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on Experimental Economics |
| By: | Omar Al-Ubaydli; John A. List; Michael K. Price |
| Abstract: | This study explores empirically the price dynamics within two distinct market institutions – a double oral auction, which resembles modern asset markets, and a bilateral exchange market, which represents markets that have existed for centuries. To provide a theoretical basis to our investigation, we test and compare the excess supply model (Walras (1874, 1877, 1889, 1896)) and the excess rent model (Smith (1962, 1965)) in both market institutions. Our approach is unique in that we make use of appropriate demand and supply systems coupled with randomization of the main treatment variable to discriminate between the theories. All previous efforts, including Smith's (1965) seminal experiments, use designs that cannot appropriately parse the models. We report several insights, perhaps most importantly, we consistently reject the Walrasian model in favor of the excess rent model, regardless of market institution. This finding has important implications both positively and normatively. |
| JEL: | C9 C91 C92 D01 D02 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16319&r=exp |
| By: | Jason Aimone (George Mason University); Laurence R. Iannaccone (Chapman University); Michael D. Makowsky (Department of Economics, Towson University) |
| Abstract: | How and why do groups form? In many cases, group formation is endogenous to the actions that individual members take and the norms associated with these actions. In this paper, we conduct an experiment that allows groups to form endogenously in the context of the classic voluntary contribution mechanism public goods game. We identify unproductive costs – “sacrifice” – as a mechanism for endogenous group formation, a result which is consistent with the “sacrifice and stigma” theory of religious groups. We find that changes in relative prices (between private and public goods) act to screen out free-riders, subjects who choose high-sacrifice groups contribute more to the public good once in these groups, and moderate welfare gains are available to those who voluntarily incur unproductive costs. |
| Keywords: | Endogenous Group Formation, Laboratory Experiment, Free Riding, Public Goods Game, Voluntary Contribution Mechanism, Sacrifice, Unproductive Costs. |
| JEL: | C92 D71 H41 Z12 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2010-15&r=exp |
| By: | Ullberg, Eskil (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology) |
| Abstract: | The question of how prices on patents rights should be determined in impersonal exchanges is examined in a laboratory environment. Dynamic gains from such organized trade with public prices are recorded. The experiment introduces a competitive market with impersonal exchange mechanisms and prices in the traditionally hierarchical and personal exchange of patents. A tradable linear contract (fixed fee plus royalty)is investigated with three mechanism designs for demand-side bidding and two levels of presumed legal validity of the underlying patent. A “trader” can split contracts useful for multiple “industries,” creating dynamic gains, potentially increasing the use of technology in the economic system. Previous research on licensing has mostly been limited to one-dimensional auction mechanisms or static environments. The results indicate that agents appear to price the blocking value in the fixed fee and the investment value, net what is paid in fixed, in the royalty component, supporting a proposed theory of prices. Risks are thereby shifted from the invention to the consumer by means of this producer market, increasing the incentives for investment in invention, potentially resulting in a more competitive technology being developed and a more efficient economic system. The results give indications on proper integration of information and rules for mechanisms for organized market on patents with transparent prices. It also shows that intermediaries (traders) are critical to achieve dynamic gains from the system as are high presumed validity of patents. |
| Keywords: | patents; trade; licensing; intellectual property; experiments |
| JEL: | D02 D23 L14 L24 O32 O34 |
| Date: | 2010–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0230&r=exp |
| By: | Ullberg, Eskil (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology) |
| Abstract: | The patent system makes organized markets in patents with transparent prices possible. Such prices are here investigated as “signals” for inventors and innovators alike ofv aluable “technology areas”, in an experimental study. They inform decisions of specialized “firms” on allocation of resources for invention given a search space of induced technology values. The traditional hierarchical model of coordinating invention and innovation in a vertically integrated firm is replaced by coordination of these activities among specialized firms through a market with prices. The experimental study builds on a study focusing on price mechanisms with exogenous technology values to a study of an economic environment with “endogenous” technology values. The results suggest that coordination clearly takes place but differs considerably between the institutions and patent validity tested (a 3 x 2 design). As with the price study, demand-side bidding in both dimensions of the linear contract appears to yield the broadest search scope, and thus the best chances for the allocation of resources for invention. Multiple end-states are observed, especially for institutions with less demand-side bidding, indicating imprecise price signals for institutions similar to today’s personal exchange. Coordination with prices appears to increase the dynamic gains of the patent system through price information to reduce or better inform about the risk in investments in new technology. |
| Keywords: | patents; intellectual property; trade; licensing; experiments |
| JEL: | D02 D23 L14 L24 O32 O34 |
| Date: | 2010–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0231&r=exp |
| By: | Timothy N. Cason; William A. Masters; Roman M. Sheremeta |
| Abstract: | This experiment compares the performance of two contest designs: a standard winnertake- all tournament with a single fixed prize, and a novel proportional-payment design in which that same prize is divided among contestants by their share of total achievement. We find that proportional prizes elicit more entry and more total achievement than the winner-take-all tournament. The proportional-prize contest performs better by limiting the degree to which heterogeneity among contestants discourages weaker entrants, without altering the performance of stronger entrants. These findings could inform the design of contests for technological and other improvements, which are widely used by governments and philanthropic donors to elicit more effort on targeted economic and technological development activities. |
| Keywords: | performance pay, tournament, piece rate, tournament design, contest, experiments, risk aversion, feedback, gender |
| JEL: | C72 D72 J33 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1231&r=exp |
| By: | Timothy N. Cason; Karthik N. Kannan; Ralph Siebert |
| Abstract: | Theoretical models of information asymmetry have identied a tradeo between the desire to learn and the desire to prevent an opponent from learning private information. This paper reports a laboratory experiment that investigates if actual bidders account for this tradeo, using a sequential procurement auction with private cost information and varying information revelation policies. Specically, the Complete Information Policy, where all submitted bids are revealed between auctions, is compared against the Incomplete Information Policy, where only the winning bid is revealed. The experimental results are largely consistent with the theoretical predictions. For example, bidders pool with other types to prevent an opponent from learning signicantly more often under a Complete Information Policy. Also as predicted, the procurer pays less when employing an Incomplete Information Policy only when the market is highly competitive. Bids are usually more aggressive than the risk neutral quantitative prediction, which is usually consistent with risk aversion. |
| Keywords: | Complete and Incomplete Information Revelation Policies, Laboratory Study, Procurement Auction, Multistage Game |
| JEL: | C91 D44 D82 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1235&r=exp |
| By: | Timothy N. Cason; Daniel Friedman; Ed Hopkins |
| Abstract: | We report experiments designed to test between Nash equilibria that are stable and unstable under learning. The “TASP” (Time Average of the Shapley Polygon) gives a precise prediction about what happens when there is divergence from equilibrium under a wide class of learning processes. We study two versions of Rock-Paper-Scissors with the addition of a fourth strategy, Dumb. The unique Nash equilibrium places a weight of 1/2 on Dumb in both games, but in one game the NE is stable, while in the other game the NE is unstable and the TASP places zero weight on Dumb. Consistent with TASP, we find that the frequency of Dumb is lower and play is further from Nash in the high payoff unstable treatment than in the other treatments. However, the frequency of Dumb is substantially greater than zero in all treatments. |
| Keywords: | games, experiments, TASP, learning, unstable, mixed equilibrium, fictitious play |
| JEL: | C72 C73 C92 D83 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1233&r=exp |
| By: | Timothy N. Cason; Lata Gangadharan; Nikos Nikiforakis |
| Abstract: | Evidence shows that real-effort investments can affect bilateral bargaining outcomes. This paper investigates whether similar investments can inhibit equilibrium convergence of experimental markets. In one treatment, sellers’ relative effort affects the allocation of production costs, but a random productivity shock ensures that the allocation is not necessarily equitable. In another treatment, sellers’ effort increases the buyers’ valuation of a good. We find that effort investments have a short-lived impact on trading behavior when sellers’ effort benefits buyers, but no effect when effort determines cost allocation. Efficiency rates are high and do not differ across treatments. |
| Keywords: | Property Rights; Real Effort; Posted Offer Markets; Random Shock; Surplus Creation |
| JEL: | C90 D4 L10 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1232&r=exp |
| By: | Gabriele Camera; Marco Casari; Maria Bigoni |
| Abstract: | Social norms of cooperation are studied under several forms of communication. In an experiment, strangers could make public statements before playing a prisoner’s dilemma. The interaction was repeated indefinitely, which generated multiple equilibria. Communication could be used as a tool to either signal intentions to coordinate on Pareto-superior outcomes, to deceive others, or to credibly commit to actions. Some forms of communication did not promote the incidence of efficient Nash play, and sometimes reduced it. Surprisingly, cooperation suffered when subjects could publicly commit to actions. |
| Keywords: | coordination, cheap-talk, deception, indefinitely repeated game, social norms |
| JEL: | C90 C70 D80 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1236&r=exp |
| By: | Gabriele Camera; Marco Casari; Maria Bigoni |
| Abstract: | We study cooperation in four-person economies of indefinite duration. Subjects interact anonymously playing a prisoner’s dilemma. We identify and characterize the strategies employed at the aggregate and at the individual level. We find that (i) grim trigger well describes aggregate play, but not individual play; (ii) individual behavior is persistently heterogeneous; (iii) coordination on cooperative strategies does not improve with experience; (iv) systematic defection does not crowd-out systematic cooperation. |
| Keywords: | repeated games, equilibrium selection, prisoners’ dilemma, random matching |
| JEL: | C90 C70 D80 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1237&r=exp |
| By: | Gabriele Camera; Marco Casari |
| Abstract: | A new behavioral foundation is uncovered for why money promotes impersonal exchange. In an experiment, subjects could cooperate by intertemporally exchanging goods with anonymous opponents met at random. Indefinite repetition supported multiple equilibria, from full defection to the efficient outcome. Introducing the possibility to hold and exchange intrinsically worthless tickets affected outcomes and cooperation patterns. Tickets resembled fiat money, which emerged as a tool for equilibrium selection in the economy. Monetary exchange facilitated coordination on cooperation and redistributed surplus from defectors to cooperators. Treatments where subjects could develop a reputation revealed a limited record-keeping role for monetary exchange. |
| Keywords: | money, cooperation, information, trust, folk theorem, repeated games |
| JEL: | C90 C70 D80 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1239&r=exp |
| By: | Keisaku Higahsida (School of Economics, Kwansei Gakuin University) |
| Abstract: | Employing an experimental approach, this paper examines whether the efficiency of fishery management can be achieved under Individual Transferable Quotas (ITQs) regimes, when fishers can choose vessel sizes. In addition to the most common types of experiments for trading permits, we analyze the situation in which the subjects choose one from two vessel types: a large-scale or a small-scale. The fixed cost for the large-scale is higher than that for the small-scale, whereas the variable cost for the large-scale is lower. We find that the average trading price converges to the theoretical equilibrium price given numbers of both types of vessels. We also find that vessels are chosen rationally in the sense that, the greater is the average trading price minus the theoretical equilibrium price in the past periods, the less incentive subjects have to invest in large-scale vessels. Moreover, quota prices in the first period could influence not only the quota prices but also the numbers of both types of vessels in the ensuing periods, and initial allocation could affect the rational choice of vessels by subjects/fishers. |
| Keywords: | Individual Transferable Quotas, tradable permits, experiment, double auction |
| JEL: | C91 Q22 Q28 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:57&r=exp |
| By: | Paolo Spada; Raymond Vreeland |
| Abstract: | Many believe that deliberative democracy, where individuals discuss alternatives before voting on them, should result in collectively superior outcomes because voters become better informed and decisions are justified using reason. These deliberations typically involve a moderator, however, whose role has been under-examined. We conduct a field experiment to test the effects moderators may have. Participants in a class of 107 students voted on options over their writing and exam requirements. Before voting, they participated in group discussions of about five people each with one moderator. Some (randomly assigned) moderators remained neutral throughout, while others made limited interventions, supporting a specific option. We find a substantial moderator effect. Our experiment is structured like deliberations used world-wide to make community decisions and thus should have some external validity. The results indicate that if organized interest groups had influence over moderators, they might be able to hijack a deliberative decision-making process. |
| Keywords: | Participatory Decision Making, Field Experiment, Voting. |
| JEL: | G10 G30 G34 G38 K20 K22 |
| Date: | 2010–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2010_19&r=exp |
| By: | Alexander Sebald (Department of Economics, University of Copenhagen); Markus Walzl (Bamberg University) |
| Abstract: | We conduct a laboratory experiment with agents working on and principals benefiting from a real effort task in which the agents’ effort/performance can only be evaluated subjectively. Principals give subjective performance feedback to agents and agents have an opportunity to sanction principals. We find that agents sanction whenever the feedback of principals is below their subjective self-evaluations even if the agents’ payoff is independent of the principals’ feedback. Based on our experimental analysis we propose a principal-agent model with subjective performance evaluations that accommodates this finding. We analyze the agents’ (optimal) behavior, optimal contracts, and social welfare in this environment. |
| Keywords: | contracts; subjective performance evaluations; self-esteem; ego-threats |
| JEL: | D01 D02 D82 D86 J41 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1018&r=exp |
| By: | Matthias Uhl (Max Planck Institute of Economics, IMPRS "Uncertainty", Jena, Germany) |
| Abstract: | Weak paternalism commits protégés to their own plans. This experiment addresses the question of whether protégés judge weakly paternalistic acts primarily by means of their consequences or on principle grounds. Subjects receive a reward for showing up to the laboratory early the next morning which decreases in time. Protégés can either self-commit to a planned time or self-liberate by preserving spontaneity. By making this binary choice protégés express their preference regarding liberty. Simultaneously, another subject is either paternalistic or liberal by making an analogous choice for them. We analyze protégés' attitudes toward both policy styles via costly reward choices. If only consequences matter, self-committers should appreciate paternalism while self-liberators should condemn it. A deontological aversion against paternalism would negate a difference between both groups. Differing judgments constitute a consequentialist pattern. However, this pattern is driven by self-liberators' clear judgments. For self-committers also a norm of non-interference into others' liberty can be identified. |
| Keywords: | Self-commitment, weak paternalism, freedom of choice, agency, moral judgments |
| JEL: | D63 I31 |
| Date: | 2010–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-055&r=exp |
| By: | Donja Darai (Socioeconomic Institute, University of Zurich); Silvia Grätz (Socioeconomic Institute, University of Zurich) |
| Abstract: | We analyze cooperative behavior in a prisoner's dilemma game with high stakes, face-to-face communication, and two rounds of pre-play in which the two final contestants are endogenously selected via a voting process. Using data from the British television game show "Golden Balls", we find a unilateral cooperation rate of 55% and a mutual cooperation rate of 33%. The stake size is on average $13,300 and ranges from $3 to $100,150. Our analysis shows that both stake size and communication have a significant impact on the player's likelihood to cooperate. In particular, we observe a negative correlation between stake size and cooperation. Also certain gestures, as handshakes, decrease the likelihood to cooperate. But, if players mutually promise each other to cooperate and in addition shake hands on it, the cooperation rate increases. We also show that a player's expectation about the stake size matters. Further, we find a strong link between contestant's pre-play behavior and the outcome of the prisoner's dilemma. Players who contribute more to the stake size are less likely to cooperate, even though each player's contribution is determined by a random process. Apart from that, it matters whether a player has lied in the pre-play and whether she experienced her opponent's goodwill. Addressing the partner selection process, we find that contestant's voting decisions are based on objective criteria, i.e., their opponent's monetary contribution to the stake size, as well as subjective personal characteristics, i.e., the opponents' trustworthiness. |
| Keywords: | prisoner's dilemma, cooperative behavior, communication, promises, voting |
| JEL: | C72 C93 H41 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:1006&r=exp |
| By: | Jianying Qiu (Department of Economics, University of Innsbruck); Eva-Maria Steiger (Strategic Interaction Group, Max Planck Institute of Economics, Jena) |
| Abstract: | Cumulative Prospect Theory (PT) introduced the weighting of probabilities as an additional component to capture risk attitudes. However, this addition would be a less significant challenge to expected utility theory (EU) if utility curvature and probability weighting showed strong positive correlation. In that case the utility curvature in EU alone, while not properly describing risky behavior in general, would still capture most of the variance of individual risk aversion. This study provides experimental evidence that such a strong and positive correlation does not exist. Although most individuals exhibit concave utility and convex probability weighting, the two components show no strong positive correlation. |
| Keywords: | risk attitudes, cumulative prospect theory, experimental study |
| JEL: | C91 D81 |
| Date: | 2010–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-053&r=exp |
| By: | Stephan Dickert (Max Planck Institute for Research on Collective Goods, Bonn); Britta Herbig (Institute for Occupational, Social and Environmental Medicine, Ludwig-Maximilians-University, Munich, Germany); Andreas Glöckner (Max Planck Institute for Research on Collective Goods, Bonn); Christina Gansen (University of Bonn); Roman Portack (University of Bonn) |
| Abstract: | In an experimental study we investigated effects of information amount and legal training on the judgment accuracy in legal cases. In a two (legal training: yes vs. no) x two (information amount: high vs. low) between-subjects design, 90 participants judged the premeditation of a perpetrator in eight real-world cases decided by the German Federal Court of Justice. Judgment accuracy was assessed in comparison with the Court’s ruling. Legal training increased judgment accuracy, but did not depend on the amount of information given. Furthermore, legal training corresponded with higher confidence. Interestingly, emotional reactions to the legal cases were stronger when more information was given for individuals without legal training but decreased for individuals with training. This interaction seems to be caused by fundamental differences in the way people construct their mental representations of the cases. We advance an information processing perspective to explain the observed differences in legal judgments and conclude with a discussion on the merits and problems of offering more information to lay people participating in legal decision making. |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2010_34&r=exp |
| By: | Ullberg, Eskil (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology) |
| Abstract: | We are well familiar with the economic analysis of a patent system in terms of a temporary monopoly on products, benefitting from marginal process inventions, formulated under conditions of certain future demands. This article develops an experimental and dynamic microeconomic model useful for studying the patent system as a trade system, where patented technology is exchanged in organized competitive markets, under uncertain future demands. An economic system design is developed to study transparent prices of patents, dynamic gains from using a patent in multiple industries and the coordination of invention, intermediary and innovation activities using a linear contract on patents (fixed fee plus royalty on revenues). A trader is introduced together with inventor and innovator agents in order to multiply the value (use) of the technology. Three mechanism designs and two levels of presumption of validity of the underlying patent right are proposed. The analysis differs from previous work on patents, trade and economics in that the focus is on the competitive pricing of the rights themselves, using demand side bidding. An informal theory is outlined to price the dual values of a patent (investing and blocking). Based on this proposition tentative hypothesis are outlined for two initial experiments using the outlined economic system design. |
| Keywords: | patents; organized markets; trade; licensing; technology |
| JEL: | D02 D23 L14 L24 O32 O34 |
| Date: | 2010–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0239&r=exp |
| By: | Carsten S. Nielsen (Department of Economics, University of Copenhagen); Alexander Sebald (Department of Economics, University of Copenhagen) |
| Abstract: | Building on Battigalli and Dufwenberg (2009)'s framework of dynamic psychological games and the recent progress in the modeling of dynamic unawareness, we provide a general framework that allows for `unawareness' in the strategic interaction of players motivated by belief-dependent psychological preferences like reciprocity and guilt. We show that unawareness has a pervasive impact on the strategic interaction of psychologically motivated players. Intuitively, unawareness influences players' beliefs concerning, for example, the intentions and expectations of others which in turn impacts their behavior. Moreover, we highlight the strategic role of communication concerning feasible paths of play in these environments. |
| Keywords: | unawareness; extensive-form games; communication; belief-dependent preferences; sequential equilibrium |
| JEL: | C72 C73 D80 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1019&r=exp |