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on Cognitive and Behavioural Economics |
| By: | Paola Manzini (Queen Mary, University of London and IZA); Marco Mariotti (Queen Mary, University of London) |
| Abstract: | In the last twenty years a growing body of experimental evidence has posed a challenge to the standard Exponential Discounting Model of choice over time. Attention has focused on some specific ‘anomalies’, notably preference reversal and declining discount rates, leading to the formulation of the model of hyperbolic discounting which is finding increasing favour in the literature. In this paper we provide a survey of both the theoretical modelling and the experimental evidence relating to choice over time. As we will show, a careful analysis of the mapping between theoretical models and experimental investigations raises questions as to whether some of the most focused upon anomalies should be indeed classified as such, or whether they are really the most challenging ones for conventional theory. New developments are emerging both at the theoretical and empirical level, opening up new exciting avenues for investigation |
| Keywords: | time preference, choice over time, theory, experiments |
| JEL: | C91 D9 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2993&r=cbe |
| By: | Ernst Fehr; Lorenz Goette |
| Abstract: | Recent studies found evidence for nominal wage rigidity during periods of relatively high nominal GDP growth. It has been argued, however, that in an environment with low nominal GDP growth, when nominal wage cuts become customary, workers’ opposition to nominal cuts would erode and, hence, firms would no longer hesitate to reduce nominal pay. If this argument is valid nominal wage rigidity is largely irrelevant because in a high-growth environment there is little need to cut nominal pay while in a low-growth environment the necessary cuts would occur. To examine this argument we use data from Switzerland where nominal GDP growth has been very low for many years in the 1990s. We find that the rigidity of nominal wages is a robust phenomenon that does not vanish in a low growth environment. In addition, it constitutes a considerable obstacle to real wage adjustments. In the absence of downward nominal rigidity, real wages would indeed be quite responsive to unemployment. Moreover, the wage sweep-ups caused by nominal rigidity are strongly correlated with unemployment suggesting that downward rigidity of nominal wages indeed contributes to unemployment. |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1343&r=cbe |
| By: | Bicchieri, Cristina; Erte, Xiao |
| Abstract: | Social norms play an important role in individual decision making. Bicchieri (2006) argues that two different expectations influence our choice to obey a norm: what we expect others to do (empirical expectations) and what we believe others think ought to be done (normative expectations). Little is known about the relative importance of these two types of expectation in individuals’ decisions, an issue that is particularly important when normative and empirical expectations are in conflict (e.g., high crime cities). In this paper, we report data from Dictator game experiments where we exogenously manipulate dictators’ expectations in the direction of either selfishness or fairness. When normative and empirical expectations are in conflict, we find that empirical expectations about other dictators’ choices significantly predict a dictator’s own choice. However, dictators’ expectations regarding what other dictators think should be done do not have a significant impact on their decisions. Our findings about the crucial influence of empirical expectations are important for those who design institutions or policies aimed at discouraging undesirable behavior. |
| Keywords: | social norms; expectations; dictator game; experimental economis |
| JEL: | C91 C72 |
| Date: | 2007–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4609&r=cbe |
| By: | Friederike Mengel (Universidad de Alicante); Veronika Grimm (Universidad de Alicante) |
| Abstract: | We experimentally investigate the effect of population viscosity (an increased probability to interact with others of one's type or group) on cooperation in a standard prisoner's dilemma environment. Subjects can repeatedly choose between two groups that differ in the defector gain in the associated prisoner's dilemma. Choosing into the group with the smaller defector-gain can signal one's willingness to cooperate. The degree of viscosity is varied across treatments. We find that viscosity produces an endogenous sorting of cooperators and defectors and persistently high rates ofcooperation. Higher viscosity leads to a sharp increase in overall cooperation rates and in addition positively affects the subjects' intrinsic willingness to cooperate. |
| Keywords: | Experiments, Cooperation, Group Selection, Norms, Population |
| JEL: | C70 C73 C90 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2007-17&r=cbe |
| By: | Gary E Bolton; Axel Ockenfels |
| Abstract: | In a seminal paper, Kreps and Wilson (1982) remark that, with regard to reputation building in the chain store game, it does not matter whether interaction is among long-term partners or one-shot strangers. We show that this remark is incorrect: in sequential equilibrium, the effectiveness of reputation building depends on the matching procedure. The reason is that the benefits of the information obtained by challenging the incumbent are internalized in the partners case but externalized in the strangers case. Perhaps surprisingly, the same intuition does not hold for the buyer-seller game with seller moral hazard; there, in sequential equilibrium, the way information disseminates in the market is irrelevant for the success of reputation building. An experiment finds that matching significantly affects reputation building behavior in both games although the size of the effect is more modest in the buyer-seller case. |
| Date: | 2007–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0035&r=cbe |
| By: | Sutter, Matthias; Strassmair, Christina |
| Abstract: | We study the effects of communication in an experimental tournament between teams. When teams, rather than individuals, compete for a prize there is a need for intra-team coordination in order to win the inter-team competition. Introducing communication in such situations may have ambiguous effects on effort choices. Communication within teams may promote higher efforts by mitigating the internal free-rider problem. Communication between competing teams may lead to collusion, thereby reducing efforts. In our experiment we control the channels of communication by letting subjects communicate through an electronic chat. We find, indeed, that communication within teams increases efforts and communication between teams reduces efforts. We use team members’ dialogues to explain these effects of communication, and check the robustness of our results. |
| Keywords: | Tournament; Team decision making; Communication; Collusion; Free-riding; Experiment |
| JEL: | C92 J33 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:2016&r=cbe |
| By: | Dan Ariely (Massachusetts Institute of Technology); Anat Bracha (Tel Aviv University); Stephan Meier (Federal Reserve Bank of Boston and IZA) |
| Abstract: | This paper experimentally examines image motivation - the desire to be liked and wellregarded by others - as a driver in prosocial behavior (doing good), and asks whether extrinsic monetary incentives (doing well) have a detrimental effect on prosocial behavior due to crowding out of image motivation. By definition, image depends on one’s behavior being visible to other people. Using this unique property we show that image is indeed an important part of the motivation to behave prosocially. Moreover, we show that extrinsic incentives interact with image motivation and are therefore less effective in public than in private. Together, these results imply that image motivation is crowded out by monetary incentives; which in turn means that monetary incentives are more likely to be counterproductive for public prosocial activities than for private ones. |
| Keywords: | prosocial behavior, extrinsic incentives, image motivation, experiments |
| JEL: | D64 C90 H41 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2968&r=cbe |
| By: | Charles Bellemare; Sabine Kroger; Arthur van Soest |
| Abstract: | We specify and estimate an econometric model which separately identifies distributional preferences and the effects of perceived intentions on responder behavior in the ultimatum game. We allow the effects of perceived intentions to depend, among other things, on the subjective probabilities responders attach to the possible offers. We estimate the model on a large representative sample from the Dutch population. We find that the relative importance of distributional preferences ad perceived intentions depends significantly on the socio-economic characteristics of responders. Strong inequity aversion to the other player's disadvantage is found for lower educated and older respodents. Responders tend to punish unfavorable offers more if they expect that fair proposals will occur with higher probability. |
| Keywords: | Inequity aversion, intentions, subjective expectations |
| JEL: | C93 D63 D84 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0721&r=cbe |
| By: | Brice Corgnet (Universidad de Navarra) |
| Abstract: | We develop a model of team formation in which workers learn about their level of ability. We show that insufficient cooperation may arise as workers learn positively about their own skills. We then build a model for team managers and establish that their objectivity in assessing coworkers' abilities may facilitate cooperation among agents. This is the case because managers are able to design team contracts based on workers' true performances. Our work provides a motive for the existence of team managers in theabsence of asymmetry of information. We develop a model of team formation in which workers learn about their level of ability. We show that insufficient cooperation may arise as workers learn positively about their own skills. We then build a model for team managers and establish that their objectivity in assessing coworkers¿ abilities may facilitate cooperation among agents. This is the case because managers are able to design team contracts based on workers¿ true performances. Our work provides a motive for the existence of team managers in theabsence of asymmetry of information. |
| JEL: | C70 C73 C90 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2007-18&r=cbe |
| By: | Christian Belzil (Centre National de la Recherche Scientifique, CIRANO and IZA); Marco Leonardi (University of Milan and IZA) |
| Abstract: | We develop a non-rational expectation econometric model of sequential schooling decisions. Using unique Italian panel data in which individual differences in attitudes toward risk are measurable (with error), we investigate the effect of risk aversion on the probability of entering higher education. This allows us to characterize the subjective (as opposed to the objective) effect of higher education on marginal risk exposure. Because the measure of risk aversion (the classical Arrow-Pratt degree of absolute risk aversion) is posterior to schooling decisions, it depends on current wealth realizations and we must therefore take into account its endogeneity. We also allow risk aversion to be measured with error. After taking into account both the endogeneity of wealth and measurement error, we find that risk aversion is a key determinant (comparable to parents’ educational background) of the decisions to enter higher education. Precisely, risk aversion acts as a deterrent to higher education investment. |
| Keywords: | risk aversion, ex-ante risk, schooling, subjective beliefs, dynamic discrete choices |
| JEL: | J24 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2994&r=cbe |
| By: | Andries de Grip (Maastricht University and IZA); Hans Bosma (Maastricht University); Dick Willems (Maastricht University); Martin van Boxtel (Maastricht University) |
| Abstract: | We have used longitudinal test data on various aspects of people’s cognitive abilities to analyze whether overeducated workers are more vulnerable to a decline in their cognitive abilities, and undereducated workers are less vulnerable. We found that a job-worker mismatch induces a cognitive decline with respect to immediate and delayed recall abilities, cognitive flexibility and verbal fluency. Our findings indicate that, to some extent, it is the adjustment of the ability level of the overeducated and undereducated workers that adjusts initial job-worker mismatch. This adds to the relevance of preventing overeducation, and shows that being employed in a challenging job contributes to workers’ cognitive resilience. |
| Keywords: | job-worker mismatch, overeducation, cognitive abilities |
| JEL: | J24 I19 I29 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2956&r=cbe |
| By: | Kets, W. (Tilburg University, Center for Economic Research) |
| Abstract: | This paper gives a critical account of the minority game literature. The minority game is a simple congestion game: players need to choose between two options, and those who have selected the option chosen by the minority win. The learning model proposed in this literature seems to differ markedly from the learning models commonly used in economics. We relate the learning model from the minority game literature to standard game-theoretic learning models, and show that in fact it shares many features with these models. However, the predictions of the learning model differ considerably from the predictions of most other learning models. We discuss the main predictions of the learning model proposed in the minority game literature, and compare these to experimental findings on congestion games. |
| Keywords: | Learning;congestion games;experiments. |
| JEL: | C73 C90 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200753&r=cbe |
| By: | Simon Gächter (University of Nottingham, CESifo and IZA); Eric J. Johnson (Columbia University); Andreas Herrmann (University of St. Gallen) |
| Abstract: | Loss aversion can occur in riskless and risky choices. Yet, there is no evidence whether people who are loss averse in riskless choices are also loss averse in risky choices. We measure individual-level loss aversion in riskless choices in an endowment effect experiment by eliciting both WTA and WTP from each of our 360 subjects (randomly selected customers of a car manufacturer). All subjects also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in the riskless choice task and loss aversion in the risky choice task are highly significantly and strongly positively correlated. We find that in both choice tasks loss aversion increases in age, income, and wealth, and decreases in education. |
| Keywords: | loss aversion, endowment effect, field experiments |
| JEL: | C91 C93 D81 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2961&r=cbe |
| By: | Shelly Lundberg (University of Washington, University of Bergen and IZA); Jennifer Romich (University of Washington); Kwok P. Tsang (University of Washington) |
| Abstract: | In this paper, we examine the determinants of decision-making power by children and young adolescents. Moving beyond previous economic models that treat children as goods consumed by adults rather than agents, we develop a noncooperative model of parental control of child behavior and child resistance. Using child reports of decision-making and psychological and cognitive measures from the NLSY79 Child Supplement, we examine the determinants of shared and sole decision-making in seven domains of child activity. We find that the determinants of sole decision-making by the child and shared decision-making with parents are quite distinct: sharing decisions appears to be a form of parental investment in child development rather than a simple stage in the transfer of authority. In addition, we find that indicators of child capability and preferences affect reports of decision-making authority in ways that suggest child demand for autonomy as well as parental discretion in determining these outcomes. |
| Keywords: | decision-making, children, family |
| JEL: | D1 J13 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2952&r=cbe |
| By: | Michèle Belot (Department of Economics, University of Essex); Marco Francesconi (Department of Economics, University of Essex) |
| Abstract: | Much empirical evidence shows that female and male partners look alike along a variety of attributes. It is however unclear whether this positive sorting is the result of either assortative or agreed-upon preferences or of meeting opportunities. We assess the nature of dating preferences and the relative importance of preferences and opportunities in dating behavior using unique new data from a large commercial speed dating agency. We find that both women and men value physical attributes, such as age and weight, and that preferences are assortative along age, height, and education. The role of preferences, however, is outplayed by that of opportunities. Along some attributes (such as education, occupation and smoking) opportunities explain more than two-thirds of the estimated variation in demand. Along other attributes (such as age), the role of preferences is more substantial, but never dominant. These results will have important implications for our understanding of the degree of social openness and mobility. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ese:iserwp:2007-17&r=cbe |