nep-exp New Economics Papers
on Experimental Economics
Issue of 2005‒04‒16
twenty-one papers chosen by
Daniel Houser
George Mason University

  1. When Punishment Fails: Research on Sanctions, Intentions and Non- Cooperation By Daniel Houser; Erte Xiao; Kevin McCabe; Vernon Smith
  2. Trust among Strangers By Teck-Hua Ho; Keith Weigelt
  3. Emotion expression in human punishment behavior By Erte Xiao; Daniel Houser
  4. The cost of fair divisions: An experimental investigation of Ultimatum Games with groups By Marco Faillo
  5. Is playing alone in the darkness sufficient to prevent informational cascades? By Annamaria Fiore; Andrea Morone
  6. Early versus Late Coalition Announcement in Experimental Democracies By Robert E. Goodin; Rupert Sausgruber; Werner Güth
  7. How Do Aspiration Levels come About? Bounded Rationality and Dynamic Search By Mie Augier; Volker Mahnke
  8. Herd Behavior in a Laboratory Financial Market By Marco Cipriani; Antonio Guarino
  9. The Individual Behavior in a Public Goods game By Walid HICHRI
  10. Is playing alone in the darkness sufficient to prevent informational cascades? By Annamaria Fiore; Andrea Morone
  12. Why Lying Pays: Truth Bias in the Communication with Conflicting Interests By Toshiji Kawagoe; Hirokazu Takizawa
  13. Within-Team Competition in the Minimum Effort Coordination Game By Enrique Fatas; Tibor Neugebauer; Javier Perote
  16. Selfish-biased conditional cooperation: On the decline of contributions in repeated public goods experiments By Tibor Neugebauer; Javier Perote; Ulrich Schmidt; Malte Loos
  17. Behaviour in a Two-Stage Two Public Goods Experiment By Massimo Finocchiaro Castro
  18. Individual Preferences for Giving By Raymond Fisman; Shachar Kariv; Daniel Markovits
  19. Cooperation in the Classroom: Experimenting with Research Joint Ventures By Michelle Sovinsky Goeree; Jeroen Hinloopen
  20. On Learning, Experimentation, and Dynamics By Leonard J. Mirman; Marc Santugini
  21. Relative Thinking Theory By Ofer H. Azar

  1. By: Daniel Houser (ICES, Department of Economics, George Mason University); Erte Xiao (ICES, Department of Economics, George Mason University); Kevin McCabe (ICES, Department of Economics, George Mason University); Vernon Smith (ICES, Department of Economics, George Mason University)
    Abstract: People can become less cooperative when threatened with sanctions, and researchers have pointed to both 'intentions' and incentives as sources of this effect. This paper reports data from a novel experimental design aimed at determining the relative importance of intentions and incentives in producing non-cooperative behavior in a personal exchange environment. Subjects play one-shot investment games in pairs. Investors send an amount to trustees and request a return on this investment and, in some treatments, are given the option to threaten sanctions to enforce this return request. The decisions of trustees who face credible threats intentionally imposed (or not) by their investors are compared to the decisions of trustees who face threats randomly imposed (or not) by nature. When not threatened, trustees typically decide to return a positive amount that is less than the investor requested. When threatened with sanctions this decision becomes least common. In particular, under severe sanction threats most trustees return the desired amount, while under weak threats the most common decision is to return nothing. Critically, these results do not depend on whether the trustee is threatened intentionally by their investor or randomly by nature: trustees who are threatened with weak sanctions are significantly more likely to provide a zero return to their investors, even when they know that their investors had no role in imposing the threat. Our findings lend support to the view that credible threats of sanctions generate a “cognitive shift” that crowds-out norm-based motivations and increases the likelihood of income-maximizing behavior.
    Keywords: punishment, intentions, cooperation, trust, reciprocity, experimental and behavioral economics
    JEL: C9
    Date: 2005–02–07
  2. By: Teck-Hua Ho (University of California, Berkeley); Keith Weigelt (University of Pennsylvania)
    Abstract: The trust building process is basic to social science. We investigate it in a laboratory setting using a novel multi-stage trust game where social gains are achieved if players trust each other in each stage. And in each stage, players have an opportunity to appropriate these gains or be trustworthy by sharing them. Players are strangers because they do not know the identity of others and they will not play them again in the future. Thus there is no prospect of future interaction to induce trusting behavior. So, we study the trust building process where there is little scope for social relations and networks. Standard game theory, which assumes all players are opportunistic, untrustworthy, and should have zero trust for others is used to construct a null hypothesis. We test whether people are trusting or trustworthy and examine how inferring the intentions of those who trust affects trustworthiness. We also investigate the effect of stake on trust, and study the evolution of trust. Results show subjects exhibit some degree of trusting behavior though a majority of them are not trustworthy and claim the entire social gain. Players are more reluctant to trust in later stages than in earlier ones and are more trustworthy if they are certain of the trustee’s intention. Surprisingly, subjects are more trusting and trustworthy when the stake size increases. Finally, we find the sub- population who invests in initiating the trust building process modifies its trusting behavior based on the relative fitness of trust.
    Keywords: Experimental Economics, Behavioral Economics
    JEL: C79 C91 D64
    Date: 2005–04–14
  3. By: Erte Xiao (George Mason University); Daniel Houser (George Mason University)
    Abstract: Evolutionary theory reveals that punishment is effective in promoting cooperation and maintaining social norms. Although it is accepted that emotions are connected to punishment decisions, there remains substantial debate over why humans use costly punishment. Here we show experimentally that constraints on emotion expression can increase the use of costly punishment. We report data from Ultimatum Games11, where a proposer offers a division of a sum of money and a responder decides whether to accept the split, or reject and leave both players with nothing. Compared to the treatment where expressing emotions directly to proposers is prohibited, rejection of unfair offers is significantly less frequent when responders can convey their feelings to the proposer concurrently with their decisions. These data support the view that costly punishment might itself be used to express negative emotions, and suggest that future studies will benefit by recognizing that human demand for emotion expression can have significant behavioral consequences in social environments including families, courts, companies and markets.
    Keywords: ultimatum game, emotion expression, sanctions, cooperation
    JEL: C9
    Date: 2005–04–08
  4. By: Marco Faillo (Department of Economics, University of Trento & Sant'Anna School of Advanced Studies, Pisa, Italy)
    Abstract: I investigated the effect of the presence of a group of non-active subjects upon the behavior of active players in a Ultimatum bargaining game. In the experiment a subject with the role of P has to offer a share r of a sum S to a subject with the role of AR who belongs to a group and decides on behalf of his group’s members (players R). If AR rejects the P’s offer, both active and non-active players get zero, if AR accepts the offer then P gets S − r while r is equally divided between AR and the members of his group. Every subject assumes all the three roles (P, AR and R) and the group size is manipulated keeping constant the share S/N (with N=number of subjects, either active or non active, involved in the game). Data suggest that active players tend to behave as they were playing a standard two-person Ultimatum game. A clear insensitivity to changes in group size by subjects playing as P, emerging in the main experiment, is compatible with the hyphotesis that at the basis of their behavior there is a willingness to gain a payoff which satisfies an ex-ante fixed aspiration level, that for most of them corresponds to about half of S. The interpretation of the decisions taken by subjects under the AR role is more complicated as, although most of them show a behavior which is compatible with the one observed in the standard Ultimatum Game, a non-negligible share of players fix very low acceptance thresholds that could be explainained in terms of a shift from the willingness to punish unfair behaviors to the responsibility for others’ wellbeing.
    Keywords: Ultimatum Bargaining, Fairness, Social Norms
    JEL: C7 C9 D0
    Date: 2005–02–28
  5. By: Annamaria Fiore; Andrea Morone
    Abstract: Models of herd behaviour and informational cascades were theoretically developed in 1992 respectively by Banerjee (A simple model of herd behavior) and Bikhchandani, Hirshleifer and Welch (A Theory of Fads, Fashion, Custom and Cultural Change as Informational Cascades). Both articles pointed out the existence of an information externality that causes a welfare loss, and both proposed the idea that destroying an amount of information may turn out in a social improvement. Although this is an old idea and in the last years many features of herd behaviour and informational cascades were studied, this particular aspect was never developed or extensively analysed. In this article we will try to investigate this hypothesis both theoretically and experimentally.
    Keywords: Informational Cascades, Individual Decision Making, Experiments, Information Externality
    JEL: C92
  6. By: Robert E. Goodin; Rupert Sausgruber; Werner Güth
    Abstract: Sometimes parties decide ahead of an election with whom they would (if possible) join in a coalition together. Other times they leave it completely open, until after the election, with whom they would coalesce. Observations from the political arena itself do not allow us to determine the differing effects of coalition forming before or after the election. We therefore explore the question experimentally, in a situation with three parties and seven voters. There are striking effects regarding party behaviour: coalitions formed before the election are much more likely to be ideologically better-connected but larger than necessary and contain superfluous parties. Voters, however, seem not to vote strategically more often in cases of preannounced coalition intentions in ways we might expect.
  7. By: Mie Augier; Volker Mahnke
    Abstract: Although the Behavioral Theory of the Firm has served as continuing stimulus in diverse field of inquiry such as organizational learning, the theory of the firm, and decision making research more generally and there is good reason to expect that this influence continues to remain significant, the reach of the theory as it stands in situation of genuine uncertainty remains limited. This paper seeks to address this gap by taking steps towards extending the theory of search. A key departure from earlier approaches to the theory of search is the inclusion of the question How do aspiration levels come about? in addition to the received question How do aspiration levels change. This approach highlights the significance of an extended model of search in situations of Knightian uncertainty and Shacklian surprise. For instance, the concept of dynamic search sheds light on the role of 1) experimentation and play in the creation of aspirations, 2) creating disbelief in situations of lacking prior experience, and 3) disengaging limits of imagination. This paper develops aspects of the theoretical foundations of the concept of dynamic search and clarifies processes leading to new aspirations that guide subsequently firm adaptation. While many implications of dynamic search are still unexplored, building on insights from specifically the economists Shackle, Knight and the recent work of March and more generally from the ‘bounded rationality’ - tradition appears to be a promising avenue for new advances in organization science.
  8. By: Marco Cipriani (George Washington University); Antonio Guarino (UCL)
    Abstract: We study herd behavior in a laboratory Þnancial market where a sequence of subjects trades an asset whose value is unknown. In two treatments the price is updated according to a deterministic rule based on the order ßow, and in another it is updated by experimental participants. Theory predicts that agents should never herd. Our experimental results are in line with this prediction. Nevertheless, we observe a phenomenon that cannot be accounted for by the theory. In some cases, subjects decide not to use their private information and choose not to trade. In other cases, they ignore their private information to trade against the market (contrarian behavior). (JEL C92, D8, G14)
    JEL: C92 D8 G14
    Date: 2005–02–17
  9. By: Walid HICHRI (GREQAM & University of Aix-Marseille III)
    Abstract: Generally, with a standard linear public goods game, one observes at the aggregate level that contributions lay between the Nash equilibrium and the social optimum and decrease over time with an end-effect.Our purpose is to see whether these general aggregate results remain available at the group and at the individual levels. To do so, we formed six groups of four persons and made them play a public goods game. At the aggregate level, we find that our results correspond almost to the standard experimental findings in literature.Using the classification of Isaac et al. (1984), we find that at the group level, only two groups adopt the standard behavior and only two groups present a behavior similar to what we obtain at the aggregate level. At the individual level, we compare contributions over time of each subject to the group and the aggregate results and classify them into types. Only in one of the 6 groups individuals adopt an homogeneous behavior. In the five other groups, individuals have different behaviors.
    Keywords: Public Goods; Free-Riding; Aggregate level; Individual Behavior; Experiments.
    JEL: H4
    Date: 2005–02–21
  10. By: Annamaria Fiore (DSE, Università di Bari); Andrea Morone (DSE, Università di Bari)
    Abstract: Models of herd behaviour and informational cascades were theoretically developed in 1992 respectively by Banerjee (A simple model of herd behavior) and Bikhchandani, Hirshleifer and Welch (A Theory of Fads, Fashion, Custom and Cultural Change as Informational Cascades). Both articles pointed out the existence of an information externality that causes a welfare loss, and both proposed the idea that destroying an amount of information may turn out in a social improvement. Although this is an old idea and in the last years many features of herd behaviour and informational cascades were studied, this particular aspect was never developed or extensively analysed. In this article we will try to investigate this hypothesis both theoretically and experimentally.
    Keywords: Informational Cascades; Individual Decision Making; Experiments; Information Externality
    JEL: C92
    Date: 2005–03–04
  11. By: Darren Hudson (Mississippi State University); Karina Gallardo (Oklahoma State University); Terry Hanson (Mississippi State University)
    Abstract: A mail survey choice experiment and in-store controlled experiment were conducted concurrently in the same location to test for hypothetical bias in choice experiments using a new product—freshwater prawns. Findings suggest that hypothetical bias in the mail survey was not present for the new product, but some hypothetical bias was detected for substitute products, depending on the choice of econometric estimation method. However, the general conclusion is the choice experiments are an effective means of assessing potential market demand for new products with little evidence for hypothetical bias.
    Keywords: hypothetical bias, choice experiments, in-store experiments, functional form choice
    JEL: C9
    Date: 2005–03–09
  12. By: Toshiji Kawagoe (Future University - Hakodate); Hirokazu Takizawa (Research Institute of Economy, Trade & Industry)
    Abstract: We conduct experiments of a cheap-talk game with incomplete information in which one sender type has an incentive to misrepresent her type. Although that Sender type mostly lies in the experiments, the Receiver tends to believe the Sender's messages. This confirms ``truth bias'' reported in communication theory in a one-shot, anonymous environment without nonverbal cues. These results cannot be explained by existing refinement theories, while a bounded rationality model explains them under certain conditions. We claim that the theory for the evolution of language should address why truthful communication survives in the environment in which lying succeeds.
    Keywords: Cheap talk, Communication, Private information, Experiment, Equilibrium refinement, Bounded rationality, Truth bias
    JEL: C72 C92 D82
    Date: 2005–03–22
  13. By: Enrique Fatas (University Valencia); Tibor Neugebauer (University Hannover); Javier Perote (Juan Carlos University Madrid)
    Abstract: We report the results of an experiment on a continuous version of the minimum effort coordination game. The introduction of within-team competition significantly increases effort levels relative to a baseline with no competition and increases coordination relative to a secure treatment where the payoff-dominant equilibrium strategy weakly dominates all other actions. Nonetheless, within-team competition does not prevent subjects to polarize both in the efficient and the inefficient equilibria.
    Keywords: Coordination Games, Team Incentives, Minimum Effort Game
    JEL: C91
    Date: 2005–03–25
  14. By: Tibor Neugebauer (University Hannover)
    Abstract: This paper considers bidding automata programmed by experienced subjects in sequential first price sealed bid auction experiments. These automata play against each other in computer tournaments. The risk neutral subgame perfect Nash equilibrium strategy of the independent private value model serves as a benchmark. The equilibrium strategy does not describe any of the heterogeneous automata programs submitted by subjects and does not always perform better than average in the tournament.
    Keywords: Experimental Economics, First-Price Sealed-Bid Auctions, Sequential Auctions, Independent Private Value Model, Finite Automata
    JEL: C92 C12 C13 C72 D44
    Date: 2005–03–25
  15. By: Tibor Neugebauer (University Hannover); Javier Perote (Juan Carlos University Madrid)
    Abstract: This article reports the results of a market experiment designed to test the predictions of the constant relative risk aversion model and to study the importance of information feedback in repeated first-price sealed-bid auctions. The data reveal that introduction of price information feedback implies a significant change of individual behavior. Without price information feedback, the data support the risk neutral Nash equilibrium prediction; with price information feedback, on the other hand, subjects overbid the risk neutral Nash equilibrium significantly. The constant relative risk aversion model is rejected since it predicts overbidding for both feedback conditions.
    Keywords: Experimental Economics, First-price Sealed-bid Auctions, Independent Private Value Model, Bidding Theory, Risk Aversion
    JEL: C92 C12 C13 C72 D44
    Date: 2005–03–25
  16. By: Tibor Neugebauer (University Hannover); Javier Perote (Juan Carlos University Madrid); Ulrich Schmidt (University Hannover); Malte Loos (University Kiel)
    Abstract: The recent literature suggests that people have social preferences with a self-serving bias. Our data analysis reveals that the stylized fact of declining cooperation in repeated public goods experiments results from this bias and adaptation.
    Keywords: experimental economics, information feedback, public goods, voluntary contributions, conditional cooperation
    JEL: C72 C92 H41
    Date: 2005–03–25
  17. By: Massimo Finocchiaro Castro (Department of Economics, Royal Holloway College, University of London & DEMQ, University of Catania)
    Abstract: In a two-stage two-public good experiment, we study the effect that subjects’ possibility of contributing to a public good in the first stage of the game has on the voluntary contributions to the second public good. Our results show that subjects do not follow either the Nash strategy or the Pareto efficient strategy and that they perceive the two public goods as substitutes.
    Keywords: public goods, experiments, voluntary provision
    JEL: A13 H41 C92
    Date: 2005–04–05
  18. By: Raymond Fisman (Graduate School of Business, Columbia University); Shachar Kariv (Department of Economics, University of California, Berkeley); Daniel Markovits (Yale Law School, Yale University)
    Abstract: This paper reports an experimental test of individual preferences for giving. We use graphical representations of modified Dictator Games that vary the price of giving. This generates a very rich data set well- suited to studying behavior at the level of the individual subject. We test the data for consistency with preference maximization, and we recover underlying preferences and forecast behavior using both nonparametric and parametric methods. Our results emphasize that classical demand theory can account surprisingly well for behaviors observed in the laboratory and that individual preferences for giving are highly heterogeneous, ranging from utilitarian to Rawlsian to perfectly selfish.
    Keywords: Experiment, Fairness, Dictator Game, and Revealed Preference
    JEL: C79 C91 D64
    Date: 2005–04–14
  19. By: Michelle Sovinsky Goeree (Claremont McKenna College); Jeroen Hinloopen (University of Amsterdam)
    Abstract: This paper describes a classroom exercise that illustrates the investment incentives facing firms when technological spillovers are present. The game involves two stages in which student “sellers” first make investment decisions then production decisions. The classroom game can be used to motivate discussions of research joint ventures, the free-rider problem, collusion, and antitrust policy regarding research and development.
    JEL: A
    Date: 2005–03–10
  20. By: Leonard J. Mirman (University of Virginia, Department of Economics); Marc Santugini (University of Virginia, Department of Economics)
    Abstract: The object of this paper is to study learning and experimentation in dynamic models in which the link between periods is not only beliefs but also capital. We study the influence of learning and experimentation on investment under both signal-dependence and signal-independence. A problem is signal-dependent when the signal the economic agent uses to update his beliefs about the unknown parameter has either a direct impact on the next period maximand or an indirect impact through a law of motion constraining his decision in the next period. A problem that does not satisfy this definition is signal-independent. We first study a class of dynamic and signal-independent models, using an example that yields a closed-form solution for the infinite-horizon program. The closed-form solution enables us to study the effect of learning on investment, the dynamics, as well as the steady state. We then study how signal-dependence influences the effect of experimentation on investment. We are able to break the effect of experimentation into two effects: the dynamic effect and the belief effect. These two effects are different under signal-dependence and signal-independence. Several examples are presented to study the direction of learning and experimentation on investment in finite-horizon programs under both signal-dependent and signal-independent framework.
    Keywords: Signal-Dependence, Information, Investment, Growth.
    JEL: D42 D83 D92 E22 L12 O12 Q20
    Date: 2005–02–18
  21. By: Ofer H. Azar (Ben-Gurion University of the Negev)
    Abstract: The article presents a theory that I denote “Relative Thinking Theory,” which claims that people consider relative differences and not only absolute differences when making various economics decisions, even in those cases where the rational model dictates that people should consider only absolute differences. The article reviews experimental evidence for this behavior, summarizing briefly several experiments I conducted, as well as some earlier related literature. It then discusses how we can think about relative thinking and formalize this behavior. Later, the article addresses several related questions: why do people exhibit relative thinking, whether it is beneficial to do so, and whether experience and education can change relative thinking. Finally, the article explains why firms seem to respond to relative thinking of consumers, and raises additional implications of relative thinking for economics and management.
    Keywords: Relative thinking, relative differences, behavioral decision making, behavioral economics, psychological economics, Weber's law, absolute differences, percentages, ratios
    JEL: D10 M30 L10 C91 A12
    Date: 2005–04–09

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