences, environmental morale, conditional cooperation, pro-social behavior
    JEL: H26 H73 D64
    Date: 2007–06–01
  12. By: Joel van der Weele
    Abstract: We present a model of collective action in a heterogenous population of egoists and conditional cooperators. Each player is uncertain about the cooperative inclinations of the other player. A government or principal who has information about the distribution of types may introduce sanctions for defection. We study the impact of such sanctions through the e¤ect on the beliefs of the players about the distribution of types they are facing. It is shown that in equilibrium sanctions can crowd out trust between agents by sending a signal that there are many egoists around. This can lead the government to set low sanctions to induce trust and 'crowd in' cooperation. In cases where conditional cooperation is an important factor in collective action, as is the case in tax compliance, the model provides a rationale for the low observed sanctions in the real world.
    Keywords: Collective action, trust, incentives, crowding out, conditional cooperation
    JEL: D83 J30 K42 M52
    Date: 2007
  13. By: David McKenzie (Development Research Group, World Bank); John Gibson (University of Waikato); Steven Stillman (Motu Economic and Public Policy Research)
    Abstract: Millions of people emigrate every year in search of better economic and social opportunities. Anecdotal evidence suggests that emigrants may have over-optimistic expectations about the incomes they can earn abroad, resulting in excessive migration pressure, and in disappointment amongst those who do migrate. Yet there is almost no statistical evidence on how accurately these emigrants predict the incomes that they will earn working abroad. In this paper we combine a natural emigration experiment with unique survey data on would-be emigrants’ probabilistic expectations about employment and incomes in the migration destination. Our procedure enables us to obtain moments and quantiles of the subjective distribution of expected earnings in the destination country. We find a significant underestimation of both unconditional and conditional labor earnings at all points in the distribution. This under-estimation appears driven in part by potential migrants placing too much weight on the negative employment experiences of some migrants, and by inaccurate information flows from extended family, who may be trying to moderate remittance demands by understating incomes.
    Keywords: Expectations; Migration; Natural Experiment
    JEL: D84 F22 J61
    Date: 2007–05
  14. By: Jordi Brandts; María Fernanda Rivas
    Abstract: The existence of punishment opportunities has been shown to cause efficiency in public goods experiments to increase considerably. In this paper we ask whether punishment also has a downside in terms of process dissatisfaction. We conduct an experiment to study the conjecture that an environment with stronger punishment possibilities leads to higher material but lower subjective well-being. The more general motivation for our study stems from the notion that people??s subjective well-being may be affected by the institutional environment they find themselves in. Our findings show that harsher punishment possibilities lead to signficantly higher well-being, controlling for earnings and other relevant variables. People derive independent satisfaction from interacting under the protection of strong punishment possibilities. These results complement the evidence on the neural basis of altruistic punishment reported in de Quervain et al. (2004).
    Keywords: Public Goods, Experiments, Well-being, Punishment
    JEL: C92 D60 H40
    Date: 2007–06–15
  15. By: James C. Cox; Vjollca Sadiraj; Bodo Vogt; Utteeyo Dasgupta
    Abstract: A large literature is concerned with analysis and empirical application of theories of decision making for environments with risky outcomes. Expected value theory has been known for centuries to be subject to critique by St. Petersburg paradox arguments. More recently, theories of risk aversion have been critiqued with calibration arguments applied to concave payoff transformations. This paper extends the calibration critique to decision theories that represent risk aversion solely with transformation of probabilities. Testable calibration propositions are derived that apply to four representative decision theories: expected utility theory, cumulative prospect theory, rank-dependent expected utility theory, and dual expected utility theory. Heretofore, calibration critiques of theories of risk aversion have been based solely on thought experiments. This paper reports real experiments that provide data on the relevance of the calibration critiques to evaluating the plausibility of theories of risk aversion. The paper also discusses implications of the data for (original) prospect theory with editing of reference payoffs and for the new dual-self model of impulse control. In addition, the paper reports an experiment with a truncated St. Petersburg bet that adds to data inconsistent with risk neutrality.
    Date: 2007–06

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