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on Experimental Economics |
| By: | Ronald J. Baker II (Millersville University of Pennsylvania); James M. Walker (Indiana University Bloomington); Arlington W. Williams (Indiana University Bloomington) |
| Abstract: | Laboratory experiments are used to study the voluntary provision of a pure public good in the presence of an anonymous external donor. The external funds are used in two different settings, lump-sum matching and one-to-one matching, to examine how allocations to the public good are affected. The experimental results reveal that allocations to the public good under lumpsum matching are significantly higher, and have significantly lower within-group dispersion, relative to one-to-one matching and a baseline setting without external matching funds. |
| Keywords: | public goods, free riding, laboratory experiments |
| JEL: | H41 C72 C92 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2006007&r=exp |
| By: | Jim Engle-Warnick; Nurlan Turdaliev |
| Abstract: | We experimentally test whether a class of monetary policy decision rules describes decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation. We find that Taylor-type rules fit the choice data well, and are instrumental in characterizing heterogeneity in decision making. Our experiment is the first to begin to organize data experimentally with an eye on monetary policy rules for this, one of the most widely watched and analyzed decisions in economics. |
| JEL: | C91 E42 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcl:mclwop:2005-02&r=exp |
| By: | Jim Engle-Warnick; Javier Escobal; Sonia Laszlo |
| Abstract: | We experimentally test for the effect of an additional alternative on the measured risk preferences of farmers in rural Peru. In our experiment, subjects revealed their risk was always dominated by one of the two existing gambles. We found that subjects chose this gamble nearly one quarter of the time, in some cases causing the subjects to appear to be more risk loving. We found that subjects in a traditional laboratory environment did not choose the dominated gamble, but their choices were affected by its presence. |
| JEL: | O33 O18 C91 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcl:mclwop:2006-10&r=exp |
| By: | David Schmidt (Federal Trade Commission, Bureau of Economics); Robert Shupp (Ball State University); James M. Walker (Indiana University Bloomington) |
| Abstract: | Across many forms of rent seeking contests, the impact of risk aversion on equilibrium play is indeterminate. We design an experiment to compare individuals’ decisions across three contests which are isomorphic under risk-neutrality, but are typically not isomorphic under other risk preferences. The pattern of individual play across our contests is not consistent with a Bayes-Nash equilibrium for any distribution of risk preferences. We show that replacing the Bayes-Nash equilibrium concept with the quantal response equilibrium, along with heterogeneous risk preferences can produce equilibrium patterns of play that are very similar to the patterns we observe. |
| Keywords: | rent seeking, experiments, risk aversion, game theory |
| JEL: | C72 C92 D72 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2006004&r=exp |
| By: | Robert S. Shupp (Ball State University); Arlington W. Williams (Indiana University Bloomington) |
| Abstract: | This research compares lottery valuation decisions made by individuals with similar decisions made by small groups. There is an extensive social psychology literature addressing group versus individual decision making, but few studies explore this issue in economic contexts with cash rewards. Willingness-to pay data elicited from independent samples of individuals and three-person groups in a repeated-measures experimental design reveal that: 1) the variance of risk preferences is generally smaller for groups than individuals, and 2) the average group is more risk averse than the average individual in high-risk situations, but groups tend to be less risk averse in low-risk situations. |
| Keywords: | lab experiments, risk preferences, group decisions, certainty equivalents |
| JEL: | C91 C92 D80 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2006-006&r=exp |
| By: | Morone, Andrea; Schmidt, Ulrich |
| Abstract: | Experimental research on decision making under risk has until now always employed choice data in order to evaluate the empirical performance of expected utility and the alternative nonexpected utility theories. The present paper performs a similar analysis which relies on pricing data instead of choice data. Since pricing data lead in many cases to a different ordering of lotteries than choices (e.g. the preference reversal phenomenon) our analysis may have fundamental different results than preceding investigations. We elicit three different types of pricing data: willingness-to-pay, willingness-to-accept and certainty equivalents under the Becker-DeGroot-Marschak (BDM) incentive mechanism. One of our main result shows that the comparative performance of the single theories differs significantly under these three types of pricing data. |
| Keywords: | expected utility, non-expected utility, experiments, WTP, WTA, BDM |
| JEL: | C91 D81 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:4759&r=exp |
| By: | Charles Bellemare; Bruce S. Shearer |
| Abstract: | The, often observed, positive correlation between incentive intensity and risk has been explained in two ways: the presence of transaction costs as determinants of contracts and the sorting of risk-tolerant individuals into firms using high-intensity incentive contracts. The empirical importance of sorting is perhaps best evaluated by directly measuring the risk tolerance of workers who have selected into incentive contracts under risky environments. We use experiments, conducted within a real firm, to measure the risk preferences of a sample of workers who are paid incentive contracts and face substantial daily income risk. Our experimental results indicate the presence of sorting; Workers in our sample are risk-tolerant. Moreover, their level of tolerance is considerably higher than levels observed for samples of individuals representing broader populations. Interestingly, the high level of risk tolerance suggests that both sorting and transaction costs are important determinants of contract choices when workers have heterogeneous preferences. |
| Keywords: | Risk aversion, sorting, incentive contracts, field experiments |
| JEL: | J33 M52 C93 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0631&r=exp |
| By: | Michael S. Visser; William T. Harbaugh; Naci H. Mocan |
| Abstract: | We report results from economic experiments that provide a direct test of the hypothesis that criminal behavior responds rationally to changes in the possible rewards and in the probability and severity of punishment. The experiments involve decisions that are best described as petty larceny, and are done using high school and college students who can anonymously take real money from each other. We find that decisions about whether and how much to steal are, in general, rational and responsive to the variations in tradeoffs, and sometimes, though not always, to the overall availability of criminal opportunities. |
| JEL: | D64 K42 L11 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12507&r=exp |
| By: | Jim Engle-Warnick; Bradley Ruffle |
| Abstract: | We experimentally examine the impact of buyer concentration on the pricing of a monopolist. In our experimental markets, a monopolist faces either two or four buyers. Markets with two buyers achieve significantly lower prices, sometimes below competitive levels, than those with four buyers. We design an additional pair of treatments to pinpoint the source of this difference. We attribute the lower pries in the two-buyer treatment to the monopolist pricing more cautiously when there are fewer buyers in order to avoid costly losses in sales. Buyer concentration may thus be an elective source of countervailing power. |
| JEL: | C91 D42 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcl:mclwop:2006-12&r=exp |
| By: | Jim Engle-Warnick; Andreas Leibbrandt |
| Abstract: | We alter who gets the last word on the outcome in three different types of trust games: the first mover the second mover, or, a committee comprised of first and second movers. The committee functions in a manner similar to a peer review process, in which experienced subjects pass judgment on the outcome reached by a different pair of subjects. Surprisingly, giving the first mover the last word benefits the second mover. Letting the committee decided increaes the first mover's trust. And first and second movers pass different types of judgments when they act as a committee. Length 29 pages |
| JEL: | C92 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcl:mclwop:2006-11&r=exp |
| By: | Martin Sefton (University of Nottingham); Robert Shupp (Ball State University); James M. Walker (Indiana University Bloomington) |
| Abstract: | A growing number of field and experimental studies focus on the institutional arrangements by which individuals are able to solve collective action problems. Important in this research is the role of reciprocity and institutions that facilitate cooperation via opportunities for monitoring, sanctioning, and rewarding others. Sanctions represent a cost to both the participant imposing the sanction and the individual receiving the sanction. Rewards represent a zero sum transfer from participants giving to those receiving rewards. We contrast reward and sanction institutions in regard to their impact on cooperation and efficiency in the context of a public goods experiment. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2006005&r=exp |
| By: | Werner Güth |
| Abstract: | The satisficing approach with its three constituent processes, aspiration formation, satisficing, and aspiration adjustment, is formally elaborated for a specific class of portfolio selection tasks. It is partly poorly confirmed by experimental data, indicating that bounded rationality requires teaching or, respectively, consulting, and learning. It is also discussed and tested experimentally whether satisficing is task transcending (are there individual constants in satisficing behavior for related tasks?) and absorbable (do we stick to satisficing behavior when becoming aware of it?). |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2006-16&r=exp |
| By: | Werner Güth; Hartmut Kliemt; M. Vittoria Levati; Geog von Wangenheim |
| Abstract: | Standard economic explanations of good conduct in trade rely almost exclusively on future-directed extrinsic motivations induced by material incentives. But intrinsic motives to behave trustworthy and to punish untrustworthiness do support trade. In our model, intrinsically motivated players are aware of their own type and observe the population share of other types. The material success of various types and their co-evolution are analyzed, and it is checked whether the dynamics of the indirect evolutionary analysis are replicated in the laboratory. |
| JEL: | B52 C72 C90 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2006-18&r=exp |
| By: | Antonio Cabrales (Universidad Carlos III de Madrid); Gary Charness (University of California); Marie-Claire Villeval (GATE CNRS) |
| Abstract: | We devise an experiment to explore the effect of different degrees of competition on optimal contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how these different degrees of competition affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies remain. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes. |
| Keywords: | experiment, hidden information, competition, efficiency |
| JEL: | A13 B49 C91 C92 D21 J41 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0605&r=exp |
| By: | David L. Dickinson (Appalachian State University); Ronald L. Oaxaca (University of Arizona and IZA Bonn) |
| Abstract: | Statistical discrimination occurs when distinctions between demographic groups are made on the basis of real or imagined statistical distinctions between the groups. While such discrimination is legal in some cases (e.g., insurance markets), it is illegal and/or controversial in others (e.g., racial profiling and gender-based labor market discrimination). “First-moment” statistical discrimination occurs when, for example, female workers are offered lower wages because females are perceived to be less productive, on average, than male workers. “Second-moment” discrimination would occur when risk-averse employers offer female workers lower wages based not on lower average productivity but on a higher variance in their productivity. This paper reports results from controlled laboratory experiments designed to study second-moment statistical discrimination in a labor market setting. Since decision-makers may not view risk in the same way as economists or statisticians (i.e., risk=variance of distribution), we also examine two possible alternative measures of risk: the support of the distribution, and the probability of earning less than the expected (maximum) profits for the employer. Our results indicate that individuals do respond to these alternative measures of risk, and employers made statistically discriminatory wage offers consistent with loss-aversion. |
| Keywords: | statistical discrimination, experiments, labor markets |
| JEL: | J31 J71 C92 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2305&r=exp |
| By: | Jim Engle-Warnick; Bradley Ruffle |
| Abstract: | We introduce a Bayesian method to infer repeted-game strategies in the form of if-then statements that best describe individuals' observed actions. We apply this method to buyer behavior in posted-offer market experiments. While the strategies of one-quarter of the buyers in our experiments correspond to the game-theoretic prediction of passive price-taking, for three-quarters of the buyers we infer repeated-game strategies that condition on time, price, and combinations of time and price. Our analysis fills a gap in a literature that studies the convergence of pricing behavior in posted-offer markets but has not addressed the market as a repeated game. We propose that strategy inference should at least complement existing methods of statistical inference on observed strategic behavior. |
| JEL: | C91 D42 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcl:mclwop:2005-04&r=exp |
| By: | Schmidt, Ulrich; Traub, Stefan |
| Abstract: | In this paper we experimentally investigate the disparity between willingness-toaccept (WTA) and willingness-to-pay (WTP) for risky lotteries. The direction of the income effect is reversed by endowing subjects with the highest price of a lottery when asking the WTP question. Our results show that the income effect is too small to be the only source of the disparity. Since the disparity concentrates on a subsample of subjects, parametric and nonparametric tests of the WTA-WTP ratio may lead to contradictory results. The disparity is significantly reduced when background risk is introduced. That is, putting subjects always into a risky position could improve the contingent valuation method which is often concerned with the assessment of risky situations such as health risks, automobile safety, etc. |
| Keywords: | WTA-WTP disparity, lotteries, background risk, contingent valuation |
| JEL: | C91 D81 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:4760&r=exp |
| By: | Michael Kosfeld (University of Zurich and IZA Bonn); Akira Okada (Hitotsubashi University); Arno Riedl (Maastricht University, CESifo and IZA Bonn) |
| Abstract: | Centralized sanctioning institutions are of utmost importance for overcoming free-riding tendencies and enforcing outcomes that maximize group welfare in social dilemma situations. However, little is known about how such institutions come into existence. In this paper we investigate, both theoretically and experimentally, the endogenous formation of institutions in a public goods game. Our theoretical analysis shows that players may form sanctioning institutions in equilibrium, including those where institutions govern only a subset of players. The experiment confirms that institutions are formed frequently as well as that institution formation has a positive impact on cooperation rates and group welfare. However, the data clearly reveal that players are unwilling to implement institutions in which some players have the opportunity to free ride. In sum, our results show that individuals are willing and able to create sanctioning institutions, but that the institution formation process is guided by behavioral principles not taken into account by standard theory. |
| Keywords: | public goods, institutions, sanctions, cooperation |
| JEL: | C72 C92 D72 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2288&r=exp |
| By: | Michele Belot,; V. Bhaskar; Jeroen van de Ven |
| Abstract: | We analyze a large-stakes prisoner's dilemma game played on a TV show. Players cooperate 40% of the time, demonstrating that social preferences are important; however, cooperation is significantly below the 50% threshold that is required for inequity aversion to sustain cooperation. Women cooperate significantly more than men, while players who have "earned" more of the stake cooperate less. A player's promise to cooperate is also a good predictor of his decision. Surprisingly, a player's probability of cooperation is unrelated to the opponent's characteristics or promise. We argue that inequity aversion alone cannot adequately explain these results; reputational concerns in a public setting might be more important. |
| Date: | 2006–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:617&r=exp |
| By: | Fernanda Rivas (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República) |
| Abstract: | There exists evidence in the social science literature that women may be more relationshiporiented, may have higher standards of ethical behavior and may be more concerned with the common good than men are. This would imply that women are more willing to sacrifice private profit for the public good, and this would be especially important for political life. Many papers with field data have found deference’s in the corrupt activities of males and females, but given their different insertion in the labor market and in politics, it is not clear if the differences are due to differences in opportunities or real gender differences. The aim of this paper is to see if women and men, facing the same situation behave in a different way, as suggested in the field-data studies, or on the contrary, when women are in the same position as men they behave in the same way. The results found in the experiment show that women are indeed less corrupt than men. This suggests that increasing women’s participation in the labor force and politics would help to reduce corruption. |
| Keywords: | corruption, gender, experiment |
| JEL: | C91 D73 J16 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:ude:wpaper:0806&r=exp |
| By: | T.K. Ahn (Florida State University); Myungsuk Lee (Sung Kyun Kwan University); Lore Ruttan (Emory University); James M. Walker (Indiana University Bloomington) |
| Abstract: | We investigate the role of payoff asymmetry in laboratory prisoner’s dilemma games. Symmetric and Asymmetric games are examined in simultaneous and sequential settings. In the asymmetric/sequential games, we study the impact of having payoff advantaged players moving either first or second. Asymmetry reduces the rates of cooperation in simultaneous games. In sequential games, asymmetry interacts with order of play such that the rate of cooperation is highest when payoff disadvantaged players move first. The presence of an exit option increases cooperation by the players who choose to play the game when payoffs are symmetric, or when payoffs are asymmetric and the payoff disadvantaged player moves first. |
| Keywords: | cooperation, prisoner’s dilemma, heterogeneity, exit option |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2006003&r=exp |
| By: | Gine, Xavier; Karlan, Dean S. |
| Abstract: | Group liability is often portrayed as the key innovation that led to the explosion of the microcredit movement, which started with the Grameen Bank in the 1970s and continues on today with hundreds of institutions around the world. Group lending claims to improve repayment rates and lower transaction costs when lending to the poor by providing incentives for peers to screen, monitor, and enforce each other’s loans. However, some argue that group liability creates excessive pressure and discourages good clients from borrowing, jeopardizing both growth and sustainability. Therefore, it remains unclear whether group liability improves the lender’s overall profitability and the poor’s access to financial markets. The authors worked with a bank in the Philippines to conduct a field experiment to examine these issues. They randomly assigned half of the 169 pre-existing group liability ' centers ' of approximately twenty women to individual-liability centers (treatment) and kept the other half as-is with group liability (control). We find that the conversion to individual liability does not affect the repayment rate, and leads to higher growth in center size by attracting new clients. |
| Keywords: | Banks & Banking Reform,Knowledge Economy,Banking Law,Education for the Knowledge Economy,Contract Law |
| Date: | 2006–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4008&r=exp |
| By: | Werner Güth; Jeannette Brosig; Torsten Weiland |
| Abstract: | Collusive agreements are often observed in procurement auctions. They are probably more easily achieved when competitors’ costs are easily estimated. If, however, the individual costs of bidders are private information, effective ring formation is difficult to realize. We compare experimentally different coordination mechanisms in a first-price procurement auction in how they promote the prospects of collusive arrangements. One mechanism allows bidders to coordinate by means of unrestricted pre-play communication. The second one enables bidders to restrict their bidding range and the last one gives them the opportunity to implement mutual shareholding. According to our results firstprice procurement is quite collusion-proof when allowing for the latter two coordination mechanisms whereas, on average, pre-play communication increases bidders’ profits. |
| Keywords: | competition, collusion, auction, bidding, public procurement |
| JEL: | C72 H57 K42 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2006-14&r=exp |
| By: | Dirk Sliwka (University of Cologne and IZA Bonn) |
| Abstract: | An explanation for motivation crowding-out phenomena is developed in a social preferences framework. Besides selfish and fair or altruistic types a third type of agents is introduced: These ‘conformists' have social preferences if they believe that sufficiently many of the others do too. When there is asymmetric information about the distribution of preferences (the `social norm'), the incentive scheme offered or autonomy granted can reveal a principal's beliefs about that norm. High-powered incentives may crowd out motivation as pessimism about the norm is conveyed. But by choosing fixed wages or granting autonomy the principal may signal trust in a favorable social norm. |
| Keywords: | social preferences, incentives, intrinsic motivation, motivation crowding-out, social norms, trust, conformity, selection |
| JEL: | M52 J33 D23 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2293&r=exp |
| By: | Cason, Timothy N.; Noussair, Charles |
| Abstract: | We construct a laboratory market with the structure of the theoretical model of Burdett, Shi, and Wright (2001). The model is a simple and natural way to represent a market in which there is a friction in the matching process between buyers and sellers. Sellers first simultaneously post prices at which they are willing to sell their single unit of a good. Buyers then simultaneously choose a seller from whom to attempt to purchase a unit. If more than one buyer chooses the same seller, the good is randomly sold to one of the buyers. If a seller is not chosen by any buyer, his unit is not sold. Our experimental results show a broad consistency with the model of Burdett et al. and less support for an alternative model, which is analogous to the model of Montgomery (1991), and which has different assumptions on the strategic interaction between sellers. The main departures that we observe from the Burdett et al. model are that (a) price dispersion exists and is slow to decay, (b) prices exceed the equilibrium level when there are only two sellers, and (c) buyers’ purchase probabilities are insufficiently responsive to price differences when there are two sellers. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1194&r=exp |
| By: | Kaire Põder (Tallinn University of Technology) |
| Abstract: | Transition is not just transition of formal institutions, convergence of price levels and living standards. The closure or the gap in formal institutions is probably less time demanding than the closure of ideological or mental gap, created in many fields in academy or social life. Social sciences have been erased during half a century and post-soviets still struggle for academic prestige of these areas. We have seen many misunderstandings concerning the interrelations, hierarchy and even object of study in social sciences. Superiority of economics is sometimes created by market signals, or superiority of some other discipline by “political signals”. Our aim is to show that in the body of social sciences economics is a normal science which can be defined by method, not by subject matter. We will introduce the alternative methodological approaches to rational choice and indicate their advantages and disadvantages. Mainly two questions are answered. First, is there some alternative methodology which has been more successful in producing efficient predictions and explanations of social affairs? Second, how methodological criticism has changed rational choice perspectives and can these changes be justified? Finally, changes in methodology of economics are discussed showing that there is no clear answer – how to parcel our social sciences? |
| Keywords: | rational choice, methodology in economics, structuralism |
| JEL: | B4 B5 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ttu:wpaper:137&r=exp |