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on Experimental Economics |
| By: | Lorenz Goette (University of Zurich and CEPR and IZA Bonn); David Huffman (IZA Bonn) |
| Abstract: | This chapter argues that the neglect of emotion in economic models explains their inability to predict important aspects of the labor market. We focus on one example: firms frequently cut real wages, increasing nominal wages by less than the inflation rate, but they very seldom cut nominal wages. This pattern suggests that workers exhibit a special resistance to nominal wage cuts, which is hard to explain if they are purely rational as assumed in standard economic models. We argue that resistance to nominal wage cuts is best understood in terms of a model where salient features of a situation trigger emotional responses and sway judgment of the entire situation. Since a cut in the nominal wage leads to a very salient reduction in pay, we argue that the reaction of workers is dominated by emotions. On the other hand, an increase in the nominal wage may produce a more deliberative evaluation, because there is no immediately salient feature. The individual needs to compare the inflation rate to the wage change before it becomes clear whether the change increases or decreases utility, thus producing a more measured response. We present evidence from experiments showing that self-reported emotions respond strongly to nominal wage cuts, but not to decreases in the real wage achieved through increasing the nominal wage by less than the inflation rate. Although emotions may benefit individual workers, by strengthening their bargaining position and preventing wage cuts, they may also lead to worse outcomes, in the form of higher unemployment. |
| Keywords: | wage rigidity, affect, emotions, money illusion, loss aversion |
| JEL: | E24 E31 E32 B49 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1895&r=exp |
| By: | Sven Fischer |
| Abstract: | Assuming inequality averse subjects as modeled by Fehr and Schmidt (1999) or in the ERC model by Bolton and Ockenfels (2000) in ultimatum games with asymmetric conflict payoffs allows to make predictions especially concerning responder acceptance thresholds. These predictions are tested in a laboratory experiment eliciting proposer offers and respondent's acceptance thresholds using the strategy vector method. By and large both models make good predictions. However, they are unable to convincingly explain the observed selfishness on behalf of responders in ultimatum games favoring them in conflict. Overall, observed behavior gives rise to a context dependent interpretation of inequality aversion and to Knez and Camerer's 1995 observation that subjects form 'egocentric assessments of fairness'. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2005-36&r=exp |
| By: | Andrea Morone; Ozlem Ozdemir |
| Abstract: | Different from previous studies that use a best estimate, interval, or sets of probabilities, we represent the degree of ambiguity through levels of information provided to subjects. The willingness to pay is higher when more amount of information is provided. |
| Keywords: | experiments, ambiguity, uncertainty, probability |
| JEL: | C92 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2005-40&r=exp |
| By: | Roberto Ricciuti |
| Abstract: | This paper reviews experiments in macroeconomics, pointing out the theoretical justifications, the strengths and weaknesses of this approach. We identify two broad classes of experiments: general equilibrium and partial equilibrium experiments, and emphasize the idea of theory testing that is behind these. A large number of macroeconomic issues have been analyzed in the laboratory spanning from monetary economics to fiscal policy, from international trade and finance, to growth and macroeconomic imperfections. In a large number of cases results give support to the theories tested. We also highlight that experimental macroeconomics has increased the number of tools available to experimentalists. |
| Keywords: | macroeconomics, experiments. |
| JEL: | C91 C92 E20 E40 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:usi:labsit:004&r=exp |
| By: | Anthony Ziegelmeyer; Katinka Pantz |
| Abstract: | This paper experimentally investigates the interdependence between market competition and endogenously emerging inter-firm collaboration. We restrict attention to arrangements resulting from bilateral collaboration agreements that typically characterize real world applications in which the activity concerned is a core activity of the partnering firms and risk sharing, contract enforcement and protection of proprietory knowledge are central issues. We rely on a baseline model by Goyal and Joshi (2003) which formalizes the strategic formation of collaborative networks between firms that are competing on the same product market. This model predicts strategically stable patterns of inter-firm collaboration which are empirically observed but have been ruled out in the previous theoretical literature. In a two-stage game, firms decide to form bilateral collaboration links, whose formation is costly but reduces marginal production costs, before they compete in quantity on the market. We report the results of a series of experiments. The first experiment is designed as a straightforward theory-test simulating a one-shot interaction. We manipulate the cost of link formation in different treatments. Our data almost perfectly match the predictions for both stages whenever the link formation costs are extreme and the predicted networks symmetric (empty or complete networks). In the case of intermediate link formation costs where the predicted networks are asymmetric, subjects rarely form asymmetric networks. When they do, observed and predicted quantities are less in accordance than for symmetric networks. Collusion cannot account for the observed behavior. In our second experiment we reject the conjecture that these findings are driven out by experience in a setting in which we increase the implemented number of repetitions of the two-stage game. Finally, in our third experiment we reduce the complexity of the setting by transforming the original two-stage game into a one-stage game where the formation of inter-firm networks directly determines firms’ payoffs. These are derived from assumed equilibrium market outputs on the here absent competition stage. In this case, observed networks coincide with the predicted ones indicating that experimental subjects’ limited capacity to foresee the outcomes of the market stage may be driving the earlier discrepancies. |
| Keywords: | Endogenous formation of networks; Cournot competition; Collusion; Experiments |
| JEL: | D85 C92 D43 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2005-38&r=exp |
| By: | Susanne Büchner; Andreas Freytag; Luis G. Gonzalez; Werner Güth |
| Abstract: | A procurement contract is granted by a bureaucrat (the auctioneer) who is interested in a low price and a bribe from the provider. The optimal bids and bribes are derived based on an iid private cost assumption. In the experiment, bribes are negatively framed (between subjects treatment) to capture that society is better off if bribes are rare or low. Although bids are lower than predicted, behavior is qualitatively in line with the linear equilibrium prediction. When bribes generate a negative externality, there is a significant increase in the variability of the data. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2005-30&r=exp |
| By: | Francois Cochard; Anthony Ziegelmeyer; Kene Boun My |
| Abstract: | We investigate the ability of the damage based tax mechanism to induce socially optimal outcomes in a controlled laboratory environment which incorporates important aspects of nonpoint pollution problems. Our experimental setting combines a strictly convex damage function with uncertainty in measuring the ambient level of pollution, indefinitely repeated interactions among heterogeneous polluters, limited information on the regulator's side about the polluters' profit functions, and, in half of the experimental conditions, limited information on the polluters' side about the strategic environment. We additionally investigate whether the relative position of the social optimum in the polluters’ emission space has an impact on the efficiency of the fiscal instrument. In almost all implemented conditions, the observed total pollution level is not significantly different from the socially optimal level but compliance at the individual level is rarely observed. Experimental conditions in which polluters have to dramatically reduce their emissions in order to comply with the fiscal instrument lead to higher efficiency levels than those where compliance implies less dramatic reductions. Our most striking result is that less information on the polluters' side is beneficial from a social point of view as the performance of the damage based tax mechanism is higher the less information polluters have about the strategic environment. |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2005-37&r=exp |
| By: | Werner Güth; Kurt-Dieter Koschmieder; M. Vittoria Levati; Ev Martin |
| Abstract: | Direct transfers allow heirs to freely use what has been passed on to them. Bequeathers who do not trust their descendants to make proper use of the fortune may prefer investing it in a safe foundation, thereby limiting their descendants' autonomy. In our study we compare experimentally these two institutional arrangements. Although bequeather and descendant have specific personal interests, they agree in their concern for preserving the fortune. Our results show that bequeathers tend to trust their descendant. When transfers to the descendant are less efficient than investments in a foundation, due to, e.g., inheritance taxation, overall bequests decrease significantly. |
| Keywords: | Autonomous foundations, inheritance, efficiency, trust |
| JEL: | C72 C92 D31 H41 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2005-33&r=exp |
| By: | Marianne Bertrand; Dean Karlin; Sendhil Mullainathan; Eldar Shafir; Jonathan Zinman |
| Abstract: | Numerous laboratory studies find that minor nuances of presentation and description change behavior in ways that are inconsistent with standard economic models. How much do these context effect matter in natural settings, when consumers make large, real decisions and have the opportunity to learn from experience? We report on a field experiment designed to address this question. A South African lender sent letters offering incumbent clients large, short-term loans at randomly chosen interest rates. The letters also contained independently randomized psychological "features" that were motivated by specific types of frames and cues shown to be powerful in the lab, but which, from a normative perspective, ought to have no impact. Consistent with standard economics, the interest rate significantly affected loan take-up. Inconsistent with standard economics, some of the psychological features also significantly affected take-up. The average effect of a psychological manipulation was equivalent to a one half percentage point change in the monthly interest rate. Interestingly, the psychological features appear to have greater impact in the context of less advantageous offers and persist across different income and education levels. In short, even in a market setting with large stakes and experienced customers, subtle psychological features appear to be powerful drivers of behavior. The findings pose a challenge for the social sciences: they suggest that psychological nuance matters but may be inherently difficult to predict given the impact of context. Successful incorporation of psychological features into field studies is likely to prove a vital, but nontrivial, addition to the formation of more general theories on when, why, and how frames and cues influence important decisions. |
| JEL: | C93 D12 D14 D21 D81 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11892&r=exp |
| By: | Maria Paz Espinosa (Universidad del País Vasco); Javier Gardeazábal (Universidad del País Vasco) |
| Keywords: | field experiment, risk aversion, scoring rules, multiple-choice tests |
| JEL: | A20 C93 D80 |
| Date: | 2005–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:200520&r=exp |
| By: | Sven Fischer; Luis G. Gonzalez; Werner Güth |
| Abstract: | A two-persons bargaining problem often consists of initially incompatible demands that can be unilaterally reduced by sequential concessions. In a 2 x 2 x 2 - factorial design we distinguish between reliable and unreliable concessions, between a static and dynamic settings and between symmetric and asymmetric initial demands. Whereas reliable concessions change the threat point, unreliable concessions do not. In the dynamic setting each player's concession can be conditional on the previous history of play; in the static setting a player's concessions for all bargaining trials are determined at the beginning of the game. In all situations conflict is triggered if neither gives in, or if a maximum number of trials is reached without a feasible agreement. Although our results indicate that conflict is more likely if concessions are reliable, the overall effciency of both institutions is similar. |
| Keywords: | concession bargaining, behavioral economics |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2005-41&r=exp |