nep-exp New Economics Papers
on Experimental Economics
Issue of 2009‒03‒22
nineteen papers chosen by
Daniel Houser
George Mason University

  1. On the Conjunction Fallacy in Probability Judgment: New Experimental Evidence By Gary Charness; Dan Levin; Edi Karni
  2. An experimental investigation of why individuals conform By Basit Zafar
  3. Does Volatility matter? Expectations of price return and variability in an asset pricing experiment By Giulio Bottazzi; Giovanna Devetag; Francesca Pancotto
  4. Broken Promises: An Experiment By Gary Charness; Martin Dufwenberg
  5. A Shock Therapy Against the “Endowment Effect” By Dirk Engelmann; Guillaume Hollard
  6. Social welfare versus inequality aversion in an incomplete contract experiment By Marco Faravelli; Oliver Kirchkamp; Helmut Rainer
  7. Reference Points and Effort Provision By Abeler, Johannes; Falk, Armin; Götte, Lorenz; Huffman, David
  8. The State Street Mile: Age and Gender Differences in Competition-Aversion in the Field By Rod Garratt; Catherine Weinberger; Nicholas Johnson
  9. The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition By Uwe Dulleck; Rudolf Kerschbamer; Matthias Sutter
  10. Endogenous Group Formation and Public Goods Provision: Exclusion, Exit, Mergers, and Redemption By Gary Charness; Chun-Lei Yang
  11. Self-Signaling Versus Social-Signaling in Giving By Zachary Grossman
  12. Intercultural trust. An experiment in Austria and Japan By Robert Jiro Netzer; Matthias Sutter
  13. Cooperation and Competition in Intergenerational Experiments in By Gary Charness; MARIE-CLAIRE VILLEVAL
  14. Another hidden cost of incentives: the detrimental effect on norm enforcement By Andreas Fuster; Stephan Meier
  15. Does aversion to the sucker's payoff matter in public goods games? By Douadia Bougherara; Sandrine Costa; Gilles Grolleau; Lisette Ibanez
  16. On Inequity Aversion A Reply to Binmore and Shaked By Ernst Fehr; Klaus M. Schmidt
  17. Incentives to Exercise By Gary Charness; Uri Gneezy
  18. Salience and taxation: theory and evidence By Raj Chetty; Adam Looney; Kory Kroft
  19. Gender Differences in Risk Aversion and Ambiguity By Lex Borghans; Bart H.H. Golsteyn; James J. Heckman; Huub Meijers

  1. By: Gary Charness (University of California, Santa Barbara); Dan Levin; Edi Karni
    Abstract: This paper reports the results of a series of experiments designed to test whether and to what extent individuals succumb to the conjunction fallacy. Using an experimental design of Kahneman and Tversky (1983), it finds that given mild incentives, the proportion of individuals who violate the conjunction principle is significantly lower than that reported by Kahneman and Tversky. Moreover, when subjects are allowed to consult with other subjects, these proportions fall dramatically, particularly when the size of the group rises from two to three. These findings cast serious doubts about the importance and robustness of such violations for the understanding of real-life economic decisions.
    Keywords: Conjunction fallacy, representativeness bias, group consultation, incentives,
    Date: 2008–10–11
  2. By: Basit Zafar
    Abstract: Social interdependence is believed to play an important role in how people make individual choices. This paper presents a simple model constructed on the premise that people are motivated by their own payoff as well as by how their actions compare with those of other people in their reference group. I show that conformity of actions may arise either from learning about the norm (social learning), or from adhering to the norm because of image-related concerns (social influence). To disentangle the two empirically, I use the fact that image-related concerns can be present only if actions are publicly observable. The model predictions are tested in a "charitable contribution" experiment in which the actions and identities of the subjects are unmasked in a controlled and systematic way. Both social learning and social influence seem to play an important role in the subjects' choices. In addition, individuals gain utility simply by making the same choice as the reference group (social comparison) and change their contributions in the direction of the social norm even when their identities are hidden. Once the identities and contribution distributions of group members are revealed, individuals conform to the modal choice of the group. Moreover, I find that social ties (defined as subjects knowing one another from outside the experimental environment) affect the role of social influence. In particular, a low-contribution norm evolves that causes individuals to contribute less in the presence of people they know.
    Keywords: Human behavior ; Social choice
    Date: 2009
  3. By: Giulio Bottazzi; Giovanna Devetag; Francesca Pancotto
    Abstract: We present results of an experiment on expectation formation in an asset market. Participants to our experiment must provide forecasts of the stock future return to computerized utility-maximizing investors, and are rewarded according to how well their forecasts perform in the market. In the Baseline treatment participants must forecast the stock return one period ahead; in the Volatility treatment, we also elicit subjective confidence intervals of forecasts, which we take as a measure of perceived volatility. The realized asset price is derived from a Walrasian market equilibrium equation with non-linear feedback from individual forecasts. Our experimental markets exhibit high volatility, fat tails and other properties typical of real financial data. Eliciting confidence intervals for predictions has the effect of reducing price fluctuations and increasing subjects' coordination on a common prediction strategy.
    Keywords: Experimental economics; Expectations; Coordination; Volatility; Asset pricing
    JEL: C91 C92 D84 G12 G14
    Date: 2009–03–12
  4. By: Gary Charness (University of California, Santa Barbara); Martin Dufwenberg
    Abstract: We test whether promises per se are effective in enhancing cooperative behavior in a form of trust game. In a new treatment, rather than permitting free-form messages, we instead allow only a bare promise-only message to be sent (or not). We find that bare promises are much less effective in achieving good social outcomes than free-form messages; in fact, bare promise-only messages lead to behavior that is much the same as when no messages are feasible. Our design also permits us to test the predictions of guilt aversion against the predictions of lying aversion. Our experimental results provide evidence that mainly supports the guilt-aversion predictions, but we also find some support for the presence of lying aversion.
    Keywords: Behavioral economics, cheap talk, communication, cost-of-lying, credibility, guilt aversion, psychological game theory, promises,
    Date: 2008–08–06
  5. By: Dirk Engelmann (Royal Holloway, University of London); Guillaume Hollard (Paris School of Economics)
    Abstract: Simple exchange experiments have identified the fact that participants trade their endowment less frequently than standard demand theory predicts. List (2003) finds, however, that the most experienced dealers acting on a well functioning market are not subject to this “endowment effect”. Thus, it seems that a lot of market experience is needed to overcome the “endowment effect”. In order to understand the effect of market experience, we introduce a distinction between two types of uncertainty, choice uncertainty and trade uncertainty, which could both lead to an “endowment effect”. While List’s own explanation is related to choice uncertainty, we conjecture that trade uncertainty is important for the “endowment effect”. To test this conjecture, we design a simple experiment where the two treatments impact differently on trade uncertainty, while controlling for choice uncertainty. Supporting our conjecture, we find that “forcing” subjects to give away their endowment in a series of exchanges, eliminates the “endowment effect” in a subsequent test. We discuss why markets might not succeed in providing sufficient incentives for learning to overcome the “endowment effect”.
    Keywords: endowment effect; robustness; experimental economics
    JEL: C91 D12
    Date: 2009–02
  6. By: Marco Faravelli; Oliver Kirchkamp; Helmut Rainer
    Abstract: We explore experimentally how power asymmetries between partners affect relationship-specific investments. We find that on average players’ investments are larger than equilibrium investments. In contrast to social dilemma experiments, in our experiment preferences for social welfare and those for equality call for different actions. Surprisingly, even disadvantaged players care more for social welfare and less for equality. As a result social welfare increases but so does inequality. We then study conditions under which power-advantaged players give up power. Power-sharing can be successful in the experiment, even when it is not in a selfish world.
    Keywords: Experiments, Incomplete Contracts, Relationship-Specific Investment, Allocation of Power, Social Preferences.
    JEL: C91 D23 D86
    Date: 2009–02
  7. By: Abeler, Johannes; Falk, Armin; Götte, Lorenz; Huffman, David
    Abstract: A key open question for theories of reference-dependent references is what determines the reference point. One candidate is expectations: what people expect could affect how they feel about what actually occurs. In a real-effort experiment, we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision. We find that effort provision is significantly different between treatments in the way predicted by models of expectation-based reference-dependent preferences: if expectations are high, subjects work longer and earn more money than if expectations are low.
    Keywords: Disappointment; Expectations; Experiment; Loss Aversion; Reference Points; Risk Aversion
    JEL: C91 D01 D84 J22
    Date: 2009–03
  8. By: Rod Garratt (University of California, Santa Barbara); Catherine Weinberger (Institute for Social, Behavioral & Economics, UCSB); Nicholas Johnson
    Abstract: Gender differences in "competitiveness," previously documented in laboratory experiments, are hypothesized to play a role in a wide array of economic outcomes. The current paper provides evidence of competition-aversion in a natural setting somewhere between the simplicity of a laboratory experiment and the full complexity and ambiguity of a labor market. The "State Street Mile" race offers both male and female participants a choice between two different levels of competition. Large, systematic age and gender differences are observed in the relationship between true ability and the decision to enter the more competitive race. Overall, qualified women and older runners are far less likely than qualified young men to enter a competitive race with cash prizes. However, the fastest young women unanimously enter the competitive race. Therefore, while we confirm age and gender differences in competitiveness in our field setting, the economic consequences to capable young women are rather small.
    Keywords: competition-aversion, age, gender,
    Date: 2009–03–01
  9. By: Uwe Dulleck (QUT); Rudolf Kerschbamer (University of Innsbruck); Matthias Sutter (University of Innsbruck and University of Gothenburg)
    Abstract: Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only a minor effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated.
    Date: 2009–03–02
  10. By: Gary Charness (University of California, Santa Barbara); Chun-Lei Yang
    Abstract: We test a mechanism whereby groups are formed endogenously, through the use of voting. Once formed, groups play a public-goods game, where there are economies of scale: in two treatments the social value of an incremental contribution to the group account increases with the size of the group, but in the second treatment, the social value is capped once a certain group size is reached. Societies of nine people are initially formed randomly into three groups of three people who play the game for three periods. Individuals then learn about the average contribution of each individual (by ID number) in one's current own group, as well as the average contribution in other groups, and can decide whether to exit the group. Remaining group members choose whether to exclude any current members from the group; the new groups and 'free agents' then choose whether to merge with other existing groups and/or other free agents. We find a great degree of success for this mechanism. The average contribution rate is quite high in both treatments, but is modestly (albeit significantly) higher in the first treatment, when there is no cap on the social value of a contribution. In the first treatment, we see large and stable groups forming, but we see considerably more instability and smaller group sizes in the second treatment. The driving force appears to be the economies of scale combined with the awareness that bad behavior will result in ostracism, but in the Athenian sense of possible redemption. This redemption is a unique feature of our environment, with about one-third of the population becoming good citizens after initially being low contributors.
    Keywords: Endogenous group formation, Exclusion, Experiment, Merger, Ostracism, Public goods, Social efficiency, Voting,
    Date: 2008–09–29
  11. By: Zachary Grossman
    Abstract: Part of why people give is because doing so sends a positive signal about the giver. The intended audience may be another person or the giver herself, yet the relative importance of social-signaling versus self-signaling is unclear. Using the predictions of a model of a preference-signaling decision-maker, I separately test for social-signaling and self-signaling in an experimental dictator game in which, with some probability, the outcome is determined by chance. Lowering the probability that the dictator's choice will count while holding constant the recipient's information has little impact on behavior, but holding constant this probability while increasing the noisiness of the recipient's signal significantly reduces giving. This provides evidence of social-signaling, but not self-signaling and suggests that giving is largely tied to what it says to others, as opposed to the self.
    Keywords: charitable giving, altruism, dictator game, self-image, self-signaling, signaling, beliefsdependent preferences,
    Date: 2009–02–02
  12. By: Robert Jiro Netzer; Matthias Sutter
    Abstract: We show that the level of trust and reciprocity in an intercultural trust game experiment between Austrian and Japanese subjects differs from the results of an intracultural experiment run in the respective countries among compatriots. Austrian subjects show significantly higher levels of trust towards Japanese subjects than towards fellow countrymen. Japanese do not differentiate between Austrian or Japanese subjects. Japanese subjects are found to be less reciprocal than Austrian subjects. A post-experimental survey reveals differences in culture-specific dispositions between the two countries that can explain the country-specific differences.
    Keywords: intercultural experiment, intracultural experiment, trust game, Austria, Japan
    JEL: C91 C71
    Date: 2009–03
  13. By: Gary Charness (University of California, Santa Barbara); MARIE-CLAIRE VILLEVAL (CNRS, University of Lyon, IZA)
    Abstract: There is economic pressure towards the postponement of the retirement age, but employers are still reluctant to employ older workers. We investigate the comparative behavior of juniors and seniors in experiments conducted both onsite with the employees of two large firms and in a conventional aboratory environment with students and retirees. We show that seniors are no more risk averse than juniors and are typically more cooperative; both juniors and working seniors respond strongly to competition. The implication is that it may be beneficial to define additional incentives near the end of the career to motivate and retain older workers.
    Keywords: Age, performance, diversity, stereotypes, cooperation,
    Date: 2008–06–22
  14. By: Andreas Fuster; Stephan Meier
    Abstract: Monetary incentives are often considered as a way to foster contributions to public goods in society and firms. This paper investigates experimentally the effect of monetary incentives in the presence of a norm enforcement mechanism. Norm enforcement through peer punishment has been shown to be effective in raising contributions by itself. We test whether and how monetary incentives interact with punishment and how this in turn affects contributions. Our main findings are that free riders are punished less harshly in the treatment with incentives, and as a consequence, average contributions to the public good are no higher than without incentives. This finding ties to and extends previous research on settings in which monetary incentives may fail to have the desired effect.
    Keywords: Human behavior ; Social choice
    Date: 2009
  15. By: Douadia Bougherara; Sandrine Costa; Gilles Grolleau; Lisette Ibanez
    Abstract: A usual explanation to low levels of contribution to public goods is the fear of getting the sucker’s payoff (cooperation by the participant and defection by the other players). In order to disentangle the effect of this fear from other motives, we design a public good game where people have an assurance against getting the sucker’s payoff. We show that contributions to the public good under this ‘protective’ design are significantly higher and interact with expectations on other individuals' contribution to the public good. Some policy implications and extensions are suggested.
    Keywords: Experiments, Public good, Sucker’s payoff, Assurance
    JEL: C72 C91 H41
    Date: 2009
  16. By: Ernst Fehr; Klaus M. Schmidt (Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland; Department of Economics, University of Munich, Ludwigstrasse 28, D-80539 Munich, Germany)
    Abstract: In this paper we reply to Binmore and Shaked’s criticism of the Fehr-Schmidt model of inequity aversion. We put the theory and their arguments into perspective and show that their criticism is not substantiated. Finally, we briefly comment on the main challenges for future research on social preferences.
    Keywords: Experiments, other-regarding preferences, inequity aversion
    JEL: B41 C90
    Date: 2009–02
  17. By: Gary Charness (University of California, Santa Barbara); Uri Gneezy (UCSD)
    Abstract: Can incentives be effective when trying to encourage the development of good habits? We investigate the effect of paying people a non-trivial amount of money to attend an exercise facility a number of times during a one-month period. In two separate studies, we find that doing so leads to a large and significant increase in the average post-intervention attendance level relative to the control group. This result is entirely driven by the impact on people who did not previously attend the gym on a regular basis, as the average attendance rates for people who had already been using the gym regularly are either unchanged or diminished. In our second study, we also obtain biometric evidence that this intervention improves important health indicators such as weight, waist size, and pulse rate. Thus, even though personal incentives to exercise are already in place, it appears that providing financial incentive to attend the gym regularly for a month serves as a catalyst to get some people past the threshold of actually getting started with an exercise regimen. We argue that there is scope for financial intervention in habit formation, particularly in the area of health.
    Keywords: Exercise, Field experiment, Habit formation, Incentives,
    Date: 2008–08–22
  18. By: Raj Chetty; Adam Looney; Kory Kroft
    Abstract: This paper presents evidence that consumers underreact to taxes that are not salient and characterizes the welfare consequences of tax policies when agents make such optimization errors. The empirical evidence is based on two complementary strategies. First, we conducted an experiment at a grocery store posting tax inclusive prices for 750 products subject to sales tax for a three week period. Scanner data show that this intervention reduced demand for the treated products by 8 percent. Second, we find that state-level increases in excise taxes (which are included in posted prices) reduce alcohol consumption significantly more than increases in sales taxes (which are added at the register and are hence less salient). We develop simple, empirically implementable formulas for the incidence and efficiency costs of taxation that account for salience effects as well as other optimization errors. Contrary to conventional wisdom, the formulas imply that the economic incidence of a tax depends on its statutory incidence and that a tax can create deadweight loss even if it induces no change in demand. Our method of welfare analysis yields robust results because it does not require specification of a positive theory for why agents fail to optimize with respect to tax policies.
    Date: 2009
  19. By: Lex Borghans (Maastricht University); Bart H.H. Golsteyn (Maastricht University and IZA); James J. Heckman (University of Chicago and University College Dublin); Huub Meijers (Maastricht University)
    Abstract: This paper demonstrates gender differences in risk aversion and ambiguity aversion. It also contributes to a growing literature relating economic preference parameters to psychological measures by asking whether variations in preference parameters among persons, and in particular across genders, can be accounted for by differences in personality traits and traits of cognition. Women are more risk averse than men. Over an initial range, women require no further compensation for the introduction of ambiguity but men do. At greater levels of ambiguity, women have the same marginal distaste for increased ambiguity as men. Psychological variables account for some of the interpersonal variation in risk aversion. They explain none of the differences in ambiguity.
    Date: 2009–03–09

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