nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒08‒31
six papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity By Fehr, Ernst; Brown, Martin; Zehnder, Christian
  2. Context dependence and consistency in dynamic choice under uncertainty: the case of anticipated regret By Takashi Hayashi
  3. If You Are So Smart, Why Aren’t You an Entrepreneur? Returns to Cognitive and Social Ability: Entrepreneurs versus Employees By Hartog, Joop; van Praag, Mirjam; van der Sluis, Justin
  4. The Impact of Social Comparisons on Reciprocity By Gächter, Simon; Nosenzo, Daniele; Sefton, Martin
  5. Recalling Mixed Emotions By Aaker, Jennifer L.; Drolet, Aimee L.; Griffin, Dale
  6. Communication Can Destroy Common Learning By Jakub Steiner; Colin Stewart

  1. By: Fehr, Ernst (University of Zurich); Brown, Martin (Swiss National Bank); Zehnder, Christian (University of Zurich)
    Abstract: We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks.
    Keywords: wage rigidity, price rigidity, relational contracts, reciprocity, reputation
    JEL: D82 J3 J41 E24 C9
    Date: 2008–08
  2. By: Takashi Hayashi (Department of Economics, University of Texas at Austin)
    Abstract: We examine if and to what extent choice dispositions can allow dependence on contexts and maintain consistency over time, in a dynamic environment under uncertainty. We focus on a eminimalf case of context dependence, opportunity dependence due to being affected by anticipated regret. There are two sources of potential inconsistency, one is arrival of information and the other is changing opportunities. First, we go over the general method of resolution of potential inconsistency, by taking any kinds of inconsistency as given constraints. Second, we characterize a class of choice dispositions that are consistent to information arrival but may be inconsistent to changing opportunities. Finally, we consider the full requirement of dynamic consistency and show that it necessarily implies independence of choice opportunities.
    Date: 2008–08
  3. By: Hartog, Joop (University of Amsterdam); van Praag, Mirjam (University of Amsterdam); van der Sluis, Justin (University of Amsterdam)
    Abstract: How valuable are cognitive and social abilities for entrepreneurs’ incomes as compared to employees? We answer three questions: (1) To what extent does a composite measure of ability affect an entrepreneur's earnings relative to employees? (2) Do different cognitive abilities (e.g. math ability, language ability) and social ability affect earnings of entrepreneurs and employees differently?, and (3) Does the balance in these measured ability levels affect an individual's earnings? Our individual fixed-effects estimates of the differential returns to ability for spells in entrepreneurship versus wage employment account for selectivity into entrepreneurial positions as determined by fixed individual characteristics. General ability has a stronger impact on entrepreneurial incomes than on wages. Entrepreneurs and employees benefit from different sets of specific abilities: Language and clerical abilities have a stronger impact on wages, whereas mathematical, social and technical ability affect entrepreneurial incomes more strongly. The balance in the various kinds of ability also generates a higher income, but only for entrepreneurs: This finding supports Lazear's Jack-of-all-Trades theory.
    Keywords: (non-)cognitive abilities, intelligence, earnings, entrepreneur(ship), wage employment, income differentials
    JEL: J23 J24 J31 J44 M13
    Date: 2008–08
  4. By: Gächter, Simon (University of Nottingham); Nosenzo, Daniele (University of Nottingham); Sefton, Martin (University of Nottingham)
    Abstract: We investigate the effects of pay comparison information (i.e. information about what co-workers earn) and effort comparison information (information about how co-workers perform) in experimental firms composed of one employer and two employees. Exposure to pay comparison information in isolation from effort comparison information does not appear to affect reciprocity toward employers: in this case own wage is a powerful determinant of own effort, but co-worker wages have no effect. By contrast, we find that exposure to both pieces of social information systematically influences employees’ reciprocity. A generous wage offer is virtually ineffective if an employee is matched with a lazy co-worker who is also paid generously: in such circumstances the employee tends to expend low effort irrespective of her own wage. Reciprocity is more pronounced when the co-worker is hard-working, as effort is strongly and positively related to own wage in this case. Reciprocity is also pronounced when the employer pays unequal wages to the employees: in this case the co-worker’s effort decision is disregarded and effort decisions are again strongly and positively related to own wage. On average exposure to social information weakens reciprocity, though we find substantial heterogeneity in responses across individuals, and find that sometimes social information has beneficial effects. We suggest that group composition may be an important tool for harnessing the positive effects of social comparison processes.
    Keywords: reciprocity, gift-exchange, social information, social comparisons, pay comparisons, peer effects
    JEL: A13 C92 J31
    Date: 2008–08
  5. By: Aaker, Jennifer L. (Stanford U); Drolet, Aimee L. (U of California, Los Angeles); Griffin, Dale
    Abstract: In two longitudinal experiments, conducted both in the field and lab, we investigated the recollection of mixed emotions. Results demonstrated that the intensity of mixed emotions is generally underestimated at the time of recall—an effect that increases over time and does not occur to the same degree with unipolar emotions. Of note, the decline in memory of mixed emotions is distinct from the pattern found for memory of negative emotions, implying that the recall bias is diagnostic of the complexity of mixed emotions rather than of any association with negative affect. Finally, the memory decay effect was driven by the felt conflict aroused by the experience of mixed emotions.
    Date: 2008–04
  6. By: Jakub Steiner; Colin Stewart
    Abstract: We show by example that communication can generate a failure of common knowledge acquisition. In the absence of communication, agents acquire approximate common knowledge of some parameter, but with communication they do not.
    Keywords: Common knowledge, communication
    JEL: D80
    Date: 2008–08–27

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