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on Experimental Economics |
| By: | John Duffy (University of Pittsburgh); Huan Xie (Concordia University); Yong-Ju Lee (Samsung Research Institute of Finance) |
| Abstract: | How do norms of trust and reciprocity arise? We investigate this question by examining behavior in an experiment where subjects play a series of indefinitely repeated trust games. Players are randomly and anonymously matched each period. The parameters of the game are chosen to support trust and reciprocity as a sequential equilibrium when no reputational information is available. The main question addressed is whether a social norm of trust and reciprocity emerges under the most extreme information restriction (community-wide enforcement) or whether trust and reciprocity require additional, individual-specific information about a player's past history of play. In the absence of such reputational information, we find that a social norm of trust and reciprocity is difficult to sustain. The provision of reputational information on past individual decisions significantly increases trust and reciprocity when subjects have experienced the absence of such a mechanism. Importantly, we find that making reputational information available at a small cost may also lead to a significant improvement in trust and reciprocity, despite the fact that most subjects do not choose to purchase this information. |
| Keywords: | Social Norms, Trust Game, Random Matching, Trust and Reciprocity, Information, Reputational Information |
| JEL: | C72 C91 C92 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:08007&r=exp |
| By: | Fehr, Ernst (University of Zurich) |
| Abstract: | In recent years, many social scientists have claimed that trust plays an important role in economic and social transactions. Despite its proposed importance, the measurement and the definition of trust seem to be not fully settled, and the identification of the exact role of trust in economic interactions has proven to be elusive. It is still not clear whether trust is just an epiphenomenon of good institutions or whether it plays an independent causal role capable of shaping important aggregate economic outcomes. In this paper, I rely on a behavioral definition of trust that enables us to relate it to economic primitives such as preferences and beliefs. I review strong biological and behavioral evidence indicating that trusting is not just a special case of risk-taking, but based on important forms of social preferences such as betrayal aversion. Behaviorally defined trust also opens the door for understanding national and ethnic trust differences in terms of differences in preferences and beliefs, and it suggests ways to examine and interpret a causal role of trust. |
| Keywords: | trust, preferences, beliefs, biological basis |
| JEL: | C7 D00 D2 D7 D8 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3895&r=exp |
| By: | Fehr, Ernst (University of Zurich); Hart, Oliver (Harvard University); Zehnder, Christian (University of Lausanne) |
| Abstract: | In a recent paper, Hart and Moore (2008) introduce new behavioral assumptions that can explain long term contracts and important aspects of the employment relation. However, so far there exists no direct evidence that supports these assumptions and, in particular, Hart and Moore's notion that contracts provide reference points. In this paper, we examine experimentally the behavioral forces stipulated in their theory. The evidence confirms the model's prediction that there is a tradeoff between rigidity and flexibility in a trading environment with incomplete contracts and ex ante uncertainty about the state of nature. Flexible contracts – which would dominate rigid contracts under standard assumptions –cause a significant amount of shading on ex post performance while under rigid contracts much less shading occurs. Thus, although rigid contracts rule out trading in some states of the world, parties frequently implement them. While our results are broadly consistent with established behavioral concepts, they cannot easily be explained by existing theories. The experiment appears to reveal a new behavioral force: ex ante competition legitimizes the terms of a contract, and aggrievement and shading occur mainly about outcomes within the contract. |
| Keywords: | contracts, reference points, experiment |
| JEL: | C7 D00 D2 D8 K00 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3889&r=exp |
| By: | Fehr, Ernst (University of Zurich); Goette, Lorenz (University of Geneva); Zehnder, Christian (University of Lausanne) |
| Abstract: | In this paper, we argue that important labor market phenomena can be better understood if one takes (i) the inherent incompleteness and relational nature of most employment contracts and (ii) the existence of reference-dependent fairness concerns among a substantial share of the population into account. Theory shows and experiments confirm, that even if fairness concerns were only to exert weak effects in one-shot interactions, repeated interactions greatly magnify the relevance of such concerns on economic outcomes. We also review evidence from laboratory and field experiments examining the role of wages and fairness on effort, derive predictions from our approach for entry-level wages and incumbent workers' wages, confront these predictions with the evidence, and show that reference-dependent fairness concerns may have important consequences for the effects of economic policies such as minimum wage laws. |
| Keywords: | fairness, contracts, wages, effort, experiments |
| JEL: | C7 D00 D2 D8 J2 L2 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3901&r=exp |
| By: | Robert S. Gazzale (Williams College); Tapan Khopkar |
| Abstract: | By providing incentives for sellers to act in a trustworthy manner, reputation mechanisms in many online environments can mitigate moral-hazard problems when particular buyers and sellers interact infrequently. However, these mechanisms rely on buyers sharing their private information about sellers with the community, and thus may suffer from too little feedback when its provision is costly. In this experimental study, we compare a standard feedback mechanism to one in which sellers can inspect a buyer's feedback-provision history, thus providing the buyer with incentives to share private information even when costly. We find fairly high trust and trustworthiness levels in all markets, with buyers showing a willingness to provide costly feedback, especially negative feedback, sufficient to induce seller trustworthiness. While we find, ceteris paribus, evidence that the availability of feedback-provision histories increases buyer trust by reducing missing feedback, it did not improve overall trustworthiness as this information enabled sellers to discriminate and act in a trustworthy manner less frequently with those who share information less frequently. |
| Keywords: | experimental economics, trust, reputation, electronic markets |
| JEL: | C72 C73 C91 C92 D82 L14 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:wil:wileco:2008-22&r=exp |
| By: | Philipp C. Wichardt; Daniel Schunk; Patrick W. Schmitz |
| Abstract: | This paper reports data from an ultimatum mini-game in which responders first had to choose whether or not to participate. Participation was costly, but the participation cost was smaller than the minimum payoff that a responder could guarantee himself in the ultimatum game. Compared to a standard treatment, we find that the rejection rate of unfavorable offers is significantly reduced when participation is costly. A possible explanation based on cognitive dissonance is offered. |
| Keywords: | Cognitive dissonance; Participation costs; Sunk costs; Ultimatum game |
| JEL: | C91 D63 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:398&r=exp |
| By: | Matthias Sutter; Ronald Bosman; Martin Kocher; Frans van Winden |
| Abstract: | We study the influence of gender and gender pairing on economic decision making in an experimental two-person bargaining game where the other party’s gender is known to both actors. We find that (1) gender per se has no significant effect on behavior, whereas (2) gender pairing systematically affects behavior. In particular, we observe much more competition and retaliation and, thus, lower efficiency when the bargaining partners have the same gender than when they have the opposite gender. These findings are consistent with predictions from psychology. Implications of our results for real-world organizations are discussed. |
| Keywords: | gender pairing, bargaining, psychology, experiment |
| JEL: | C72 C91 C92 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2008-27&r=exp |
| By: | Maria Fernanda Rivas; Matthias Sutter |
| Abstract: | We study the effects of leadership in the provision of public goods by examining (i) the relative importance of reward and punishment as leadership devices, (ii) whether endogenous leadership is more efficient than exogenously enforced leadership, and (iii) whether leaders contributing last, instead of first, also increase contributions. The experimental results are: (i) Reward options yield lower contributions than punishment through exclusion. (ii) Endogenous leadership is much more efficient than exogenously imposed leadership. (iii) Sequentiality itself is not beneficial for contributions since groups where the leader contributes as the last member do not contribute more than groups without a leader. |
| Keywords: | Public goods experiment, Leadership, Exclusion power, Reward, Endogeneity |
| JEL: | C72 C92 H41 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2008-25&r=exp |
| By: | Andrew E. Clark; David Masclet; Marie-Claire Villeval |
| Abstract: | This paper considers the effect of status or relative income on work effort, combining experimental evidencefrom a gift-exchange game with the analysis of multi-country ISSP survey data. We find a consistent negativeeffect of others' incomes on individual effort in both datasets. The individual's rank in the income distribution isa stronger determinant of effort than is others' average income, suggesting that comparisons are more ordinalthan cardinal. In the experiment, effort is also affected by comparisons over time: those who received higherincome offers or enjoyed higher income rank in the past exert lower levels of effort for a given current incomeand rank. |
| Keywords: | Effort, comparison income, rank, peak-end, experiments |
| JEL: | M54 J33 A13 C92 D63 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0886&r=exp |
| By: | Iñigo Iturbe Ormaetxe (Universidad de Alicante); Giovanni Ponti (Universidad de Alicante); Josefa Tomás (Universidad de Alicante); Luis Ubeda (Universidad de Alicante) |
| Abstract: | This paper studies, both theoretically and experimentally, frame effects in the context of a public good game in which players have to make a costly contribution either i) to achieve or ii) not to lose a non excludable monetary prize. Our protocol leads to public good provision (not deterioration) only if a certain contribution level is achieved. Since both frames differ with respect to the reference point, we use Prospect Theory to derive testable predictions. In particular, Prospect Theory predicts more contribution in the second frame. Our evidence suggests that a) subjects¿ behavior is highly sensitive to frames and b) the theoretical prediction is confirmed except when the threshold is low. We also estimate the parameters which better suit our experimental evidence, partly confirming previous results in the literature. |
| Keywords: | Public goods provision, framing, prospect theory |
| JEL: | C92 D81 H40 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2008-15&r=exp |
| By: | Wråke, Markus; Myers, Erica; Mandell, Svante; Holt, Charles; Burtraw, Dallas (Resources for the Future) |
| Abstract: | An important feature in the design of an emissions trading program is how emissions allowances are initially distributed into the market. In a competitive market the choice between an auction and free allocation should, according to economic theory, not have any influence on firms’ production choices nor on consumer prices. However, many observers expect the method of allocation to affect product prices. This paper reports on the use of experimental methods to investigate behavior with respect to how prices will be determined under a cap-and-trade program. Participants initially display a variety of pricing strategies. However, given a simple economic setting in which earnings depend on this behavior, we find that subjects learn to consider the value of allowances and overall behavior moves toward that predicted by economic theory. |
| Keywords: | carbon dioxide, climate change, emissions trading, distributional effects, electricity, allocation, auctions |
| JEL: | C91 D44 |
| Date: | 2008–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:rff:dpaper:dp-08-49&r=exp |
| By: | Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University) |
| Abstract: | Recent experimental evidence supports the in?uence of a player?s unchosen alternatives in other agent?s actions. This paper examines a tractable theoretical model of reference-dependent preferences in which individuals compare other players?chosen action with respect to their un- chosen alternatives. We analyze the equilibrium prediction in complete information sequential- move games, and compare it with that of standard games where players are not concerned about unchosen alternatives. We show that, without relying on interpersonal payo¤ comparisons (i.e., with strictly individualistic agents), our model predicts higher cooperation among the players than standard game-theoretic models. In addition, our framework embodies certain behavioral models from the literature on social status acquisition and intentions-based reciprocity as spe- cial cases. Finally, we con?rm our results in three economic applications: the labor market gift exchange game, the ultimatum bargaining game, and the sequential public good game. |
| Keywords: | Unchosen alternatives, Sequential-move games, Relative comparisons, Kindness, Reciprocity. |
| JEL: | C72 C78 C91 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:espinola-2&r=exp |
| By: | Thomas J. Kane; Douglas O. Staiger |
| Abstract: | We used a random-assignment experiment in Los Angeles Unified School District to evaluate various non-experimental methods for estimating teacher effects on student test scores. Having estimated teacher effects during a pre-experimental period, we used these estimates to predict student achievement following random assignment of teachers to classrooms. While all of the teacher effect estimates we considered were significant predictors of student achievement under random assignment, those that controlled for prior student test scores yielded unbiased predictions and those that further controlled for mean classroom characteristics yielded the best prediction accuracy. In both the experimental and non-experimental data, we found that teacher effects faded out by roughly 50 percent per year in the two years following teacher assignment. |
| JEL: | I21 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14607&r=exp |
| By: | Oswald, Andrew J. (Department of Economics, University of Warwick); Proto, Eugenio (Department of Economics, University of Warwick); Sgroi, Daniel (Department of Economics, University of Warwick) |
| Abstract: | Little is known by economists about how emotions affect productivity. To make persuasive progress, some way has to be found to assign people exogenously to different feelings. We design a randomized trial. In it, some subjects have their happiness levels increased, while others in a control group do not. We show that a rise in happiness leads to greater productivity in a paid piece-rate task. The effect is large; it can be replicated; it is not a reciprocity effect; and it is found equally among males and females. We discuss the implications for economics. |
| Keywords: | Labor productivity ; emotions ; well-being ; happiness ; positive affect ; experimental economics |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:882&r=exp |
| By: | Thomas K. Bauer; Christoph M. Schmidt |
| Abstract: | Using data on the valuation of Christmas gifts received by students in different fields at a German university, we investigate whether the endowment effect differs between students of economics and other respondents and whether it varies with the market price of the object under consideration.Our estimation results suggest that economics students have both, a significant lower WTP andWTA, indicating that existing studies on the efficiency loss of holiday gifts and experimental studies on the endowment effect that rely on data from economics students may be biased. The result further indicate that the endowment effect is independent of the market price of the object. |
| Keywords: | Loss aversion, endowment effect, Christmas presents, deadweight loss |
| JEL: | D01 D49 D61 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0075&r=exp |
| By: | Alan Manning; Farzad Saidi |
| Abstract: | A number of papers have recently argued that men and women have different attitudes andbehavioural responses to competition. Laboratory experiments suggest that these genderdifferences are very large but it is important to be able to map these findings into real worlddifferences. In this paper, we use performance pay as an indicator of competition in theworkplace and compare the gender gap in incidence of performance pay and earnings andwork effort under these contracts. Women are less likely to found in performance paycontracts but the gender gap is small. Furthermore, the effect of performance pay on earningsis modest and does not differ markedly by gender. Consequently the ability of these theoriesto explain the gender pay gap seems very limited. |
| Keywords: | Gender Pay gap, Performance Pay |
| JEL: | J31 J33 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0898&r=exp |
| By: | Steven Cantrell; Jon Fullerton; Thomas J. Kane; Douglas O. Staiger |
| Abstract: | The National Board for Professional Teaching Standards (NBPTS) assesses teaching practice based on videos and essays submitted by teachers. We compared the performance of classrooms of elementary students in Los Angeles randomly assigned to NBPTS applicants and to comparison teachers. We used information on whether each applicant achieved certification, along with information on each applicant's NBPTS scaled score and subscores, to test whether the NBPTS score was related to teacher impacts on student achievement. We found that students randomly assigned to highly-rated applicants performed better than students assigned to comparison teachers, while students assigned to poorly-rated applicants performed worse. Estimates were similar using data on pairs of teachers that were not randomly assigned. Our results suggest a number of changes that would improve the predictive power of the NBPTS process. |
| JEL: | I21 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14608&r=exp |
| By: | Felix Munoz-Garcia (School of Economic Sciences, Washington State University) |
| Abstract: | This paper examines the role of status acquisition as a motive for giving in voluntary contri- butions to public goods. In particular, every donor?s status is given by the di¤erence between his contribution and that of the other donor. Speci?cally, I show that contributors give more than in standard models where status is not considered, and their donation is increasing in the value they assign to status. In addition, players?contributions are increasing in the value that their opponents assign to status, re?ecting donors? intense competition to gain social status. Furthermore, I consider contributors?equilibrium strategies both in simultaneous and sequen- tial contribution mechanisms. Then, I compare total contributions in both of these mechanisms. I ?nd that the simultaneous contribution order generates higher total contributions than the sequential mechanism only when donors are su¢ ciently homogeneous in the value they assign to status. Otherwise, the sequential mechanism generates the highest contributions. |
| Keywords: | Public goods games, Status acquisition, Competition. |
| JEL: | C7 H41 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:munoz-2&r=exp |
| By: | Ed Hopkins; Tatiana Kornienko |
| Abstract: | Society often allocates valuable resources - such as prestigious positions, salaries, or marriage partners - via tournament-like institutions. In such situations, inequality affects incentives to compete and hence has a direct effect on equilibrium choices and hence material outcomes. We introduce a new distinction between inequality in initial endowments (e.g. ability, inherited wealth) and inequality of what one can obtain as rewards (e.g. prestigious positions, money). We show that these two types of inequality have opposing effects on equilibrium behavior and wellbeing. Greater inequality of rewards tends to hurt most people — both the middle class and the poor, — who are forced into greater effort. In contrast, greater inequality of endowments tends to benefit the middle class. Thus, which type of inequality is considered hugely affects the correctness of our intuitions about the implications of inequality. |
| Keywords: | inequality, endowments, rewards, relative position, ordinal rank, games, tournaments, dispersive order, star order. |
| JEL: | C72 D63 D62 D31 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:185&r=exp |
| By: | Alessandra Casella (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579, Economics Department, Columbia University - Columbia University); Shuky Ehrenberg (Yale Law School - Université Yale - New Haven); Andrew Gelman (Applied Statistics Center Columbia University - Columbia University); Jie Shen (Department of Statistics University of California - University of California - Irvine) |
| Abstract: | Democratic systems are built, with good reason, on majoritarian principles, but their legitimacy requires the protection of strongly held minority preferences. The challenge is to do so while treating every voter equally and preserving aggregate welfare. One possible solution is storable votes: granting each voter a budget of votes to cast as desired over multiple decisions. During the 2006 student elections at Columbia University, we tested a simple version of this idea: voters were asked to rank the importance of the different contests and to choose where to cast a single extra "bonus vote," had one been available. We used these responses to construct distributions of intensities and electoral outcomes, both without and with the bonus vote. Bootstrapping techniques provided estimates of the probable impact of the bonus vote. The bonus vote performs well: when minority preferences are particularly intense, the minority wins at least one of the contests with 15--30 percent probability; and, when the minority wins, aggregate welfare increases with 85--95 percent probability. When majority and minority preferences are equally intense, the effect of the bonus vote is smaller and more variable but on balance still positive. |
| Keywords: | Storable Votes, Referendums, Minorities, Majority Voting, Experiments |
| Date: | 2008–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00349037_v1&r=exp |