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on Experimental Economics |
| By: | Ronald J. Baker II (Millersville University of Pennsylvania); Susan K. Laury (Georgia State University); Arlington W. Williams (Indiana University Bloomington) |
| Abstract: | Lottery-choice experiments are conducted to compare risk preferences revealed by three-person groups versus isolated individuals. A lottery-choice experiment consists of a menu of paired lottery choices structured so that the crossover point from a low-risk to a high-risk lottery can be used to infer the degree of risk aversion. A between-subjects experiment of group versus individual lottery-choice decisions reveal that there is not a significant difference in the average crossover point, but lottery choices are affected by a significant interaction between subject composition (individual or group) and lottery winning percentage. Also, a three-phased individual-group-individual sequenced experiment reveals that the count of safe lotteries chosen by groups is, on average, significantly greater than the mean of the individual members. Finally, making a phase-two group decision has a significant impact on subsequent phase-three individual decisions relative to the initial phase-one (individual) decisions. |
| Keywords: | lab experiments, risk preferences, group decisions |
| JEL: | C91 C92 D80 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:20070181_updated&r=exp |
| By: | Tor Eriksson (Aarhus School of Business, Aarhus University, Department of Economics and Center for Corporate Performance); Anders Poulsen (School of Economics, University of East Anglia); Marie-Claire Villeval (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| Abstract: | This paper experimentally investigates the impact of different pay and relative performance information policies on employee effort. We explore three information policies: No feedback about relative performance, feedback given halfway through the production period, and continuously updated feedback. The pay schemes are a piece rate payment scheme and a winner-takes-all tournament. We find that, regardless of the pay scheme used, feedback does not improve performance. There are no significant peer effects in the piece-rate pay scheme. In contrast, in the tournament scheme we find some evidence of positive peer effects since the underdogs almost never quit the competition even when lagging significantly behind, and frontrunners do not slack off. Moreover, in both pay schemes information feedback reduces the quality of the low performers’ work. |
| Keywords: | evaluation, feedback, information, laboratory experiments, peer effects, performance pay, piece rate, tournament |
| JEL: | C70 C91 J16 J24 J31 J33 M52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0812&r=exp |
| By: | Lugovskyy, Volodymyr; Puzzello, Daniela; Tucker, Steven |
| Abstract: | Pervasive overbidding represents a well-documented feature of all-pay auctions. Aggregate bids exceed Nash predictions in laboratory experiments, and individuals often submit bids that guarantee negative profits. This paper examines three factors that may reduce pervasive overbidding: (a) repetition (experience), (b) reputation (strangers vs. partners) and (c) active participation. We find that aggregate over-dissipation diminishes but is not eliminated with repetition, and that repetition, in conjunction with active participation generates bids consistent with the static Nash predictions. |
| JEL: | C9 D72 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8604&r=exp |
| By: | Tor Eriksson (Department of economics - University of Aarhus); Anders Poulsen (School of economics - University of East Anglia); Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | This paper experimentally investigates the impact of different pay and relative performance information policies on employee effort. We explore three information policies: No feedback about relative performance, feedback given halfway through the production period, and continuously updated feedback. The pay schemes are a piece rate payment scheme and a winner-takes-all tournament. We find that, regardless of the pay scheme used, feedback does not improve performance. There are no significant peer effects in the piece-rate pay scheme. In contrast, in the tournament scheme we find some evidence of positive peer effects since the underdogs almost never quit the competition even when lagging significantly behind, and frontrunners do not slack off. Moreover, in both pay schemes information feedback reduces the quality of the low performers’ work. |
| Keywords: | evaluation ; feedback ; information ; laboratory experiments ; peer effects ; performance pay ; piece rate ; tournament |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00276396_v1&r=exp |
| By: | Andreas Park; Daniel Sgroi |
| Abstract: | While herding has long been suspected to play a role in financial market booms and busts, theoretical analyses have struggled to identify conclusive causes for the effect. Recent theoretical work shows that informational herding is possible in a market with efficient asset prices if information is bi-polar, and contrarianism is possible with single-polar information. We present an experimental test for the validity of this theory, contrasting with all existing experiments where rational herding was theoretically impossible and subsequently not observed. Overall we observe that subjects generally behave according to theoretical predictions, yet the fit is lower for types who have the theoretical potential to herd. While herding is often not observed when predicted by theory, herding (sometimes irrational) does occur. Irrational contrarianism in particular leads observed prices to substantially differ from the efficient benchmark. Alternative models of behavior, such as risk aversion, loss aversion or error correction, either perform quite poorly or add little to our understanding. |
| Keywords: | Herding,Informational Efficiency, Experiments. |
| JEL: | G14 G24 G28 |
| Date: | 2008–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-316&r=exp |
| By: | David Dickinson (Department of Economics - Appalachian State University); Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | Agency theory assumes that tighter monitoring by the principal should motivate agents to increase their effort, whereas the “crowding-out” literature suggests that the opposite may occur. These two assertions are not necessarily contradictory provided that the nature of the employment relationship is taken into account (Frey 1993). Results from controlled laboratory experiments show that many principals engage in costly monitoring, and most agents react to the disciplining effect of monitoring by increasing effort. However, we also find some evidence that effort is crowded out when monitoring is above a certain threshold. We identify that both interpersonal principal/agent links and concerns for the distribution of output payoff are important for the emergence of this crowding-out effect. |
| Keywords: | principal-agent theory ; monitoring ; crowding-out ; motivation ; real effort experiment |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00276284_v1&r=exp |
| By: | Siddiqi, Hammad |
| Abstract: | The lure of choice is a behavioral bias with important implications for financial markets. The question of whether this bias survives in market equilibrium is an issue that can be tackled with experimental economics methods. Here, we use the 4-door Monty Hall as a tool to measure the lure of choice both at the individual as well as the market level. We find that if individuals exhibit this bias then market prices also reflect this bias, hence, trading activity alone is not sufficient to reduce or eliminate the lure of choice. The bias, both at the individual as well as the market level, is robust to learning. If at least two traders strongly exhibit this bias, then competition between them is sufficient to outweigh the impact of other biases in judgment. This result has important implications for models with heterogeneous traders. Furthermore, the lure of choice is found to be compatible with event-style market efficiency |
| Keywords: | Judgment Errors; Lure of Choice; Monty Hall; Group Experiments; Event Efficiency; Asset Pricing; Behavioral Bias Behavioral Bias; Asset Pricing |
| JEL: | G10 C92 G12 |
| Date: | 2007–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8591&r=exp |
| By: | Brown, Martin (Swiss National Bank); Zehnder, Christian (Harvard Business School) |
| Abstract: | We examine how asymmetric information and competition in the credit market affect voluntary information sharing between lenders. We study an experimental credit market in which information sharing can help lenders to distinguish good borrowers from bad ones, ecause borrowers may exogenously switch locations. Lenders are, however, engaged in spatial competition, and thus may lose market power by sharing information with competitors. Our results suggest that asymmetric information in the credit market increases the frequency of information sharing between lenders significantly. Competition between lenders reduces information sharing, but the impact of competition seems to be only of second order importance. |
| Keywords: | information sharing; credit; competition; asymmetric information |
| JEL: | D82 G21 G28 |
| Date: | 2008–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2008_001&r=exp |
| By: | Timothy N. Cason; Lata Gangadharan; Pushkar Maitra |
| Abstract: | Most problems with formal sector credit lending to the poor in developing countries can be attributed to the lack of information and inadequate collateral. One common feature of successful credit mechanisms is group-lending, where the loan is advanced to an individual if he/she is a part of a group and members of the borrowing group can monitor each other. Since group members have better information about each other compared to lenders, peer monitoring is often less expensive than lender monitoring. Theoretically this leads to greater monitoring and greater rates of loan repayments. This paper reports the results from a laboratory experiment of group lending in the presence of moral hazard and (costly) peer monitoring. We compare peer monitoring treatments when credit is provided to members of the group sequentially and simultaneously, and individual lending with lender monitoring. The results depend on the relative cost of monitoring by the peer vis-à-vis the lender. In the more typical case where the cost of peer monitoring is lower than the cost of lender monitoring, our results suggest that peer monitoring results in higher loan frequencies, higher monitoring and higher repayment rates compared to lender monitoring. In the absence of monitoring cost differences, performance is mostly similar across group and individual lending schemes, although loan frequencies and monitoring rates are sometimes modestly greater with group lending. Within group lending, although the dynamic incentives provided by sequential leading generate the greatest equilibrium surplus, simultaneous group leading provides equivalent empirical performance. |
| Keywords: | Group Lending, Monitoring, Moral Hazard, Laboratory Experiment, Loans, Development |
| JEL: | G21 C92 O2 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1208&r=exp |
| By: | Timothy N. Cason; Shakun Datta |
| Abstract: | In this laboratory experiment sellers simultaneously post prices and choose whether to advertise. Buyers then decide whether to buy from a seller whose advertisement they have received, or engage in costly sequential search to obtain price quotes from other sellers. In the unique symmetric equilibrium, sellers either charge a high unadvertised price or randomize in an interval of lower advertised prices. Increases in either search or advertising costs raise equilibrium prices, and equilibrium advertising intensity decreases with lower search costs and higher advertising costs. Our results are consistent with most of these comparative static predictions, and sellers also post lower advertised than unadvertised prices as predicted. In all treatments, however, sellers price much lower than the equilibrium interval and earn very low profits. Although buyers’ search decisions are approximately optimal, sellers advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium that features significant seller market power. |
| Keywords: | Experiment, Posted offer, Market power, Mixed strategy, Uncertainty, Shopping |
| JEL: | D43 D83 L13 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1212&r=exp |
| By: | Giuseppe Danese; Luigi Mittone |
| Abstract: | Inspired by Karl Polanyi’s writings on three allocation modes, namely reciprocity, exchange and redistribution, we first tested a reciprocity ring with ten players. The baseline treatment, with no possibility of socialisation, displayed very low levels of allocative efficiency. Consistently with the Polanyian approach to reciprocity, we found that inducing the notion of symmetry among the players increased efficiency levels significantly. We then simulated a market exchange, with significant allocative efficiency gains. We conclude that indirect-reciprocity rings among anonymous players can seldom function in the absence of definite institutional refinements, promoting forms of symmetry-acknowledgement. |
| Keywords: | Reciprocity, Redistribution, Exchange, Comparative Institutional Analysis. |
| JEL: | Z13 D02 C91 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpce:0803&r=exp |
| By: | Gunnthorsdottir, Anna; Vragov, Roumen; seifert, Stefan; McCabe, Kevin |
| Abstract: | According to theory a pure meritocracy is efficient because individual members are competitively rewarded according to their individual contributions to society. However, purely individually based meritocracies seldom occur. We introduce a new model of social production called “team-based meritocracy” (TBM) in which individual members are rewarded based on their team membership. We demonstrate that as long as such team membership is both mobile and competitively based on contributions, individuals are able to tacitly coordinate a complex and counterintuitive asymmetric equilibrium that is close to Pareto-optimal, possibly indicating that such a group-based meritocracy could be a social structure to which humans respond with particular ease. Our findings are relevant to many contemporary societies in which rewards are at least in part determined via membership in organizations such as for example firms, and organizational membership is increasingly determined by contribution rather than privilege. |
| Keywords: | social stratification; meritocracies; mechanism design; non-cooperative games; experiment; team production. |
| JEL: | D20 C72 |
| Date: | 2008–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8627&r=exp |
| By: | Steven Gjerstad |
| Abstract: | The pure exchange model is the foundation of the neoclassical theory of value, yet equilibrium predictions and models of price adjustment for this model remained untested prior to the experiment reported in this paper. With the exchange economy replicated several times, prices and allocations converge sharply to the competitive equilibrium in continuous double auction (CDA) trading. Convergence is evaluated by comparing the extent of price adjustment within each market replication (or trading period) to the extent of adjustment across trading periods: most observed price adjustment occurs within trading periods, so price adjustment data are evaluated with the Hahn process model (Hahn and Negishi [1962]), which is a disequilibrium model of within-period trades. Estimation demonstrates that the model is consistent with observed price paths within each period of the exchange economy. The model is augmented with an additional assumption – based on observations from this experiment – that the initial trade price in period t+1 is randomly drawn from the interval between the minimum and maximum trade prices in period t. The estimated within-period adjustment rule, combined with this across-period adjustment rule, generates price paths similar to data from an experiment session. |
| Keywords: | Competitive equilibrium, disequilibrium dynamics, continuous double auction, experimental economics, exchange economy, Hahn process, neoclassical theory of value, tatonnement, unit root tests |
| JEL: | C22 C92 D41 D44 D51 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1205&r=exp |
| By: | Markus Groth (Centre for Sustainability Management, Leuphana University of Lüneburg) |
| Abstract: | The European Union’s Council Regulation (EC) No 1698/2005 on support for rural development by the European Agricultural Fund for Rural Development has introduced promising changes in rewarding farmers by the implementation of conservation auctions and granting farmers’ transaction costs. The paper therefore deals with the evaluation of private transaction costs within a case study using repeated auctions to reward plant biodiversity. Based on a review of the current literature the paper develops a specific definition of transaction costs as well as a methodology to measure and calculate the farmers’ private transaction costs. The case study enfolds two field experiment auctions and two corresponding surveys. The transaction costs are measured by the use of written questionnaires and will be discussed both as a first reference value of farmers’ transaction costs as well as compared to the individual payments within the case study auctions in order to investigate the real-life performance of this specific application of repeated conservation auctions in biodiversity protection efforts. |
| Keywords: | agri-environmental policy, biodiversity conservation auctions, transaction costs, ecological services, plant biodiversity, experimental economics, EAFRD-Regulation |
| JEL: | C93 D44 D82 H41 L14 Q24 Q28 Q57 R52 |
| Date: | 2008–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:lue:wpaper:84&r=exp |