nep-exp New Economics Papers
on Experimental Economics
Issue of 2005‒11‒09
six papers chosen by
Daniel Houser
George Mason University

  1. Does Competition Affect Giving? An Experimental Study By John Duffy; Tatiana Kornienko
  2. Inequality Reduces Punishment-Induced Cooperation in Humans By James Fowler; Tim Johnson; Richard McElreath; Oleg Smirnov
  3. The Evolution of Trust and Reputation: Results from Simulation Experiments By Andreas Diekmann; Wojtek Przepiorka
  4. The Neural Basis of Financial Risk Taking By Camelia Kuhnen; Brian Knutson
  5. A Double Auction Market with Signals of Varying Precision By Carl Plat
  6. Employment effects of a payroll tax cut – Evidence from a regional tax subsidy experiment By Ossi Korkeamäki; Roope Uusitalo

  1. By: John Duffy (University of Pittsburgh); Tatiana Kornienko (University of Stirling)
    Abstract: We explore whether natural human competitiveness can be exploited to stimulate charitable giving in a controlled laboratory experiment involving three different treatments of a sequential ``dictator game.'' Without disclosing the actual amounts given and kept, in each period players are publicly ranked -- by the amount they give away, by the amount they keep for themselves, or spuriously. Our results are generally supportive of the hypothesis that competitive urges can encourage or frustrate altruistic behavior, depending on the competitive frame. We find some support for an alternative hypothesis that relative concerns are due to information-gathering rather than competition.
    Keywords: Dictator game, repeated decisions, charitable giving, altruistic behavior, competitive altruism, status, relative standing, tournaments, motivation, information-based relative concerns
    JEL: C91 D64
    Date: 2005–08–13
  2. By: James Fowler (University of California, Davis); Tim Johnson (Max Planck Institute for Human Development); Richard McElreath (University of California, Davis); Oleg Smirnov (University of Miami)
    Abstract: Humans often cooperate, voluntarily paying an individual cost to supply a benefit to others. Public good experiments show that punishment induces a high level of cooperation, even when it is costly to the punisher. It is unclear, however, what motivates individuals to engage in costly punishment: a desire to retaliate against non-cooperators or a desire to reduce inequality among group members. Although both motives might have a positive effect on cooperation, they cannot be separated in the conventional public good game. Here we conduct an experiment in which we add a randomly-generated fixed payoff to a public good game with punishment. This design allows us to determine whether punishment is aimed at low contributors or high earners. The results show that players punish frequently, penalizing both those who contribute the least and those who earn the most. However, the exogenously-created inequality tends to distort the meaning of punishment, which dramatically reduces the amount of cooperation observed. This evidence suggests that social equality may be necessary if punishment is to have a positive influence on cooperation in humans.
    JEL: C9
    Date: 2005–08–26
  3. By: Andreas Diekmann (ETH Zurich, Department of Social Sciences & Humanities); Wojtek Przepiorka (ETH Zurich, Department of Social Sciences & Humanities)
    Abstract: In online interactions in general, but especially in interactions between buyers and sellers on internet-auction platforms, the interacting parties must deal with trust and cooperation problems. Whether a rating system is able to foster trust and cooperation through reputation and without an external enforcer is an open question. We therefore explore through ecological analysis different buyer and seller strategies in terms of their success and their contribution to supporting or impeding trust and cooperation. In our agent-based model, the interaction between a buyer and a seller is defined by a one-shot trust game with a reputation mechanism. In every interaction, a buyer has complete information about a seller's past behavior. We find that cooperation evolves under two conditions even in the absence of an external sanctioning authority. On the one hand, some minimal fraction of buyers must make use of the sellers’ reputation in their buying strategies and, on the other hand, trustworthy sellers must be given opportunities to gain a good reputation through their cooperative behavior. Despite the apparent usefulness of the reputation mechanism, a small number of deceitful sellers are able to hold their ground.
    Keywords: trust game, reputation, agent-based simulation
    JEL: C9
    Date: 2005–08–30
  4. By: Camelia Kuhnen (Stanford Graduate School of Business); Brian Knutson (Stanford University Department of Psychology)
    Abstract: Investors systematically deviate from rationality when making financial decisions, yet the mechanisms responsible for these deviations have not been identified. Using event-related fMRI, we examined whether anticipatory neural activity would predict optimal and suboptimal choices in a financial decision-making task. We characterized two types of deviations from the optimal investment strategy of a rational risk- neutral agent as risk-seeking mistakes and risk-aversion mistakes. Nucleus accumbens activation preceded risky choices as well as risk- seeking mistakes, while anterior insula activation preceded riskless choices as well as risk-aversion mistakes. These findings suggest that distinct neural circuits linked to anticipatory affect promote different types of financial choices, and indicate that excessive activation of these circuits may lead to investing mistakes. Thus, consideration of anticipatory neural mechanisms may add predictive power to the rational actor model of economic decision-making.
    Keywords: neuroeconomics, neurofinance, brain, investing, emotions, affect
    JEL: D81 D83 D84 C91 G11
    Date: 2005–09–06
  5. By: Carl Plat
    Abstract: A computerized double auction market with human traders is employed to examine the relation of price and volume under conditions of asymmetric information. In this market, the informed traders receive higher precision signals than the uninformed traders. The relation of price and volume has been suggested as an important factor in the process of information revelation whereby information held by informed traders is transferred to uninformed traders. In contrast, the no-trade theorems suggest that trade should not occur at all between informed and uninformed traders. The results show trading volume within the informed group to be positively correlated with signal precision. In situations of asymmetric information, uninformed trading activity as measured by volume/precision correlations declines significantly as the precision of the signals of informed traders increases. However, the presence of asymmetric information does not lead to a zero trade condition for either the informed or the uninformed traders.
    Keywords: Experimental, Double Auction, Information Precision, Trading Volume, Asymmetric Information
    JEL: C92 G12 G14 D8
    Date: 2005–08–26
  6. By: Ossi Korkeamäki; Roope Uusitalo
    Abstract: The Finnish government implemented a temporary exemption from employer social insurance contributions for the employers that are located in high unemployment areas of the Northern Finland. The payroll tax exemption was designed as an experiment that aimed to evaluate employment effects of a regional payroll tax reduction. As a result of the experiment payroll taxes were reduced by 3 – 6 percentage points for three years beginning in January 2003. In this paper we evaluate the employment and wage effects of the regionally targeted payroll tax reduction. We compare the employment and wage changes in the target region to the employment and wage changes in a control region with a similar unemployment rate and industry structure than the target region. As finding an identical control region is not possible, we adopt a matching procedure by choosing, for each firm in the target region, a matched pair from the control region. We perform propensity score matching and use the estimated propensities as balancing scores to create a control group of firms that is similar to the treatment group in all the observable pre-treatment characteristics. We then estimate the effect of the payroll tax reduction using difference-in-differences estimators, essentially comparing employment and wage changes between the matched pairs after the start of the experiment. We report results from both nearest neighbour and kernel matched comparison groups. To enhance the transparency of the evaluation we have created the matched firm pairs from the plant database of Statistics Finland and designed and published the evaluation method before any data on employment or wage outcomes were available in December 2003. We will follow the employment change of the selected firms based on annual tax reports that will be available in March 2004. Detailed information on the wage responses will be added to the report in May 2004 based on the payroll data of the members of The Confederation of Finnish Industry and Employers and The Employers Federation of the Service Industries.
    Date: 2004–08

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