nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2016‒07‒16
six papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Risk and Loss Aversion, Price Uncertainty and the Implications for Consumer Search By Adriaan R. Soetevent; Tadas Bruzikas
  2. Medical insurance and free choice of physician shape patient overtreatment: A laboratory experiment By Huck, Steffen; Lünser, Gabriele; Spitzer, Florian; Tyran, Jean-Robert
  3. Hard Labour in the lab: Are monetary and non-monetary sanctions really substitutable? By Matteo Rizzolli; James Tremewan
  4. An Experiment on Information Use in College Student Loan Decisions By Darolia, Rajeev
  5. Differences Attract: An Experimental Study of Focusing in Economic Choice By Andersson, Ola; Ingebretsen Carlson, Jim; Wengström, Erik
  6. Green nudges: Do they work? Are they ethical? By Christian Schubert

  1. By: Adriaan R. Soetevent (University of Groningen, The Netherlands); Tadas Bruzikas (University of Groningen, The Netherlands)
    Abstract: Do the choices of consumers who search for a product's best price exhibit risk neutral, risk averse or loss averse risk attitudes? We study how in a problem of sequential search with costless recall the relation between a consumer's willingness to pay for continued search and the level of price uncertainty depends on her risk preferences. Independent of the current best price, an increase in price uncertainty encourages continued search when consumers are risk neutral. However, we prove that theory predicts an inversion when consumers are either risk or loss averse. In those cases, an increase in price uncertainty only increases the consumer's willingness to pay (WTP) for continued search if the current best price is sufficiently low. We subsequently use this observation in an empirical test to identify between different risk preferences in a stylized problem of sequential search. In line with the inversion, we find that a reduction in price uncertainty decreases the WTP for continued search when the current best price is low but increases the WTP when it is high. While at odds with the assumption of risk neutrality, this finding is consistent with models of consumer risk and/or loss aversion. Moreover, the model parameters of risk and loss aversion that lead to the best empirical fit have values similar to those estimated for other decision domains.
    Keywords: consumer search; risk aversion; loss aversion; price uncertainty
    JEL: D11 D12 D83 M31
    Date: 2016–07–04
  2. By: Huck, Steffen; Lünser, Gabriele; Spitzer, Florian; Tyran, Jean-Robert
    Abstract: In a laboratory experiment designed to capture key aspects of the interaction between physicians and patients, we study the effects of medical insurance and competition in the guise of free choice of physician, including observability of physicians' market shares. Medical treatment is an example of a credence good: only the physician knows the appropriate treatment, the patient does not. Even after a consultation, the patient is not sure whether he received the right treatment or whether he was perhaps overtreated. We find that with insurance, moral hazard looms on both sides of the market: patients consult more often and physicians overtreat more often than in the baseline condition. Competition decreases overtreatment compared to the baseline and patients therefore consult more often. When the two institutions are combined, competition is found to partially offset the adverse effects of insurance: most patients seek treatment, but overtreatment is moderated.
    Keywords: Credence good,Physician,Overtreatment,Competition,Insurance
    JEL: C91 I11 I13
    Date: 2016
  3. By: Matteo Rizzolli; James Tremewan
    Abstract: The theory of optimal deterrence suggests the substitution of mon- etary sanctions over non-monetary sanctions whenever this is possible because non-monetary sanctions are more socially costly. This pre- scription is based on the assumption that monetary and non-monetary sanctions are perfect substitutes: there exists a monetary equivalent of a non-monetary sanction that, if used as a ne, produces the same level of deterrence. We test this assumption with an experiment. In our stealing game potential thieves face the possibility of punishment. Our non-monetary sanction treatments mimic hard labour: we require convicted individuals to carry out a tedious real e ort task. In the monetary treatments sanctions are insteadones, which are based on individuals' willingness to pay to avoid the effort task to ensure com- parability to the non-monetary treatment. A second manipulation of our experiment concerns the balance of errors in the adjudication pro- cedure (convictions of innocents and acquittal of guilty individuals). We and that stealing is reduced most e ectively by a sanction regime that combines non-monetary sanctions with a severe procedure. Our data is consistent with the notion that both monetary punishment and pro-defendant sanction regimes are less effective in communicat- ing moral condemnation of an act.
    JEL: D01 K14 K40 K41 D42
    Date: 2016–06
  4. By: Darolia, Rajeev (Federal Reserve Bank of Philadelphia)
    Abstract: There is ample concern that college students are making ill-informed student loan decisions with potentially negative consequences to themselves and the broader economy. This paper reports the results of a randomized field experiment in which college students are provided salient information about their borrowing choices. The setting is a large flagship public university in the Midwest, and the sample includes all nongraduating students who previously borrowed student loan money (~10,000 students). Half of the students received individually tailored letters with simplified information about future monthly payments, cumulative borrowing, and the typical borrowing of peers; the other half is the control group that received no additional information. There are at most modest effects of the letter overall, which suggests that information alone is not sufficient to drive systematically different borrowing choices among students. However, some key student subgroups changed their borrowing in response to the letter, particularly those with low GPAs. There is also evidence of intended (more contact with financial aid professionals) and unintended (lower Pell Grant receipt) consequences of the letter.
    Keywords: Student Loans; Debt Letter; Financial Literacy; Payment Cards Center;
    JEL: D83 H52 I22 I28
    Date: 2016–06–01
  5. By: Andersson, Ola (Research Institute of Industrial Economics, Sweden); Ingebretsen Carlson, Jim (Department of Economics, Lund University); Wengström, Erik (Department of Economics, Lund University)
    Abstract: Several recent models of choice build on the idea that decision makers are more likely to choose an option if its attributes stand out compared to the attributes of the available alternatives. One example is the model of focusing by Köszegi and Szeidl (2013) where decision makers focus disproportionally on the attributes in which the available options differ more, implying that some attributes will be overweighted. We test this prediction in a controlled experiment. We find that subjects are more likely to make inconsistent choices when we manipulate the choice set by adding new options that are unchosen, but affect the maximal difference in attributes among the options. Hence, our results suggest that there exists a focusing effect.
    Keywords: Individual decision making; focus; attention; salience; decoy; experiments
    JEL: C91 D03 D12
    Date: 2016–06–30
  6. By: Christian Schubert (University of Kassel)
    Abstract: Environmental policies are increasingly informed by behavioral economics insights. ‘Green nudges’ in particular have been suggested as a promising new tool to encourage consumers to act in an environmentally responsible way, such as choosing renewable energy sources or saving energy. While there is an emerging literature on the instrumental effectiveness of behavioral policy tools such as these, their ethical assessment has largely been neglected. This paper attempts to fill this gap by, first, providing a structured overview of the most important contributions to the literature on pro-environmental nudges and, second, offering some critical guidelines that may help the practitioner come to an ethically informed assessment of nudges.
    Keywords: Nudges, Libertarian Paternalism, Behavioral Economics, Green Defaults, Autonomy
    Date: 2016

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