nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒08‒02
eight papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Enforcement of Contribution Norms in Public Good Games with Heterogeneous Populations By Reuben, Ernesto; Riedl, Arno
  2. How do college students form expectations? By Basit Zafar
  3. Routines and their breaking – an agent-based analysis of leisure time mobility By Frank Beckenbach; Ramón Briegel; Wilfried Konrad; Gerd Scholl; Stefan Zundel
  4. Reforming Institutions: Where to Begin? By M. Idrees Khawaja; Sajawal Khan
  5. Trust and Control at the Workplace: Evidence from Representative Samples of Employees in Europe By Grund, Christian; Harbring, Christine
  6. Learning and Profitability in a Theory of the Firm By Paul Hallwood
  7. Fragility of reputation and clustering of risk-taking By Guillermo L. Ordoñez
  8. Incentives, Identity, and Organizational Forms By Kohei Daido

  1. By: Reuben, Ernesto (Columbia University); Riedl, Arno (Maastricht University)
    Abstract: Economic and social interaction takes place between individuals with heterogeneous characteristics. We investigate experimentally the emergence and informal enforcement of different contribution norms to a public good in homogeneous and different heterogeneous groups. When punishment is not allowed all groups converge towards free-riding. With punishment, contributions increase and differ distinctly across groups and individuals with different induced characteristics. We show econometrically that these differences are not accidental but enforced by punishment. The enforced contribution norms are related to fairness ideas of equity regarding contribution possibilities but not regarding earnings. Individuals with different characteristics tacitly agree on the norm to be enforced, even if this leads to large payoff differences. Our results also emphasize the role of details of the environment that may alter focal contribution norms in an important way.
    Keywords: public good, heterogeneous groups, punishment, cooperation, social norms, norm enforcement
    JEL: H41 C92 Z13
    Date: 2009–07
  2. By: Basit Zafar
    Abstract: Because students rely on their subjective expectations when choosing a college major, understanding this process of expectations formation is crucial for education policy recommendations. This paper focuses on how college students form expectations about various major-specific outcomes. I collect a unique panel data set of Northwestern University undergraduates that contains their subjective expectations about major-specific outcomes. Although students tend to be overconfident about their future academic performance, I find that they revise their expectations about various major-specific outcomes in systematic ways. For example, students who receive extremely positive information about their ability revise upward their prediction for short-term grade-point average (GPA). Similarly, those who receive very negative information revise downward their beliefs about GPA. Furthermore, students seem to update their probabilistic beliefs in a manner consistent with Bayesian analysis: Prior beliefs about outcomesto be realized in college tend to be fairly precise, while new information influences prior beliefs about outcomes in the workplace. Moreover, students who are more uncertain about major-specific outcomes in the initial survey make greater absolute revisions in their beliefs in the follow-up survey. Finally, I present evidence that learning plays a role in the decision to switch majors. Negative revisions to beliefs about graduating in four years, enjoying coursework, and earning an expected salary are associated with dropping a major.
    Keywords: Education ; Forecasting ; Human behavior ; Prediction (Psychology)
    Date: 2009
  3. By: Frank Beckenbach (Department of Economics, University of Kassel); Ramón Briegel (Department of Economics, University of Kassel); Wilfried Konrad (Institute for Ecological Economy Research (IÖW), Heidelberg); Gerd Scholl (Institute for Ecological Economy Research (IÖW), Berlin); Stefan Zundel (Environmental Economics, University of Applied Sciences of Lausitz)
    Abstract: In this paper a multi-method approach for analyzing leisure time mobility is suggested. In our conceptual foundation we synthesize approaches from behaviourally oriented psychology and economics by referring to the framework of Ajzen, a Maslowian theory of needs and a bounded rational way to pick up and transform information according to the basic tenets of Carnegie school (Simon/March) giving special emphasis to the role of routines. This conceptual foundation is the background for the architecture of an agent-based simulation model. This simulation model is used to specify the conditions and effects of routine breaking. Finally the empirical component of our approach is sketched: according to the underlying behavioural orientation we figured out lists of constructs related to the most important behavioural components of the agents. These constructs are brought together in quantitative as well as qualitative questionnaires. The resulting data are statistically evaluated by using descriptive methods. This research is funded by the German Ministry of Education and Research.
    Keywords: Agent-based simulation,Behavioural Economics, Consumer research, Routines, Mobility, Theory of planned behaviour
    Date: 2009–01
  4. By: M. Idrees Khawaja (Pakistan Institute of Development Economics, Islamabad); Sajawal Khan (State Bank of Pakistan, Karachi)
    Abstract: No society is devoid of institutions but many live with poor institutions. Institutions promote growth. This is a view now held firmly and widely. The task then is to ‘engineer’ growth-promoting institutions. Endogeneity characterises institutions; for example, groups enjoying political power influence economic institutions, but political power itself is a function of wealth. Given endogeneity, if the task is to design institutional reforms, the question then arises, as to what to reform first. We use the theories of institutional evolution put forth by Douglas North, Darron Acemoglu and Dani Rodrik and the historical experiences of different countries in the context of development (or non-development) of institutions, to determine the starting-point of institutional reforms, if the objective is to design institutional reforms. We argue that in Pakistan, neither large commercial interest nor fiscal constraints can force the de jure power to reform institutions. Typically, large commercial interests in Pakistan have thrived on favours from de jure power, and therefore do not have teeth. Given strategic interests of foreign powers, foreign aid will alleviate the fiscal constraint and the ruler-citizens bargain—though reforming institution in exchange for tax revenue will remain a dream. The country does not seem ready for a revolution either; the thought process that typically precedes revolutions seems to have barely begun. The alternative, that remains, then is the gradualist approach preferred by North, Acemoglu, and Rodrik. Institutional reforms in Pakistan should begin with reform of the educational system—the introduction of a common educational system for all and sundry up to a certain level. Two reasons make us chose the educational system as the candidate to start the process of institutional reform. First, a common educational system will produce a shared value system which, in turn, will reduce the heterogeneity in the society. Lesser heterogeneity in society will then facilitate an agreement over the minimal set of institutional reforms. Second, politicians being myopic, the de jure power is more likely to concede to the demand for reform of the educational system as compared to the demand to, say, put an end to rent-seeking. The former will affect the de jure power a generation hence, while the latter will affect them today.
    Keywords: Institutional Evolution, Institutional Change, Human Behaviour
    JEL: D02 P16
    Date: 2009
  5. By: Grund, Christian (University of Würzburg); Harbring, Christine (University of Cologne)
    Abstract: Based on two representative samples of employees, the German Socio Economic Panel and the European Social Survey, we explore the relation between certain measures of control in employment relationships (i.e. working time regulations, use of performance appraisal systems, monitoring by supervisors, autonomy to organize the work) and individuals’ inclination to trust others. Trust is measured by the general trust question like in most other economic studies based on surveys. We find that strict working time regulations, monitoring and lack of autonomy – all indicators for control at the workplace – are negatively related to trust. Moreover, we contribute to the literature on trust by gathering hints to other potential determinants of trust.
    Keywords: autonomy, control, monitoring, performance appraisal, regulation of working time, trust
    JEL: J81 M12 M5
    Date: 2009–07
  6. By: Paul Hallwood (University of Connecticut)
    Abstract: Teams combine tacit and separable knowledge so complicating the pricing of knowledge and mitigating against knowledge transfer between firms. The efficient markets hypothesis suggests that entities possessing insider information should be ablest at accurately pricing any given complementary set of knowledge. Thus, even though some knowledge in a given complementary set is separable from a team, the easily transferable pieces are still most likely to be used within the originating firm. The boundaries of a firm may therefore expand even when knowledge is not tacit and transaction costs in markets for ideas are otherwise low.
    Keywords: asymmetric information, evolutionary theory of the firm, governance, holdup, insider information, path dependency, rent appropriation, tacit information, transaction costs.
    JEL: D23 F23 L80
    Date: 2009–07
  7. By: Guillermo L. Ordoñez
    Abstract: Concerns about constructing and maintaining good reputations are known to reduce borrowers' excessive risk-taking. However, I find that the self-discipline induced by these concerns is fragile, and can break down without obvious changes in economic fundamentals. Furthermore, in the aggregate, breakdowns are clustered among borrowers with intermediate and good reputations, which can exacerbate an economy's weakness and contribute to a broad economic crisis. These results come from an aggregate dynamic global game analysis of reputation formation in credit markets. The selection of a unique equilibrium is accomplished by assuming that borrowers have incomplete information about economic fundamentals.
    Keywords: Risk
    Date: 2009
  8. By: Kohei Daido (School of Economics, Kwansei Gakuin University)
    Abstract: Abstract This paper studies the optimal organizational form and the optimal type of manager by considering the nonmaterial (psychological) payoff as well as the standard material payoff for agents. I compare two organizational forms: T-form, where all agents have the same job title so that they are in a single reference group; and H-form, where one agent is appointed to be the manager and the others are subordinates who form a reference group. I show that the principal should appoint a more (less) able agent to be the manager when the effects of peer pressure are more (less) critical. In addition, I find the conditions under which H-form is more likely to be preferred to T-form. Finally, I discuss the phenomenon of the proliferation of job titles in the context of this model.
    Keywords: Principal-agent Model, Multiagents, Moral Hazard, Reference Group, Peer Pressure, Identity, Proliferation of Job Titles.
    JEL: B49 D82 D86 M12 M54
    Date: 2009–07

This nep-cbe issue is ©2009 by Marco Novarese. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.