nep-exp New Economics Papers
on Experimental Economics
Issue of 2010‒09‒11
twenty papers chosen by
Daniel Houser
George Mason University

  1. Theory, Experimental Design and Econometrics Are Complementary (And So Are Lab and Field Experiments) By Glenn W. Harrison; Morten Lau; E. Elisabet Rutström
  2. Characterizing Risk Attitudes of Industrial Managers By Glenn W. Harrison; Sebastian Moritz; Richard Pibernik
  3. Latent Process Heterogeneity in Discounting Behavior By Maribeth Coller; Glenn W. Harrison; E. Elisabet Rutström
  4. Estimating Subjective Probabilities By Steffen Andersen; John Fountain; Glenn W. Harrison; E. Elisabet Rutström
  5. Preferences for Redistribution and Pensions: What Can We Learn from Experiments? By Tausch Franziska; Potters Jan; Riedl Arno
  6. How (Not) To Decide: Procedural Games By Gani Aldashev; Georg Kirchsteiger; Alexander Sebald
  7. "Context effects in a negative externality experiment" By Kent D. Messer; Jordan F. Suter; Jubo Yan
  8. Experimental Evidence of Tax Framing Effects on the Work/Leisure Decision By Gamage, David; Hayashi, Andrew; Nakamura, Brent K
  9. Are Income and Consumption Taxes Ever Really Equivalent? Evidence from a Real-Effort Experiment with Real Goods By Blumkin, Tomer; Ruffle, Bradley; Ganun, Yosef
  10. Windfall vs. Earned Money in the Laboratory: Do They Affect the Behavior of Men and Women Differently? By Carlsson, Fredrik; He, Haoran; Martinsson, Peter
  11. Age Effects and Heuristics in Decision Making By Tibor Besedes; Cary Deck; Sudipta Sarangi; Mikhael Shor
  12. Deception and confession: Experimental evidence from a deception game in Japan By Keiko Aoki, Kenju Akai, Kenta Onoshiro
  13. Information, Uncertainty, and Subjective Entitlements in Bargaining By Karagozoglu Emin; Riedl Arno
  14. Asymmetrically Dominated Alternatives and Random Incentive Mechanisms By Ulrich Schmidt
  15. "Core-Selecting Auctions: An Experimental Study" By Eiichiro Kazumori
  16. Strategic Ignorance and the Robustness of Social Preferences By Grossman, Zachary
  17. A simple economic teaching experiment on the hold-up problem By Balkenborg, Dieter; Kaplan, Todd R; Miller, Tim
  18. Expert Opinion and the Demand for Experience Goods: An Experimental Approach in the Retail Wine Market By Hilger, James; Rafert, Greg; Villas-Boas, Sofia B
  19. Relational Contracting Under the Threat of Expropriation – Experimental Evidence By Brown, M.; Serra Garcia, M.
  20. Essays on Experimental Bubble Markets. By Powell, O.R.

  1. By: Glenn W. Harrison; Morten Lau; E. Elisabet Rutström
    Abstract: Experiments are conducted with various purposes in mind including theory testing, mechanism design and measurement of individual characteristics. In each case a careful researcher is constrained in the experimental design by prior considerations imposed either by theory, common sense or past results. We argue that the integration of the design with these elements needs to be taken even further. We view all these elements that make up the body of research methodology in experimental economics as mutually dependant and therefore take a systematic approach to the design of our experimental research program. Rather than drawing inferences from individual experiments or theories as if they were independent constructs, and then using the findings from one to attack the other, we recognize the need to constrain the inferences from one by the inferences from the other. Any data generated by an experiment needs to be interpreted jointly with considerations from theory, common sense, complementary data, econometric methods and expected applications. We illustrate this systematic approach by reference to a research program centered on large artefactual field experiments we have conducted in Denmark. An important contribution that grew out of our work is the complementarity between lab and field experiments.
    Date: 2010–09
  2. By: Glenn W. Harrison; Sebastian Moritz; Richard Pibernik
    Abstract: We study the risk attitudes of an important segment of the economy: managers. We conduct artefactual field experiments with 130 managers from 12 industrial companies. Our analysis is particularly careful to evaluate alternative models of decision-making under risk. In general, we find that the managers in our sample are moderately risk averse. Assuming a standard EUT model they exhibit similar risk attitudes as other sample populations. However, we find some differences within our sample. Superiors exhibit a higher level of risk aversion than team members that work for them in their department. Comparing purchasing managers with a random sample of non-purchasing managers from different corporate functions such as controlling, sales, engineering and so on, we cannot conclude that they differ from each other. We show that alternative theories of risky behavior provide complementary information on the risk attitude of industrial managers. While an expected utility theory model only characterizes managers as globally risk averse, we learn from a prospect theory model that the managers in our sample are only risk averse for a certain range of payoffs. For other payoffs, they even exhibit risk-seeking behavior. The reference point that determines which outcomes are to be viewed as losses and which as gains is not that induced by the task frame. We show that subjects had implicit expectations about their earning in the experiment, and used these expectations to evaluate the lotteries presented to them. Remarkably, the managers in our sample did not weigh probabilities and they did not exhibit a hypothetical bias in their decisions.
    Date: 2010–09
  3. By: Maribeth Coller; Glenn W. Harrison; E. Elisabet Rutström
    Abstract: We show that observed choices in discounting experiments are consistent with roughly one-half of the subjects using exponential discounting and one-half using quasi-hyperbolic discounting. We characterize the latent data generating process using a mixture model which allows different subjects to behave consistently with each model. Our results have substantive implications for the assumptions made about discounting behavior, and also have significant methodological implications for the manner in which we evaluate alternative models when there may be complementary data generating processes.
    JEL: D91 C91
    Date: 2010–09
  4. By: Steffen Andersen; John Fountain; Glenn W. Harrison; E. Elisabet Rutström
    Abstract: Subjective probabilities play a role in many economic decisions. There is a large theoretical literature on the elicitation of subjective probabilities, and an equally large empirical literature. However, there is a gulf between the two. The theoretical literature proposes a range of procedures that can be used to recover subjective probabilities, but stresses the need to make strong auxiliary assumptions or "calibrating adjustments" to elicited reports in order to recover the latent probability. With some notable exceptions, the empirical literature seems intent on either making those strong assumptions or ignoring the need for calibration. We illustrate how the joint estimation of risk attitudes and subjective probabilities using structural maximum likelihood methods can provide the calibration adjustments that theory calls for. This allows the observer to make inferences about the latent subjective probability, calibrating for virtually any well-specified model of choice under uncertainty. We demonstrate our procedures with experiments in which we elicit subjective probabilities. We calibrate the estimates of subjective beliefs assuming that choices are made consistently with expected utility theory or rank-dependent utility theory. Inferred subjective probabilities are significantly different when calibrated according to either theory, thus showing the importance of undertaking such exercises. Our findings also have implications for the interpretation of probabilities inferred from prediction markets.
    Date: 2010–09
  5. By: Tausch Franziska; Potters Jan; Riedl Arno (METEOR)
    Abstract: Redistribution is an inevitable feature of collective pension schemes and economic experiments have revealed that most people have a preference for redistribution that is not merely inspired by self-interest. Interestingly, little is known on how these preferences interact with preferences for different pension schemes. In this paper we review the experimental evidence on preferences for redistribution and suggest some links to redistribution through pensions. For that purpose we distinguish between three types of situations. The first deals with distributional preferences behind a veil of ignorance. In the second type of situation, individuals make choices in front of the veil of ignorance and know their position. Finally, we discuss situations in which income is determined by interdependent rather than individual choices. In the closing parts of the paper we discuss whether and how these experimental results speak to the redistribution issues of pensions. For example, do they argue for or against mandatory participation? Should we have less redistribution and more actuarial fairness? How does this depend on the type of redistribution involved?Keywords: redistribution, fairness, pension, insurance, experiment
    Keywords: public economics ;
    Date: 2010
  6. By: Gani Aldashev; Georg Kirchsteiger; Alexander Sebald
    Abstract: Psychologists and experimental economists …nd that peoples behavior is shaped not only by outcomes but also by the procedures through which these outcomes are reached. Using Psychological Game Theory we develop a general framework allowing players to be motivated by procedural concerns. We present two areas in which procedural concerns play a key role. First, we apply our framework to policy experiments and show that if subjects exhibit procedural concerns, the way in which researchers allocate subjects into treatment and control groups influences the experimental results. The estimate of the treatment e¤ect is always biased as compared to the e¤ect of a general introduction of the treatment. In our second application we analyze the problem of appointing agents into jobs that di¤er in terms of their desirability. Because of procedural concerns the principals choice of appointment procedure a¤ects the subsequent e¤ort choice of agents. We test this theoretical hypothesis in a …eld experiment. The results are consistent with our predictions.
    Keywords: Procedural concerns; Psychological game theory; Policy experiments; Appointment procedures
    JEL: A13 C70 C93 D63
    Date: 2010–08
  7. By: Kent D. Messer (Department of Food & Resource Economics,University of Delaware); Jordan F. Suter (Department of Economics and Environmental Studies,Oberlin College); Jubo Yan (Graduate Student, Cornell University)
    Abstract: This study investigates the degree to which framing and context influence observed rates of free-riding behavior in a negative externality laboratory experiment. Building on the work of Andreoni (1995a) and Messer et al. (2007) we frame the decision not to contribute to a public fund as generating a negative externality on other group members. The experimental treatments involving 252 subjects vary communication, voting, and the status quo of the initial endowment. Results indicate that allowing groups the opportunity to communicate and vote significantly reduces rates of free-riding, and this effect is especially pronounced when initial endowments are placed in the private as opposed to the public fund.
    Keywords: Negative externality; voluntary contribution mechanism; cheap talk; voting; status quo bias; experimental economics
    JEL: C91 C92 H4
    Date: 2010
  8. By: Gamage, David; Hayashi, Andrew; Nakamura, Brent K
    Abstract: The choice between a set of alternatives often depends on how those alternatives are described, as well as their actual economic costs and benefits. We report results from an experiment designed to evaluate the impact of different descriptions of the after-tax wage on both (1) subjects’ willingness to perform a work task rather than an alternative leisure option, and (2) the amount of work performed by those subjects selecting the work task. Utilizing an experimental design that facilitates both within and between-subject comparisons, we find that that subjects’ willingness to work varies with the framing of the after-tax wage and that, in particular, subjects are much less willing to work when the returns to work are framed as a low wage plus a bonus than when the returns are described as a high wage minus a tax. Along the intensive margin we find suggestive evidence that subjects stop working just before their wage becomes subject to a significantly higher marginal tax rate, but we do not observe similar clustering when gross wages become subject to an equivalent wage decrease that is not described as a tax increase.
    Keywords: Experiment, Framing, Labor Supply, Taxation
    Date: 2010–06–18
  9. By: Blumkin, Tomer (Ben Gurion University); Ruffle, Bradley (Ben Gurion University); Ganun, Yosef (Ben Gurion University)
    Abstract: The public finance literature demonstrates the equivalence between consumption and labor-income (wage) taxes. We introduce an experimental paradigm in which individuals make real labor-leisure choices and spend their earned income on real goods. We use this paradigm to test whether a labor-income tax and an equivalent consumption tax lead to identical labor-leisure allocations. Despite controlling for subjects’ work ability and inherent labor-leisure preferences and disallowing saving, subjects reduce their labor supply significantly more in response to an income tax than to an equivalent consumption tax. We discuss the economic implications of a policy shift to a consumption tax.
    Keywords: experimental economics, tax equivalence, income tax, consumption tax, behavioral economics
    JEL: C91 H22 H31
    Date: 2010–08
  10. By: Carlsson, Fredrik (Department of Economics, School of Business, Economics and Law, Göteborg University); He, Haoran (School of Economics and Business Administration, Beijing Normal University); Martinsson, Peter (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We experimentally investigate, using a dictator game, if the effects of windfall and earned endowments on behavior differ between men and women genders. In line with previous studies, we find that windfall endowments significantly increase the amount donated. The impact of moving from earned to windfall endowment on behavior is larger for females, yet the gender difference is statistically insignificant. Thus, we do not find evidence that the change in how the endowment is obtained in a laboratory experiment affects male and female behavior differently.<p>
    Keywords: dictator game; experiment; earned endowment; gender; windfall gain
    JEL: C91 C93 D64
    Date: 2010–09–02
  11. By: Tibor Besedes; Cary Deck; Sudipta Sarangi; Mikhael Shor
    Abstract: Using controlled experiments, we examine how individuals make choices when faced with multiple options. Choice tasks are designed to mimic the selection of health insurance, prescription drug, or retirement savings plans. In our experiment, available options can be objectively ranked allowing us to examine optimal decision making. First, the probability of a person selecting the optimal option declines as the number of options increases, with the decline being more pronounced for older subjects. Second, heuristics differ by age with older subjects relying more on suboptimal decision rules. In a heuristics validation experiment, older subjects make worse decisions than younger subjects.
    Keywords: experiments, decision making, optimal choice, age effects, heuristics
    JEL: C91 I18
    Date: 2010
  12. By: Keiko Aoki, Kenju Akai, Kenta Onoshiro
    Abstract: This study investigated lying behavior and the behavior of people who were deceived by using a deception game (Gneezy, 2005) in both anonymity and face-to-face conditions, and in two different monetary payoffs between senders and receivers. Moreover, subjects were used to investigate lying behavior in students as well as in people from a variety of different socioeconomic backgrounds. Wealso explored how liars feel about lying by using new messages sent from the senders to the receivers after the receivers selected the option on which the earnings in the experiment depended. The following results are obtained: i) lying behavior in the senders significantly differed between students and non-students at a payoff in the anonymity treatment, but did not significantly differ between students in the anonymity and face-to-face treatments; ii) lying behavior was not influenced by gender; iii) liars’ feelings about lying were influenced more in the face-to-face treatment than in the anonymity treatment; and iv) the receivers who were deceived were more likely to believe a sender’s message tobe true in the anonymity treatment. This study implies that having face-to-face contact prompts liars to confess their behavior because they mayfeel remorse orguilt. In addition, people who are deceived overestimate the chances of not being deceived by a stranger.
    Date: 2010–08
  13. By: Karagozoglu Emin; Riedl Arno (METEOR)
    Abstract: More often than not production processes are the joint endeavor of people having different abilities and productivities. Such production processes and the associated surplus production are often not fully transparent in the sense that the relative contributions of involved agents are blurred; either by lack of information about the actual performance of collaborators or because of random noise in the production process or both. These variables likely influence the surplus sharing negotiations following the production. By means of a laboratory experiment, we systematically investigate their role for the whole bargaining process from opening offers to (dis)agreements and find that uncertainties in surplus production and (even) a very coarse performance information lead to bargaining asymmetries. In addition, we find that bargainers’ subjective entitlements are also influenced by performance information and the randomness inherent in the production process. These differences in subjective entitlements together with the differences in entitlements between better and worse performers influence the whole bargaining process and significantly contribute to the differences in bargaining outcomes. Keywords: bargaining; performance information; randomness in production process; entitlements; experiments.
    Keywords: operations research and management science;
    Date: 2010
  14. By: Ulrich Schmidt
    Abstract: This note presents an experimental study of the random lottery incentive mechanism. In the baseline treatment we observe risk behavior in a given choice problem. We show that by integrating a second, asymmetrically dominated choice problem in a random incentive mechanism risk behavior can be manipulated systematically. This implies that the isolation hypothesis is violated the random incentive mechanism does not elicit true preferences
    Keywords: Random incentive mechanism, isolation, asymmetrically dominated alternatives
    JEL: C91 D81
    Date: 2010–08
  15. By: Eiichiro Kazumori (Faculty of Economics, University of Tokyo)
    Abstract: Many business and policy problems, such as allocation of spectrum rights and financial assets, involve allocation of heterogeneous objects among players with superadditive values. This paper uses laboratory experiments to study core-selecting auctions (clock-proxy auctions of Ausubel, Cramton, and Milgrom (2004)) recently proposed as a solution to this problem. Our experimental design involves three factors. The first factor is the auction design and we consider generalized Vickrey auctions, simultaneous ascending auctions, and clock-proxy auctions. The second factor is the value structure of agents. In addition to a benchmark case of additive values, we considered superadditive value structures which feature the exposure problem and the coordination problem. The third factor is subject characteristics. We ran experiments with professional traders and university students. We found that clock-proxy auctions outperformed generalized Vickrey auctions. Clock-proxy auctions outperformed simultaneous ascending auctions with the exposure problem value structure, and did statistically equally well with the additive and the coordination problem value structure. The result suggests a trade-off between efficiency improvements and complexity in package bidding. An ANOVA of outcomes demonstrated that auction designs were significant, and the interaction terms were often significant. We estimated the effect of auction design on efficiency and revenue and found that its magnitude depended on the valuation structure and subject characteristics. The result suggests that market design is not one-size-fits-all and a successful design builds on an understanding of fine details of the problem environments.
    Date: 2010–08
  16. By: Grossman, Zachary
    Abstract: How robust are social preferences to variations in the environment in which a decision is made? By varying the elicitation method and default choice in the `moral wiggle-room' game of Dana, Weber, and Kuang (2007), I examine the robustness and nature of the pattern of information avoidance in which many dictators in experiments-- if initially uncertain-- avoid learning whether their choice will help or hurt another person and choose selfishly. When ignorance is not the default choice, participants choose it much less frequently. However, when dictators express their outcome choice using the strategy method, most are willing to overcome the default choice and reveal the payoff state ex post. I conclude that people will employ strategic ignorance to avoid a morally-fraught decision if they can do so passively, but having to actively choose ignorance betrays its usefulness and leads to behavior largely consistent with models of preferences over outcomes. Thus while opportunities to create and exploit moral wiggle-room limit fair-minded behavior, environmental or psychological variables may reinforce the motivation that leads people to choose fair outcomes.
    Keywords: social preferences, strategic ignorance, moral wiggle-room, default effects, status quo bias, self- deception, self-signaling, dictator games
    Date: 2010–08–12
  17. By: Balkenborg, Dieter; Kaplan, Todd R; Miller, Tim
    Abstract: The hold-up problem is central to the theory of incomplete contracts. It shows how the difficulty to write complete contracts and the resulting need to renegotiate can lead to underinvestment. We describe the design of a simple teaching experiment that illustrates the hold-up problem. The model used is a simple perfect information game. The experiment can hence also be used to illustrate the concept of subgame perfect equilibrium and the problem of making non-binding commitments.
    Keywords: classroom experiment; holdup problem
    JEL: L14 K12 C90
    Date: 2010–09–03
  18. By: Hilger, James; Rafert, Greg; Villas-Boas, Sofia B
    Abstract: The effect of expert opinion on demand for experience goods is difficult to quantify, as the relationship between purchases and reviews may be driven by product quality. Further, it is unclear whether a review-based demand effect is due to providing quality or existence information. Utilizing a retail �field experiment to overcome these obstacles, we �find a significant� positive average consumer response to expert opinion labels for wine. Demand decreases for low scoring wines and demand increases for wines scoring average or higher. Results indicate that expert opinion labels transmit quality information as opposed to solely shelf visibility.
    Date: 2010–08–05
  19. By: Brown, M.; Serra Garcia, M. (Tilburg University, Center for Economic Research)
    Abstract: We examine how relational contracting in credit and investment relationships is affected by the potential expropriation of funds. We implement credit relationships in which repayment is not third-party enforceable, i.e. borrowers can default on their loans. In our main treatment the borrower can expropriate the lender’s funds: a defaulting borrower can reinvest the loaned funds in future periods. In a control treatment borrowers cannot expropriate borrowed funds, i.e. if they default they cannot reinvest these funds in future periods. We find that potential expropriation decreases the overall volume of credit as lenders offer smaller loans in initial periods. Borrowers are more likely to default in earlier periods of the relationship when expropriation is possible, especially when they receive large loans. Together these results suggest that relational contracts may be particularly difficult to establish in markets where the expropriation of funds is feasible. This finding is relevant to credit markets in which lenders’ rights are weak, but also to sovereign lending, as well as to foreign direct investment in countries with weak investor protection.
    Keywords: Relational contracts;Investor protection;Banking;Sovereign debt;Foreign direct investment.
    JEL: C73 G21 O16 F21 F34
    Date: 2010
  20. By: Powell, O.R. (Tilburg University)
    Abstract: Markets play at least three important roles in the economy. First, they allow for exchange. Second, markets allow for the pooling and reduction of risk. Third, markets can aggregate information. It is this third function of markets that is the study of this thesis. Through their transaction prices, markets have the potential to aggregate diverse information and provide signals to agents about the relative value of different goods and services. The problem, however, is that there is no guarantee that market prices will correctly reflect fundamentals. In fact, there is no guarantee that they will do so even approximately correctly. One such pattern in which prices can deviate from fundamentals is a bubble. Bubbles often leave chaos in their wake. Those caught unaware by the crash in prices experience significant losses that often lead to cascading effects in other parts of the economy. The direct cost of a bubble is the over-investment that results from the temporary over-pricing of the asset. The indirect costs of a bubble are the consequences of the typically large and rapid redistributions of wealth that occur when prices crash at the end of the bubble. These large fluctuations in wealth can lead to social disruption and have spillover effects on the rest of the economy. This thesis consists of three experimental studies that examine different aspects of bubble markets. The recent convulsions in the global economic system have shown that there are strong concerns regarding the ability of the market system to “get things right''. This thesis is a small step forward towards better understanding that system and improving its performance.
    Date: 2010

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