nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒11‒11
thirteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. What Do Firms Learn? Production, Distribution and the Division of Labour By Paolo Ramazzotti
  2. Words Speak Louder Than Money By MaroÅ¡ Servátka; Steven Tucker; Radovan VadoviÄ
  3. Everyone Is A Winner: Promoting Cooperation Through Non-Rival Intergroup Competition By Ernesto Reuben; Jean-Robert Tyran
  4. Behavioral Foundations of Microcredit: Experimental and Survey Evidence From Rural India By Michal Bauer; Julie Chytilová; Jonathan Morduch
  5. Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals By Antonio Guarino; Marco Cipriani
  6. Do behavioral biases adversely affect the macro-economy? By George M. Korniotis; Alok Kumar
  7. Sick Leave and the Composition of Work Teams By Matthias Weiss
  8. Competition and the Ratchet Effect By Charness, Gary; Kuhn, Peter J.; Villeval, Marie-Claire
  9. Habit formation and labor supply By CREMER, Helmuth; DE DONDER, Philippe; MALDONADO, Dario; PESTIEAU, Pierre
  10. The value of useless information By Alaoui, Larbi
  11. Self-Productivity and Complementarities in Human Development: Evidence from MARS By Blomeyer, Dorothea; Coneus, Katja; Laucht, Manfred; Pfeiffer, Friedhelm
  12. Checking Out Temptation: An Natural Experiment with Purchases at the Grocery Register By Daniel Houser; David Reiley; Michael Urbancic
  13. Experiments with the Traveler's Dilemma: Welfare, Strategic Choice and Implicit Collusion By Kaushik Basuy; Leonardo Becchetti; Luca Stanca

  1. By: Paolo Ramazzotti (University of Macerata)
    JEL: O1 O11
    Date: 2002–10
  2. By: MaroÅ¡ Servátka (University of Canterbury); Steven Tucker (University of Canterbury); Radovan VadoviÄ
    Abstract: This paper reports on an experiment studying the effectiveness of two types of mechanisms for promoting trust: pecuniary and non-pecuniary as well as their mutual interaction. Our data provide evidence that both mechanisms significantly enhance trust in comparison to the standard investment game. However, we find that the pecuniary mechanism performs significantly worse than the non-pecuniary one. Our results also point to the fact that pecuniary mechanism, which depends on monetary incentives, can be counterproductive when combined with mechanism which relies primarily on psychological incentives.
    Keywords: Communication; Deposit; Experimental economics; Trust; Trustworthiness
    JEL: C70 C91
    Date: 2008–10–29
  3. By: Ernesto Reuben (Northwestern University); Jean-Robert Tyran (Department of Economics, University of Copenhagen)
    Abstract: In this paper, we study the effectiveness of intergroup competition in promoting cooperative behavior. We focus on intergroup competition that is non-rival in the sense that everyone can be a winner. This type of competition does not give groups an incentive to outcompete others. However, in spite of this fact, we find that intergroup competition produces a universal increase in cooperation. Furthermore, in settings where there are strong incentives to compete, intergroup competition benefits a majority of individuals.
    Keywords: intergroup competition; cooperation; public goods; experiment
    JEL: H41 M52 C92
    Date: 2008–08
  4. By: Michal Bauer (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Julie Chytilová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jonathan Morduch (NYU)
    Abstract: This paper draws a link between self-control problems and the contractual mechanisms of microcredit. We use a series of “lab experiments in the field” which were designed to elicit measures of time discounting on a sample of 573 individuals in rural Karnataka, India. Evidence from the experiments were integrated with individual survey data on the economic and financial lives of villagers. One third of participants made choices consistent with hyperbolic preferences (more impatient now than in the future), and would be made better off if they could discipline their time inconsistent preferences. While hyperbolic preferences have been often associated with saving behavior, we describe links to borrowing as well. We find that “hyperbolic” women save a lower share of their savings at home and save less in total levels. Women with hyperbolic preferences are also more likely to borrow--and to do so through microcredit institutions specifically. The finding highlights the role of the fixed and frequent installment schedule ubiquitous in microcredit contracts. While microcredit contracts are celebrated for mitigating informational asymmetries, the evidence suggests that they also offer helpful structure for people with self-discipline problems who seek to accumulate capital but who lack suitable contractual saving devices.
    Keywords: banking; : time preference, hyperbolic discounting, loan contracts, microfinance
    JEL: C93 D91 O12
    Date: 2008–11
  5. By: Antonio Guarino; Marco Cipriani
    Abstract: We study herd behavior in a laboratory financial market with financial market professionals. We compare two treatments, one in which the price adjusts to the order flow so that herding should never occur, and one in which event uncertainty makes herding possible. In the first treatment, subjects herd seldom, in accordance with both the theory and previous experimental evidence on student subjects. A proportion of subjects, however, engage in contrarianism, something not accounted for by the theory. In the second treatment, the proportion of herding decisions increases, but not as much as theory suggests; moreover, contrarianism disappears altogether.
    Keywords: Capital markets , Price controls , Economic models , Data analysis ,
    Date: 2008–06–06
  6. By: George M. Korniotis; Alok Kumar
    Abstract: This study investigates whether the adverse effects of investors' behavioral biases extend beyond the domain of financial markets to the broad macro-economy. We focus on the risk sharing (or income smoothing) role of financial markets and demonstrate that risk sharing levels are higher in U.S. states in which investors have higher cognitive abilities and exhibit weaker behavioral biases. Further, states with better risk sharing opportunities achieve higher levels of risk sharing if investors in those states exhibit greater financial sophistication. Among the various determinants of risk sharing, behavioral factors have the strongest effects. The average level of risk sharing in states with unsophisticated investors (= 0.121) is less than half of the average risk sharing level in states with financially sophisticated investors (= 0.308). Collectively, our evidence indicates that the high risk sharing potential of financial markets is not fully realized because the aggregate behavioral biases of individual investors impede state-level risk sharing.
    Date: 2008
  7. By: Matthias Weiss (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: In this paper, I analyse the relation between workers’ sick leave and the composition of their work teams with respect to age, job tenure, education, and nationality. The probability of sick leave of workers in work teams is shown to be lower if their teammates are older, have shorter job tenure, are less educated, female and of same nationality. In particular, the difference between a worker’s age and the average age of her teammates explains a large part of the well-known positive correlation between age and sick days. In fact, for workers older than 44 years, individual age does not have any significant effect on sick days if the difference between individual age and average team age is held constant. This age difference can be controlled by the management. If older workers have more sick days only if they work in teams with younger workers, it might optimal to form age-homogeneous work teams.
    JEL: J14 I10 M54
    Date: 2008–11–02
  8. By: Charness, Gary (University of California, Santa Barbara); Kuhn, Peter J. (University of California, Santa Barbara); Villeval, Marie-Claire (CNRS, GATE)
    Abstract: The 'ratchet effect' refers to a situation where a principal uses private information that is revealed by an agent's early actions to the agent's later disadvantage, in a context where binding multi-period contracts are not enforceable. In a simple, context-rich environment, we experimentally study the robustness of the ratchet effect to the introduction of ex post competition for principals or agents. While we do observe substantial and significant ratchet effects in the baseline (no competition) case of our model, we find that ratchet behavior is nearly eliminated by labor-market competition; interestingly this is true regardless of whether market conditions favor principals or agents.
    Keywords: ratchet effect, competition, experiment, private information, labor markets
    JEL: C91 D23 D82 J24 L14
    Date: 2008–10
  9. By: CREMER, Helmuth; DE DONDER, Philippe; MALDONADO, Dario; PESTIEAU, Pierre (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: This paper shows that the combination of habit formation – present consumption creating additional consumption needs in the future – and myopia may explain why some retirees are forced to "unretire", i.e., unexpectedly return to work. It also shows that when myopia about habit formation leads to unretirement there is a case for government's intervention. In a first-best setting the optimal solution can be decentralized by a simple "Pigouvian" (paternalistic) consumption tax (along with suitable lump-sum taxes). In a second-best setting, when personalized lump-sum transfers are not available, consumption taxes may have conflicting paternalistic and redistributive effects. We study the design of consumption taxes in such a setting when myopic individuals differ in productivity.
    Keywords: habit formation, myopia, unretiring
    JEL: D91 H21 H55
    Date: 2008–06
  10. By: Alaoui, Larbi
    Abstract: There are a number of cases in which individuals do not expect to find out which outcome occurs. The standard von Neumann-Morgenstern Expected Utility model cannot be used in these cases, since it does not distinguish between lotteries for which the outcomes are observed by the agent and lotteries for which they are not. This paper provides an axiomatic model that makes this distinction. A representation theorem is then obtained. This framework admits preferences for observing the outcome, and preferences for remaining in doubt. Doubt-proneness and doubt-aversion are defined, and the relation between risk-aversion, caution and doubt-attitude is explored. The model builds on the standard vNM framework, but other frameworks can also be extended to allow for preferences for observing the outcomes and preferences for remaining in doubt. A methodology for this extension is also provided. This framework can accommodate behavioral patterns that are inconsistent with the vNM model, and which have let to significantly different models. In particular, this framework accommodates self-handicapping, in which an agent chooses to impair his own performance. It also admits a status-quo bias, even though it does not allow for framing effects. In a political economy setting, voters have incentive to remain ignorant even if information is costless.
    Keywords: Decision theory; Value of information; Doubt; Unobserved outcomes; Unresolved lotteries
    JEL: D80
    Date: 2008–10–25
  11. By: Blomeyer, Dorothea; Coneus, Katja; Laucht, Manfred; Pfeiffer, Friedhelm
    Abstract: This paper investigates the role of self-productivity and home resources in capability formation from infancy to adolescence. In addition, we study the complementarities between basic cognitive, motor and noncognitive abilities and social as well as academic achievement. Our data are taken from the Mannheim Study of Children at Risk (MARS), an epidemiological cohort study following the long-term outcome of early risk factors. Results indicate that initial risk conditions cumulate and that differences in basic abilities increase during development. Self-productivity rises in the developmental process and complementarities are evident. Noncognitive abilities promote cognitive abilities and social achievement. There is remarkable stability in the distribution of the economic and socio-emotional home resources during the early life cycle. This is presumably a major reason for the evolution of inequality in human development.
    Keywords: Initial Conditions, Intelligence, Persistence, Home Resources, Social Competencies, School Achievement
    JEL: D87 I12 I21 J13
    Date: 2008
  12. By: Daniel Houser (Interdsciplinary Center for Economic Science, George Mason University); David Reiley (Department of Economics, University of Arizona); Michael Urbancic (Department of Economics, University of California at Berkeley)
    Abstract: A long literature in psychology, as well as a more recent theory literature in economics, suggests that prolonged exposure to a tempting stimulus can eventually lead people to ¨Dsuccumb¡¬ to that temptation. Here we develop a model for decision under temptation, and test its predictions using data from a natural experiment. We take advantage of naturally occurring, exogenous variation in the amount of time individual consumers spend waiting in grocery store checkout lines. We collect over 2,800 observations from three grocery stores. We obtain robust evidence that time spent in line economically and statistically significantly increases the probability that one purchases a tempting item. For example, people who wait in line 25 percent longer than average are about 17 percent more likely to purchase a tempting item. Moreover, for any fixed time in line, we find that the presence of a child significantly increases the likelihood of a purchase. These results are consistent with models that connect purchasing decisions to temptation, and also suggest that children yield to temptation more rapidly than adults. Our results offer novel quantitative and empirical content to the rapidly expanding economics literature on decisions under temptation.
    Date: 2004–08
  13. By: Kaushik Basuy; Leonardo Becchetti; Luca Stanca
    Abstract: This paper investigates behavior in the Traveler's Dilemma game and isolates deviations from textbook predictions caused by di®erences in welfare perceptions and strategic miscalculations. It presents the results of an experimental analysis based on a 2x2 design where the own and the other subject's bonus-penalty parameters are changed independently. We ¯nd that the change in own bonus-penalty alone entirely explains the e®ect on claims of a simultaneous change in one's own and the other's bonus-penalty. An increase in the other subject's bonus-penalty has a signi¯cant negative e®ect on claims when the own bonus-penalty is low, whereas it does not have a signi¯cant e®ect when the own bonus-penalty is high. We also ¯nd that expected claims are inconsistent with actual claims in the asymmetric treatments. Focus- ing on reported strategies, we document substantial heterogeneity and show that changes in choices across treatments are to a large extent explained by risk aversion.
    Date: 2008–10

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