nep-exp New Economics Papers
on Experimental Economics
Issue of 2007‒06‒02
three papers chosen by
Daniel Houser
George Mason University

  1. Myopic Loss Aversion and House-Money Effect Overseas: an experimental approach By José L. B. Fernandes; Juan Ignacio Peña; Benjamin M. Tabak
  3. Trust and Social Collateral By Markus Mobius; Adam Szeidl

  1. By: José L. B. Fernandes; Juan Ignacio Peña; Benjamin M. Tabak
    Abstract: Recent literature has found two behavioral effects - house-money and myopic loss aversion (MLA) - in several experimental designs. We show that although we can find a house-money effect using survey methods this evidence disappears when we study investment decision within a multi-period investment experiment. Loss aversion is found to govern the risk-taking behavior of subjects in dynamic settings, overcoming the house-money effect. These results are robust to experiments conducted in two different countries, Spain and Brazil.
    Date: 2006–09
  2. By: Antonio Cabrales; Raffaele Miniaci; Marco Piovesan; Giovanni Ponti
    Abstract: This paper reports experimental evidence on a stylized labor market. The experiment is designed as a sequence of three treatments. In the last treatment, TR3, four principals, who face four teams of two agents, compete by offering the agents a contract from a fixed menu. In this menu, each contract is the optimal solution of a (complete information) mechanism design problem where principals face agents’ who have social (i.e. interdependent) distributional preferences a’ la Fehr and Schmidt [19] with a specific parametrization. Each agent selects one of the available contracts offered by the principals (i.e. he “chooses to work” for a principal). Production is determined by the outcome of a simple effort game induced by the chosen contract. In the first two treatments, TR1 and TR2, we estimate individual social preference parameters and beliefs in the effort game, respectively. We find that social preferences are significant determinants of the matching process between labor supply and demand in the market stage, as well as principals’ and agents’ contract and effort decisions. In addition, we also see that social preferences explain the matching process in the labor market, as agents display a higher propensity to choose to work for a principal with similar distributional preferences.
    Date: 2007–03
  3. By: Markus Mobius; Adam Szeidl
    Abstract: This paper builds a theory of informal contract enforcement in social networks. In our model, relationships between individuals generate social collateral that can be used to control moral hazard when agents interact in a borrowing relationship. We define trust between two agents as the maximum amount that one can borrow from the other, and derive a simple reduced form expression for trust as a function of the social network. We show that trust is higher in more connected and more homogenous societies, and relate our trust measure to commonly used network statistics. Our model predicts that dense networks generate greater welfare when arrangements typically require high trust, and loose networks create more welfare otherwise. Using data on social networks and behavior in dictator games, we document evidence consistent with the quantitative predictions of the model.
    JEL: D02 D23
    Date: 2007–05

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