nep-exp New Economics Papers
on Experimental Economics
Issue of 2007‒09‒02
sixteen papers chosen by
Daniel Houser
George Mason University

  1. Do the right thing: But only if others do so By Bicchieri, Cristina; Erte, Xiao
  2. Doing Good or Doing Well? Image Motivation and Monetary Incentives in Behaving Prosocially By Dan Ariely; Anat Bracha; Stephan Meier
  3. Self-Reinforcing Market Dominance By Daniel Halbheer; Ernst Fehr; Lorenz Goette; Armin Schmutzler
  4. Individual-Level Loss Aversion in Riskless and Risky Choices By Simon Gächter; Eric J. Johnson; Andreas Herrmann
  5. Preferences, Intentions, and Expectations: a Large-Scale Experiment with a Representative Subject Pool By Charles Bellemare; Sabine Kroger; Arthur van Soest
  7. Communication, cooperation and collusion in team tournaments - An experimental study By Sutter, Matthias; Strassmair, Christina
  8. Does Laboratory Trading Mirror Behavior in Real World Markets? Fair Bargaining and Competitive Bidding on EBay By Gary E Bolton; Axel Ockenfels
  9. Everyone-a-banker or the Ideal Credit Acceptance Game: Theory and Evidence By Juergen Huber; Martin Shubik; Shyam Sunder
  10. The Minority Game: An Economics Perspective By Kets, W.
  11. How Social Reputation Networks Interact with Competition in Anonymous Online Trading: An Experimental Study By Gary E Bolton; Claudia Loebbecke; Axel Ockenfels
  12. Choice Over Time By Paola Manzini; Marco Mariotti
  13. Honesty Is the Best Policy?When There Is Money in It: Can Firms Promote Honest Reporting Behavior by Managers? By Jia, Y.
  14. Tournaments and Office Politics: Evidence from a Real Effort Experiment By Jeffrey Carpenter; Peter Hans Matthews; John Schirm
  15. Information Externalities, Matching and Reputation Building - A Comment on Theory and an Experiment By Gary E Bolton; Axel Ockenfels
  16. Salience and Taxation: Theory and Evidence By Raj Chetty; Adam Looney; Kory Kroft

  1. By: Bicchieri, Cristina; Erte, Xiao
    Abstract: Social norms play an important role in individual decision making. Bicchieri (2006) argues that two different expectations influence our choice to obey a norm: what we expect others to do (empirical expectations) and what we believe others think ought to be done (normative expectations). Little is known about the relative importance of these two types of expectation in individuals’ decisions, an issue that is particularly important when normative and empirical expectations are in conflict (e.g., high crime cities). In this paper, we report data from Dictator game experiments where we exogenously manipulate dictators’ expectations in the direction of either selfishness or fairness. When normative and empirical expectations are in conflict, we find that empirical expectations about other dictators’ choices significantly predict a dictator’s own choice. However, dictators’ expectations regarding what other dictators think should be done do not have a significant impact on their decisions. Our findings about the crucial influence of empirical expectations are important for those who design institutions or policies aimed at discouraging undesirable behavior.
    Keywords: social norms; expectations; dictator game; experimental economis
    JEL: C91 C72
    Date: 2007–08–25
  2. By: Dan Ariely (Massachusetts Institute of Technology); Anat Bracha (Tel Aviv University); Stephan Meier (Federal Reserve Bank of Boston and IZA)
    Abstract: This paper experimentally examines image motivation - the desire to be liked and wellregarded by others - as a driver in prosocial behavior (doing good), and asks whether extrinsic monetary incentives (doing well) have a detrimental effect on prosocial behavior due to crowding out of image motivation. By definition, image depends on one’s behavior being visible to other people. Using this unique property we show that image is indeed an important part of the motivation to behave prosocially. Moreover, we show that extrinsic incentives interact with image motivation and are therefore less effective in public than in private. Together, these results imply that image motivation is crowded out by monetary incentives; which in turn means that monetary incentives are more likely to be counterproductive for public prosocial activities than for private ones.
    Keywords: prosocial behavior, extrinsic incentives, image motivation, experiments
    JEL: D64 C90 H41
    Date: 2007–08
  3. By: Daniel Halbheer (Socioeconomic Institute, University of Zurich); Ernst Fehr (Institute for Empirical Research in Economics, University of Zurich); Lorenz Goette (Center for Behavioral Economics and Decision Making, Federal Reserve Bank of Boston); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: Are initial competitive advantages self-reinforcing, so that markets exhibit an endogenous tendency to be dominated by only a few firms? Although this question is of great economic importance, no systematic empirical study has yet addressed it. Therefore, we examine experimentally whether firms with an initial cost advantage are more likely to invest in cost reductions than firms with higher initial costs. Wefind that the initial competitive advantages are indeed self-reinforcing, but subjects in the role of firms overinvest relative to the Nash equilibrium. However, the pattern of overinvestment even strengthens the tendency towards self-reinforcing cost advantages relative to the theoretical prediction. Further, as predicted by the Nash equilibrium, aggregate investment is not affected by the initial efficiency distribution. Finally, investment spillovers reduce investment, and investment is higher than the joint-profit maximizing benchmark for the case without spillovers and lower for the case with spillovers.
    Keywords: Cost-reducing Investment, Asymmetric Oligopoly, Increasing Dominance, Experimental Study
    JEL: C90 D43 L13 O31
    Date: 2007–08
  4. By: Simon Gächter (University of Nottingham, CESifo and IZA); Eric J. Johnson (Columbia University); Andreas Herrmann (University of St. Gallen)
    Abstract: Loss aversion can occur in riskless and risky choices. Yet, there is no evidence whether people who are loss averse in riskless choices are also loss averse in risky choices. We measure individual-level loss aversion in riskless choices in an endowment effect experiment by eliciting both WTA and WTP from each of our 360 subjects (randomly selected customers of a car manufacturer). All subjects also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in the riskless choice task and loss aversion in the risky choice task are highly significantly and strongly positively correlated. We find that in both choice tasks loss aversion increases in age, income, and wealth, and decreases in education.
    Keywords: loss aversion, endowment effect, field experiments
    JEL: C91 C93 D81
    Date: 2007–07
  5. By: Charles Bellemare; Sabine Kroger; Arthur van Soest
    Abstract: We specify and estimate an econometric model which separately identifies distributional preferences and the effects of perceived intentions on responder behavior in the ultimatum game. We allow the effects of perceived intentions to depend, among other things, on the subjective probabilities responders attach to the possible offers. We estimate the model on a large representative sample from the Dutch population. We find that the relative importance of distributional preferences ad perceived intentions depends significantly on the socio-economic characteristics of responders. Strong inequity aversion to the other player's disadvantage is found for lower educated and older respodents. Responders tend to punish unfavorable offers more if they expect that fair proposals will occur with higher probability.
    Keywords: Inequity aversion, intentions, subjective expectations
    JEL: C93 D63 D84
    Date: 2007
  6. By: Friederike Mengel (Universidad de Alicante); Veronika Grimm (Universidad de Alicante)
    Abstract: We experimentally investigate the effect of population viscosity (an increased probability to interact with others of one's type or group) on cooperation in a standard prisoner's dilemma environment. Subjects can repeatedly choose between two groups that differ in the defector gain in the associated prisoner's dilemma. Choosing into the group with the smaller defector-gain can signal one's willingness to cooperate. The degree of viscosity is varied across treatments. We find that viscosity produces an endogenous sorting of cooperators and defectors and persistently high rates ofcooperation. Higher viscosity leads to a sharp increase in overall cooperation rates and in addition positively affects the subjects' intrinsic willingness to cooperate.
    Keywords: Experiments, Cooperation, Group Selection, Norms, Population
    JEL: C70 C73 C90
    Date: 2007–08
  7. By: Sutter, Matthias; Strassmair, Christina
    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
  8. By: Gary E Bolton; Axel Ockenfels
    Abstract: We conducted a controlled field experiment on eBay and examined to what extent both social and competitive laboratory behavior is robust to institutionally complex real world markets with experienced traders, who selected themselves into these markets. EBay’s natural trading system provides bridges between lab and field environment that can be exploited to explore differences in behavior in the two environments. We find that many sellers do not make use of their commitment power as predicted by standard theories of both selfish and social behavior. However, a concern for equity strongly affects outcomes and reputation building in bilateral bargaining, while buyer competition effectively masks this concern and robustly yields equilibrium outcomes. The dichotomy of behaviors mirrors observations in laboratory research. Furthermore, we find that behavioral patterns in the field experiment mirror fully naturally occurring trading patterns in the market.
    Date: 2007–08–16
  9. By: Juergen Huber (University of Innsbruck); Martin Shubik (Cowles Foundation, Yale University); Shyam Sunder (Yale University)
    Abstract: Is personal credit issued by participants sufficient to operate an economy efficiently, with no outside or government money? Sorin (1995) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues her own IOUs and a costless efficient clearinghouse adjusts the exchange rates among them so the markets always clear. The results suggest that if the information system and clearing are so good as to preclude moral hazard, any form of information asymmetry, or need for trust, the economy operates efficiently at any price level without government money. Conversely, perhaps explanations for prevalence of government money should be sought in either the above mentioned frictions or our unwillingness to experiment with innovation.
    Keywords: Government and individual money, Efficiency, Experimental gaming
    JEL: C73 C91
    Date: 2007–08
  10. By: Kets, W. (Tilburg University, Center for Economic Research)
    Abstract: This paper gives a critical account of the minority game literature. The minority game is a simple congestion game: players need to choose between two options, and those who have selected the option chosen by the minority win. The learning model proposed in this literature seems to differ markedly from the learning models commonly used in economics. We relate the learning model from the minority game literature to standard game-theoretic learning models, and show that in fact it shares many features with these models. However, the predictions of the learning model differ considerably from the predictions of most other learning models. We discuss the main predictions of the learning model proposed in the minority game literature, and compare these to experimental findings on congestion games.
    Keywords: Learning;congestion games;experiments.
    JEL: C73 C90
    Date: 2007
  11. By: Gary E Bolton; Claudia Loebbecke; Axel Ockenfels
    Abstract: Many Internet markets rely on ‘feedback systems’, essentially social networks of reputation, to facilitate trust and trustworthiness in anonymous transactions. Market competition creates incentives that arguably may enhance or curb the effectiveness of these systems. We investigate how different forms of market competition and social reputation networks interact in a series of laboratory online markets, where sellers face a moral hazard. We find that competition in strangers networks (where market encounters are one-shot) most frequently enhances trust and trustworthiness, and always increases total gains-from-trade. One reason is that information about reputation trumps pricing in the sense that traders usually do not conduct business with someone having a bad reputation not even for a substantial price discount. We also find that a reliable reputation network can largely reduce the advantage of partners networks (where a buyer and a seller can maintain repeated exchange with each other) in promoting trust and trustworthiness if the market is sufficiently competitive. We conclude that, overall, competitive online markets have more effective social reputation networks.
    Date: 2007–08–01
  12. By: Paola Manzini (Queen Mary, University of London and IZA); Marco Mariotti (Queen Mary, University of London)
    Abstract: In the last twenty years a growing body of experimental evidence has posed a challenge to the standard Exponential Discounting Model of choice over time. Attention has focused on some specific ‘anomalies’, notably preference reversal and declining discount rates, leading to the formulation of the model of hyperbolic discounting which is finding increasing favour in the literature. In this paper we provide a survey of both the theoretical modelling and the experimental evidence relating to choice over time. As we will show, a careful analysis of the mapping between theoretical models and experimental investigations raises questions as to whether some of the most focused upon anomalies should be indeed classified as such, or whether they are really the most challenging ones for conventional theory. New developments are emerging both at the theoretical and empirical level, opening up new exciting avenues for investigation
    Keywords: time preference, choice over time, theory, experiments
    JEL: C91 D9
    Date: 2007–08
  13. By: Jia, Y. (Tilburg University, Center for Economic Research)
    Abstract: This paper provides experimental evidence on how incentive compensation, peer-group behavior, and audit (team) effectiveness influence managerial reporting behavior. Results show that an increase in incentive compensation intensity induces subjects to report less truthfully. High level of peer honesty promotes truthful reporting; however, the effects are weaker when incentive compensation intensity is high. Audit (team) effectiveness shows no significant influence on reporting behavior. The results provide the first clear evidence that firms need to consider carefully the effect of incentive compensation as well as the influence of peer groups when designing contracts. Furthermore, without a credible penalty for untruthful financial report, increased audit (team) effectiveness will not promote honest reporting.
    Keywords: Managerial honesty; Incentive compensation intensity; Peer behavior; Audit effectiveness
    JEL: G30 J33 M41
    Date: 2007
  14. By: Jeffrey Carpenter (Middlebury College and IZA); Peter Hans Matthews (Middlebury College); John Schirm (Google)
    Abstract: In many environments, tournaments can elicit more effort from workers, except perhaps when workers can sabotage each other. Because it is hard to separate effort, ability and output in many real workplace settings, the empirical evidence on the incentive effect of tournaments is thin. There is even less evidence on the impact of sabotage because real world acts of sabotage are often subtle manifestations of subjective peer evaluation or "office politics." We discuss a real effort experiment in which effort, quality adjusted output and office politics are compared under piece rates and tournaments. Our results suggest that tournaments increase effort only in the absence of office politics. Competitors are more likely to sabotage each other in tournaments and, as a result, workers actually provide less effort simply because they expect to be the victims of sabotage. Adjusting output for quality with the rating of an independent auditor shrinks the incentive effect of the tournament even further since output tends to become more slipshod.
    Keywords: tournament, sabotage, real effort, experiment
    JEL: C92 J33 J41
    Date: 2007–08
  15. By: Gary E Bolton; Axel Ockenfels
    Abstract: In a seminal paper, Kreps and Wilson (1982) remark that, with regard to reputation building in the chain store game, it does not matter whether interaction is among long-term partners or one-shot strangers. We show that this remark is incorrect: in sequential equilibrium, the effectiveness of reputation building depends on the matching procedure. The reason is that the benefits of the information obtained by challenging the incumbent are internalized in the partners case but externalized in the strangers case. Perhaps surprisingly, the same intuition does not hold for the buyer-seller game with seller moral hazard; there, in sequential equilibrium, the way information disseminates in the market is irrelevant for the success of reputation building. An experiment finds that matching significantly affects reputation building behavior in both games although the size of the effect is more modest in the buyer-seller case.
    Date: 2007–08–04
  16. By: Raj Chetty; Adam Looney; Kory Kroft
    Abstract: A central assumption in public finance is that individuals optimize fully with respect to the incentives created by tax policies. In this paper, we test this assumption using two empirical strategies. First, we conducted an experiment at a grocery store where we posted tax-inclusive prices for 750 products subject to sales tax for a three week period. Using scanner data, we find that posting tax-inclusive prices reduced demand by roughly 8 percent among the treated products relative to control products and nearby control stores. Second, we find that state-level increases in excise taxes (which are included in posted prices) reduce aggregate alcohol consumption significantly more than increases in sales taxes (which are added at the register and hence less salient). Both sets of results indicate that tax salience affects behavioral responses. We propose a bounded rationality model to explain why salience matters, and show that it matches our evidence as well as several additional stylized facts. In the model, agents incur second-order (small) utility losses from ignoring some taxes, even though these taxes have first-order (large) effects on social welfare and government revenue. Using this theoretical framework, we develop elasticity-based formulas for the efficiency cost and incidence of commodity taxes when agents do not optimize fully.
    JEL: D11 H0 J0 K34
    Date: 2007–08

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