nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒07‒07
sixteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Cognitive Dissonance, Pessimism, and Behavioral Spillover Effects By David L. Dickinson; Robert J. Oxoby
  2. The Effect of Incentive Structure on Heuristic Decision Making: The Proportion Heuristic By Robert J. Oxoby
  3. Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles By Andrew E. Clark; Paul Frijters; Michael Shields
  4. The Economics, Technology and Neuroscience of Human Capability Formation By James J. Heckman
  5. Free riding and norms of control: self determination and imposition. An experimental comparison. By Luigi Mittone; Francesca Bortolami
  6. Behavioural Economics and Drinking Behaviour: Preliminary Results from an Irish College Study By Liam Delaney; Colm Harmon; Patrick Wall
  7. Pitfalls to Avoid when Measuring Institutions: Is 'Doing Business' Damaging Business? By Benito Arruñada
  8. Legal Origins and the Evolution of Institutions: Evidence from American State Courts By Daniel Berkowitz; Karen Clay
  9. How Long Do Teacher Effects Persist? By Spyros Konstantopoulos
  10. Naïve Learning in Social Networks: Convergence, Influence and Wisdom of Crowds By Matthew O. Jackson; Benjamin Golub
  11. Markets vs. Politics, Correcting Erroneous Beliefs Differently By Martin Gregor
  12. Subjective Beliefs and Schooling Decisions By Christian Belzil
  13. Validating the Use of Vignettes for Subjective Threshold Scales By Arthur Van Soest; Liam Delaney; Colm Harmon; Arie Kapteyn; James P. Smith
  14. In Search of Stars: Network Formation among Heterogeneous Agents By Aljaž Ule; Jacob K. Goeree; Arno Riedl
  15. Locus of control and cross-cultural adjustment of expatriate managers By Flytzani, Stella; Nijkamp, Peter
  16. Information Networks and Worker Recruitment By Jordi Brandts; Arthur Schram; Klarita Gërxhani

  1. By: David L. Dickinson (Appalachian State University); Robert J. Oxoby (University of Calgary and IZA)
    Abstract: This paper reports results from a unique two-stage experiment designed to examine the spillover effects of optimism and pessimism. In stage 1, we induce optimism or pessimism onto subjects by randomly assigning a high or low piece rate for performing a cognitive task. We find that participants receiving the low piece rate are significantly more pessimistic with respect to performance on this task. In stage 2 individuals participate in an ultimatum game. We find that minimum acceptable offers are significantly lower for pessimistic subjects, though this pessimism was generated in a completely unrelated environment. These results highlight the existence of important spillover effects that can be behaviorally and economically important - for example, pessimism regarding one’s initial conditions (e.g., living in poverty) may have spillover effects on one’s future labor market outcomes.
    Keywords: optimism, pessimism, bargaining, experiments
    JEL: C91 D84
    Date: 2007–06
  2. By: Robert J. Oxoby (University of Calgary and IZA)
    Abstract: When making judgments, individuals often utilize heuristics to interpret information. We report on a series of experiments designed to test the ways in which incentive mechanisms influence the use of a particular heuristic in decision-making. Specifically, we demonstrate how information regarding the number of available practice problems influences the behaviors of individuals preparing for an exam (the proportion heuristic). More importantly the extent to which this information influences behavior depends critically on the way in which performance incentives are structured. In particular, relative compensation schemes magnify the influence of this heuristic while joint compensation schemes dampen its influence. We discuss these results with respect to the literature on effective compensation.
    Keywords: performance judgments, heuristics, incentives, experiments
    JEL: C9 M5
    Date: 2007–06
  3. By: Andrew E. Clark (Paris School of Economics and IZA); Paul Frijters (Queensland University of Technology); Michael Shields (University of Melbourne and IZA)
    Abstract: The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility and discuss some non-happiness research (behavioural, experimental, neurological) dealing with income comparisons. We last consider how relative income in the utility function affects economic models of behaviour in a number of different domains.
    Keywords: income, happiness, utility, comparison, habituation
    JEL: D01 D31 H00 I31 J28
    Date: 2007–06
  4. By: James J. Heckman (University of Chicago, American Bar Foundation, University College Dublin and IZA)
    Abstract: This paper begins the synthesis of two currently unrelated literatures: the human capital approach to health economics and the economics of cognitive and noncognitive skill formation. A lifecycle investment framework is the foundation for understanding the origins of human inequality and for devising policies to reduce it.
    Keywords: critical periods, sensitive periods, early childhood, Barker hypothesis
    JEL: I12 I21
    Date: 2007–06
  5. By: Luigi Mittone; Francesca Bortolami
    Abstract: This is an experiment on the effect of norm application in a public good game. We want to investigate whether a control norm affects the contribution level differently, only in relation to the way in which the norm is applied in the game. We compare the amount of public good provided in two different groups. In the first group (constituent group), experimental subjects create a control norm, and then they self-apply it in a basic public good game. In the second group (control group), the norm created by the constituent group is exogenously imposed. Experimental results show a significant difference between the two public good levels considered. Self determination implies a higher level of efficiency, as compared to the exogenous one.
    Keywords: public good games, free riding, norm of control, voluntary contribution
    JEL: H41 C92
    Date: 2007
  6. By: Liam Delaney (University College Dublin); Colm Harmon (University College Dublin and IZA); Patrick Wall (University College Dublin)
    Abstract: This paper examines the results of single-equation regression models of the determinants of alcohol consumption patterns among college students modelling a rich variety of covariates including gender, family and peer drinking, tenure, personality, risk perception, time preferences and age of drinking onset. The results demonstrate very weak income effects and very strong effects of personality, peer drinking (in particular closest friend), time preferences and other substance use. The task of future research is to verify these results and assess causality using more detailed methods.
    Keywords: alcohol, peer effects, time preferences
    JEL: I12
    Date: 2007–06
  7. By: Benito Arruñada
    Abstract: Over recent years, both governments and international aid organizations have been devoting large amounts of resources to “simplifying” the procedures for setting up and formalizing firms. Many of these actions have focused on reducing the initial costs of setting up the firm, disregarding the more important role of business registers as a source of reliable information for judges, government departments and, above all, other firms. This reliable information is essential for reducing transaction costs in future dealings with all sorts of economic agents, both public and private. The priorities of reform policies should therefore be thoroughly reviewed, stressing the value of the legal institutions rather than trivializing them as is often the case.
    Keywords: Starting business, doing business, informal economy, company registers
    JEL: K22 K23 L59 O17
    Date: 2007–06
  8. By: Daniel Berkowitz; Karen Clay
    Abstract: Several important studies of institutions assume that the quality of institutions is persistent following some formative historic event. The assumption of institutional persistence, however, begs the question of how these institutions persisted. To better understand this issue, this paper examines the evolution of state courts in the United States. We begin by reviewing the evidence that France, Spain, and Mexico operated civil-law legal systems in territory that would later make up thirteen states. One important philosophical difference between civil-law and common-law legal systems arises from differences in their beliefs regarding the appropriate degree of judicial independence. To show how these beliefs, if persistent, would manifest themselves, we present a model in which legislatures allocate budgets to their judges. In the model, common and civil-law legislatures have different preferences regarding the level of judicial independence. Our model predicts civil-law legislatures will give fewer discretionary resources to their judges when judicial elections are replaced by a system of appointments. We confirm this prediction using state-level data for the period 1961-1999. Finally, we argue that one important reason why civil-law preferences for a weak judiciary appear to have persisted in the American states is that the political culture within state legislatures is slow-moving.
    Date: 2007–06
  9. By: Spyros Konstantopoulos (Northwestern University and IZA)
    Abstract: Previous findings from experimental and non-experimental studies have demonstrated that teachers differ in their effectiveness. In addition, evidence from non-experimental studies has indicated that teacher effects can last up to five years. This study used high-quality data from a four-year randomized experiment in which teachers and students were randomly assigned to classes to examine whether teacher effects on student achievement persist over time. Teacher effects are defined as teacher specific residuals adjusted for student and treatment effects. Findings indicate that the teacher effects are cumulative and observed not only in the current or the following grade, but they endure up to three years in early elementary grades. The findings also suggest that teacher effects are important and their additive effects on student achievement are as large as the additive effects of small classes. Finally, teacher effects are larger in reading than in mathematics.
    Keywords: teacher effects, experimental data, multi-level models
    JEL: I2
    Date: 2007–06
  10. By: Matthew O. Jackson (Stanford University); Benjamin Golub (Division of the Humanities and Social Sciences)
    Abstract: We study learning and influence in a setting where agents communicate according to an arbitrary social network and naïvely update their beliefs by repeatedly taking weighted averages of their neighbors’ opinions. A focus is on conditions under which beliefs of all agents in large societies converge to the truth, despite their naïve updating. We show that this happens if and only if the influence of the most influential agent in the society is vanishing as the society grows. Using simple examples, we identify two main obstructions which can prevent this. By ruling out these obstructions, we provide general structural conditions on the social network that are sufficient for convergence to truth. In addition, we show how social influence changes when some agents redistribute their trust, and we provide a complete characterization of the social networks for which there is a convergence of beliefs. Finally, we survey some recent structural results on the speed of convergence and relate these to issues of segregation, polarization and propaganda.
    Keywords: Social Networks, Learning, Diffusion, Bounded Rationality
    JEL: D85 D83 A14 L14 Z13
    Date: 2007–06
  11. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: In the fields of social choice, public choice and political economics, the main difference between private and political choice is whether individual preferences are aggregated to make a decision. A much less studied difference is whether beliefs are aggregated to make a decision. In this paper, we argue that the need for aggregation creates different incentives for belief updates in private and political choice. We review contemporary theories of biased beliefs in politics: Bayesian misperceptions, behavioral anomalies, and rational irrationality. We examine assumptions and consequences of all the approaches vis-à-vis issues of common knowledge, stability, symmetry, and multiplicity of stable states. As a route for further analysis, we construct an evolutionary model including a coordination failure. Differences in learning dynamics make the political play of this baseline game Pareto-inferior to the private play.
    Keywords: public choice; political economics; beliefs; learning;
    JEL: B53 D72 D83
    Date: 2007–06
  12. By: Christian Belzil (Centre National de la Recherche Scientifique, CIRANO, CIREQ and IZA)
    Abstract: This paper considers the estimation of sequential schooling decisions made by agents who are endowed with subjective beliefs about their own ability. I use unique Italian panel data which provide information on i) the curvature of the per-period utility function, ii) schooling decisions, iii) post-schooling earnings, in order to estimate the future component of the differences in intertemporal utilities of school and work independently from the present component, (as in Geweke and Keane, 1995, 2001), and evaluate the importance of "present bias". Under certain conditions, which include imposing equality between the modal belief and true ability, I recover individual specific subjective probability distributions. I estimate both the degree of confidence (a measure of spread) and the incidence of over (and under) estimation. I find that the future component of intertemporal utilities dominates schooling decisions. I find a strong incidence of under-estimation among the more able and a much smaller incidence of over-estimation among the low ability group. At the medium ability spectrum, there is evidence of some over-estimation. The degree of confidence is high and implies that agents have a substantial amount of inside information (36% of the population act on a degenerate subjective distribution). Overall, the variance of the objective ability heterogeneity distribution is 4 times as large the variance of the distribution characterizing subjective beliefs.
    Keywords: subjective distributions, expectation parameterization, rational expectation, schooling, dynamic programming, present bias, over-confidence
    JEL: J24
    Date: 2007–05
  13. By: Arthur Van Soest (Tilburg University, RAND and IZA); Liam Delaney (University College Dublin); Colm Harmon (University College Dublin and IZA); Arie Kapteyn (RAND and IZA); James P. Smith (RAND and IZA)
    Abstract: Comparing self-assessed indicators of subjective outcomes such as health, work disability, political efficacy, job satisfaction, etc. across countries or socio-economic groups is often hampered by the fact that different groups use systematically different response scales. Anchoring vignettes have been introduced as an effective tool to correct for such differences. This paper develops an integrated framework in which objective measurements are used to validate the vignette-based corrections. The framework is applied to vignettes and objective and subjective self-assessments of drinking behavior by students in Ireland. Model comparisons using the Akaike information criterion favor a specification with response consistency and vignette corrected response scales. Put differently, vignette based corrections appear quite effective in bringing objective and subjective measures closer together.
    Keywords: anchoring vignettes, reporting bias, hopit model
    JEL: C81 I12
    Date: 2007–06
  14. By: Aljaž Ule (University of Amsterdam); Jacob K. Goeree (California Institute of Technology); Arno Riedl (University of Maastricht)
    Abstract: This paper reports results from a laboratory experiment on network formation among heterogeneous agents. The experimental design extends the Bala-Goyal (2000) model of network formation with decay and two-way flow of benefits by allowing for agents with lower linking costs or higher benefits to others. Furthermore, agents’ types may be common knowledge or private information. In all treatments, the (efficient) equilibrium network has a “star” structure. With homogeneous agents, equilibrium predictions fail completely. In contrast, with heterogeneous agents stars frequently occur, often with the high-value or low-cost agent in the center. Stars are not born but rather develop: with a high-value agent, the network’s centrality, stability, and efficiency all increase over time. Probit estimations based on best-response behaviour and other-regarding preferences are used to analyze individual linking behavior. Our results suggest that heterogeneity is a major determinant for the predominance of star-like structures in real-life social networks.
    Keywords: Network Formation, Experiment, Heterogeneity, Private Information
    JEL: C72 C92 D82 D85
    Date: 2007–06
  15. By: Flytzani, Stella (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Nijkamp, Peter
    Abstract: International labour mobility is becoming a key feature of a globalizing world. There is an increasing amount of literature on the success and failure conditions of migrant workers. A particular class of foreign workers is formed by so-called expatriates who are sent on a temporary basis (several years normally) by a parent company located in a given country to live and work in another country, notably as an employee in a subsidiary abroad. This paper aims to investigate the performance of expatriate managers by explaining their cross-cultural adjustment potential from their personal management style features. These features are derived from the concept of locus of control in social learning theory, in which two types of responses to challenges are distinguished: internals (controlling events themselves) and externals (following outside forces). Based on a sample of 43 individuals, our study concludes that managers with an internal locus of control are more successful in coping with the difficulties inherent in adjusting to a foreign culture.
    Date: 2007
  16. By: Jordi Brandts; Arthur Schram; Klarita Gërxhani
    Abstract: This paper studies experimentally how the existence of social information networks affects the ways in which firms recruit new personnel. Through such networks firms learn about prospective employees' performance in previous jobs. Assuming individualistic preferences social networks are predicted not to affect overall labor market behavior, while with social preferences the prediction is that when bilaterally negotiated: (i) wages will be higher and (ii) that workers in jobs with incomplete contracts will respond with higher effort. Our experimental results are consistent with the social preferences view, both for the case of excess demand and excess supply of labor. In particular, the presence of information networks leads to more efficient allocations.
    Keywords: Labor Markets, Information Networks, Worker Recruitment, Indirect reciprocity, Experiments
    JEL: C90 J30 J40
    Date: 2007–06–15

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