nep-exp New Economics Papers
on Experimental Economics
Issue of 2005‒02‒13
five papers chosen by
Daniel Houser
George Mason University

  1. Distrust - The Hidden Cost of Control By Falk, Armin; Kosfeld, Michael
  2. Equilibrium of Real Financial Markets: Theory and Experimental Evidence By Bossaerts, Peter
  3. Creating Competition Out of Thin Air: Market Thickening and Right-to-Choose Auctions By Eliaz, Kfir; Offerman, Theo; Schotter, Andrew
  4. Verified Trust: Reciprocity, Altruism and Noise in Trust Games By Brülhart, Marius; Usunier, Jean-Claude
  5. Different Positive Feelings Leading to Different Ad Evaluations: The Case of Cosiness, Excitement and Romance By T. FASEUR; M. GEUENS

  1. By: Falk, Armin; Kosfeld, Michael
    Abstract: We show experimentally that a principal's distrust in the voluntary performance of an agent has a negative impact on the agent's motivation to perform well. Before the agent chooses his performance, the principal in our experiment decides whether he wants to restrict the agents' choice set by implementing a minimum performance level for the agent. Since both parties have conflicting interests, restriction is optimal for the principal whenever the latter expects the agent to behave opportunistically. We find that most principals in our experiment do not restrict the agent's choice set but trust that the agent will perform well voluntarily. Principals who trust induce, on average, a higher performance and hence earn higher payoffs than principals who control. The reason is that most agents lower their performance as a response to the signal of distrust created by the principal's decision to limit their choice set. Our results shed new light on dysfunctional effects of explicit incentives as well as the puzzling incompleteness of many economic contracts.
    Keywords: control; distrust; incentives; incomplete contracts; motivation; principal-agent relationship; trust
    JEL: C7
    Date: 2004–08
  2. By: Bossaerts, Peter
    Abstract: The theory and the data in this Paper challenge the view that there is no structure in prices and allocations when markets are off equilibrium. Starting from the observation that price-taking usually applies only to small orders, a theory of equilibration is derived based on the assumption that orders are optimal only locally. Prices adjust in the direction of the order imbalance. In the context of mean-variance preferences, the theory predicts that a security’s price will correlate with excess demands in other securities, and the sign of this correlation is the same as that of the covariance of the final payoffs. In the short run, prices tend to a local equilibrium where the risk-aversion weighted endowment portfolio (RAWE) is mean-variance optimal. Relative to the market portfolio, RAWE overweighs securities that are held disproportionally by more risk averse agents; RAWE puts less weight on securities that are held primarily by more risk tolerant agents. Throughout equilibration, portfolio separation is violated generically, and violations are more extreme when payoff covariances are positive. For a variety of patterns of initial allocations (including identical initial holdings), the equity premium is larger at the outset than at (CAPM) equilibrium. Experimental evidence confirms the predictions conclusively.
    Keywords: CAPM; Equilibration; experimental finance; financial markets; optimal portfolios; portfolio separation
    JEL: C92 D50 G12
    Date: 2004–10
  3. By: Eliaz, Kfir; Offerman, Theo; Schotter, Andrew
    Abstract: We study a procedure for selling multiple heterogenous goods, which is commonly used in practice but rarely studied in the literature. The novel feature of this procedure is that instead of selling the goods themselves, the seller offers buyers the right to choose among the available goods. Thus, buyers who are after completely different goods are forced to compete for the same good, the ‘right to choose’. Competition can be further enhanced by restricting the number of rights that are sold. This is shown both theoretically and experimentally. Our main experimental finding is that by auctioning ‘rights-to-choose’ rather than the goods themselves, the seller induces an aggressive bidding behaviour that generates more revenue than the theoretical optimal mechanism.
    Keywords: Behavioural Mechanism-Design; Experimental auctions; Right-to-Choose Auctions
    JEL: C91 D44
    Date: 2004–10
  4. By: Brülhart, Marius; Usunier, Jean-Claude
    Abstract: Behavioural economists have come to recognize that reciprocity, the interaction of trust and trustworthiness, is a distinct and economically relevant component of individual preferences alongside selfishness and altruism. This recognition is principally due to observed decisions in experimental ‘trust games’. However, recent research has cast doubt on the explanatory power of trust as a determinant of those decisions, suggesting that altruism may explain much of what ‘looks like’ trust. Moreover, empirical tests for alternative behavioural determinants can be sensitive to experimental bias due to differences in protocols and framing. Therefore, we propose discriminatory tests for altruism and trust that can be based on within-treatment and within-subject comparisons, and we control for group attributes of experimental subjects. Our results support trust (i.e. expected reciprocation) as the dominant motivation for ‘trust like’ decisions.
    Keywords: altruism; experimental error; reciprocity; trust game
    JEL: C91 D63 D64
    Date: 2004–11
    Abstract: This study adds to the debate about the valence-based versus the unique and discrete view of feelings. By conducting an experiment using 317 subjects, we compared the differential impact of three different positive feelings on ad effectiveness. Support for the discrete view of feelings was found in the sense that ad- and context-evoked cosiness, excitement and romance had a different impact on ad attitudes. Moreover, in the area of context effects further support for the unique view of feelings was found: the exciting, the romantic and the cosy ad scored best after telling a feeling-congruent story.
    Date: 2004–11

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