nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒02‒13
fourteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Tipping motivations and behavior in the US and Israel By Azar, Ofer H.
  2. Are You What You Eat? Experimental Evidence on Health Habits and Risk Preferences By Matteo M. Galizzi; Marisa Miraldo
  3. Behavioral economics as applied to firms: a primer By Armstrong, Mark; Huck, Steffen
  4. Screening, Competition, and Job Design: Economic Origins of Good Jobs By Bartling, Björn; Fehr, Ernst; Schmidt, Klaus M.
  5. Supplier-induced demand as strategic framing By Kris De Jaegher
  6. Conditioning and Updating under Cumulative Prospect Theory By Alex Stomper; Marie-Louise Vierø
  7. Beliefs and Actions in the Trust Game: Creating Instrumental Variables to Estimate the Causal Effect By Costa-Gomes, Miguel A.; Huck, Steffen; Weizsäcker, Georg
  8. Punishment, Cooperation, and Cheater Detection in "Noisy" Social Exchange By Gary Bornstein; Ori Weisel
  9. Social Norms and Behavior in the Local Commons Through the Lens of Field Experiments By Juan Camilo Cárdenas
  10. Collective Action forWatershed Management: Field Experiments in Colombia and Kenya By Juan Camilo Cárdenas; Luz Ángela Rodríguez; Nancy Johnson
  11. How Prevalent is Post-Decision Dissonance? Some Doubts and New Evidence By Holden, Steinar
  12. Paying Attention to Payoffs in Analogy-Based Learning By Miettinen, Topi
  13. Do Peers Affect Student Achievement? Evidence from Canada Using Group Size Variation By Boucher, Vincent; Bramoullé, Yann; Djebbari, Habiba; Fortin, Bernard
  14. Estimating the Technology of Cognitive and Noncognitive Skill Formation By Cunha, Flavio; Heckman, James J.; Schennach, Susanne

  1. By: Azar, Ofer H.
    Abstract: Tipping is a multi-billion dollar phenomenon and a major source of income for millions of workers. The results of a study conducted in the US and Israel suggest that people tip mainly to show gratitude, conform to the social norm, and because they know that waiters' income depends on tips. Tipping is motivated more by the positive consequences of tipping than by the negative results of not tipping. Patronage frequency and dining alone have no systematic effects on the level of tips or their sensitivity to service quality. Respondents report tipping much more for excellent service than for poor service, suggesting that tipping can provide significant incentives for high-quality service. A large majority prefers tipping to service charges.
    Keywords: tipping; social norms; cross-cultural differences
    JEL: D12 A12 Z13 C42 L83 C91
    Date: 2009
  2. By: Matteo M. Galizzi; Marisa Miraldo
    Abstract: We run an experiment to assess whether preferences for risk significantly differ for individuals with different health habits. We administrate a questionnaire followed by an experimental test to a sample of 120 subjects. The questionnaire measures health characteristics, habits and life style and assesses details about individual nutritional balance, drinking, smoking and physical exercise. We construct a number of individual health and nutritional indexes, including the Healthy Eating Index based on the USDA guidelines. We elicit preferences for risk using variants of the Holt and Laury (2002) paired lotteries test. Conditional on individual health habits and life style variables, we estimate the risk preferences for each subject, using Maximum Likelihood estimation. We observe that risk preferences significantly differ for subjects with different health habits and found some evidence of risk aversion. In particular, while smokers do not appear to be significantly more risk seeking, subjects with high scores of the Healthy Eating Index are characterized by higher degree of risk aversion.
    Date: 2010
  3. By: Armstrong, Mark; Huck, Steffen
    Abstract: We discuss the literatures on behavioral economics, bounded rationality and experimental economics as they apply to firm behavior in markets. Topics discussed include the impact of imitative and satisficing behavior by firms, outcomes when managers care about their position relative to peers, the benefits of employing managers whose objective diverges from profit-maximization (including managers who are overconfident or base pricing decisions on sunk costs), the impact of social preferences on the ability to collude, and the incentive for profit-maximizing firms to mimic irrational behavior.
    Keywords: Behavioral economics; bounded rationality; experimental economics; oligopoly; antitrust
    JEL: D21 C92 D43
    Date: 2010–01
  4. By: Bartling, Björn (University of Zurich); Fehr, Ernst (University of Zurich); Schmidt, Klaus M. (University of Munich)
    Abstract: In recent decades, many firms offered more discretion to their employees, often increasing the productivity of effort but also leaving more opportunities for shirking. These "high-performance work systems" are difficult to understand in terms of standard moral hazard models. We show experimentally that complementarities between high effort discretion, rent-sharing, screening opportunities, and competition are important driving forces behind these new forms of work organization. We document in particular the endogenous emergence of two fundamentally distinct types of employment strategies. Employers either implement a control strategy, which consists of low effort discretion and little or no rent-sharing, or they implement a trust strategy, which stipulates high effort discretion and substantial rent-sharing. If employers cannot screen employees, the control strategy prevails, while the possibility of screening renders the trust strategy profitable. The introduction of competition substantially fosters the trust strategy, reduces market segmentation, and leads to large welfare gains for both employers and employees.
    Keywords: job design, high-performance work systems, screening, reputation, competition, trust, control, social preferences, complementarities
    JEL: C91 D86
    Date: 2010–01
  5. By: Kris De Jaegher
    Abstract: This paper develops a model of supplier-induced demand as strategic framing where the patient has reference-dependent references, and the physician can persuade the patient to buy a treatment by affecting the patient.s reference point. In the main result, the patient is assumed to have a constant rate of risk aversion (lovingness) in the gain (loss) region. Two scenarios are treated. In the cure scenario, the physician wants to frame the patient.s decision problem such that he prefers to buy a risky curative treatment rather than no treatment. It is shown that the physician is most persuasive if she sets a high reference point, such that the patient sees all payoffs as losses down from that reference point. In the prevention scenario, the physician wants to frame the patient.s decision problem such that he prefers a safe preventive treatment rather than no treatment. In this case, the physician.s optimal framing either involves framing all payoffs as gains, thus making the patient riskaverse. Alternatively, loss aversion is exploited by framing only the fact of getting ill (rather than having prevented illness) as a loss.
    Keywords: supplier-induced demand, prospect theory, strategic framing
    JEL: D82 I11
    Date: 2010–01
  6. By: Alex Stomper (MIT and IAS Vienna); Marie-Louise Vierø (Queen's University)
    Abstract: This paper derives conditions under which the well-known decomposition of unconditional expected utility into marginal probabilities and conditional expected utility generalizes to Cumulative Prospect Theory, as well as updating rules for probability weighting functions. The results are, for example, of interest for empirical and experimental work, when available choice data is for situations where payoffs given the conditioning events are random.
    Keywords: Cumulative Prospect Theory, probability weighting functions, conditioning, updating
    JEL: D80 D84
    Date: 2009–12
  7. By: Costa-Gomes, Miguel A. (University of Aberdeen); Huck, Steffen (University College London); Weizsäcker, Georg (University College London)
    Abstract: In many economic contexts, an elusive variable of interest is the agent's expectation about relevant events, e.g. about other agents' behavior. Recent experimental studies as well as surveys have asked participants to state their beliefs explicitly, but little is known about the causal relation between beliefs and other behavioral variables. This paper discusses the possibility of creating exogenous instrumental variables for belief statements, by shifting the probabilities of the relevant events. We conduct trust game experiments where the amount sent back by the second player (trustee) is exogenously varied by a random process, in a way that informs only the first player (trustor) about the realized variation. The procedure allows detecting causal links from beliefs to actions under plausible assumptions. The IV estimates indicate a significant causal effect, comparable to the connection between beliefs and actions that is suggested by OLS analyses.
    Keywords: social capital, trust game, instrumental variables, belief elicitation
    JEL: C72 C81 C91 D84
    Date: 2010–01
  8. By: Gary Bornstein; Ori Weisel
    Abstract: Explaining human cooperation in large groups of non-kin is a major challenge to both rational choice theory and the theory of evolution. Recent research suggests that group cooperation can be explained assuming that cooperators can punish non-cooperators or cheaters. The experimental evidence comes from economic games in which group members are informed about the behavior of all others and cheating occurs in full view. We demonstrate that under more realistic information conditions, where cheating is less obvious, punishment is ineffective in enforcing cooperation. Evidently, the explanatory power of punishment is constrained by the visibility of cheating.
    Date: 2009–12
  9. By: Juan Camilo Cárdenas
    Abstract: Behavior in the local commons is usually embedded in a context of regulations and social norms that the group of users face. Such norms and rules affect how individuals value material and non-material incentives and therefore determine their decision to cooperate or over extract the resources from the common-pool. This paper discusses the importance of social norms in shaping behavior in the commons through the lens of experiments, and in particular experiments conducted in the field with people that usually face these social dilemmas in their daily life. Through a large sample of experimental sessions with around one thousand people between villagers and students, I test some hypothesis about behavior in the commons when regulations and social norms constrain the choices of people. The results suggest that people evaluate several components of the intrinsic and material motivations in their decision to cooperate. While responding in the expected direction to a imperfectly monitored fine on over extraction, the expected cost of the regulation is not a sufficient explanatory factor for the changes in behavior by the participants in the experiments. Even with zero cost of violations, people can respond positively to an external regulator that issues a normative statement about a rule that is aimed at solving the social dilemma.
    Date: 2009–11–22
  10. By: Juan Camilo Cárdenas; Luz Ángela Rodríguez; Nancy Johnson
    Abstract: The dilemma of collective action around water use and management involves solving both the problems of provision and appropriation. Cooperation in the provision can be affected by the rival nature of the appropriation and the asymmetries in the access. We report two field experiments conducted in Colombia and Kenya. The Irrigation Game was used to explore the provision and appropriation decisions under asymmetric or sequential appropriation, complemented with a Voluntary Contribution Mechanism experiment which looks at provision decisions under symmetric appropriation. The overall results were consistent with the patterns of previous studies: the zero contribution hypotheses is rejected whereas the most effective institution to increase cooperation was face-to-face communication, and above external regulations, although we find that communication works much more effectively in Colombia. We also find that the asymmetric appropriation did reduce cooperation, though the magnitude of the social loss and the effectiveness of alternative institutional options varied across sites.
    Date: 2009–11–15
  11. By: Holden, Steinar (Dept. of Economics, University of Oslo)
    Abstract: Recent research is exploring the case for cognitive or post-decision dissonance using the free-choice paradigm of Brehm (1956). Participants are repeatedly faced with a choice between items that they have given the same rating of liking, two items at a time, and it is found that items not chosen in one choice has a lower tendency of being chosen in a subsequent choice against a different alternative item. This tendency is interpreted as evidence for cognitive or post-decision dissonance. I argue that this interpretation of the evidence is invalid. Furthermore, I report a novel experiment in which participants were specifically asked to compare the items, allowing for a consistent interpretation of the evidence. I find no evidence of post-decision dissonance after a choice between items where one was viewed as more attractive than the other, but potentially some weak evidence of post-decision dissonance after a choice between items viewed as equally attractive.
    Keywords: post-decision dissonance; cognitive dissonance; preferences
    Date: 2009–08–30
  12. By: Miettinen, Topi (Stockholm Institute of Transition Economics)
    Abstract: This paper introduces the payoff-confirming analogy-based expectation equilibrium (PCABEE) as a way to refine the set of analogy-based equilibria and the associated admissible analogy partitions. In addition to the actions of others, own payoff history provides information about others’ strategies but, yet, non-Bayesian Nash equilibria may exist both with an incorrect and a correct prior. We provide general conditions when this happens. Two stylized employer-employee interactions, one with a correct and one with an incorrect prior, are provided illustrating how PCABEE can be used to analyze robust stereotypes and how incorrect such stereotypes may lead to discrimination.
    Keywords: analogy expectations; bounded rationality; curse; learning; discrimination; stereotypes
    JEL: C72 D82
    Date: 2009–12–28
  13. By: Boucher, Vincent (University of Montreal); Bramoullé, Yann (Université Laval); Djebbari, Habiba (Université Laval); Fortin, Bernard (Université Laval)
    Abstract: We provide the first empirical application of a new approach proposed by Lee (2007) to estimate peer effects in a linear-in-means model. This approach allows to control for group-level unobservables and to solve the reflection problem. We investigate peer effects in student achievement in Mathematics, Science, French and History in Quebec secondary schools. We estimate the model using maximum likelihood and instrumental variables methods. We find evidence of peer effects. The endogenous peer effect is positive, when significant, and some contextual peer effects matter. Using calibrated Monte Carlo simulations, we find that high dispersion in group sizes helps with potential issues of weak identification.
    Keywords: reflection problem, student achievement, peer effects
    JEL: C31 I20 Z13
    Date: 2010–01
  14. By: Cunha, Flavio (University of Pennsylvania); Heckman, James J. (University of Chicago); Schennach, Susanne (University of Chicago)
    Abstract: This paper formulates and estimates multistage production functions for children's cognitive and noncognitive skills. Skills are determined by parental environments and investments at different stages of childhood. We estimate the elasticity of substitution between investments in one period and stocks of skills in that period to assess the benefits of early investment in children compared to later remediation. We establish nonparametric identification of a general class of production technologies based on nonlinear factor models with endogenous inputs. A by-product of our approach is a framework for evaluating childhood and schooling interventions that does not rely on arbitrarily scaled test scores as outputs and recognizes the differential effects of the same bundle of skills in different tasks. Using the estimated technology, we determine optimal targeting of interventions to children with different parental and personal birth endowments. Substitutability decreases in later stages of the life cycle in the production of cognitive skills. It increases slightly in later stages of the life cycle in the production of noncognitive skills. This finding has important implications for the design of policies that target the disadvantaged. For some configurations of disadvantage and for some outcomes, it is optimal to invest relatively more in the later stages of childhood than in earlier stages.
    Keywords: cognitive skills, noncognitive skills, dynamic factor analysis, endogeneity of inputs, anchoring test scores, parental influence
    JEL: C31 J13
    Date: 2010–01

This nep-cbe issue is ©2010 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.
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