nep-exp New Economics Papers
on Experimental Economics
Issue of 2007‒12‒15
twelve papers chosen by
Daniel Houser
George Mason University

  1. Testing Guilt Aversion By Ellingsen, Tore; Johannesson, Magnus; Tjøtta, Sigve; Torsvik, Gaute
  2. Trust in Private and Common Property Experiments By James C. Cox; Elinor Ostrom; James M. Walker; Jamie Castillo; Eric Coleman; Robert Holahan; Michael Schoon; Brian Steed
  3. Virtual world experimentation: An exploratory study By Thomas Chesney; Swee-Hoon Chuah; Robert Hoffmann
  4. Comparison of Mean-Variance Theory and Expected-Utility Theory through a Laboratory Experiment By Andrea Morone
  5. Voluntary Teaming and Effort By Claudia Keser; Claude Montmarquette
  6. Sequential Reciprocity in Two-Player, Two-Stage Games: An Experimental Analysis By Dhaene G.; Bouckaert J.
  7. Resolute Choice in interaction: a qualitative experiment. By Lotito, Gianna
  8. Tacit Collusion. The Neglected Experimental Evidence By Christoph Engel
  9. Billiards and Brains: Cognitive Ability and Behavior in a p-Beauty Contest By Burnham, Terence C.; Cesarini, David; Wallace, Björn; Johannesson, Magnus; Lichtenstein, Paul
  11. Insurance, credit, and technology adoption : field experimental evidence from Malawi By Yang, Dean; Gine, Xavier
  12. Risky Choice and Type-Uncertainty in "Deal or No Deal?" By Gee, C.

  1. By: Ellingsen, Tore (Dept. of Economics, Stockholm School of Economics); Johannesson, Magnus (Dept. of Economics, Stockholm School of Economics); Tjøtta, Sigve (Department of Economics, University of Bergen); Torsvik, Gaute (Department of Economics, University of Bergen)
    Abstract: Guilt averse individuals experience a utility loss if they believe they let someone down. In particular, generosity depends on what the donor believes that the recipient expects to receive. In experimental work, several authors have identified a positive correlation between such second-order donor beliefs and generous behavior, as predicted by the guilt aversion hypothesis. However, the correlation could alternatively be due to a “false consensus effect,” i.e., the tendency of people to believe others to think like themselves. In order to test the guilt aversion hypothesis more rigorously, we conduct three separate experiments: a dictator game experiment, a complete information trust game experiment, and a hidden action trust game experiment. In the experiments we inform donors about the beliefs of their respective recipients, while eliciting these beliefs so as to maximize recipient honesty. The correlation between generous behavior and donors’ second-order beliefs is close to zero in all three experiments.
    Keywords: guilt aversion; beliefs; generosity; experiments
    JEL: C91 D64
    Date: 2007–12–07
  2. By: James C. Cox; Elinor Ostrom; James M. Walker; Jamie Castillo; Eric Coleman; Robert Holahan; Michael Schoon; Brian Steed
    Abstract: We report the results from a series of experiments designed to investigate behavior in two settings that are frequently posited in the policy literature as generating different outcomes: private property and common property. The experimental settings closely parallel earlier experimental studies of the investment or trust game. The primary research question relates to the effect of the initial allocation of property rights on the level of trust that subjects will extend to others with whom they are linked. We find that assigning the initial endowments as common property of each of N pairs of a first mover and second mover leads to marginally greater cooperation or trust than when the initial endowments are fully owned by the two individual movers as their, respective, private property. Subjects’ decisions are also shown to be correlated with attitudes toward trust and fairness that are measured in post-experiment questionnaires.
    Date: 2007–11
  3. By: Thomas Chesney (Nottingham University Business School); Swee-Hoon Chuah (Nottingham University Business School); Robert Hoffmann (Nottingham University Business School)
    Abstract: We explore the scientific potential of virtual worlds for experimental economists. In particular, we report the results of a series of virtual world experiments designed to examine the suitability of (a) users as subjects and (b) the computer interface as an experimental platform. Formal results and informal observations from the sessions are discussed in terms of the methodological opportunities and challenges of virtual experimentation generally.
    Keywords: virtual worlds, laboratory experiments, human values survey
    JEL: C72 C88 C99 Z13
    Date: 2007–09–12
  4. By: Andrea Morone (University of Bari.)
    Abstract: In the 40.s and early 50. two decision theories were proposed and have since dominated the scene of the fascinating field of decision-making. In 1944 . when von Neumann and Morgenstern showed that if preferences are consistent with a set of axioms then it is possible to represent these preferences by the expectation of some utility function . Expected Utility theory provides a natural way to establish .measurable utility.. In the early 50.s Markowitz introduced the Mean-Variance theory that is the basis of modern portfolio selection theory. Even if both models were analyzed from virtually all possible points of view; although they were tested against several generalizations; even though they seem to be the most attractive theories of decision making, they were never tested against each other. This paper will try to fill this gap. It investigates, using experimental data, which of these two models represent a better approximation of subjects. preferences.
    Keywords: Expected utility, Mean variance, preference functional, pair wise choice, experiments.
    JEL: C92 G12
    Date: 2007–10
  5. By: Claudia Keser; Claude Montmarquette
    Abstract: In a series of experimental games, each of two players may choose between remuneration based on either private or team effort. Although at least one of the players has the subgame perfect equilibrium strategy to choose remuneration based on private effort, we frequently observe team remuneration chosen by both players. Team remuneration allows for high payoff for each player for cooperation, but at the same time provides individual incentives to take a free ride on the other player's effort. Due to significant cooperation we observe that in team remuneration participants make higher profits than in private remuneration. We also observe that, when participants are not given the option of private remuneration, they cooperate significantly less.
    Keywords: Team effort, voluntary collaboration, experimental economics
    JEL: C72 C90 H41 J33
    Date: 2007
  6. By: Dhaene G.; Bouckaert J.
    Abstract: We experimentally test Dufwenberg and Kirchsteiger’s (2004) theory of sequential reciprocity in a sequential prisoner’s dilemma (SPD) and a mini-ultimatum game (MUG). Data on subjects’ behavior and first and second-order beliefs allow us to classify their behavior as a material best response, a reciprocity best response, both, or none. In both games, about 80% of the first-movers’ behavior is a material best response, a reciprocity best response, or both. The remaining 20% of first-movers almost always make choices that are “too kind” according to the theory of reciprocity. Second-movers’ behavior, in both games, is fully in line with the predictions of the theory. Average behavior and beliefs, across subjects, are found to be compatible with a sequential reciprocity equilibrium in the SPD, but not in the MUG. We also found first- and second-order beliefs to be unbiased in the SPD, and nearly unbiased in the MUG, with the exception that first-movers in the MUG significantly overestimated the second-mover’s rejection rate of unequal offers.
    Date: 2007–11
  7. By: Lotito, Gianna
    Abstract: The purpose of this paper is that of extending the model of Resolute Choice (McClennen 1990) to a situation of interaction and comparing its performance with the Sophisticated-subgame perfect equilibrium model in an experiment. A non-cooperative game in which two players with different preference orderings over outcomes move sequentially is adopted as a framework to compare the two models. I consider those combinations of the players' preference structures which generate the different plans and find those game situations where either one or two outcomes Pareto-dominant over Sophisticated Choice exist. Two definitions of Resolute Choice are therefore tested, which allow to discriminate choice between two different Pareto dominant outcomes. In the experiment three games with the same structure but different payoffs are played. The design allows preliminary group discussion among the players about the decisions to be taken, which is taped and transcribed. The results show support for Resolute Choice as Pareto dominance, while the ability of Resolute Choice as Nash bargaining to explain behaviour is quite limited. The subjects' motivations are very useful in interpreting the results. They show that choice for a Pareto dominant outcome is mainly driven by the idea of Pareto optimality itself. Motivations differ slightly according to which strategy is chosen to reach one of the Pareto dominant outcomes. A result to be noted is the relevance of the different payoffs of the games in motivating choice. The method used in the experiment to elicit the subjects' responses is the strategy method. A direct consequence is that the results are all in terms of strategies chosen by subjects. In view of this, an alternative way to look at the experiment results has been tried, which consists in a simulation of the outcomes of the games that would have resulted from direct interaction among the players. The results have then been compared to the ones from the experiment.
    Keywords: dynamic decision making, myopia, sophistication, resoluteness, non-cooperative game
    JEL: C91 C72 D80
    Date: 2007–12
  8. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Both in the US and in Europe, antitrust authorities prohibit merger not only if the merged entity, in and of itself, is no longer sufficiently controlled by competition. The authorities also intervene if, post merger, the market structure has changed such that "tacit collusion" becomes disturbingly more likely. It seems that antitrust neglects the fact that, for more than 50 years, economists have been doing experiments on this very question. Almost any conceivable determinant of higher or lower collusion has been tested. This paper standardises the evidence by way of a meta-study, and relates experimental findings as closely as possible to antitrust doctrine.
    Keywords: Oligopoly, Coordinated Effects, Tacit Collusion, Merger Guidelines, Airtours, Experimental Markets
    JEL: D21 D43 K21 L13 L41
    Date: 2007–09
  9. By: Burnham, Terence C. (Program for Evolutionary Dynamics, Harvard University); Cesarini, David (Department of Economics, Massachusetts Institute of Technology); Wallace, Björn (Dept. of Economics, Stockholm School of Economics); Johannesson, Magnus (Dept. of Economics, Stockholm School of Economics); Lichtenstein, Paul (Department of Medical Epidemiology and Biostatistics, Karolinska Institutet)
    Abstract: "Beauty contests" are well-studied, dominance-solvable games that generate two interesting results. First, most behavior does not conform to the unique Nash equilibrium. Second, there is considerable unexplained heterogeneity in behavior. In this work, we evaluate the relationship between beauty contest behavior and cognitive ability. We find that subjects with high cognitive ability exhibit behavior that is closer to the Nash equlibrium. We examine this finding through the prism of economic and biological theory.
    Keywords: beauty contest; rationality; cognitive ability; Nash equlibrium
    JEL: C90 D01
    Date: 2007–12–10
  10. By: Ernst Fehr; Jean-Robert Tyran
    Abstract: Much evidence suggests that people are heterogeneous with regard to their abilities to make rational, forward-looking decisions. This raises the question as to when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results. We examine this question in the context of a long-standing and important economic problem: the adjustment of nominal prices after an anticipated monetary shock. Our experiments suggest that two types of bounded rationality – money illusion and anchoring – are important behavioral forces behind nominal inertia. However, depending on the strategic environment, bounded rationality has vastly different effects on aggregate price adjustment. If agents’ actions are strategic substitutes, adjustment to the new equilibrium is extremely quick, whereas under strategic complementarity, adjustment is both very slow and associated with relatively large real effects. This adjustment difference is driven by price expectations, which are very flexible and forward-looking under substitutability but adaptive and sticky under complementarity. Moreover, subjects’ expectations are also considerably more rational under substitutability.
    Date: 2007–10
  11. By: Yang, Dean; Gine, Xavier
    Abstract: The adoption of new agricultural technologies may be discouraged because of their inherent riskiness. This study implemented a randomized field experiment to ask whether the provision of insurance against a major source of production risk induces farmers to take out loans to invest in a new crop variety. The study sample was composed of roughly 800 maize and groundnut farmers in Malawi, where by far the dominant source of production risk is the level of rainfall. We randomly selected half of the farmers to be offered credit to purchase high-yielding hybrid maize and improved groundnut seeds for planting in the November 2006 crop season. The other half of the farmers were offered a similar credit package but were also required to purchase (at actuarially fair rates) a weather insurance policy that partially or fully forgave the loan in the event of poor rainfall. Surprisingly, take up was lower by 13 percentage points among farmers offered insurance with the loan. Take-up was 33.0 percent for farmers who were offered the uninsured loan. There is suggestive evidence that the reduced take-up of the insured loan was due to the high cognitive cost of evaluating the insurance: insured loan take-up was positively correlated with farmer education levels. By contrast, the take-up of the uninsured loan was uncorrelated with farmer e ducation.
    Keywords: ,Access to Finance,Debt Markets,Hazard Risk Management,Crops & Crop Management Systems
    Date: 2007–12–01
  12. By: Gee, C.
    Abstract: This paper uses data from the popular television game-show, "Deal or No Deal?", to analyse the way individuals make choices under risk. In a unique approach to the problem, I present a formal game-theoretical model of the show in which both the contestant and the banker are modelled as strategic players. I use standard techniques to form hypotheses of how rational expected utility-maximisers would behave as players in the game and I test these hypotheses with the relevant choice data. The main result is that an increasing o¤er function is the result of optimal behaviour when the banker is uncertain about the contestant.s risk attitudes. This result provides a theoretical foundation to the empirical model of the banker that pervades the literature. Estimates of the coefficient of relative risk aversion are consistent with estimates from other studies and estimates of the discernment parameter suggest contestants have difficulty making choices.
    Keywords: Choice under Risk, Expected Utility, Asymmetric Information, Risk-Aversion
    JEL: C72 C93 D81 D82
    Date: 2007–11

This nep-exp issue is ©2007 by Daniel Houser. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.