nep-exp New Economics Papers
on Experimental Economics
Issue of 2009‒06‒03
sixteen papers chosen by
Daniel Houser
George Mason University

  1. On the Conjunction Fallacy in Probability Judgment: New Experimental Evidence Regarding Linda By Edi Karni
  2. Patience or Fairness? Analyzing Social Preferences in Repeated Games By John Duffy; Felix Munoz-Garcia
  3. Rewards and Punishments in Bargaining By Svetlana Pevnitskaya; Dmitry Ryvkin
  4. Focused Power: Experimental Manifestation of the Shapley-Shubik Power Index By Chris Geller; Jamie Mustard; Ranya Shahwan
  5. Incentivising trust By Pamela Lenton; Paul Mosley
  6. Stochastic Deadlines: A Comparison of Parallel Multiple Auction Designs By Sascha Füllbrunn; Tim Hoppe
  7. A Novel Computerized Real Effort Task Based on Sliders By David Gill; Victoria Prowse
  8. Present-Biased Preferences and Credit Card Borrowing By Meier, Stephan; Sprenger, Charles
  9. Betting on Machina's reflection example: an experiment on ambiguity By L’Haridon, Olivier; Placido, Lætitia
  10. Conflict, Settlement, and the Shadow of the Future By Michael McBride; Stergios Skaperdas
  11. Teaching Opportunity Cost in an Emissions Permit Experiment By Mandell, Svante; Holt, Chrles; Myers, Erica; Burtraw, Dallas; Wråke, Markus
  12. An experimental investigation of imprecision attitude and its relation with risk attitude and impatience By Michèle Cohen; Jean-Marc Tallon; Jean-Christophe Vergnaud
  13. Risk Attitude, Beliefs Updating and the Information Content of Trades: An Experiment By BISIÈRE, Christophe; DÉCAMPS, Jean-Paul; LOVO, Stefano
  14. Different methods to define utility functions yield different results and engage different neural processes By Heldmann, Marcus; Vogt, Bodo; Heinze, Hans-Jochen; Münte, Thomas
  15. Auctioning Greenhouse Gas Emissions Permits in Australia By Regina Betz; Stefan Seifert; Peter Cramton; Suzi Kerr
  16. Preempting versus Postponing: the Stealing Game By Andrea Gallice

  1. By: 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.
    Date: 2009–05
  2. By: John Duffy; Felix Munoz-Garcia
    Abstract: This paper investigates how the introduction of social preferences affects players` equilibrium behavior in both one-shot and infinitely repeated versions of the Prisoner`s Dilemma game. We first show that defection survives as the unique equilibrium of the stage game if at least one player is not too concerned about inequity aversion. Second, we demonstrate that in the infinitely repeated version of the game, fairness concerns operate as a `substitute` for time discounting, as fairness helps sustain cooperation for lower discount factors. We then extend our results to more general simultaneous-move games, and more general preferences. Finally, we point out the implications of our findings for the design and analysis of experiments involving repeated games. In particular, repeated game equilibria which are thought to be supported by sufficiently large discount factors, may in fact be sustained by a combination of discounting and social preference parameters, an observation that may help rationalize recent experimental findings.
    JEL: C72 C73 H43 D91
    Date: 2009–05
  3. By: Svetlana Pevnitskaya (Department of Economics, Florida State University); Dmitry Ryvkin (Department of Economics, Florida State University)
    Abstract: Bargaining fails when participants do not reach an agreement despite an opportunity for Pareto improvement. Numerous experimental studies found that in asymmetric bargaining, where one party proposes the terms and the other can accept or reject the proposal, low offers are typically rejected. We conduct an experiment where upon acceptance the responding party can apply costly rewards and/or punishments, and find that the likelihood of acceptance increases. The least generous offers have the highest chance to be accepted in the presence of punishment alone. Proposers are most generous when responders can both reward and punish, and offer least (even compared to the baseline) when responders can only reward. The optimal scheme of rewards and punishments varies with the population of proposers, indicating that the appropriate scheme can potentially compensate for a mismatch between proposers' and responders' social norms.
    Keywords: bargaining, rewards and punishments, experimental economics, ultimatum
    JEL: C78 C90
    Date: 2009–04
  4. By: Chris Geller (Deakin University); Jamie Mustard (Deakin University); Ranya Shahwan
    Abstract: Experiments evaluate the fit of the Shapley-Shubik Power Index to a controlled human environment. Subjects with differing votes divide a fixed purse by majority rule in online chat rooms under supervision. Earnings serve as a measure of power. Chat rooms and processes for selecting subjects reduce or eliminate extraneous political forces, leaving logrolling as the primary political force. Initial proposals by subjects for division of the purse allow measurement of effects from focal points and transaction costs. Net results closely fit the Shapley-Shubik Power Index.
    Keywords: Voting, Power Index, Focal Point, Shapley-Shubik, Experiment
    JEL: C71 C78 C92
    Date: 2007–11–23
  5. By: Pamela Lenton (Department of Economics, The University of Sheffield); Paul Mosley (Department of Economics, The University of Sheffield)
    Abstract: We argue that trust can be incentivised by measures which increase the ability of trusters to protect themselves against risk. We work within the framework originally established by Berg, Dickhaut and McCabe (1995) in which trust is measured experimentally as the ability to generate reciprocity in response to an initial offer of money within a two-person game. An incentive is conveyed both by means of variations in the multiplier applied to the first player’s initial offer and by giving the first player the opportunity to insure themselves against the possibility that the second player will fail to reciprocate their initial offer. Measured trust is strongly responsive to both these incentives. Thus third parties have the ability to influence the outcome of the game, not only, as in the analysis of Charness et al (2008), by punishing failure to reciprocate and rewarding ‘good’ initial offers, but also by offering protection which strengthens the first player’s risk efficacy, or ratio of assets to risk.
    Keywords: Experimental economics; Game theory; Risk; Reciprocity
    JEL: A13 C70 C73 D81
    Date: 2009–03
  6. By: Sascha Füllbrunn (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Tim Hoppe (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: In online auction platforms, offers are listed side by side and may end at the same point in time. While theoretical studies predict efficient coordination across auctions, experimental and empirical studies observe efficiency losses, i.e. goods remain unsold. In order to mitigate this coordination failure, we contribute to the literature of auction design by introducing a stochastic deadline in parallel multiple auctions. In these parallel Candle Auctions, several auctions start at the same time but end (separately) due to a stochastic process. We think that the stochastic ending rule decreases the coordination failure because the threat of a sudden termination forces the bidders to coordinate across auctions early in the auction process. Indeed, we find that coordination is less pronounced in parallel Candle Auctions resulting in higher efficiency
    Keywords: Simultaneous Auctions, Internet, Auction Design, Experimental Economics
    JEL: D44 C92
    Date: 2009–05
  7. By: David Gill; Victoria Prowse
    Abstract: In this note, we present a novel computerized real effort task based on moving sliders across a screen which overcomes many of the drawbacks of existing real effort tasks. The task was first developed and used by us in Gill and Prowse (2009). We outline the design of our “slider task”, describe its advantages compared to existing real effort tasks and provide a statistical analysis of the behavior of subjects undertaking the task. We believe that the task will prove valuable to researchers in designing future real effort experiments.
    Keywords: Real effort task, Slider task, Design of laboratory experiments, Learning and time effects, Individual heterogeneity
    JEL: C90 C91
    Date: 2009
  8. By: Meier, Stephan (Columbia University); Sprenger, Charles (University of California, San Diego)
    Abstract: Some individuals borrow extensively on their credit cards. This paper tests whether present-biased time preferences correlate with credit card borrowing. In a field study, we elicit individual time preferences with incentivized choice experiments, and match resulting time preference measures to individual credit reports and annual tax returns. The results indicate that present-biased individuals are more likely to have credit card debt, and have significantly higher amounts of credit card debt, controlling for disposable income, other socio-demographics, and credit constraints.
    Keywords: time preferences, dynamic inconsistency, credit card borrowing, field experiment
    JEL: D12 D14 D91 C93
    Date: 2009–05
  9. By: L’Haridon, Olivier; Placido, Lætitia
    Abstract: In a recent paper, Machina (2008) suggested choice problems in the spirit of Ellsberg (1961) which challenge tail-separability, an implication of Choquet Expected Utility (CEU) to a similar extent as the Ellsberg paradox challenged the sure-thing principle implied by Subjective Expected Utility (SEU). We have tested choice behavior for bets on one of Machina’s choice problems, the reflection example. Our results indicate that tail-separability is violated by a large majority of subjects (over 70% of the sample). These empirical findings complement the theoretical analysis of Machina (2008) and, together, they confirm the need for new approaches in the analysis of ambiguity for decision making.
    Keywords: ambiguity; Choquet expected utility; experimental economics
    JEL: C90 D81
    Date: 2008–10–01
  10. By: Michael McBride (Department of Economics, University of California-Irvine); Stergios Skaperdas (Department of Economics, University of California-Irvine)
    Abstract: In many instances of potential violent or non-violent conflict, the future strategic positions of adversaries are very different when there is open conflict than when there is settlement. Then, we show that as the future becomes more important, open conflict becomes more likely than settlement. We discuss the applicability of this finding in war, litigation, and other settings, and test it it in a laboratory experiment. We find that subjects are more likely to engage in risky conflict as the future becomes more important.
    Keywords: Conflict; Llitigation; Property rights; Folk theorem
    JEL: C72 C91 D01 D74
    Date: 2009–05
  11. By: Mandell, Svante (Swedish National Road & Transport Research Institute (VTI)); Holt, Chrles (Department of Economics, University of Virginia); Myers, Erica (Resources for the Future); Burtraw, Dallas (Resources for the Future); Wråke, Markus (IVL Swedish Environmental Institute)
    Abstract: This paper describes an individual choice experiment that can be used to teach students how to correctly account for opportunity costs in production decisions. Students play the role of producers who require a fuel input and an emissions permit for production. Given fixed market prices, they make production quantity decisions on the basis of their costs. Permits have a constant price throughout the experiment. In one treatment, students have to purchase both a fuel input and an emissions permit for each production unit. In a second treatment, they receive permits for free, and any unused permits are sold on their behalf at the permit price. If students correctly incorporate opportunity costs, they will have the same supply function in both treatments. This experiment motivates classroom discussion of opportunity costs and emissions permit allocation under cap-and-trade schemes. The European Union Emissions Trading Scheme provides a relevant example for classroom discussion, as industry earned significant windfall profits from free allocation of emissions allowances in the early phases of the program.
    Keywords: opportunity cost; emissions permits; allowance allocation; classroom experiments
    JEL: A22 C90 Q52
    Date: 2009–05–25
  12. By: Michèle Cohen (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jean-Marc Tallon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jean-Christophe Vergnaud (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: We report in this paper the result of three experiments on risk, ambiguity and time attitude. The first two differed by the population considered (students vs general population) while the third one used a different protocol and concerned students and portfolio managers. We find quite a lot of heterogeneity at the individual level. Of principal interest was the elicitation of risk, time and ambiguity attitudes and the relationship among these (model free) measures. We find that on the student population, there is essentially no correlation. A non negligible fraction of the population behaves in an extremely cautions manner in the risk and ambiguity domain. When we drop this population from the sample, the correlation between our measures is also non significant. We also raise three questions linked to measurement of ambiguity attitudes that come out from our data sets.
    Keywords: Experiments, risk aversion, impatience, imprecision aversion.
    Date: 2009–03
  13. By: BISIÈRE, Christophe; DÉCAMPS, Jean-Paul; LOVO, Stefano
    JEL: G14 D82
    Date: 2009–05
  14. By: Heldmann, Marcus (Otto-von-Guericke University Magdeburg); Vogt, Bodo (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Heinze, Hans-Jochen (Otto-von-Guericke University Magdeburg); Münte, Thomas (Otto-von-Guericke University Magdeburg)
    Abstract: Although the concept of utility is fundamental to many economic theories, up to now a generally accepted method determining a subject’s utility function is not available. We investigated two methods that are used in economic sciences for describing utility functions by using response-locked event-related potentials in order to assess their neural underpinnings. For defining the certainty equivalent (CE), we used a lottery game with probabilities of 0.5, for identifying the subjects’ utility functions directly a standard bisection task was applied. Although the lottery tasks’ payoffs were only hypothetical, a pronounced negativity was observed resembling the error related negativity (ERN) previously described in action monitoring research, but this occurred only for choices far away from the indifference point between money and lottery. By contrast, the bisection task failed to evoke an ERN irrespective of the responses’ correctness. Based on these findings we are reasoning that only decisions made in the lottery task achieved a level of subjective relevance that activates cognitive-emotional monitoring. In terms of economic sciences, our findings support the view that the bisection method is unaffected by any kind of probability valuation or other parameters related to risk and in combination with the lottery task can, therefore, be used to differentiate between payoff and probability valuation.
    Keywords: Utility function; neuroeconomics; error-related negativity; executive functions; cognitive electrophysiology; lottery,bisection
    Date: 2009–05
  15. By: Regina Betz; Stefan Seifert; Peter Cramton (Economics Department, University of Maryland); Suzi Kerr
    Abstract: The allocation of permits is an important design aspect of an emissions trading scheme. Traditionally, governments have favoured a free allocation of greenhouse gas permits based on individual historical emissions (“grandfathering”) or industry benchmark data. As, particularly in the EU, the free allocation of permits has proven complex and inefficient and the distributional implications are politically difficult to justify, auctioning emissions permits has become more popular. The EU is now moving to auctioning more than 50% of all permits in 2013 and in the U.S. the Regional Greenhouse Gas Initiative (RGGI) has started with auctioning 100%. Another case in point is the Austra-lian proposal for a Carbon Pollution Reduction Schemes (CPRS) which provides for auctioning a significant share of total permits. This paper discusses some important theoretical and practical aspects of designing an auction for allocating emissions per-mits in Australia. The specific design details proposed here have been adopted by the Australian Government in their CRPS White Paper. Particularly interesting is the pro-posed structure of auctioning multiple emissions units of different vintages simultane-ously.
    Keywords: Auctions, carbon auctions, greenhouse gas auctions
    JEL: D44
    Date: 2009
  16. By: Andrea Gallice
    Abstract: We present an endogenous timing game of action commitment in which play- ers can steal from each other parts of a homogeneous and perfectly divisible pie (market). We show how the incentives to preempt or to follow the rivals radi- cally change with the number of players involved in the game. In the course of the analysis we also introduce, discuss and apply the concept of pu-dominance, a generalization of the risk-dominance criterion to games with more than two players.
    Keywords: stealing, endogenous timing games, pu-dominance.
    JEL: C72 C73
    Date: 2008–06

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