nep-exp New Economics Papers
on Experimental Economics
Issue of 2008‒04‒12
twelve papers chosen by
Daniel Houser
George Mason University

  1. Incentives Versus Sorting in Tournaments: Evidence from a Field Experiment By Leuven, Edwin; Oosterbeek, Hessel; Sonnemans, Joep; van der Klaauw, Bas
  2. Sequential reciprocity in two-player, two-stages games: an experimental analysis By Geert Dhaene; Jan Bouckaert
  3. Risk Taking in Winner-Take-All Competition By Matthias Kräkel; Petra Nieken; Judith Przemeck
  4. Consumer Networks and Firm Reputation: A First Experimental Investigation By Huck, Steffen; Lünser, Gabriele; Tyran, Jean-Robert
  5. Hand in the Cookie Jar: An Experimental Investigation of Equity-based Compensation and Managerial Fraud By David Bruner; Michael McKee; Rudy Santore
  6. Conditional Cooperation: Disentangling Strategic from Non-Strategic Motivations By Reuben, E.; Suetens, S.
  7. Value and Outcome Uncertainty as Explanations for the WTA vs WTP Disparity: Theory and Experimental Evidence By William Neilson; Michael McKee; Robert P. Berrens
  8. Morals and Mores? Experimental Evidence on Equity and Equality from the US and Japan By James Konow; Tatsuyoshi Saijo; Kenju Akai
  9. Giving To Ingrates? By Michael Jones; Michael McKee
  10. Capital Markets, Information Aggregation and Inequality: Theory and Experimental Evidence By Grüner, Hans Peter
  11. Sole versus Shared Responsibility: Fraud Consultation and Auditor Judgment By Knechel, W.R.; Wallage, P.; Nöteberg, A.H.
  12. Allocating an indivisible good. A questionnaire-experimental study of intercultural differences By Erik Schokkaert; Kurt Devooght; Bart Capeau; Sara Lelli

  1. By: Leuven, Edwin; Oosterbeek, Hessel; Sonnemans, Joep; van der Klaauw, Bas
    Abstract: A vast body of empirical studies lends support to the incentive effects of rank-order tournaments. Evidence comes from experiments in laboratories and non-experimental studies exploiting sports or firm data. Selection of competitors across tournaments may bias these non-experimental studies, whereas short task duration or lack of distracters may limit the external validity of results obtained in lab experiments or from sports data. To address these concerns we conducted a field experiment where students selected themselves into tournaments with different prizes. Within each tournament the best performing student on the final exam of a standard introductory microeconomics course could win a substantial financial reward. A standard non-experimental analysis exploiting across tournament variation in reward size and competitiveness confirms earlier findings. We find however no evidence for effects of tournament participation on study effort and exam results when we exploit our experimental design, indicating that the non-experimental results are completely due to sorting. Treatment only affects attendance of the first workgroup meeting following the announcement of treatment status, suggesting a difference between short-run and long-run decision making.
    Keywords: Field Experiments; Incentives; Sorting; Tournaments
    JEL: C93 J33 M52
    Date: 2008–01
  2. By: Geert Dhaene; Jan Bouckaert
    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 behavior and first- and second-order beliefs allow us to classify each subject’s behavior as a material best response, a reciprocity best response, both, or none. We found that in both games the behavior of about 80% of the firstmovers was a material best response, a reciprocity best response, or both. The remaining 20% of first-movers almost always made choices that were “too kind” according to the theory of reciprocity. Secondmover behavior, in both games, was fully in line with the predictions of the theory. The average behavior and beliefs across subjects were 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.
    Keywords: sequential reciprocity; sequential prisoner’s dilemma; mini-ultimatum game.
    JEL: A13 C70 C92 D63
    Date: 2008–03
  3. By: Matthias Kräkel; Petra Nieken; Judith Przemeck
    Abstract: We analyze a two-stage game between two heterogeneous players. At stage one, common risk is chosen by one of the players. At stage two, both players observe the given level of risk and simultaneously invest in a winner-take-all competition The game is solved theoretically and then tested by using laboratory experiments. We find three effects that determine risk taking at stage one - an effort effect, a likelihood effect and a reversed likelihood effect. For the likelihood effect, risk taking and investments are clearly in line with theory. Pairwise comparison shows that the effort effect seems to be more relevant than the reversed likelihood effect when takin risk.
    Keywords: Tournaments; Competition; Risk-Taking; Experiment
    JEL: M51 C91 D23
    Date: 2008–04–03
  4. By: Huck, Steffen; Lünser, Gabriele; Tyran, Jean-Robert
    Abstract: Arguing that consumers are the carriers of firms’ reputations, we examine the role of consumer networks for trust in markets that suffer from moral hazard. When consumers are embedded in a network, they can exchange information with their neighbours about their private experiences with different sellers. We find that such information exchange fosters firms' incentives for reputation building and, thus, enhances trust and efficiency in markets. This efficiency-enhancing effect is already achieved with a rather low level of network density.
    Keywords: consumer network; information conditions; moral hazard; reputation; trust
    JEL: C72 C92 D40 L14
    Date: 2008–01
  5. By: David Bruner; Michael McKee; Rudy Santore
    Abstract: The use of equity-based compensation is an increasingly popular means by which to align the incentives of top management with that of the shareholders. However, recent theoretical and empirical research suggests that the use of equity-based compensation has the unintended consequence of creating the incentive to commit managerial fraud of the type being reported in the press. This paper reports experimental evidence showing that the amount of fraud committed by subjects is positively correlated with the level of equity, as is the level of effort. As well, the amount of fraud that is committed is negatively correlated with the probability of detection and subjects’ risk aversion. The experimental design permits the identification of causal relations in the directions just noted. Key Words:
    JEL: G34 C91
    Date: 2008
  6. By: Reuben, E.; Suetens, S. (Tilburg University, Center for Economic Research)
    Abstract: We use a novel experimental design to examine the role of reputational concerns in explaining conditional cooperation in social dilemmas. By using the strategy method in a repeated sequential prisoners? dilemma in which the probabilistic end is known, we can distinguish between strategically and non-strategically motivated cooperation. Second movers who are strong reciprocators ought to conditionally cooperate with first movers irrespective of whether the game continues or not. In contrast, strategically motivated second movers conditionally cooperate only if the game continues and they otherwise defect. Experimental results, with two different subject pools, indicate reputation building is used around 30% of the time, which accounts for between 50% and 75% of all realized cooperative actions. The percentage of strong reciprocators varied between 6% to 23%.
    Keywords: cooperation;reputation building;strong reciprocity;repeated prisoners? dilemma
    JEL: C91 D01 D74
    Date: 2008
  7. By: William Neilson; Michael McKee; Robert P. Berrens
    Abstract: This paper contributes to the widespread discussion of the sources of the divergence between WTA and WTP values. The paper reports on theoretical and empirical investigations which show that value and outcome uncertainty offer an explanation for this disparity. Given a set of hypotheses generated by the theory, the paper investigates the disparity using an inducedvalue experimental laboratory setting. The incentive-compatible Becker-DeGroot-Marshak mechanism is employed to elicit the WTP and WTA values. Two conclusions can be drawn from the empirical results. First, the WTA - WTP difference is generally increasing in both value and outcome uncertainty. Second, a re-contracting option reduces the disparity when it arises from value uncertainty. Key Words: Experimental, Uncertainty, WTP-WTA disparity
    JEL: C9 D8
    Date: 2008
  8. By: James Konow; Tatsuyoshi Saijo; Kenju Akai
    Date: 2008–04–04
  9. By: Michael Jones; Michael McKee
    Abstract: Models for voluntary provision of public goods predict free riding is rational unless the model includes a motive for the act of giving referred to as a “warm glow” in the literature. The source for this warm glow is likely to include the gratitude of the recipient. The experimental setting employed here controls for positive or negative reciprocity from the recipient of a gift to isolate the individual satisfaction from the act of giving as the remaining motivation for giving. The experimental treatment is whether the recipient is informed that his/her payoff includes a “gift” from another participant (donor or giver). The central finding is that donations increase when the donor/giver knows that the recipient knows that a gift has been provided. Key Words:
    Date: 2008
  10. By: Grüner, Hans Peter
    Abstract: In most industrialized economies, financial wealth is distributed far more unequally than income. According to Wolff (2007) more than half of the American households possess almost no productive capital while realizing about 20 percent of national income. This mismatch poses a problem for the efficient aggregation of consumer needs on capital markets. Individuals use information about their own preferences as consumers to identify profitable investments. Under certain conditions, this behaviour efficiently matches future demand with productive capacity, thus replacing future markets for consumer goods. However, when wealth is distributed too unequally, capacity cannot match consumer needs. I present some first experimental evidence in favour of consumption driven investment behaviour based on real portfolio choices and self-reported preferences about consumer goods.
    Keywords: capital markets; Consumption driven investment; information aggregation; wealth distribution
    JEL: C91 G11 G14 O16
    Date: 2008–03
  11. By: Knechel, W.R.; Wallage, P.; Nöteberg, A.H. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Auditors are increasingly expected to consult with technical experts when dealing with potential client fraud. We investigate whether auditor judgments related to fraud assessment and consultation propensity are affected by the form of a requirement to consult about fraud. We test two specific forms of guidance about fraud consultations: (1) “advisory and non-binding†and (2) “mandatory and bindingâ€, and develop two sets of competing hypotheses based on cognitive theory. If auditors desire to retain decision control over an engagement, a binding and mandatory consultation requirement may lead them to under-estimate fraud risk to avoid consultation. However, if auditors wish to shift responsibility for a sensitive issue such as potential fraud to experts, fraud risk may be over-estimated. Results from two experiments with 208 Dutch auditors demonstrate that fraud risk and the willingness to consult are both assessed higher under a mandatory and binding consultation requirement. This effect is compounded when a client exhibits significant underlying red flags and deadline pressure is tight. We also find that managers are more susceptible to bias than (near) partners and that fraud risk judgments vary depending prior experience with actual fraud cases.
    Keywords: consultation requirement;consultation propensity;fraud risk assessment
    Date: 2008–03–17
  12. By: Erik Schokkaert; Kurt Devooght; Bart Capeau; Sara Lelli
    Abstract: We present the results of a questionnaire study in Belgium, Burkina Faso and Indonesia focusing on the problem of the just allocation of an indivisible good. The formal axioms proposed in social choice theory are helpful in structuring the response patterns. Interindividual differences can be interpreted in a meaningful way in terms of basic intuitions about desert, efficiency and compensation. Belgian students are most resourceegalitarian, Burkinese students attach a large weight to innate capacities, Indonesian students focus on actual production. The crucial no-envy criterion is supported by a majority of respondents, but this majority becomes small if there is an unavoidable conflict between no-envy and the "responsibility" requirement of the stand-alone upper bound.
    Keywords: distributive justice, indivisible good, no envy criterion, intercultural differences
    JEL: D63
    Date: 2008–03

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