nep-exp New Economics Papers
on Experimental Economics
Issue of 2009‒01‒17
eleven papers chosen by
Daniel Houser
George Mason University

  1. Indenture as a Self-Enforced Contract Device : An Experimental Test By Alexander S. Kritikos; Jonathan H.W. Tan
  2. Fragility of Information Cascades: An Experimental Study using Elicited Beliefs By Frederic Koessler; Anthony Ziegelmeyer; Juergen Bracht; Eyal Winter
  3. The Effect of Rating Agencies on Herd Behaviour By Giovanni Ferri; Andrea Morone
  4. Investigating Discretionary Environmental Enforcement: a pilot experiment By Germani, Anna Rita; Morone, Andrea; Morone, Piergiuseppe
  5. Update formulas for split-plot and block designs By Arnouts H.; Goos P.
  6. Some Issues of Methods, Theories, and Experimental Designs By James C. Cox
  7. On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity By Fehr, Ernst; Brown, Martin; Zehnder, Christian
  8. Auction Fever: Theory and Experimental Evidence By Ehrhart, Karl-Martin; Ott, Marion; Abele, Susanne
  9. Auctions with Positive Synergies: Experimental Evidence By Chow, YuenLeng; Yavas, Abdullah
  10. Uncertainty effect revisited using physical lottery format By Ondřej Rydval; Andreas Ortmann; Sasha Prokosheva; Ralph Hertwig
  11. Saliency of Outside Options in the Lost Wallet Game By James C. Cox; Maros Servatka; Radovan Vadovic

  1. By: Alexander S. Kritikos; Jonathan H.W. Tan
    Abstract: We experimentally test the efficacy of indenture as a self-enforced contract device. In an indenture game, the principal signals the intention of payment-on-delivery, by tearing a banknote and giving the agent half of it as "prepayment"; the agent receives the completing half after delivering the service. By forward induction, cooperation is incentive-compatibly self-enforcing. The indenture performs very well, inducing a significantly higher level of cooperation than that in a three-stage centipede game, which we use to benchmark the natural rate of cooperation. The difference between cooperation rates in both games increases over time.
    Keywords: Cooperation, experiment, contracts, indenture, reciprocity
    JEL: C91 D64 J41
    Date: 2009
  2. By: Frederic Koessler (Paris School of Economics and CNRS); Anthony Ziegelmeyer (Max Planck Institute for Research into Economic Systems, Strategic Interaction Group, Jena, Germany); Juergen Bracht (University of Aberdeen Business School); Eyal Winter (Center for Rationality and Interactive Decision Theory, Hebrew University of Jerusalem)
    Abstract: This paper examines the occurrence and fragility of information cascades in laboratory experiments. One group of low informed subjects make predictions in sequence. In a matched pairs design, another set of high informed subjects observe the decisions of the first group and make predictions. According to the theory of information cascades (Bikhchandani, Hirshleifer, and Welch, 1992), if initial decisions coincide, an information cascade should occur: it is rational for subsequent players with low quality information to follow the observed pattern regardless of their private information. However, an information cascade should be fragile: it is always rational for subsequent players with high quality information to follow their private information. In line with existing experiments on information cascades, we find some evidence that low informed subjects follow the herd when it is rational, and this herding behavior occurs more frequently if there is a pronounced imbalance. The main finding of this paper is that information cascades are not fragile. We find strong evidence that highly informed subjects follow the herd regardless of their private information. In accordance with those observations we show, by explicitly eliciting subjects' beliefs about the state, that beliefs are not constant in the number of previous decisions that coincide, whether or not an information cascade already occurred. Subjects' behavior can be understood with a statistical model that allows for the possibility of errors in earlier decisions.
    Keywords: Information cascades, elicited beliefs, experimental economics
    JEL: C72 C92 D82
    Date: 2008–12–20
  3. By: Giovanni Ferri (University of Bari.); Andrea Morone (University of Bari.)
    Abstract: This paper purports to provide some evidence on the effect of rating agencies on herding in financial markets. By means of a laboratory experiment, we investigate the effect and interaction between private and public information. Previous experiments showed that lemmings behaviour can survive in a market context where information is private (Hey and Morone, 2004), and that an experimental market can be very volatile and not efficient in transmitting information (Alfarano et al., 2006). We study experimentally, if socially undesirable behaviour - that survives in a market contest - may be eliminated owing to the presence of rating agencies.
    Keywords: herd behaviour, informational cascades, rating agency, bubble
    JEL: C91 D82 D83
    Date: 2008–11
  4. By: Germani, Anna Rita; Morone, Andrea; Morone, Piergiuseppe
    Abstract: In this work, we conducted a laboratory experiment in order to test the findings of a theoretical environmental enforcement model played as a strategic game where the firm’s behavior is influenced by the course of actions discretionally undertaken by both the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Justice (DOJ). Our experimental findings suggest that the presence of the DOJ can be counterproductive in increasing social welfare, since it implies solely additional enforcement costs, which, in turn, might reduce the probability of conducting inspections by the EPA without affecting the probability of firm’s compliance.
    Keywords: classroom experiments; environmental enforcement; environmental economics
    JEL: Q50 O13 C90
    Date: 2009–01
  5. By: Arnouts H.; Goos P.
    Abstract: For the algorithmic construction of optimal experimental designs, it is important to be able to evaluate small modifications of given designs in terms of the optimality criteria at a low computational cost. In this article, we propose update formulas for evaluating the impact of changes to the levels of easy-to-change factors and hard-to-change factors in split-plot designs as well as the impact of a swap of points between blocks or whole plots in block designs or split-plot designs.
    Date: 2008–12
  6. By: James C. Cox
    Abstract: null
    Date: 2009–01
  7. By: Fehr, Ernst (University of Zurich); Brown, Martin (Swiss National Bank); Zehnder, Christian (Harvard Business School)
    Abstract: We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks.
    Keywords: Reputation; Reciprocity; Relational Contracts; Price Rigidity; Wage Rigidity
    JEL: C90 D82 E24 J30 J41
    Date: 2008–07–01
  8. By: Ehrhart, Karl-Martin (Universitaet Karlsruhe); Ott, Marion (Universitaet Karlsruhe); Abele, Susanne (Miami University, Department of Psychology)
    Abstract: It is not a secret that certain auction formats yield on average higher prices than others. The phenomenon that dynamic auctions are more likely to elicit higher bids than static one-shot auctions is often associated with the term ''auction fever.'' On a psychological level, we consider the so-called pseudo-endowment effect as largely responsible for peoples’ tendency to submit higher bids, potentially amplified by the source-dependence effect. The phenomenon of auction fever is replicated in an experimental investigation of different auction formats within a private values framework where bidders have private but incomplete knowledge of their valuation for a hypothetical good. We suggest this assumption to be more realistic than definite private values, as assumed in the traditional IPV model. An additional experimental investigation within the traditional IPV framework does not either reveal any indication for the appearance of auction fever. On the basis of our experimental observations we present a model of reference-dependent utility theory that comprehends the phenomenon by assuming that bidders' reference points are shifted by the pseudo-endowment and the source-dependence effect.
    Date: 2008–12–15
  9. By: Chow, YuenLeng; Yavas, Abdullah
    Abstract: In a standard auction, bidders bid more aggressively when the number of bidders increases. However, Krishna and Rosenthal (1996, Games and Economic Behavior) show that when bidders have multiple-unit demand that generates positive synergies, bidders bid less aggressively as the number of bidders increases. The first objective of this paper is to offer experimental evidence on this seemingly counter-intuitive theoretical prediction. Following the model of Krishna and Rosenthal, we design a simultaneous second-price sealed-bid auction for two objects with two types of bidders: single-object and multiple-object demand bidders. Our results show that bidders bid less aggressively with increased competition. The second objective is to investigate the effect of offering global bidders the option of bidding for both objects as a package as well as submitting individual bids for each object. Controlling for bidders' valuations, we find that offering this option to global bidders increases allocative efficiency and sellers' revenue.
    Keywords: Auction; Positive Synergies; Increased Competition; Package Bids
    JEL: D44 C91
    Date: 2008–12
  10. By: Ondřej Rydval (Max Planck Institute of Economics, Jena, Germany, and CERGE-EI, Prague, Czech Republic); Andreas Ortmann (CERGE-EI (a joint workplace of the Center for Economic Research and Graduate Education, Charles University, and the Economics Institute of the Academy of Sciences of the Czech Republic), Prague, Czech Republic); Sasha Prokosheva (CERGE-EI (a joint workplace of the Center for Economic Research and Graduate Education, Charles University, and the Economics Institute of the Academy of Sciences of the Czech Republic), Prague, Czech Republic); Ralph Hertwig (University of Basel, Switzerland)
    Abstract: We replicate three pricing tasks of Gneezy, List and Wu (2006) for which they document the so called uncertainty effect, namely that people value a binary lottery over non-monetary outcomes less than other people value the lottery’s worse outcome. Unlike the authors who implement a verbal lottery description, we use a physical lottery format which rules out any misinterpretation of the lottery structure. Contrary to Gneezy, List and Wu, we systematically observe that subjects’ willingness to pay for the lottery is significantly higher than other subjects' willingness to pay for the lottery’s worse outcome.
    Keywords: Risky choice, framing, experiments, task ambiguity
    JEL: C81 C91 C93 D83
    Date: 2009–01–06
  11. By: James C. Cox; Maros Servatka; Radovan Vadovic
    Abstract: null
    Date: 2009–01

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