nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2011‒05‒14
twelve papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Monitoring and Pay: An Experiment on Employee Performance under Endogenous Supervision By Dittrich, Dennis A. V.; Kocher, Martin G.
  2. Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device By Martin Brown; Armin Falk; Ernst Fehr
  3. Institutions and Contract Enforcement By Armin Falk; David Huffman; W. Bentley Macleod
  4. Reference Points and Effort Provision By Johannes Abeler; Armin Falk; Lorenz Goette; David Huffman
  5. Can Intertemporal Choice Experiments Elicit Time Preferences for Consumption? Yes By Glenn W. Harrison; J. Todd Swarthout
  6. Myopia, pension payments and retirement: An experimental approach By Craig Holmes
  7. Smiling is a Costly Signal of Cooperation Opportunities: Experimental Evidence from a Trust Game By Centorrino, Samuele; Djemaï, Elodie; Hopfensitz, Astrid; Milinski, Manfred; Seabright, Paul
  8. Trading and Liquidity with Limited Cognition By Biais, Bruno; Hombert, Johan; Weill, Pierre-Olivier
  9. How to Make a 29% Increase Look Bigger: Numerosity Effects in Option Comparisons By M. PANDELAERE; B. BRIERS
  10. Comparing Group and Individual Choices under Risk and Ambiguity: An Experimental Study By Marielle Brunette; Laure Cabantous; Stéphane Couture
  11. What makes us want to have more than others? Explaining relative consumption effects of public and private goods By Hillesheim, Inga; Mechtel, Mario
  12. Managerial Valuation of Applicant Credentials and Personal Traits in Hiring Decisions By Jones, James R.; Co, Catherine Y.; Harter, James K.; Yun, Myeong-Su

  1. By: Dittrich, Dennis A. V.; Kocher, Martin G.
    Abstract: We present an experimental test of a shirking model where monitoring intensity is endogenous and effort a continuous variable. Wage level, monitoring intensity and consequently the desired enforceable effort level are jointly determined by the maximization problem of the firm. As a result, monitoring and pay should be complements. In our experiment, between and within treatment variation is qualitatively in line with the normative predictions of the model under standard assumptions. Yet, we also find evidence for reciprocal behavior. Our data analysis shows, however, that it does not pay for the employer to solely rely on the reciprocity of employees.
    Keywords: incentive contracts; supervision; efficiency wages;experiment; incomplete contracts; reciprocity
    JEL: C91 J31 J41
    Date: 2011–01
  2. By: Martin Brown (Swiss National Bank and CenTER Tilburg University); Armin Falk (University of Bonn); Ernst Fehr (Institute for Empirical Research in Economics, University of Zurich)
    Abstract: When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.
    Keywords: Relational Contracts, Involuntary Unemployment
    JEL: D82 J3 J41 E24 C9
    Date: 2011–05
  3. By: Armin Falk (University of Bonn and IZA); David Huffman (Swarthmore College and IZA); W. Bentley Macleod (Columbia University and IZA)
    Abstract: We provide evidence on how two important types of institutions – dismissal barriers, and bonus pay – affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded.
    Keywords: incomplete contracts, bonus pay, efficiency wages, employment protection, firing costs, experiment
    JEL: J41 J3 C9 D01
    Date: 2011–05
  4. By: Johannes Abeler (University of Nottingham); Armin Falk (University of Bonn); Lorenz Goette (University of Lausanne); David Huffman (Swarthmore College)
    Abstract: A key open question for theories of reference-dependent preferences is what determines the reference point. One candidate is expectations: what people expect could affect how they feel about what actually occurs. In a real-effort experiment, we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision. We find that effort provision is significantly different between treatments in the way predicted by models of expectation-based reference-dependent preferences: if expectations are high, subjects work longer and earn more money than if expectations are low.
    Keywords: Reference Points, Expectations, Loss Aversion, Disappointment, Experiment
    JEL: C91 D01 D84 J22
    Date: 2011–05
  5. By: Glenn W. Harrison; J. Todd Swarthout
    Abstract: The most popular experimental method for eliciting time preferences involves subjects making choices over smaller, sooner amounts of money and larger, later amounts of money. Under some theoretically possible configurations of preferences and procedures, the discount rates inferred from these choices could lead to misleading inferences about time preferences for consumption. Using a direct empirical test, we show that those configurations of preferences are empirically implausible.
    Date: 2011–05
  6. By: Craig Holmes (Department of Economics, University of Oxford)
    Abstract: The behavioral economics literature on time discounting has suggested that individuals may systematically undersave when planning for retirement. Hence, pension systems have developed to enable, or indeed force, individuals to save more for retirement. Of course, the saving aspect and the timing of retirement are connected, in the sense that the expected length of retirement determines what is meant by adequate post-retirement resources, and vice versa. Despite this, the timing aspect rarely enters into policy discussions, although the same behavioural phenomena that lead to undersaving – in this paper, myopia and present bias – may also have implications for the retirement decision. Moreover, the form of pension payments may also affect the timing decision when individuals do not have time consistent preferences. This paper presents a model of saving and retirement timing where saving rates are mandated, and pension payment may come in either a lump-sum or an annuity. It tests the model using data collected through a new experiment. The experiment presented has a particular novel feature which made it uniquely suited for testing the theoretical model. Specifically, participants in the experiment came back to the laboratory on a weekly basis over a two month period. This decision to return to the laboratory (or, to leave the experiment and collect a pension) became in itself the main variable of interest. The experiment therefore exploited the effort it takes for participants to come to the laboratory to capture preferences over time-use and leisure. The results shown that plans over leaving the experiment tend not to reflect preferences, whilst actual leaving times were lower for more impulsive individuals and those who gave up more time to participate. This suggests a tradeoff between increasing saving through pension systems and earlier retirement. Payment group had no effect on retirement timing, most likely because the small rewards meant participants were indifferent between the two forms of payment. The results suggest individuals may have time-inconsistent preferences over leisure choices, leading to the incidences of unplanned early retirement.
    Keywords: Retirement, Quasi-hyperbolic discounting, Pension payments, Laboratory experiment
    JEL: J26 D91 C91
    Date: 2011–03
  7. By: Centorrino, Samuele; Djemaï, Elodie; Hopfensitz, Astrid; Milinski, Manfred; Seabright, Paul
    Abstract: We test the hypothesis that "genuine" or "convincing" smiling is a costly signal that has evolved to induce cooperation in situations requiring mutual trust. Potential trustees in a trust game made video clips for viewing by potential trusters before the latter decided whether to send them money. Ratings of the genuineness of smiles vary across clips; it is difficult to make convincing smiles to order. We argue that smiling convincingly is costly, because smiles from trustees playing for higher stakes are rated as significantly more convincing, so that rewards appear to induce effort. We show that it induces cooperation: smiles rated as more convincing strongly predict judgments about the trustworthiness of trustees, and willingness to send them money. Finally, we show that it is a honest signal: those smiling convincingly return more money on average to senders. Convincing smiles are to some extent a signal of the intrinsic character of trustees: less honest individuals find smiling convincingly more difficult. They are also informative about the greater amounts that trustees playing for higher stakes have available to share: it is harder to smile convincingly if you have less to offer.
    Date: 2011–04
  8. By: Biais, Bruno (Toulouse School of Economics (CNRS-CRM, IDEI)); Hombert, Johan (HEC Paris); Weill, Pierre-Olivier (University of California and NBER)
    Abstract: We study the reaction of nancial markets to aggregate liquidity shocks when traders face cognition limits. While each nancial institution recovers from the shock at a random time, the trader representing the institution observes this recovery with a delay, reecting the time it takes to collect and process information about positions, counterparties and risk exposure. Cognition limits lengthen the recovery process. They also imply that traders who nd their institution has not yet recovered from the shock place market sell orders, and then progressively buy back at relatively low prices, while simultaneously placing limit orders to sell later when the price will have recovered. This generates round trip trades, which raise trading volume. We compare the case where algorithms enable traders to implement this strategy to that where traders can only place orders when they have completed their information processing task.
    Keywords: Liquidity shock, Limit-orders, Asset pricing and liquidity, Algorithmic trading, Limited cognition, Sticky plans
    JEL: D83 G12
    Date: 2010–12–07
    Abstract: Consumers prefer quantitative to qualitative information, yet the same quantitative information can appear as different numbers (e.g., 7-year warranty = 84-month warranty). The current paper demonstrates that consumers focus more on the number of units (7 versus 84) than on the type of units (year versus month), which implies a unit effect. The same attribute difference expressed as a higher number of units induces a perception of being larger (Study 1). When consumers receive the same information on different scales, the unit effect disappears (Study 2). Because differences in quality for the various options appear inflated due to the use of a scale with more units, consumers may switch away from a lower quality option when the quality ratings employ many units (Study 3). Finally, the unit effect implies that consumers are more sensitive to proportional differences and ratios of attribute levels when the attribute expression relies on many units rather than a few units (Study 4).
    Date: 2011–02
  10. By: Marielle Brunette (Laboratoire d'Economie Forestiere, Nancy, France); Laure Cabantous (Nottingham University Business School); Stéphane Couture (Unité de Biométrie et Intelligence Artificielle (UBIA), Toulouse, France)
    Abstract: In this paper, we build on the emerging literature on group decision-making to study the so-called ‘group shift’ effect, i.e., groups are less risk-averse than individuals. Our study complements past research in two ways. First, we study the group shift effect under two sources of uncertainty, namely risk where probabilities are known, and ambiguity where probabilities are imprecise. Second, we study the impact of the group decision rule (unanimity and majority) on group shift. Results from a lottery-choice experiment show a general tendency for the group shift effect, regardless of the decision rule. The group shift effect, however, is found to be significant only under risk in the unanimity treatment. Our study hence provides a clear test of the effect of the decision rule on the group shift effect under both risk and ambiguity.
    Keywords: Collective decision, Unanimity, Majority, Preferences, Risk, Ambiguity
    JEL: C91 C92
    Date: 2011–05–06
  11. By: Hillesheim, Inga; Mechtel, Mario
    Abstract: We conduct a survey with 264 participants to test for relative consumption effects of national and local public goods as well as private goods. In contrast to previous results, we find that relative consumption effects are more pronounced for private goods than for public goods. Our second finding is that relative consumption effects are less pronounced for local public goods than for national public goods. We discuss and test different explanations for a good's degree of positionality and find that these can, in part, account for our results very well. --
    Keywords: Relative consumption,Positional goods,Public good spillovers,Non-psychological costs
    JEL: C91 D12 D62 D63
    Date: 2011
  12. By: Jones, James R. (University of Nebraska at Omaha); Co, Catherine Y. (University of Nebraska at Omaha); Harter, James K. (The Gallup Organization); Yun, Myeong-Su (Tulane University)
    Abstract: We study how managers value applicant credentials and personal traits in hiring decisions. Using the ordered probit model, we confirm previous results – managers rank applicant traits higher than credentials. However, we also uncover patterns not previously observed – managerial valuations of some of these characteristics are dependent on managers' perception of the overall state of the economy, on firm and immediate workplace characteristics, and on managers' personal characteristics. Manager valuations of credentials vary with a large number of factors; this is not so for applicant personal traits. This is not surprising as most managers view the five traits considered "as extremely important."
    Keywords: personality, credentials, hiring practices, ordered probit
    JEL: J29 M12 C21
    Date: 2011–04

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