nep-exp New Economics Papers
on Experimental Economics
Issue of 2009‒10‒24
nine papers chosen by
Daniel Houser
George Mason University

  1. Distinguishing trust from risk: an anatomy of the investment game By Daniel Houser; Daniel Schunk; Joachim Winter
  2. The Impact of Empowering Investors on Trust and Trustworthiness By Kiridaran Kanagaretnam; Stuart Mestelman; Khalid Nainar; Mohamed Shehata
  3. Sequential versus simultaneous contributions to public goods: Experimental evidence By Simon Gaechter; Daniele Nosenzo; Elke Renner; Martin Sefton
  4. Herding and Contrarian Behavior in Financial Markets: An Experimental Analysis By Park, A.; Sgroi, D.
  5. Herding, Contrarianism and Delay in Financial Market Trading By Park, A.; Sgroi, D.
  7. A General Treatment of Non-Response Data From Choice Experiments Using Logit Models By Kelvin Balcombe; Iain Fraser
  8. Global Security Policies Against Terrorism and the Free Riding Problem: An Experimental Approach By Nathalie Colombier; David Masclet; Daniel Mirza; Claude Montmarquette
  9. Anomalies in Tournament Design: The Madness of March Madness By Robert Baumann; Victor Matheson; Cara Howe

  1. By: Daniel Houser; Daniel Schunk; Joachim Winter
    Abstract: The role of trust in promoting economic activity and societal development has received considerable academic attention by social scientists. A popular way to measure trust at the individual level is the so-called “investment game” (Berg, Dickhaut, and McCabe, 1995). It has been widely noted, however, that risk attitudes can also affect decisions in this game, and thus in principle confound inferences about trust. We provide novel evidence shedding light on the role of risk attitudes for trusting decisions. To the best of our knowledge our data are the first rigorous evidence that (i) aggregate investment distributions differ significantly between trust and risk environments, and (ii) risk attitudes predict individual investment decisions in risk games but not in the corresponding trust games. Our results are convergent evidence that trust decisions are not tightly connected to a person’s risk attitudes, and they lend support to the “trust” interpretation of decisions in investment games.
    Date: 2009–10
  2. By: Kiridaran Kanagaretnam; Stuart Mestelman; Khalid Nainar; Mohamed Shehata
    Abstract: This paper uses laboratory mechanism design in an investment environment to examine the impact of empowering investors with the right to veto the investee’s profit distribution decision on the level of trust and trustworthiness. One of the key findings is that the empowerment of investors through both costless and costly vetoes significantly increases trust by over 30% in both cases. Interestingly, we observe a comparable pattern when the power to veto is removed. Analyses of veto decisions indicate that empowering investors increases both trust and trustworthiness without an undue abuse of the power to veto and that the veto decisions are largely driven by unfair responses, consistent with the theory on inequity aversion.
    Keywords: Empowerment; Veto; Investment; Trust; Trustworthiness; Reciprocity
    JEL: C70 C91 D63 D81 D82
    Date: 2009–09
  3. By: Simon Gaechter (University of Nottingham); Daniele Nosenzo (University of Nottingham); Elke Renner (University of Nottingham); Martin Sefton (University of Nottingham)
    Abstract: We report an experiment comparing sequential and simultaneous contributions to a public good in a quasi-linear two-person setting. In one parameterization we find that overall provision is lower under sequential than simultaneous contributions, as predicted, but the distribution of contributions is not as extreme as predicted and first movers do not attain their predicted firstmover advantage. In another parameterization we again find that the distribution of contributions is not as predicted when the first mover is predicted to free ride, but we find strong support for equilibrium predictions when the second mover is predicted to free ride. These results can be explained by second movers' willingness to punish first movers who free ride, and unwillingness to reward first movers who contribute.
    Keywords: Public Goods; Voluntary Contributions; Sequential Moves; Experiment
    JEL: C92 H41
    Date: 2009–09
  4. By: Park, A.; Sgroi, D.
    Abstract: We are the first paper to analyze and confirm the existence and extent of rational informational herding and rational informational contrarianism in a financial market experiment, and to compare and contrast these with the equivalent irrational phenomena. In our study, subjects generally behave according to benchmark rationality. Traders who should herd or be contrarian in theory are the significant source of both within the data. Correcting for subjects who chose not to trade at least once (an irrational action in itself), increases our ability to predict herding or contrarian behavior considerabl.
    Keywords: Herding, Contrarianism, Informational Efficiency, Experiments
    JEL: C91 D82 G14
    Date: 2009–10–12
  5. By: Park, A.; Sgroi, D.
    Abstract: Herding and contrarian behavior are often-cited features of real-world financial markets. Theoretical models of continuous trading that study herding and contrarianism, however, usually do not allow traders to choose when to trade or to trade more than once. We present a large-scale experiment to explore these features within a tightly controlled laboratory environment. Herding and contrarianism are significantly more pronounced than in compa- rable studies that do not allow traders to time their decisions. Traders with extreme information tend to trade earliest, followed by those with information conducive to contrarianism, while those with the theoretical potential to herd delay the most.
    Keywords: Herding, Contrarianism, Endogenous-time Trading, Experiments
    JEL: C91 D82 G14
    Date: 2009–10–12
  6. By: Heffetz, Ori; Shayo, Moses
    Abstract: Elementary consumer theory assumes that prices affect demand only because they affect the budget constraint (BC). By contrast, several models suggest that prices can affect demand through other channels (e.g. because they signal quality). This alternative conjecture is consistent with evidence from marketing studies. However, neither theory nor evidence is informative regarding the magnitude of non-BC effects. The key econometric challenge arises from the fact that a change in prices typically also changes the BC. This paper uses a lab and a field experiment to disentangle BC from non-BC effects of prices on demand. In our lab experiment we find that, consistent with marketing evidence, prices positively affect stated willingness to pay. However, when examining actual demand, non-BC price elasticities are considerably smaller than BC price elasticities and are often statistically insignificant. Further, these non-BC elasticities do not increase with product uncertainty. Finally, we do not detect any non-BC effects in our field experiment.
    Keywords: consumer behavior, demand, price, quality signals, experiments, Demand and Price Analysis, Food Consumption/Nutrition/Food Safety, Marketing, D01, D12, D8, M31,
    Date: 2009–07
  7. By: Kelvin Balcombe; Iain Fraser
    Abstract: A new approach is developed for the treatment of 'Don't Know' (DK) responses, within Choice Experiments. A DK option is motivated by the need to allow respondents the opportunity to express uncertainty. Our model explains a DK using an entropy measure of the similarity between options given to respondents within the Choice Experiment. We illustrate our model by applying it to a Choice Experiment examining consumer preferences for nutrient contents in food. We find that similarity between options in a given choice set does explain the tendency for respondents to report DK.
    Keywords: Choice Experiment; Respondent Uncertainty; Bayesian Methods
    JEL: C35 I18 Q18
    Date: 2009–10
  8. By: Nathalie Colombier; David Masclet; Daniel Mirza; Claude Montmarquette
    Abstract: The World Trade Center attack has shed light on the urgent need to implement preventing measures against terrorism and to enhance cooperation in the global security system for all countries. However, international coordination cannot be taken for granted. It is often ineffective and likely to fail for several reasons. Perhaps the more prominent reason to explain failure in coordination is that collective actions against terrorism may suffer from the well known free riding problem (Sandler and Enders, 2004). In this paper we experimentally investigate cooperation dilemma in counterterrorism policies by measuring to what extent international deterrence policy may suffer from free riding. In our game, contributions to the group account do not aim to increase the production of the public good but instead seek to decrease the probability that a stochastic event destroys the good. A country could choose to free ride by investing nothing in the international deterrence policy and instead invest all its resources in its own national protection or even choose to ignore totally terrorism by investing on alternative projects. We also look at the effects of institutions that allow sanctioning and rewarding of other countries to facilitate coordination on deterrence policy. We find that, in absence of institutional incentives and after controlling for risk aversion, most of countries defect by investing very weakly in collective actions against terrorism while largely investing to protect themselves. In contrast, the introduction of punishment/reward incentive systems improves significantly the contribution level to the collective security account. <P>L’attentat qui a frappé le World Trade Center a fait la lumière sur l’urgence de mettre en œuvre des mesures préventives contre le terrorisme et d’améliorer la collaboration au sein du système de sécurité mondial en faisant intervenir tous les pays. Toutefois, on ne peut tenir la coordination internationale pour acquise car elle est souvent inefficace et risque d’échouer pour plusieurs raisons. L’échec de la coordination s’explique peut-être de façon plus marquée par le fait que les actions collectives contre le terrorisme sont susceptibles de souffrir d’un problème bien connu appelé resquillage (Sandler et Enders, 2004). Dans le présent document, nous examinons au moyen d’expériences le dilemme au sujet de la collaboration qui est posé par les politiques contre le terrorisme et nous tentons d’établir dans quelle mesure la politique internationale de dissuasion peut souffrir du phénomène de resquillage. Dans le cadre de notre jeu, les contributions au compte collectif ne visent pas à augmenter la production du bien public, mais plutôt à diminuer la probabilité qu’un événement stochastique détruise le bien en question. Un pays pourrait choisir de resquiller, soit en n’investissant pas dans la politique internationale de dissuasion, mais en utilisant plutôt toutes ses ressources pour sa protection nationale. Il pourrait aussi choisir d’ignorer totalement le terrorisme et d’investir dans certains autres projets. Nous nous penchons aussi sur l’influence qu’exercent les organismes qui permettent de sanctionner ou de récompenser les autres pays dans le but de faciliter la coordination en matière de politique de dissuasion. Nous constatons que, en l’absence d’encouragements institutionnels et une fois l’aversion à l’égard du risque maîtrisée, la plupart des pays font défection en investissant très peu dans les actions collectives contre le terrorisme et beaucoup dans leur propre protection. Par contre, l’introduction de mécanismes d’encouragement axés sur les punitions ou les récompenses améliore considérablement l’ampleur de la participation au compte collectif pour la sécurité.
    Keywords: Design of experiments, experimental economics, terrorism, conflicts,public economics., Structure des expériences, économie expérimentale, terrorisme, conflits, économie du secteur public.
    JEL: D72 C91
    Date: 2009–10–01
  9. By: Robert Baumann (Department of Economics, College of the Holy Cross); Victor Matheson (Department of Economics, College of the Holy Cross); Cara Howe (Department of Economics, College of the Holy Cross)
    Abstract: Tournament design is of crucial importance in competitive sports. The primary goal of effective tournament design is to provide incentives for the participants to maximize their performance both during the tournament and in the time period leading up to the tournament. In spectator sports, a secondary goal of tournament design is to also promote interesting match ups that generate fan interest. Seeded tournaments, in general, promote both goals. Teams or individuals with strong performances leading up to a tournament receive higher seeds which increase their chances of progressing further in the tournament. Furthermore, seeding ensures that the strongest teams or players are most likely to meet in the final rounds of the tournament when fan interest is at its peak. Under some distributions of team or player skill, however, a seeding system can introduce anomalies that could affect incentives. Our analysis of the NCAA men’s basketball tournament uncovers such an anomaly. The seeding system in this tournament gives teams with better success in the regular season more favorable first round match ups, but the tournament is not reseeded as the games progress. Therefore, while higher seeds progress to the 2nd round of the tournament at uniformly higher rates than lower seeds, this relationship breaks down in later rounds. We find that 10th and 11th seeds average more wins and typically progress farther in the tournament than 8th and 9th seeds. This finding violates the intended incentive structure of seeded tournaments.
    Keywords: basketball, tournament design, sports, NCAA
    JEL: L83 D02
    Date: 2009–10

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