nep-exp New Economics Papers
on Experimental Economics
Issue of 2008‒10‒28
fourteen papers chosen by
Daniel Houser
George Mason University

  1. Do Strategic Substitutes Make Better Markets? A Comparison of Bertrand and Cournot Markets By Douglas D. Davis
  2. Allocative efficiency and traders' protection under zero intelligence behavior By Marco LiCalzi; Lucia Milone; Paolo Pellizzari
  3. Noblesse Oblige? Determinants of Survival in a Life and Death Situation By Bruno S. Frey; David A. Savage; Benno Torgler
  4. Incorporating Cost in Power Analysis for Three-Level Cluster Randomized Designs By Konstantopoulos, Spyros
  5. Experimental Evidence on Inequality Aversion: Dictators Give to Help the Less Fortunate By Korenok Oleg; Edward L. Millner; Laura Razzolini
  6. Psychological Pressure in Competitive Environments: Evidence from a Randomized Natural Experiment By Jose Apesteguia; Ignacio Palacios-Huerta
  7. Facilitating Classroom Economics Experiments with an Emerging Technology: The Case of Clickers By Liu, Donald J.; Walker, J.D.; Bauer, Theresa A.; Zhao, Meng
  8. Experimental Evidence on Inequity Aversion and Self-Selection between Incentive Contracts By Sabrina Teyssier
  9. Tournaments with prize-setting agents By Eriksen, Kristoffer W.; Kvaløy, Ola; Olsen, Trond E.
  10. Performance Pay, Sorting and Social Motivation By Tor Eriksson; Marie-Claire Villeval
  12. Economic Laboratory Experiment on Horn's Rule By Kris De Jaegher; Stephanie Rosenkranz; Utz Weitzel
  13. Strong reciprocity and reputation management By Yamagishi, Toshio; Horita, Yutaka; Takagishi, Haruto
  14. Trader personality and trading performance. A framework and financial market experiment By Arjen van Witteloostuijn; Katrin Muehlfeld

  1. By: Douglas D. Davis (Department of Economics, VCU School of Business)
    Abstract: Recent experiments suggest that games where actions are strategic substitutes rather than strategic complements exhibit some desirable performance characteristics. This paper reports an experiment conducted to test whether these characteristics extend to differentiated product Cournot and Bertrand markets. We find that Cournot markets do not generally outperform Bertrand markets, and that the opposite is often true. Bertrand markets exhibit comparatively higher convergence levels and speeds, particularly when products are close substitutes. Bertrand sellers do engage in more signaling activity than Cournot sellers. Such efforts, however, affect market outcomes only occasionally, and only when products are differentiated. Analysis of individual decisions suggests that the observed differences in convergence levels and speeds are driven by a propensity for sellers to use forecast and inertia anchors as bases for action choices in addition to best replies. Given these propensities, Bertrand markets converge more rapidly and more completely to static Nash predictions, particularly when products are close substitutes, because the differences between the various anchors is smaller in Bertrand markets.
    Keywords: Experiments, Market Concentration, Market Power
    JEL: C9 D4 L4
    Date: 2008–10
  2. By: Marco LiCalzi (Department of Applied Mathematics, University of Venice); Lucia Milone (Advanced School of Economics, University of Venice); Paolo Pellizzari (Department of Applied Mathematics, University of Venice)
    Abstract: This paper studies the continuous double auction from the point of view of market engineering: we tweak the resampling rule adopted in an often-used version of this exchange protocol to search for an improved design. We assume zero intelligence trading as a lower bound for more robust behavioral rules and look at allocative efficiency, as well as three subordinate performance criteria: mean spread, cancelation rate, and traders' protection. This latter notion measures the ability of a protocol to help traders capture their share of the competitive equilibrium profits. We consider two families of resampling rules and obtain the following results. Full resampling is not necessary to attain high allocative effciency, but fine-tuning the resampling rate is important. The best allocative performances are virtually indistinguishable across the two families. However, if the market designer adds any of the other three criteria as a subordinate goal, then a resampling rule based on using a price band around the best quotes is superior.
    JEL: D51 D40 C63 C92
    Date: 2008–10
  3. By: Bruno S. Frey; David A. Savage; Benno Torgler
    Abstract: This paper explored the determinants of survival in a life and death situation created by an external and unpredictable shock. We are interested to see whether pro-social behaviour matters in such extreme situations. We therefore focus on the sinking of the RMS Titanic as a quasi-natural experiment do provide behavioural evidence which is rare in such a controlled and life threatening event. The empirical results support that social norm such as “women and children first” survive in such an environment. We also observe that women of reproductive age have a higher probability of surviving among women. On the other hand, we observe that crew members used their information advantage and their better access to resources (e.g. lifeboats) to generate a higher probability of surviving. The paper also finds that passenger class, fitness, group size, and cultural background matter.
    Keywords: Decision under Pressure, Altruism, Social Norms, Interdependent Preferences, Excess of Demand
    JEL: D63 D64 D71 D81
    Date: 2008–10–23
  4. By: Konstantopoulos, Spyros (Boston College)
    Abstract: In experimental designs with nested structures entire groups (such as schools) are often assigned to treatment conditions. Key aspects of the design in these cluster randomized experiments include knowledge of the intraclass correlation structure and the sample sizes necessary to achieve adequate power to detect the treatment effect. However, the units at each level of the hierarchy have a cost associated with them and thus researchers need to decide on sample sizes given a certain budget, when designing their studies. This paper provides methods for computing power within an optimal design framework (that incorporates costs of units in all three levels) for three-level cluster randomized balanced designs with two levels of nesting. The optimal sample sizes are a function of the variances at each level and the cost of each unit. Overall, larger effect sizes, smaller intraclass correlations at the second and third level, and lower cost of level-3 and level-2 units result in higher estimates of power.
    Keywords: experimental design, statistical power, optimal sampling
    JEL: I20
    Date: 2008–10
  5. By: Korenok Oleg (Department of Economics, VCU School of Business); Edward L. Millner (Department of Economics, VCU School of Business); Laura Razzolini (Department of Economics, VCU School of Business)
    Abstract: We design an experiment to identify the motivation underlying dictators’ behavior. In the typical dictator game, the recipient’s payoff is completely determined by the amount passed. We give an endowment to the recipient as well as the dictator, breaking the equivalence between the amount passed and the recipient’s payoff. The majority of dictators behave as if recipients’ payoffs are normal goods. When we increased recipients’ endowments, dictators decreased the amounts passed. More than half of dictators are averse to inequality. They passed nothing when endowments were equalized. We conclude that in the standard dictator game most dictators pass because the recipients are given no endowments and inequality is at its maximum.
    Keywords: Other-regarding utility, dictator game
    JEL: C91 D63 D64
    Date: 2008–08
  6. By: Jose Apesteguia; Ignacio Palacios-Huerta
    Abstract: Much like cognitive abilities, emotional skills can have major effects on perfor mance and economic outcomes. This paper studies the behavior of professional subjects involved in a dynamic competition in their own natural environment. The setting is a penalty shoot-out in soccer where two teams compete in a tournament framework taking turns in a sequence of five penalty kicks each. As the kicking order is determined by the random outcome of a coin flip, the treatment and control groups are determined via explicit randomization. Therefore, absent any psychological effects, both teams should have the same probability of winning regardless of the kicking order. Yet, we find a systematic first-kicker advantage. Using data on 2,731 penalty kicks from 262 shoot-outs for a three decade period, we find that teams kicking first win the penalty shoot-out 60.5% of the time. A dynamic panel data analysis shows that the psychological mechanism underlying this result arises from the asymmetry in the partial score. As most kicks are scored, kicking first typically means having the opportunity to lead in the partial score, whereas kicking second typically means lagging in the score and having the opportunity to, at most, get even. Having a worse prospect than the opponent hinders subjects' performance. Further, we also find that professionals are self-aware of their own psychological effects. When a recent change in regulations gives winners of the coin toss the chance to choose the kicking order, they rationally react to it by systematically choosing to kick first. A survey of professional players reveals that when asked to explain why they prefer to kick first, they precisely identify the psychological mechanism for which we find empirical support in the data: they want “to lead in the score in order to put pressure on the opponent."
    Keywords: LeeX
    Date: 2008–10
  7. By: Liu, Donald J.; Walker, J.D.; Bauer, Theresa A.; Zhao, Meng
    Abstract: The authors discuss how they used the audience response system (ARS) to facilitate pit market trading in an applied microeconomics class and report the efficacy of the approach. Using the ARS to facilitate active learning by engaging students in economics experiments has pedagogical advantages over both the labor-intensive approach of pencil-and-paper and the capital-intensive route of relying on networked or on-line computer labs which oftentimes preclude or restrict face-to-face student interactions. Thus, the new method of conducting experiments represents an added advantage on top of such conventional functions as taking attendance and administering quizzes of this increasingly popular classroom technology.
    Keywords: Teaching/Communication/Extension/Profession,
    Date: 2008–10–23
  8. By: Sabrina Teyssier (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France)
    Abstract: This paper reports on the results of an experiment testing whether the agents selfselect between a competitive payment scheme and a revenue-sharing scheme depending on their inequity aversion. Average efficiency should be increased when these payment schemes are endogenously chosen by agents. We show that the choice of the competition is negatively affected by disadvantageous inequity aversion and risk aversion. In the second half of the experiment, the effect of individual preferences is indirect through the effect of past results. The self-selection of agents increases the efficiency of the competitive scheme but not that of the revenue-sharing scheme, due to a heterogeneity of behaviors.
    Keywords: performance pay, incentives, self-selection, inequity aversion, competition, revenue-sharing scheme
    JEL: C92 D63 J31 J33 M52
    Date: 2008
  9. By: Eriksen, Kristoffer W. (Norwegian School of Hotel Management, Dept. of Business Administration, University of Stavanger); Kvaløy, Ola (Norwegian School of Hotel Management, Dept. of Business Administration, University of Stavanger); Olsen, Trond E. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In many tournaments it is the contestants themselves who determine reward allocation. Labor-union members bargain over wage distribution, and many firms allow self-managed teams to freely determine internal resource allocation, incentive structure, and division of labour. We analyze, and test experimentally, a rank-order tournament where heterogenous agents determine the spread between winner prize and looser prize. We investigate the relationship between prize spread, uncertainty (i.e. noise between e¤ort and performance), heterogeneity and effort. The paper challenges well-known results from tournament theory. We find that a large prize spread is associated with low degree of uncertainty and high degree of heterogeneity, and that heterogeneity triggers effort. By and large, our real-effort experiment supports the theoretical predictions.
    Keywords: Rank-order tournament; prize spread; ability-difference
    JEL: C30
    Date: 2008–10–17
  10. By: Tor Eriksson (Department of economics - University of Aarhus); 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: Variable pay links pay and performance but may also help firms in attracting more productive employees. Our experiment investigates the impact of performance pay on both incentives and sorting and analyzes the influence of repeated interactions between firms and employees on these effects. We show that (i) the opportunity to switch from a fixed wage to variable pay scheme increases the average effort level and its variance; (ii) high skill employees concentrate under the variable pay scheme; (iii) however, in repeated interactions, efficiency wages reduce the attraction of performance pay. Social motivation and reputation influence both the provision of incentives and their sorting effect.
    Keywords: performance pay ; incentives ; sorting ; social motivation ; experiment
    Date: 2008
  11. By: Gordon Menzies; Daniel Zizzo
    Abstract: We consider an experimental setting where traders in stock markets or exchange rate markets receive one stylized piece of information at a time about the value of an asset. We find that having limited knowledge about the prior distribution of true asset values does not hamper the decision making by traders and markets. There is empirical support for the common modeling assumption of simplifying agent heterogeneity into two types, a rational one and a less rational one. A correspondence exists between the average degree of belief conservatism found with individual buying and selling prices and that observed with market prices.
    JEL: C91 D83 D84 F31 G12
    Date: 2008–10
  12. By: Kris De Jaegher; Stephanie Rosenkranz; Utz Weitzel
    Abstract: This paper develops a framework for empirically testing several alternative game-theoretic rationales for Horn’s rule. It then presents an economic laboratory experiment where these rationales are empirically tested. Subjects seem to coordinate on Horn’s rule where efficiency acts as a focal point. Nevertheless, a weak interpretation of the evolutionary argument is not rejected: prior play does have an effect on future play. This suggests a hierarchy of effects, where the focal point effect dominates the evolutionary effect, with the latter being more pronounced in cheap talk situations.
    Keywords: Horn’s Rule, Signalling Theory, Pragmatics, Economic Laboratory
    JEL: C72 C92
    Date: 2008–10
  13. By: Yamagishi, Toshio; Horita, Yutaka; Takagishi, Haruto
    Abstract: Large scale cooperation among non-kin individuals is an evolutionary puzzle since it enhances other individuals’ fitness at a cost to oneself. One possible solution to this puzzle is evolution of strong reciprocity through group selection. Rejection choices of unfair offers in the ultimatum game has been considered a testimony to the operation of the social preferences of inequity aversion and reciprocity that underlie strong reciprocity. Across three studies using three different methodologies (strategy method, one-shot game, repeated one-shot game), we compared rejection behavior in the ultimatum, impunity, and private impunity games. Results showed that about 30-40% of responders who faced an unfair offer rejected it even when such behavior aggravated unfairness rather than reducing it (i.e., in the impunity and the private impunity games), though the rejection rates in these games were only about a half of that in the ultimatum game. It was also found, across three studies, that the rejection rate of unfair offers in the impunity game was about the same as that in the private impunity game, in which the responder’s decision was not informed to the propose
    Keywords: Reputation; Strong reciprocity
    JEL: C72
    Date: 2008–10–20
  14. By: Arjen van Witteloostuijn; Katrin Muehlfeld
    Abstract: To date, the main source of inspiration for behavioral finance scholars has been cognitive psychology. Cognitive psychology offers a rich set of insights into human decision-making, and the biases that tend to influence it. Such biases provide important reasons as to why anomalies may characterize financial market behavior. This study builds on this tradition by merging in insights from yet another psychology sub-discipline: personality psychology. We argue that a human being’s personality is a key determinant of her behavior and performance. We illustrate, for a limited subset of six personality traits (locus of control, maximizing tendency, regret disposition, self-monitoring, sensation seeking and type-A/B behavior), how this logic can be applied in the context of the study of trader behavior and performance. We explore this line of reasoning in an illustrative asset market experiment, involving 34 economics students. The results suggest that different personality traits affect distinct components of trading behavior, and so trading performance. In particular, more relaxed types who are more susceptible to regret trade less frequently (a performance enhancing strategy). Impatient, urgency-driven types with low sensitivity for environmental cues tend towards the disadvantageous price-taker role (accepting limit orders posted by other traders) and exhibit a lower tendency towards exploiting arbitrage opportunities.
    Keywords: Upper echelon theories, Personality traits, Financial market experiments, Trader behavior
    JEL: C91 D8 G1 G11
    Date: 2008–10

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