nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2015‒09‒11
fourteen papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. A Self-Funding Reward Mechanism for Tax Compliance By Enrique Fatas; Daniele Nosenzo; Martin Sefton; Daniel John Zizzo
  2. Loss Aversion, Reference Dependence and Diminishing Sensitivity in Choice Experiments By Anthony Scott; Julia Witt
  3. Be a Good Samaritan to a Good Samaritan: Field Evidence of Interdependent Other-Regarding Preferences in China By Chang, Simon; Dee, Thomas S.; Tse, Chun-Wing; Yu, Li
  4. Authority and centrality: Power and cooperation in social dilemma networks By Boris van Leeuwen; Abhijit Ramalingam; David Rojo Arjona; Arthur Schram
  5. Goal Bracketing and Self-Control By Alice Hsiaw
  6. Why are heterogeneous communities inefficient? Theory, history, and an experiment By David Hugh-Jones; Carlo Perroni
  7. Delay of Gratification and the Role of Defaults: An Experiment with Kindergarten Children By Sutter, Matthias; Yilmaz, Levent; Oberauer, Manuela
  8. Does it matter which effort task you use? A comparison of four effort tasks when agents compete for a prize By Emanuela Lezzi; Piers Fleming; Daniel John Zizzo
  9. Impact of Artificial Intelligence on Economic Theory By Tshilidzi Marwala
  10. Do consumers take advantage of common pricing standards? An experimental investigation By Robert Sugden; Jiwei Zheng
  11. Identity and group conflict By Subhasish M. Chowdhury; Joo Young Jeon; Abhijit Ramalingam
  12. Decision Initiation, Decision Implementation, and the Allocation of Decision Rights By Randolph Sloof; Ferdinand A. von Siemens
  13. Benefit Losses Loom Larger than Taxes: The Effects of Framing and Loss Aversion on Behavioural Responses to Taxes and Benefits By Avram, Silvia
  14. Identity, language, and conflict: An experiment on ethno-linguistic diversity and group discrimination in two bilingual societies By Maria Paz Espinosa; Enrique Fatas; Paloma Ubeda

  1. By: Enrique Fatas (Department of Economics, University of East Anglia); Daniele Nosenzo (Department of Economics, University of Nottingham); Martin Sefton (Department of Economics, University of Nottingham); Daniel John Zizzo (BENC and Newcastle University Business School, Newcastle University)
    Abstract: We compare in a laboratory experiment two audit-based tax compliance mechanisms that collect fines from those found non-compliant. The mechanisms differ in the way fines are redistributed to individuals who were either not audited or audited and found to be compliant. The first, as is the case in most extant tax systems, does not discriminate between the un-audited and those found compliant. The second targets the redistribution in favor of those found compliant. We find that targeting increases compliance when paying taxes generates a social return. We do not find any increase in compliance in a control treatment where individuals audited and found compliant receive symbolic rewards. It is not the mere assigning of rewards, but the material incentives inherent in the rewards that improve compliance. We conclude that existing tax mechanisms have room for improvement by rewarding financially those audited and found compliant.
    Keywords: tax evasion, rewards, audits
    Date: 2015
  2. By: Anthony Scott (Melbourne Institute of Applied Economic and Social Research, University of Melbourne); Julia Witt (Department of Economics, University of Manitoba)
    Abstract: In the discrete choice experiment literature, it has been argued that the choice sets from which respondents choose should include an unforced choice because this is more realistic and accounts for status quo bias. However, we propose a much stronger set of arguments for preferring to use unforced choices where relevant. These relate to the concepts of loss aversion, reference dependence and diminishing sensitivity from prospect theory. We use data from a discrete choice experiment of different types of jobs for nurses, where the introduction of a third alternative, representing the respondent’s current job, changes the reference point, which is different for each respondent. The increased salience of the reference point, in turn, changes the size of any losses or gains when comparing Job A or Job B with their current situation, and since losses are valued more than gains, this affects the marginal utility of each attribute. This has implications for policy conclusions based on willingness to pay. Including an unforced choice is necessary (when appropriate) not only for the purposes of ‘realism’, but also because different marginal utilities are produced due to loss aversion, reference dependence and diminishing sensitivity. Classification-I11, J24, J32, D80, C99
    Keywords: Discrete choice experiments, loss aversion, reference dependence, diminishing sensitivity, health workforce
    Date: 2015–09
  3. By: Chang, Simon (University of Western Australia); Dee, Thomas S. (Stanford University); Tse, Chun-Wing (Central University of Finance and Economics); Yu, Li (Central University of Finance and Economics)
    Abstract: We conducted large-scale lost letter experiments in Beijing, a megacity with more than 21 million residents, to test if the observed altruistic attribute of the letter recipient would induce more passersby to return the lost letters. The treatment letters were addressed to a nationally renowned charitable organization in China, while the control letters were intended to an invented individual. A total of 832 ready-to-be-posted letters were distributed in 208 communities across eight districts in the city. The overall return rate was only about 13%. Yet, the return rate of the treatment letters (17%) was nearly twice as high as that of the control letters (9%). The finding adds large-scale field experiment evidence in support of the interdependent other-regarding preferences theory. In addition, we also found that the lost letters were more likely to be returned if they were dropped in communities with a relatively higher income or a postal box located closer.
    Keywords: other-regarding preferences, lost letter technique, altruism, China
    JEL: C93 D03
    Date: 2015–08
  4. By: Boris van Leeuwen (Toulouse School of Economics); Abhijit Ramalingam (University of East Anglia); David Rojo Arjona (University of Leicester); Arthur Schram (Amsterdam School of Economics)
    Abstract: We investigate the effects of power on cooperation in repeated social dilemma settings. Groups of five players play either multi-player trust games or VCM-games on a fixed network. Power stems from having the authority to allocate funds raised through voluntary contributions by all members and/or from having a pivotal position in the network (centrality). We compare environments with and without ostracism by allowing players in some treatments to exclude others from further participation in the network. Our results show that power matters but that its effects hinge strongly on the type involved. Reminiscent of the literature on leadership, players with authority often act more cooperatively than those without such power. Nevertheless, when possible, they are quickly ostracized from the group. Thus, this kind of power is not tolerated by the powerless. In stark contrast, centrality leads to less cooperative behavior and this free riding is not punished; conditional on cooperativeness, players with power from centrality are less likely to be ostracized than those without. Hence, not only is this type of power tolerated, but so is the free riding it leads to.
    Keywords: power, cooperation, networks, public goods
    JEL: C91 D02 D03 H41
    Date: 2015–03–03
  5. By: Alice Hsiaw (Brandeis University)
    Abstract: This paper studies the role of goal bracketing to attenuate time inconsistency. When setting non-binding goals in multi-stage project, an agent must also decide how and when to evaluate himself against such goals. In particular, he can bracket broadly by setting an aggregate goal for the entire project, or narrowly by setting incremental goals for individual stages. In the presence of loss aversion and uncertainty over outcomes, this decision involves a trade-off between motivation and comparative disutility due to ex-ante uncertainty. Narrow goal bracketing can be used as an instrument to counteract the self-control problem, while broad goal bracketing can itself generate apparently erroneous behavior such as the sunk cost fallacy. The sequential nature of decision-making introduces a differential reaction to outcome uncertainty based on its timing, which determines the optimal bracketing choice.
    Date: 2015–08
  6. By: David Hugh-Jones (University of East Anglia); Carlo Perroni (University of Warwick)
    Abstract: We examine why heterogenous communities may fail to provide public goods. Current work characterizes sanctioning free-riders as an under-supplied public good. We argue that often free-riders can be punished by the coordinated action of a group. This punishment can be profitable, and need not be undersupplied. But the power to expropriate defectors can also be used to expropriate outgroups. Heterogenous societies may be inefficient because minorities, rather than free-riders, are expropriated. Even if this is not so, groups’ different beliefs about the reasons for expropriation may make the threat of punishment less effective at preventing free-riding. We illustrate our theory with evidence from California mining camps, contemporary India, and US schools. In a public goods experiment using minimal groups and a profitable punishment institution, outgroups were more likely to be punished, and reacted differently to punishment than in group members.
    Keywords: group coercion, social heterogeneity
    JEL: H1 H4 N4 D02
    Date: 2015–04–02
  7. By: Sutter, Matthias (University of Cologne); Yilmaz, Levent (University of Innsbruck); Oberauer, Manuela (University of Innsbruck)
    Abstract: The ability to delay gratification has been shown to be related to higher education and income and better health status. We study in an experiment with 336 kindergarten children, aged three to six years, whether intertemporal choice behavior is malleable. In a control condition, about 50% of children prefer two rewards the next day over one reward immediately. By setting a simple default this fraction increases to more than 70%, indicating that simple defaults work very successfully in promoting delay of gratification. We also find that patience increases with age and that more patient children have a lower BMI.
    Keywords: delay of gratification, intertemporal choice, default, experiment, children
    JEL: C91 D03
    Date: 2015–08
  8. By: Emanuela Lezzi (University of Insubria); Piers Fleming (University of East Anglia); Daniel John Zizzo (Newcastle University)
    Abstract: Effort tasks are commonly used to assess individual investment and performance in an experimental setting. Although the tasks used are diverse, they are typically intended to be equivalent as far as they aim to generalize beyond the specific task. We compare an induced value effort task and three real effort tasks in a contest game. Results show that there is no equivalence across tasks in relation to how risk attitude, anxiety and gender predict performance.
    Keywords: effort tasks, experimental methodology, contests, induced value
    JEL: C72 C90 C91
    Date: 2015–04
  9. By: Tshilidzi Marwala
    Abstract: Artificial intelligence has impacted many aspects of human life. This paper studies the impact of artificial intelligence on economic theory. In particular we study the impact of artificial intelligence on the theory of bounded rationality, efficient market hypothesis and prospect theory.
    Date: 2015–07
  10. By: Robert Sugden (University of East Anglia); Jiwei Zheng (University of Warwick)
    Abstract: Gaudeul and Sugden have hypothesized that, when some but not all competing products are priced in a common standard and when consumers are liable to make errors in cross-standard price comparisons, consumers confine their attention to common-standard offers. This ‘largest common standard’ (LCS) heuristic provides incentives for sellers to use common standards, and so differs from most ‘consider-then-choose’ decision processes by not exposing consumers to exploitation by sellers. We report an experimental test of this hypothesis, using choice tasks similar to those represented in the Gaudeul–Sugden model. These tasks are parameterized such that participants, given their actual cognitive abilities, would benefit by using the LCS heuristic. However, we find little evidence that this heuristic is used. Most participants use a ‘dominance editing’ (DE) rule which begins by eliminating transparently dominated offers. This rule incentivises sellers not to use common standards. Since DE is less efficient than LCS, given participants’ cognitive abilities, the use of DE is evidence of overconfidence.
    Keywords: shortlisting, common standard, largest common standard heuristic, dominance editing, consideration set
    Date: 2015–07
  11. By: Subhasish M. Chowdhury (University of East Anglia); Joo Young Jeon (University of East Anglia); Abhijit Ramalingam (University of East Anglia)
    Abstract: We experimentally investigate the effects of real and minimal identities on group conflict. In turn we provide a direct test of the hypotheses coined by Amartya Sen that the salience of a real identity escalates conflict but that of a mere classification would not do so. In a baseline treatment two groups – one of East Asians, and the other of Caucasians – engage in a group contest, but the information on racial composition is not revealed. In the minimal identity treatment each group is arbitrarily given a different color code, whereas in the real identity treatment the race information is revealed. Supporting Sen’s hypotheses, we find that compared to the baseline, free-riding declines and conflict effort increases in the real identity treatment but not in the minimal identity treatment. Moreover, this occurs due to an increase in efforts in the real identity treatment by females in both racial groups, but not by a particular racial group.
    Keywords: conflict, identity, race, gender
    JEL: C91 C92 D03 D74 J15 J16
    Date: 2015–05–25
  12. By: Randolph Sloof (University of Amsterdam, the Netherlands); Ferdinand A. von Siemens (Goethe University Frankfurt, Germany)
    Abstract: Organizations must not only take the right decisions, they must also ensure that these decisions are effectively implemented. Fama and Jensen (1983) argue that the same members of many organization are often responsible for both decision initiation and implementation. If these have social preferences, they might thus sabotage both project choices and implementation to express their discontent with the allocation of decision rights. How decisions come about also affects implementation if workers have reciprocal fairness concerns. Our experimental evidence demonstrates that the possibility to sabotage implementation leads to more delegation, but only if workers have high costs of obstructing informed decisions. We further find that the allocation of authority as such affects implementation.
    Keywords: Delegation; Implementation; Procedural Preferences; Reciprocity
    JEL: C91 D23 D86 L20
    Date: 2015–09–01
  13. By: Avram, Silvia
    Abstract: A substantive body of research highlights the existence of framing effects in labour supply responses to taxation challenging traditional models that assume taxes only influence behaviour via the budget constraint. Using a lab experiment, this paper examines the presence of differential responses to identical marginal tax schedules coming from direct taxation and from benefit withdrawal respectively. In an incentivised real-effort task, subjects supply time and effort while facing an incentive structure that is framed as taxation or benefit withdrawal respectively, while yielding the exact same budget constraint. Results indicate that subjects in the benefit withdrawal condition are more likely to reduce working time compared to both subjects in the tax treatment and a control group where the incentive structure is described without using the language of taxes and benefits. The effect is driven by loss-averse individuals suggesting that benefit streams may be subject to an ‘endowment effect’. The findings have clear implications for welfare policy design.
    Date: 2015–08–20
  14. By: Maria Paz Espinosa (University of the Basque Country); Enrique Fatas (University of East Anglia); Paloma Ubeda (University of the Basque Country)
    Abstract: Ethno-linguistic diversity has been empirically linked to low provision of public goods. We contribute to this literature analyzing diversity in a lab-in-the-field experiment in which we carefully control for ethno-linguistic diversity in two different bilingual societies, one with a much stronger identity conflict (the Basque Country) than the other (Valencia Country). In both locations, our participants come from different ethno- linguistic cultures (Catalan or Spanish, Basque or Spanish), and interact with other participants from their same background or a different one. We recruit participants using their mother tongue language, and study the effect of homogeneous (with no diversity) or mixed (with ethno-linguistic diversity) natural cultural identities in a nested public goods game with a local and a global public good. The game is constructed to eliminate any tension between efficiency and diversity; so, not contributing to the global (and efficient) public good can be interpreted as willingness to exclude the other group from the benefits of your contribution. Our results strongly support that diversity is strongly context dependent. While diversity in the Basque Country significantly reduces contributions to the global public good, and efficiency, it has no effect in the Valencia Country (if any, the effect is positive, but insignificant). We show that diversity destroys (reinforces) conditional cooperation in the Basque (Valencia) Country. While diversity is associated with overoptimistic empirical beliefs in Valencia, it significantly increases normative group discrimination in Basque Country.
    Keywords: natural identity, ethno-linguistic groups, group effects, norms, discrimination
    Date: 2015–08

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