nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒08‒14
ten papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Love for Efficiency or Confusion? A QRE Analysis of Individual Contributions in a Public Good Game By Luca Corazzini, Marcelo Tyszler
  2. Intermittent Reinforcement and the Persistence of Behavior: Experimental Evidence By Hogarth, Robin M.; Villeval, Marie Claire
  3. Behavioral Economics and Consumer Protection and Competition Law: A Judicial Perspective By Ginsburg, Douglas H.; Moore, Derek W.
  4. Paying the Price of Sweetening Your Donation - Evidence from a Natural Field Experiment By Alpízar, Francisco; Martinsson, Peter
  5. Social Norms, Information and Trust Among Strangers: Theory and Evidence By John Duffy; Huan Xie; Yong-Ju Lee
  6. Pricing Scheme Choice: How Process Affects Outcome By Natalia Shestakova
  7. Structural modeling of altruistic giving By Breitmoser, Yves
  8. Do Emotions Improve Labor Market Outcomes? By Lorenz Goette; David Huffman
  9. The Problem of Money Illusion in Economics By Erber, Georg
  10. Do Professionals Choke Under Pressure? By Thomas J. Dohmen

  1. By: Luca Corazzini, Marcelo Tyszler
    Abstract: Does the hypothesis of 'love for (group) efficiency' account for subjects' over-contribution in public good games? By using data from a VCM experiment with heterogeneous endowments and asymmetric information, we estimate a quantal response equilibrium (QRE) extension of a model in which subjects have preferences for group efficiency. Under the hypothesis of homogeneous population, the estimated parameter of subjects' concerns for efficiency vanishes and most of the variability of contributions seems to be explained by noisy behaviors. A different picture emerges when we introduce cross-subject heterogeneity in concerns for group efficiency. In this case, the majority of the subjects makes contributions that are compatible with the hypothesis of 'love for (group) efficiency'. A formal likelihood-ratio test strongly rejects the models not allowing for noise in contributions and homogeneous subjects for the more general QRE extension with heterogeneous preferences for (group) efficiency coupled with noise in subjects' behavior.
    Keywords: Love for (Group) Efficiency; Voluntary Contribution Mechanism; Quantal Response Equilibrium; Laboratory Experiment.
    JEL: C92 D71
    Date: 2010–08
  2. By: Hogarth, Robin M. (Universitat Pompeu Fabra); Villeval, Marie Claire (CNRS, GATE)
    Abstract: Whereas economists have made extensive studies of the impact of levels of incentives on behavior, they have paid little attention to the effects of regularity and frequency of incentives. We contrasted three ways of rewarding participants in a real-effort experiment in which individuals had to decide when to exit the situation: a continuous reinforcement schedule (all periods paid); a fixed intermittent reinforcement schedule (one out of three periods paid); and a random intermittent reinforcement schedule (one out of three periods paid on a random basis). In all treatments, monetary rewards were withdrawn after the same unknown number of periods. Overall, intermittent reinforcement leads to more persistence and higher total effort, while participants in the continuous condition exit as soon as payment stops or decrease effort dramatically. Randomness increases the dispersion of effort, inducing both early exiting and persistence in behavior; overall, it reduces agents’ payoffs. Our interpretation is that, in the presence of regime shifts, both the frequency and the randomness of the reinforcement schedules influence adjustments that participants make across time to their reference points in earnings expectations. This could explain why agents persist in activities although they lose money, such as excess trading in stock markets.
    Keywords: randomness, ambiguity, intermittent reinforcement, incentives, experiment
    JEL: C92 M54 J28 J31
    Date: 2010–07
  3. By: Ginsburg, Douglas H.; Moore, Derek W.
    Abstract: Neoclassical economics or “price theory†has had a profound effect upon antitrust analysis, first as practiced in academia and then as reflected in the jurisprudence of the Supreme Court of the United States. More recently, behavioral economics has had a large and growing influence upon legal scholarship generally. Still, behavioral economics has not yet affected judicial decisions in the United States in any substantive area of law. The question we address is whether that is likely to change in the foreseeable future, i.e., whether the courts’ present embrace of price theory in antitrust cases portends the courts’ imminent acceptance of behavioral economics in either antitrust or consumer protection cases.
    Date: 2010–04
  4. By: Alpízar, Francisco (Environment for Development Center for Central America, CATIE, Turrialba, Costa Rica); Martinsson, Peter (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Using a natural field experiment in a recreational site, a public good almost fully dependent on voluntary donations, we explored the crowding-out effect of gift rewards. First, we investigated whether receiving a map in appreciation of a donation crowded out prosocial behavior and found no significant effect of giving the map. Second, we explored the effect of adding the map to a treatment designed to increase donations. Interestingly, when the gift was combined with our attempt to trigger reputational and self image motives, the probability of donating decreased significantly, compared to the social reference treatment alone.<p>
    Keywords: Crowding-out; donation; natural field experiment; reciprocity
    JEL: C93 D10 D60 Q50
    Date: 2010–08–05
  5. By: John Duffy; Huan Xie; Yong-Ju Lee
    Abstract: Can a social norm of trust and reciprocity emerge among strangers? We investigate this question by examining behavior in an experiment where subjects play a series of indefinitely repeated trust games. Players are randomly and anonymously matched each period. The main questions addressed are whether a social norm of trust and reciprocity emerges under the most extreme information restriction (anonymous community-wide enforcement) or whether trust and reciprocity require additional, individual-specific information about a player’s past history of play and whether that information must be provided freely or at some cost. In the absence of such reputational information, we find that a social norm of trust and reciprocity is difficult to sustain. The provision of reputational information on past individual decisions significantly increases trust and reciprocity, with longer histories yielding the best outcomes. Importantly, we find that making reputational information available at a small cost may also lead to a significant improvement in trust and reciprocity, despite the fact that most subjects do not choose to purchase this information.
    JEL: C72 C78 C91 C92 L14
    Date: 2010–08
  6. By: Natalia Shestakova
    Abstract: Standard price discrimination theories are based on the assumption that consumers use their future demand estimates to evaluate net utility of each pricing scheme and choose the scheme with the highest value. However, some evidence suggests that consumers might not always behave this way. The experiment presented in this paper shows that indeed a substantial proportion of subjects choose not to evaluate the net utility of the offered pricing schemes. Instead, they select from pricing schemes based on a comparison of the schemes' parameters. Interestingly, this selection approach leads to the correct pricing-scheme choice when subjects are not well aware of their demand, and to the incorrect choice when they are. The results call for alternative theories of price discrimination and corresponding policy implications.
    Keywords: Choice process; heuristics; price discrimination; experiment
    JEL: D42 D83
    Date: 2010–07
  7. By: Breitmoser, Yves
    Abstract: The paper analyzes econometric models of altruistic giving in dictator and public goods games. Using existing data sets, I evaluate internal and external validity of "atheoretic" regression models as well as structural models of random behavior, random coefficients, and random utility, controlling for subject heterogeneity by finite mixture modeling. In dictator games, atheoretic regression lacks external validity, while random coefficient models and random utility models offer high degrees of both internal and external validity. In public goods games, regression works comparably well, being bettered only by random utility models. Overall, the ordered GEV model of random utility is most appropriate to describe choices in the considered games.
    Keywords: structural modeling; altruism; dictator game; public goods; ordered choice sets
    JEL: C50 C44 D64 C72
    Date: 2010–08–05
  8. By: Lorenz Goette; David Huffman
    Abstract: Traditionally, models of economic decision-making assume that individuals are rational and emotionless. This chapter argues that the neglect of emotion in economic models explains their inability to predict important aspects of the labor market. We focus on one example: the scarcity of nominal wage cuts. [IZA Discussion Paper No. 1895]
    Keywords: wage rigidity, affect, emotions, money illusion, loss aversion
    Date: 2010
  9. By: Erber, Georg
    Abstract: Money illusion in economic theory has been an assumption rejected for academic economists for quite some time. However, with the gradual diffusion of behavioural economics based on experimental research this has changed. Now, it has become a respected fact to accept money illusion as a stylized fact of human behaviour. However, it still needs a better understanding why monetary phenomena especially related to financial markets play an important role in understanding the real economy, the production, consumption and exchange of commodities and services. The author of this paper suggests that financial markets are particular engaged in intertemporal valuation problems which are common to any kind of economic activity. Since money is the unit of account, accounting problems related to the uncertain nature of future economic development makes a continuous readjustment of valuations in money units necessary. However, financial markets are imperfect as Minsky has pointed out. Because of these imperfections the possibility of significant long-lasting valuation problems emerges. One reason for this is that in standard economic reasoning the problem of intentional cheating is neglected. Furthermore major innovations like e.g. the ICT revolution with the Internet or the introduction of securitization as a means to redistribute risk as general purpose innovations make valuations of the long term to medium term impacts on the economy extremely difficult. The recent financial market bubbles are significantly related to such general purpose innovations. If monetary policy fails to control for irrational exuberance of investors about the future benefits and profits of such innovations, this inherently embodies the risk of a financial market shock, if expectations of the general public have to adjust after overoptimistic prediction about the future economic development. The author, however, considers that there are some early warning indicators which would give the possibility of timely action of policy makers to control financial market bubbles. The complacency of monetary authorities of the past decades to do so, has not primarily a diagnostic problem to deal with money illusion, but even more so with vested interests of insiders of private investors on the institution to control unlawful behaviour. By weakening the regulatory framework, failing to establish transparency and accountability of agents eager to get rich as fast as possible without taking into regard the rules of good governance the current global financial crisis of institutional failure to contain the instability of financial markets to an acceptable social level. Money illusion is so as well an expression that unfounded optimism about the self-regulatory discipline of market participates is sufficient to stop financial markets get out of control to an historical unprecedented level.
    Keywords: Money Illusion; Imperfect Financial Markets; Regulatory Failure; Behavioural Finance
    JEL: G18 G28 B00
    Date: 2010–07–15
  10. By: Thomas J. Dohmen
    Abstract: High rewards or the threat of severe punishment do not only provide incentives to exert high levels of effort but also create pressure. Such pressure can cause paradoxical performance effects, namely performance decrements despite strong incentives and high motivation. By analyzing the performance of professional football players on a well-defined task, namely to score on a penalty kick, the paper provides empirical evidence for the existence of such detrimental incentive effects. Two pressure variables are considered in particular: (1) the importance of success and (2) the presence of spectators. There are plenty of situations in which pressure arises in the workplace. Knowing how individuals perform under pressure conditions is crucial for labor economists because it has implications for the design of the workplace and the design of incentive schemes. [IZA Discussion Paper No. 1905]
    Keywords: choking under pressure, paradoxical performance effects of incentives, social pressure
    Date: 2010

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