nep-exp New Economics Papers
on Experimental Economics
Issue of 2005‒07‒25
nine papers chosen by
Daniel Houser
George Mason University

  1. Forced information disclosure and the fallacy of transparency in markets By Cason, Timothy N.; Plott, Charles R.
  2. Innovation races: An experimental study on strategic research activities By Uwe Cantner; Andreas Nicklisch; Torsten Weiland
  3. Causes, consequences, and cures of myopic loss aversion - An experimental investigation By Gerlinde Fellner; Matthias Sutter
  4. Leading by example in a public goods experiment with heterogeneity and incomplete information By M. Vittoria Levati; Matthias Sutter; Eline van der Heijden
  5. Format Choice of Food and Grocery Retailers By Sinha Piyush Kumar; Mathew Elizabeth; Kansal Ankur
  6. The Neuroeconomics of Trust By Paul J. Zak
  7. The Effects of Beliefs versus Risk Preferences on Bargaining Outcomes By David L. Dickinson
  8. The Role of Rivalry. Public Goods versus Common-Pool Resources By Frank P. Maier-Rigaud; Jose Apesteguia
  9. The Role of Choice in Social Dilemma Experiments By Frank P. Maier-Rigaud; Jose Apesteguia

  1. By: Cason, Timothy N.; Plott, Charles R.
    Abstract: A theory advanced in regulatory hearings holds that market performance will be improved if one side of the market is forced to publicly reveal preferences. For example, wholesale electricity producers claim that retail electricity consumers would pay lower prices if wholesale public utility demand is disclosed to producers. Experimental markets studied here featured decentralized, privately negotiated contracts, typical of the wholesale electricity markets. Two conclusions emerge: (i) such markets generally converge to the competitive equilibrium and (ii) forced disclosure works to the disadvantage of the disclosing side. Information disclosure would result in higher wholesale and thus higher retail electricity prices
    Date: 2004–06
  2. By: Uwe Cantner; Andreas Nicklisch; Torsten Weiland
    Abstract: In an experimental setting, firms in a duopoly market engage in a patent tournament and compete for profit-enhancing product advancements. The firms generate income by matching exogenously defined demand preferences with an appropriately composed product portfolio of their own. Demand preferences are initially unknown and first need to be revealed by an investigation of the possible product variations. The better firms approximate demand preferences, the higher their profits. In the ensuing innovation race, firms interact through information spillovers resulting from the imperfect appropriability of research successes. In the random period of the experiment, the continuity of the search process is disturbed by an exogenous shock that affects both the supply and demand side and again spurs research competition. Firms may henceforth explore an enlarged product space in attempting to match the equally modified demand preferences. In our analysis, we explore the behavioral regularities of agents who are engaged in innovation activities. As a key element we test to what extend relative economic performance exercises a stimulating effect on the implementation of innovation and imitation strategies.
    Keywords: Innovation, Imitation, Patent Tournament, Trial and Error Process
    JEL: D81 O31
    Date: 2005–07
  3. By: Gerlinde Fellner; Matthias Sutter
    Abstract: Myopic loss aversion (MLA) has been established as one prominent explanation for the equity premium puzzle. In this paper we address two issues related to the effects of MLA on risky investment decisions. First, we assess the relative impact of feedback frequency and investment flexibility (via the investment horizon) on risky investments. Second, given that we observe higher investments with a longer investment horizon, we examine conditions under which investors might endogenously opt for a longer investment horizon in order to avoid the negative effects of MLA on investments. We find in our experimental study that investment flexibility seems to be at least as relevant as feedback frequency for the effects of myopic loss aversion. When subjects are given the choice to opt for a long or short investment horizon, there is no clear preference for either. Yet, if subjects face a default horizon (either long or short), there is rather little switching from the one to the other horizon, showing that a default might work to attenuate the effects of MLA. However, /if/ subjects switch, they are more often willing to switch from the long to the short horizon than vice versa, suggesting a preference for higher investment flexibility.
    Keywords: loss aversion, risk, investment, experiment
    JEL: C91 D80 G11
    Date: 2005–07
  4. By: M. Vittoria Levati; Matthias Sutter; Eline van der Heijden
    Abstract: We study the effects of leadership on the private provision of a public good when group members are heterogeneously endowed. Leadership is implemented as a sequential public goods game where one group member contributes first and all the others follow. Our results show that the presence of a leader increases average contribution levels, but less so than in case of homogeneous endowments. Leadership is almost ineffective, though, if subjects do not know the distribution of endowments. Granting the leaders exclusion power does not lead to significantly higher contributions.
    Keywords: public goods experiment, leadership, exclusion, heterogeneous endowments, incomplete information
    JEL: C72 C92 H41
    Date: 2005–07
  5. By: Sinha Piyush Kumar; Mathew Elizabeth; Kansal Ankur
    Abstract: Format choice is recognized as a cognitive process. Like any other purchasing decision format choice also is an information processing behavior. A store is chosen based on the confidence that the customer has regarding the store; about the nature and quality of product and service he will receive. In Indian scenario formats have been found to be influencing the choice of store as well as orientation of the shoppers (Sinha and Uniyal, 2005). This study seeks to analyze the various factors influencing decision making process of customers in choosing a store format. A full-profile* procedure was used for the Conjoint Analysis in this study. The exploratory study brought out five different formats that existed in the food and grocery sector. With this it also identified combinations of the seven parameters have given rise to some generic retail formats. It also helped identifying the important factor set which affects consumer format choice decisions. The findings also provide details useful for retailers in designing an efficient retail package to offer their customers. * Full-profile conjoint analysis has been a popular approach to measure attribute utilities. In the full-profile conjoint task, different product descriptions (or even different actual products) are developed and presented to the respondent for acceptability or preference evaluations. Each product profile is designed as part of a fractional factorial experimental design that evenly matches the occurrence of each attribute with all other attributes. By controlling the attribute pairings, the researcher can estimate the respondent’s utility for each level of each attribute tested.
    Date: 2005–07–20
  6. By: Paul J. Zak (Claremont Graduate University)
    Abstract: The traditional view in economics is that individuals respond to incentives, but absent strong incentives to the contrary selfishness prevails. Moreover, this “greed is good” approach is deemed “rational” behavior. Nevertheless, in daily interactions and in numerous laboratory studies, a high degree of cooperative behavior prevails—even among strangers. A possible explanation for the substantial amount of “irrational” behavior observed in markets (and elsewhere) is that humans are a highly social species and to an extent value what other humans think of them. This behavior can be termed trustworthiness—cooperating when someone places trust in us. I also analyze the cross-country evidence for environments that produce high or low trust. A number of recent experiments from my lab have demonstrated that the neuroactive hormone oxytocin facilitates trust between strangers, and appears to induce trustworthiness. In rodents, oxytocin has been associated with maternal bonding, pro-social behaviors, and in some species long-term pair bonds, but prior to the work reviewed here, the behavioral effects of oxytocin in humans had not been studied. This presentation discusses the neurobiology of positive social behaviors and how these are facilitated by oxytocin. My experiments show that positive social signals cause oxytocin to be released by the brain, producing an unconscious attachment to a stranger. I also discuss recent research that manipulates oxytocin levels, and functional brain imaging research on trust.
    Keywords: Oxytocin, social capital, neuroeconomics, development, experiments
    JEL: C9
    Date: 2005–07–21
  7. By: David L. Dickinson
    Abstract: In bargaining environments with uncertain impasse outcomes (e.g., litigation or labor strike outcomes), there is an identification problem that confounds data interpretation. In such environments, the minimally acceptable settlement value from a risk-averse (risk-loving) but unbiased bargainer is empirically indistinguishable from what one could get with risk-neutrality and pessimism (optimism). This paper reports data from a controlled bargaining experiment where risk preferences and beliefs are both measured in order to assess their relative importance in bargaining outcomes. The average lab subject is risk-averse, yet optimistic, which is consistent with existing studies that examine each in isolation. I also find that the effects of optimism dominate those of risk-aversion. Optimistic bargainers are significantly more likely to dispute and have aggressive final bargaining positions. Dispute rates are not statistically affected by risk preferences, but there is some evidence that risk aversion leads to less aggressive bargaining positions and lower payoff outcomes. A key implication is that increased settlement rates are more likely achieved by minimizing impasse uncertainty (to limit the potential for optimism) rather than maximizing uncertainty (to weaken the reservation point of risk-averse bargainers), as has been argued in the dispute resolution literature.
    Keywords: risk preference, optimism, bargaining, experiments
    JEL: C91 D81 D84
    Date: 2005
  8. By: Frank P. Maier-Rigaud (Max Planck Institute for Research on Collective Goods, Bonn, Germany); Jose Apesteguia
    Abstract: Despite a large theoretical and empirical literature on public goods and common-pool resources, a systematic comparison of these two types of social dilemmas is lacking. In fact, there is considerable confusion about these two types of dilemma situations. As a result, they are often treated alike. In this paper we argue that the degree of rivalry is the fundamental difference between the two games. We show that rivalry implies that both games cannot be represented by the same game theoretic structure. Fur-thermore, we experimentally study behavior in a quadratic public good and a quadratic common-pool resource game with identical Pareto opti-mum but divergent interior Nash equilibria. The results show that partici-pants clearly perceive the differences in rivalry. Aggregate behavior in both games starts relatively close to Pareto efficiency and converges to the respective Nash equilibrium.
  9. By: Frank P. Maier-Rigaud (Max Planck Institute for Research on Collective Goods, Bonn, Germany); Jose Apesteguia
    Abstract: On the basis of problems related to asymmetric information, self-governance has been proposed and often empirically found to be superior to the external imposition of rules in social dilemma situations. The present paper suggests and experimentally analyses a different line of argument, namely to what extent behavioral aspects can explain these findings. We study this hypothesis using the simplest, most general dilemma form: the prisoner’s dilemma (PD). We compare behavior when players are given the possibility of choosing between two different representations of the same PD, to behavior when players are externally assigned to play a specific game. We find that cooperation rates are significantly higher in the games that were chosen.
    Keywords: Freedom of Choice, Self-governance, Social Dilemmas, Framing
    JEL: H41 C90 C91
    Date: 2003–09

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