nep-exp New Economics Papers
on Experimental Economics
Issue of 2007‒08‒27
nine papers chosen by
Daniel Houser
George Mason University

  1. Individual Rationality and Market Efficiency By Steven Gjerstad; Jason M. Shachat
  2. Cooperation among strangers: an experiment with indefinite interaction By Gabriele Camera; Marco Casari
  3. Social Identity and Preferences over Redistribution By Klor, Esteban F; Shayo, Moses
  4. Communication, cooperation and collusion in team tournaments – An experimental study By Matthias Sutter; Christina Strassmair
  5. Moral Distance and Moral Motivations in Dictator Games By Fernando Aguiar; Pablo Branas-Garza; Luis M. Miller
  6. Field and Lab Convergence in Poisson LUPI Games By Östling, Robert; Wang, Joseph Tao-yi; Chou, Eileen; Camerer, Colin F.
  7. The biological basis of expected utility anomalies By Matsushita, Raul; Baldo, Dinora; Martin, Bruna; Da Silva, Sergio
  8. The Dynamics of Distributive Politics By Marco Battaglini; Thomas Palfrey
  9. The economic consequences of a Tobin tax - An experimental analysis By Michael Hanke; Jürgen Huber; Michael Kirchler; Matthias Sutter

  1. By: Steven Gjerstad; Jason M. Shachat
    Abstract: The demonstration by Smith [1962] that prices and allocations quickly converge to the competitive equilibrium in the continuous double auction (CDA) was one of the first – and remains one of the most important results in experimental economics. His initial experiment, subsequent market experiments, and models of price adjustment and exchange have added considerably to our knowledge of how markets reach equilibrium, and how they respond to disruptions. Perhaps the best known model of exchange in CDA market experiments is the random behavior in the “zero-intelligence” (ZI) model by Gode and Sunder [1993]. They conclude that even without trader rationality the CDA generates efficient allocations and “convergence of transaction prices to the proximity of the theoretical equilibrium price,” provided only that agents meet their budget constraints. We demonstrate that – by any reasonable measure – prices don’t converge in their simulations. Their budget constraint requires that a buyer’s currency never exceeds her value for the commodity, which is an unnatural restriction. Their conclusion that market efficiency results from the structure of the CDA independent of traders’ profit seeking behavior rests on their claim that the constraints that they impose are a part of the market institution, but this is not so. We show that they in effect impose individual rationality, which is an aspect of agents’ behavior. Researchers on learning in markets have been misled by their interpretation of the ZI simulations, with deleterious effects on the debate on market adjustment processes.
    Keywords: Bounded rationality; double auction; exchange economy; experimental economics; market experiment; “zero intelligence” model
    JEL: C70 C92 D44 D51
    Date: 2007–08
  2. By: Gabriele Camera; Marco Casari
    Abstract: We study the emergence of norms of cooperation in experimental economies populated by strangers interacting indefinitely and lacking formal enforcement institutions. In all treatments the efficient outcome is sustainable as an equilibrium. We address the following questions: can these economies achieve full efficiency? Which institutions for monitoring and enforcement promote cooperation? Finally, what classes of strategies are employed to achieve high efficiency? We find that, first, cooperation can be sustained even in anonymous settings; second, some type of monitoring and punishment institutions significantly promote cooperation; and, third, subjects dislike indiscriminate strategies and prefer selective strategies.
    Keywords: experiments, repeated games, cooperation, equilibrium selection, prisoners’ dilemma, random matching
    JEL: C70 C92 D44 D51
    Date: 2007–06
  3. By: Klor, Esteban F; Shayo, Moses
    Abstract: We design an experiment to study the effects of social identity on preferences over redistribution. The experiment highlights the trade-off between social identity concerns and maximization of monetary payoffs. Subjects belonging to two distinct natural groups are randomly assigned gross incomes and vote over alternative redistributive tax regimes, where the regime is chosen by majority rule. We find that a significant subset of the subjects systematically deviate from monetary payoff maximization towards the tax rate that benefits their group when the monetary cost of doing so is not significantly high. These deviations cannot be explained by efficiency concerns, inequality aversion, reciprocity, social learning or conformity. Finally, we show that behaviour in the lab helps explain the relationship between reported income and stated preferences over redistribution observed in surveys.
    Keywords: Experimental Economics; Income Redistribution; Social Identity; Social Preferences
    JEL: C92 D63 D72
    Date: 2007–07
  4. By: Matthias Sutter; Christina Strassmair
    Abstract: We study the effects of communication in an experimental tournament between teams. When teams, rather than individuals, compete for a prize there is a need for intra-team coordination in order to win the inter-team competition. Introducing communication in such situations may have ambiguous effects on effort choices. Communication within teams may promote higher efforts by mitigating the internal free-rider problem. Communication between competing teams may lead to collusion, thereby reducing efforts. In our experiment we control the channels of communication by letting subjects communicate through an electronic chat. We find, indeed, that communication within teams increases efforts and communication between teams reduces efforts. We use team members’ dialogues to explain these effects of communication, and check the robustness of our results.
    Keywords: Tournament, Team decision making, Communication, Collusion, Free-riding, Experiment
    JEL: C92 J33
    Date: 2007–08
  5. By: Fernando Aguiar (IESA-CSIC); Pablo Branas-Garza (Departamento de Teoria Economica, Universidad de Granada); Luis M. Miller (IESA-CSIC; Strategic Interaction Group, Max Planck Institute of Economics)
    Abstract: We perform an experimenta linvestigation using a dictator game in which individuals must make a moral decision - to give or not to give an amount of money to poor people in the Third World. A questionnaire in which the subjects are asked about the reasons for their decision shows that, at least in this case, moral motivations carry a heavy weight in the decision: the majority of dictators give the money for reasons of a consequentialist nature. Based on the results presented here and of other analogous experiments, we conclude that dicator behavior can be understood in terms of moral distance rather than social distance and that it systematically deviates from the egoism assumption in economic models and game theory.
    Keywords: Keywords: Dictator game, moral distance, moral motivations, experimental economics.
    JEL: A13 C72 C91
    Date: 2007–08–20
  6. By: Östling, Robert (Dept. of Economics, Stockholm School of Economics); Wang, Joseph Tao-yi (Department of Economics, National Taiwan University); Chou, Eileen (Management and Organization, Kellogg School of Management, Northwestern University); Camerer, Colin F. (Division for the Humanities and Social Sciences, California Institute of Technology)
    Abstract: In the lowest unique positive integer (LUPI) game, players pick positive integers and the player who chose the lowest unique number (not chosen by anyone else) wins a fixed prize. We derive theoretical equilibrium predictions, assuming fully rational players with Poisson-distributed uncertainty about the number of players. We also derive predictions for boundedly rational players using quantal response equilibrium and a cognitive hierarchy of rationality steps with quantal responses. The theoretical predictions are tested using both field data from a Swedish gambling company, and laboratory data from a scaled-down version of the field game. The field and lab data show similar patterns: in early rounds, players choose very low and very high numbers too often, and avoid focal ("round") numbers. However, there is some learning and a surprising degree of convergence toward equilibrium. The cognitive hierarchy model with quantal responses can account for the basic discrepancies between the equilibrium prediction and the data.
    Keywords: Population uncertainty; Poisson game; QRE; congestion game; guessing game; experimental methods; behavioral game theory; cognitive hierarchy
    JEL: C72 C92 C93 L83
    Date: 2007–08–14
  7. By: Matsushita, Raul; Baldo, Dinora; Martin, Bruna; Da Silva, Sergio
    Abstract: We assess the biological basis of expected utility anomalies through an experiment of the Allais paradox. A questionnaire study of 120 subjects replicates the anomalies and further gathers information about the respondents’ bio-characteristics, such as gender, age, parenthood, handedness, second to fourth digit ratio, current emotional state, past negative experiences, and religiousness. We find that some of those bio-characteristics matter for the anomalies.
    Keywords: expected utility anomalies; risky choice; Allais paradox; experimental economics
    JEL: D81 C91
    Date: 2007–08–17
  8. By: Marco Battaglini; Thomas Palfrey
    Abstract: We study dynamic committee bargaining over an infinite horizon with discounting. In each period a committee proposal is generated by a random recognition rule, the committee chooses between the proposal and a status quo by majority rule, and the voting outcome in period t becomes the status quo in period t+1. We study symmetric Markov equilibria of the resulting game and conduct an experiment to test hypotheses generated by the theory for pure distributional (divide-the-dollar) environments. In particular, we investigate the effects of concavity in the utility functions, the existence of a Condorcet winning alternative, and the discount factor (committee "impatience"). We report several new findings. Voting behavior is selfish and myopic. Status quo outcomes have great inertia. There are strong treatment effects, that are in the direction predicted by the Markov equilibrium. We find significant evidence of concave utility functions.
    Keywords: Dynamic bargaining, voting, experiments, divide-the-dollar,committees
    JEL: D71 D72 C78 C92
    Date: 2007–07
  9. By: Michael Hanke; Jürgen Huber; Michael Kirchler; Matthias Sutter
    Abstract: The effects of a Tobin tax on foreign exchange markets have long been disputed. We present an experiment with currency trading on two markets, where either none, one, or both markets are taxed. Our results confirm the hitherto undisputed issues: a tax reduces trading volume, shifts market share to untaxed markets, and leads to negligible tax revenues if tax havens exist. Concerning the controversial issues we find that (i) volatility effects depend on the existence of tax havens and on market size, (ii) market efficiency remains unaffected by the tax, (iii) short-term speculation is reduced, and (iv) the tax has persistent effects even after its abolishment.
    Keywords: Tobin tax, Experiment, Foreign exchange, Market efficiency, Trading volume, Volatility
    JEL: C91 E62
    Date: 2007–08

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