nep-exp New Economics Papers
on Experimental Economics
Issue of 2006‒09‒30
eight papers chosen by
Daniel Houser
George Mason University

  1. Budget Processes: Theory and Experimental Evidence By Karl-Martin Ehrhart; Roy Gardner; Juergen von Hagen; Claudia Keser
  2. Global Risk, Investment, and Emotions By Ronald Bosman; Frans van Winden
  3. Ambiguity and Asset Prices: An Experimental Perspective By Peter Bossaerts; Serena Guarnaschelli; Paolo Ghirardato; William Zame
  4. I want to know: Willingness to pay for unconditional veto power By Werner Güth; René Levínský; Tobias Uske; Thomas Gehrig
  5. Studying Labor Market Institutions in the Lab: Minimum Wages, Employment Protection and Workfare By Armin Falk; David Huffman
  6. Believing in Economic Theory: Sex, Lies, Evidence, Trust and Ideology By Nathaniel Wilcox
  7. Actions and Beliefs: Estimating Distribution-Based Preferences Using a Large Scale Experiment with Probability Questions on Expectations By Charles Bellemare; Sabine Kröger; Arthur van Soest
  8. Location, Location, Location! A Classroom Demonstration of the Hotelling Model By Lisa R. Anderson; Jessica Holmes; Mark Jeffreys; Dan Lass; Jack Soper

  1. By: Karl-Martin Ehrhart (University of Karlsruhe); Roy Gardner (Indiana University Bloomington); Juergen von Hagen (University of Bonn); Claudia Keser (IBM T.J. Watson Research Center)
    Abstract: This paper studies budget processes, both theoretically and experimentally. We compare the outcomes of bottom-up and top-down budget processes. It is often presumed that a top-down budget process leads to a smaller overall budget than a bottom-up budget process. Ferejohn and Krehbiel (1987) showed theoretically that this need not be the case. We test experimentally the theoretical predictions of their work. The evidence from these experiments lends strong support to their theory, both at the aggregate and the individual subject level.
    Keywords: budget processes, voting equilibrium, experimental economics
    JEL: H61 C92
    Date: 2006–09
  2. By: Ronald Bosman; Frans van Winden
    Abstract: We investigate a novel dynamic choice problem in an experiment where emotions are measured through self-reports. The choice problem concerns the investment of an amount of money in a safe option and a risky option when there is a “global risk” of losing all earnings, from both options, including any return from the risky option. Our key finding is that global risk can reduce the amount invested in the risky option. This result cannot be explained by classical Expected Utility or by its main contenders Rank-Dependent Utility and Cumulative Prospect Theory. Anexplanation is offered by taking account of emotions, using the emotion data from the experiment and recent psychological findings. We also find that people invest less if own earnings are at stake, compared to money obtained as an endowment.
    Keywords: investment; global risk; real effort; emotions; dynamic choice.
    JEL: A12 C91 D80 G11
    Date: 2006–09
  3. By: Peter Bossaerts; Serena Guarnaschelli; Paolo Ghirardato; William Zame
    Abstract: Most of the economics and finance literature assumes that individual agents obey the Savage axioms; that is, they maximize expected utility according to subjective priors. However, Knight, Ellsberg and others argue that individual agents distinguish between risk (known probabilities) and uncertainty, or ambiguity (unknown probabilities), and that individual agents may display aversion to ambiguity, just as they display aversion to risk. This paper studies the impact of ambiguity aversion on equilibrium asset prices and portfolio holdings in competitive financial markets. It argues that attitude toward ambiguity is heterogeneous in the population, just as attitude toward risk is heterogeneous in the population, but that heterogeneity in attitude toward ambiguity has di erent implications than heterogeneity in attitude toward risk: agents who are su ciently ambiguity averse find open sets of prices for which they refuse to hold an ambiguous portfolio. This leads to a wider range of state price densities and to potential reversals of ranking of state price densities. Experiments confirm the theoretical predictions. The experiments also suggest a positive correlation between risk aversion and ambiguity aversion, which in turn suggests an explanation of the "value effect."
    Keywords: ambiguity, risk aversion, asset prices, portfolio holdings, experimental economics.
    JEL: C9 D81 G11 G12
    Date: 2006
  4. By: Werner Güth; René Levínský; Tobias Uske; Thomas Gehrig
    Abstract: In the Yes/No game, like in the ultimatum game, proposer and responder can share a monetary reward. In both games the proposer suggests a reward distribution which the responder can accept or reject (yielding 0-payoffs). The games only differ in that the responder does (not) learn the suggested reward distribution in the Ultimatum (Yes/No) game. Although an opportunistic responder would always accept and therefore should not be willing to pay for knowing the proposal, earlier results (Güth, Levati, Ockenfels, and Weiland, 2005) show that offers in the Yes/No game are less generous and that responders, on average, earn less in the Yes/No game. By experimentally eliciting the willingness to pay for learning the proposal, we investigate whether these effects are adequately anticipated or whether they are overstated, as observed in an earlier related study (Gehrig, Güth, Levinsky, 2003).
    Keywords: Information acquisition, Endowment effect, Veto power, Anticipation, Decision strategy
    JEL: C91 D82
    Date: 2006–09
  5. By: Armin Falk (IZA Bonn and University of Bonn); David Huffman (IZA Bonn)
    Abstract: A central concern in economics is to understand the interplay between institutions and labor markets. In this paper we argue that laboratory experiments are a powerful tool for studying labor market institutions. One of the most important advantages is the ability to implement truly exogenous institutional change, in order to make clear causal inferences. We exemplify the usefulness of lab experiments by surveying evidence from three studies, each of which investigates a different, crucial labor market institution: minimum wage laws, employment protection legislation and workfare.
    Keywords: laboratory experiments, minimum wages, employment protection legislation, workfare
    JEL: I38 K31 J3
    Date: 2006–09
  6. By: Nathaniel Wilcox (Department of Economics, University of Houston)
    Abstract: In many empirical studies, ideology significantly predicts political outcomes, even after controlling for interests. This may reflect ideology’s influence on descriptive beliefs about the workings of the economic world. We investigate these beliefs about supply and demand theory, using survey methods and an experimental demonstration. As expected, relatively liberal respondents have more skeptical ex-ante beliefs (before viewing the experiment) about the theory. Surprisingly, however, relatively conservative respondents update beliefs (after viewing the experiment) so much less strongly that they have more skeptical ex-post beliefs. We explore and discount alternative explanations for these relationships between ideology and beliefs.
    Date: 2004–10
  7. By: Charles Bellemare; Sabine Kröger; Arthur van Soest
    Abstract: We combine the choice data of proposers and responders in the ultimatum game, their expectations elicited in the form of subjective probability questions, and the choice data of proposers (“dictators”) in a dictator game to estimate a structural model of decision making under uncertainty. We use a large and representative sample of subjects drawn from the Dutch population. Our results indicate that there is considerable heterogeneity in preferences for equity in the population. Changes in preferences have an important impact on decisions of dictators in the dictator game and responders in the ultimatum game, but a smaller impact on decisions of proposers in the ultimatum game, a result due to proposer’s subjective expectations about responders’ decisions. The model which uses subjective data on expectations has better predictive power and lower noise level than a model which assumes that players have rational expectations. <P>Afin de déceler un modèle structurel de prise de décision dans l'incertitude, nous combinons les données recueillies par i) les choix des deux types de joueurs dans le jeu de l'ultimatum (ceux qui proposent et ceux qui répondent), ii) leurs attentes obtenues sous la forme de questions à probabilité subjective, et iii) les choix des dictateurs (premiers joueurs) dans le jeu du dictateur. Nous utilisons un large échantillon représentatif des sujets dans la population néerlandaise. Nos résultats indiquent une hétérogénéité considérable dans la population sur les préférences en matière d'équité. La diversité de ces préférences a un impact important sur les décisions des dictateurs dans le jeu du dictateur, et sur les répondeurs dans le jeu de l'ultimatum, mais un impact plutôt moindre sur les décisions des joueurs qui proposent dans le jeu de l'ultimatum. Cette dernière observation est due aux attentes subjectives de ces joueurs face aux décisions des répondeurs. Le modèle qui utilise des données subjectives sur les attentes des joueurs prévoit mieux les choix des sujets et réduit plus le bruit qu'un modèle qui suppose que les joueurs ont des attentes rationnelles.
    Keywords: , attentes subjectives, aversion à l'injustice, jeu de l'ultimatum
    JEL: C93 D63 D84
    Date: 2006–09–01
  8. By: Lisa R. Anderson (Department of Economics, College of William and Mary); Jessica Holmes (Department of Economics, Middlebury College); Mark Jeffreys (Behavioral Science Department and Integrated Studies Department, Utah Valley State College); Dan Lass (Department of Resource Economics, University of Massachusetts); Jack Soper (Department of Economics and Finance, John Carroll University)
    Abstract: Why are car dealerships concentrated in the same location? Why do "diamond districts" and "garment districts" emerge in large cities? This commonly observed clustering of competitors is a source of intrigue for many undergraduates; their intuition tells them that firms should locate away from close rivals in order to avoid competing for the same customers. This paper outlines a classroom experiment that complements the standard theoretical discussion of Hotelling's (1929) spatial competition model and provides students with a deeper understanding of the intuition behind competitive clustering. The experiment places the student in the role of the street vendor who must choose his or her optimal location in a "linear city." Like Hotelling's vendors, each student chooses the most profitable location for his or her cart, taking into account the locations of competitors and the transportation costs and distribution of potential customers. Students are also faced with the two-stage decision that introduces a Hotelling location-price model. The experiment can be implemented in any size class, with very little preparation. It is well-suited for courses in microeconomics, industrial organization, game theory, experimental economics, public choice, and urban economics and can also be incorporated into management, geography and political science courses.
    Keywords: classroom experiment, location choice
    JEL: A22 C22 C90 D21 L10
    Date: 2006–09–18

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