nep-exp New Economics Papers
on Experimental Economics
Issue of 2008‒05‒31
twelve papers chosen by
Daniel Houser
George Mason University

  1. Can we do policy recommendations from a framed field experiment? The case of coca cultivation in Colombia By Ibanez, Marcela; Martinsson, Peter
  2. Cooling-Off in Negotiations - Does It Work? By Joerg Oechssler; Andreas Roider; Patrick W. Schmitz
  3. Allocation, externalities, and the fair division approach: An experimental study By Torsten Weiland
  4. Cognitive Abilities and Behavioral Biases By Oechssler, Jörg; Roider, Andreas; Schmitz, Patrick W.
  5. Cognitive dissonance, risk aversion and the pretrial negotiation impasse By Langlais, Eric
  6. On an Evolutionary Foundation of Neuroeconomics By Schipper, Burkhard C
  7. QRE, NSNX and the Paradox of Voting By Howard Margolis
  8. Creating a Consistent Poverty Measure Over Time Using NAS Procedures: 1996-2005 By Thesia I. Garner; Katherine S. Short
  9. A Note on ‘Neglect Defaulting’ By Howard Margolis
  10. In Quest of Truth: The War of Methods in Economics By Pillai N., Vijayamohanan
  11. The second-price auction solves King Solomon's dilemma By Mihara, H. Reiju
  12. The Unique-lowest Sealed-bid Auction By Harold Houba; Dinard van der Laan; Dirk Veldhuizen

  1. By: Ibanez, Marcela (Department of Economics, School of Business, Economics and Law, Göteborg University); Martinsson, Peter (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Laboratory experiments are potentially effective tools for studying behavior in settings where little or no information would otherwise exist such as participation in illicit activities. However, using laboratory experiments to draw policy recommendations is highly debatable. We investigate the external validity of a framed field experiment that mimics coca cultivation and find evidence that behavior in the experiment is consistent with self-reported behavior. We use the experiment to discuss the effectiveness of carrot and stick policies on coca investments. The experiment indicates that subjects are more responsive to changes in the relative profit of cattle farming than to changes in the probability of coca eradication.
    Keywords: Coca cultivation; Colombia; Experiment; Public Bad
    JEL: C91 C93 D62 K42
    Date: 2008–05–27
  2. By: Joerg Oechssler (University of Heidelberg, Department of Economics); Andreas Roider (University of Heidelberg, Department of Economics); Patrick W. Schmitz (University of Cologne, Department of Economics)
    Abstract: Negotiations frequently end in conflict after one party rejects a final offer. In a large-scale internet experiment, we investigate whether a 24-hour coolingoff period leads to fewer rejections in ultimatum bargaining. We conduct a standard cash treatment and a lottery treatment, where subjects receive lottery tickets for several large prizes - emulating a high-stakes environment. In the lottery treatment, unfair offers are less frequently rejected, and cooling-off significantly reduces the rejection rate further. In the cash treatment, rejections are more frequent and remain so after cooling-off. This treatment difference is particularly pronounced for subjects with lower cognitive abilities.
    Keywords: negotiations, ultimatum game, emotions, cooling-off, cognitive abilities, behavioral biases, internet experiment
    JEL: C78 C99 D8
    Date: 2008–04
  3. By: Torsten Weiland (Max Planck Institute of Economics)
    Abstract: We experimentally investigate four allocation mechanisms - all based on the fair division approach, with varying bid elicitation methods and price rules - in terms of their allocation efficiency, distributional effects, and regularities in individual bidding behavior. In a repeated design, an indivisible good is assigned that generates profits for its owner but, at the same time, exerts negative externalities on the non-acquiring bidders. Both the bidders' valuations of the good and their potentially incurred damages are stochastic and denote private information, inciting strategic bidding and complicating an efficient allocation. Indeed, observed bidding is dominated by strategic reporting which, however, only marginally diminishes efficiency. One particular allocation mechanism, relying on sparse information elicitation and the first-price rule, is found to yield economically superior results to both more complex and second-price based allocation mechanisms.
    Keywords: Allocation, auction, fair division, externalities, experiment
    JEL: C92 D44 D62 L14
    Date: 2008–04–08
  4. By: Oechssler, Jörg (University of Heidelberg); Roider, Andreas (University of Heidelberg); Schmitz, Patrick W. (University of Cologne)
    Abstract: We use a simple, three-item test for cognitive abilities to investigate whether established behavioral biases that play a prominent role in behavioral economics and finance are related to cognitive abilities. We find that higher test scores on the Cognitive Reflection Test of Frederick (2005) indeed are correlated with lower incidences of the conjunction fallacy, conservatism in updating probabilities, and overconfidence. Test scores are also significantly related to subjects’ time and risk preferences. We find no influence on anchoring. However, even if biases are lower for people with higher cognitive abilities, they still remain substantial.
    Keywords: behavioral finance, biases, cognitive abilities, cognitive reflection test
    JEL: C91 D80 D90 J24
    Date: 2008–05
  5. By: Langlais, Eric
    Abstract: There exist evidence that asymmetrical information do exist between litigants: not in a way supporting Bebchuk (1984)'s assumption that defendants' degree of fault is a private information, but more likely, as a result of parties' predictive power of the outcome at trial (Osborne, 1999). In this paper, we suggest an explanation which allows to reconcilie different results obtained in experimental economics. We assume that litigants assess their estimates on the plaintiff's prevailing rate at trial using a two-stage process. First, they manipulate the available information in a way consistent with the self-serving bias. Then, these priors are weighted according to the individual's attitude towards risk. The existence of these two different cognitive biases are well documented in the experimental literature. Within this framework, we study their influence in a model of litigation where the self-serving bias of one party is private information. We show that the influence of the former is consistent with the predictions of the "optimistic approach" of trials. However, we show that the existence of risk aversion and more generally non neutrality to risk, is more dramatic in the sense that it has more unpredictable effects.
    Keywords: litigation; pretrial bargaining; cognitive dissonance and self-serving bias; risk aversion.
    JEL: D81 K41
    Date: 2008–03
  6. By: Schipper, Burkhard C
    Abstract: Neuroeconomics focuses on brain imaging studies mapping neural responses to choice behavior. Economic theory is concerned with choice behavior but it is silent on neural activities. We present a game theoretic model in which players are endowed with an additional structure - a simple "nervous system" - and interact repeatedly in changing games. The nervous system constrains information processing functions and behavioral functions. By reinterpreting results from evolutionary game theory (Germano, 2007), we suggest that nervous systems can develop to "function well" in exogenously changing strategic environments. We present an example indicating that an analogous conclusion fails if players can influence endogenously their environment.
    Keywords: Neuroeconomic theory; Evolutionary game theory; Learning in games
    JEL: B40 B21 A12 C73 B25 C72 D87
    Date: 2008–04–16
  7. By: Howard Margolis
    Abstract: Levine & Palfrey's (2007) QRE account of turnout in large elections raises the broader question of how much of a departure from standard rational choice theory is justified by the considerable repertoire of rational choice anomalies that has accumulated since Downs and Olson half a century ago. An alternative but more controversial unconventional view turns on what I call NSNX motivation to account for how agents seek a balance between self-interest and social motivation. NSNX agents have irreducibly dual utility functions. QRE agents have a standard utility function but they do not maximize it. I review the situation showing why in situations where NSNX effects could be expected, QRE might mirror those effects. I show how by varying parameters of an experiment we can cleanly distinguish between actual QRE effects which should bring predictions closer to the data than Nash and NSNX effects which should do the same.
    Keywords: rational choice, NSNX
    Date: 2007–12
  8. By: Thesia I. Garner (U.S. Bureau of Labor Statistics); Katherine S. Short (U.S. Census Bureau)
    Abstract: This paper presents an experimental poverty measure and compares it to the current official measure, now more than 40 years old. The experimental measure is based on an approach, drawn from work by a National Academy of Sciences (NAS) expert Panel, to consistently define basic needs and family resources. The experimental thresholds are based on out-of-pocket spending by families on basic goods and services and are based on an “outflows” concept. The resource measure is based on an “inflows” concept and reflects money coming into the household that is available to meet one’s basic needs. The U.S. Consumer Expenditure Survey serves as the basis for the experimental thresholds and the Current Population Survey Annual Social and Economic Supplement serves as the basis for the resource measure. Results for 1996 to 2005 are reported with trends examined. An important finding is that increases in expenditures for shelter and utilities, captured in the new thresholds, suggest a greater increase in the number of families not able to meet basic needs than is reflected by the official poverty statistics.
    Keywords: NAS, Poverty, Consumer Exenditure Survey, Current Population Survey
    JEL: I32
    Date: 2008–05
  9. By: Howard Margolis
    Abstract: I introduce the notion of "neglect defaulting", which labels the propensity to neglect possibilities which are ordinarily sensibly neglected. In familiar contexts we are well-tuned to recognize when to override the default. But outside the range of familiar experience – here in the artificial context of puzzles – these ordinarily benign defaults can make it difficult for even sophisticated subjects, such as readers of this note, to avoid responses which on reflection will be seen as obviously mistaken. A detail of particular importance is that although subjects are easily prompted to take one step in the direction of reaching a sound response, the tendency to then neglect to consider that another step may be needed is remarkably strong. In each of the five examples the needed but usually neglected second step is quite trivial. Concluding remarks point to consequences for larger questions in politics and other contexts out of scale with everyday experience.
    Keywords: decision making, judgment
    Date: 2008–04
  10. By: Pillai N., Vijayamohanan
    Abstract: The present paper discusses the ‘battle of methods’ in economics in its epistemic pursuit in the framework of a dialectics between science and art. The traditional distinction between deduction and induction has come to be characterized as a ‘theory-data confrontation’; while the former a priori approach has flourished in terms of mathematical economics, the inductive approach has fulfilled its mission through econometrics and experimental economics. The paper outlines the recent trends in econometrics and experimental economics in the context of empirical pursuit. We conclude the study, reiterating the contemporary consensus on the complementary roles of the two approaches: a theory-data confluence, not in a static, but in a dialectical framework.
    Keywords: Economic Methodology; Deduction; Induction; Dialectics; Mathematics; Econometrics
    JEL: B23 B16 B00 B41
    Date: 2008–05–25
  11. By: Mihara, H. Reiju
    Abstract: Consider the problem of allocating k identical, indivisible objects among n agents, where k is less than n. The planner's objective is to give the objects to the top k valuation agents at zero costs to the planner and the agents. Each agent knows her own valuation of the object and whether it is among the top k. Modify the (k+1)st-price sealed-bid auction by introducing a small participation fee and the option not to participate in it. This strikingly simple mechanism (modified auction) implements the desired outcome in iteratively weakly undominated strategies. Moreover, no pair of agents can profitably deviate from the equilibrium by coordinating their strategies or bribing each other.
    Keywords: Solomon's problem; implementation; entry fees; Olszewski's mechanism; collusion; bribes
    JEL: D71 D61 C72
    Date: 2008–05
  12. By: Harold Houba (VU University Amsterdam); Dinard van der Laan (VU University Amsterdam); Dirk Veldhuizen (VU University Amsterdam)
    Abstract: Unique-lowest sealed-bid auctions are auctions in which participation is endogenous and the winning bid is the lowest bid among all unique bids. Such auctions admit very many Nash equilibria (NEs) in pure and mixed strategies. The two-bidders' auction is similar to the Hawk-Dove game, which motivates to study symmetric NEs: Properties and comparative statics are derived and the symmetric NE with the lowest expected gains is the maximin in symmetric strategies, which allows computation through a mathematical program. Simulations provide numerical evidence that the symmetric NE with the lowest expected gains is the unique limit point of the replicator dynamics.
    Keywords: Auctions; Sealed-Bid Auction; Evolutionary Stability; Endogenous Entry; Maximin
    JEL: D44 C72 C73 C61 L83
    Date: 2008–05–16

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