New Economics Papers
on Experimental Economics
Issue of 2011‒05‒14
seventeen papers chosen by

  1. Managing Self-Confidence: Theory and Experimental Evidence By Markus M. Mobius; Muriel Niederle; Paul Niehaus; Tanya S. Rosenblat
  2. Reference Points and Effort Provision By Johannes Abeler; Armin Falk; Lorenz Goette; David Huffman
  3. Monitoring and Pay: An Experiment on Employee Performance under Endogenous Supervision By Dittrich, Dennis A. V.; Kocher, Martin G.
  4. Performance Pay and Multi-dimensional Sorting – Productivity, Preferences and Gender By Thomas Dohmen; Armin Falk
  5. Institutions and Contract Enforcement By Armin Falk; David Huffman; W. Bentley Macleod
  6. Can Intertemporal Choice Experiments Elicit Time Preferences for Consumption? Yes By Glenn W. Harrison; J. Todd Swarthout
  7. Myopia, pension payments and retirement: An experimental approach By Craig Holmes
  8. Framing Effects and Expected Social Security Claiming Behavior By Jeffrey R. Brown; Arie Kapteyn; Olivia S. Mitchell
  9. Comparing Group and Individual Choices under Risk and Ambiguity: An Experimental Study By Marielle Brunette; Laure Cabantous; Stéphane Couture
  10. Community Management is Good for Forests: Results from a Field Experiment in India By South Asian Network for Development SANDEE
  11. Negotiation under possible third party settlement. By Birkeland d.y., Sigbjørn
  12. Public Goods Agreements with Other-Regarding Preferences By Charles D. Kolstad
  13. Smiling is a Costly Signal of Cooperation Opportunities: Experimental Evidence from a Trust Game By Centorrino, Samuele; Djemaï, Elodie; Hopfensitz, Astrid; Milinski, Manfred; Seabright, Paul
  14. What drives taxi drivers? A field experiment on fraud in a market for credence goods By Loukas Balafoutas; Adrian Beck; Rudolf Kerschbamer; Matthias Sutter
  15. Remembering to Pay? Reminders vs. Financial Incentives for Loan Payments By Ximena Cadena; Antoinette Schoar
  16. Customer Reactions in Out-of-Stock Situations – Do promotion-induced phantom positions alleviate the similarity substitution hypothesis? By Jana Luisa Diels; Nicole Wiebach
  17. Nash bargained consumption decisions: a revealed preference analysis By Laurens CHERCHYE; Thomas DEMUYNCK; Bram DE ROCK

  1. By: Markus M. Mobius; Muriel Niederle; Paul Niehaus; Tanya S. Rosenblat
    Abstract: Evidence from social psychology suggests that agents process information about their own ability in a biased manner. This evidence has motivated exciting research in behavioral economics, but has also garnered critics who point out that it is potentially consistent with standard Bayesian updating. We implement a direct experimental test. We study a large sample of 656 undergraduate students, tracking the evolution of their beliefs about their own relative performance on an IQ test as they receive noisy feedback from a known data-generating process. Our design lets us repeatedly measure the complete relevant belief distribution incentive-compatibly. We find that subjects (1) place approximately full weight on their priors, but (2) are asymmetric, over-weighting positive feedback relative to negative, and (3) conservative, updating too little in response to both positive and negative signals. These biases are substantially less pronounced in a placebo experiment where ego is not at stake. We also find that (4) a substantial portion of subjects are averse to receiving information about their ability, and that (5) less confident subjects are causally more likely to be averse. We unify these phenomena by showing that they all arise naturally in a simple model of optimally biased Bayesian information processing.
    JEL: C91 C93 D83
    Date: 2011–05
  2. By: Johannes Abeler (University of Nottingham); Armin Falk (University of Bonn); Lorenz Goette (University of Lausanne); David Huffman (Swarthmore College)
    Abstract: A key open question for theories of reference-dependent preferences 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: Reference Points, Expectations, Loss Aversion, Disappointment, Experiment
    JEL: C91 D01 D84 J22
    Date: 2011–05
  3. By: Dittrich, Dennis A. V.; Kocher, Martin G.
    Abstract: We present an experimental test of a shirking model where monitoring intensity is endogenous and effort a continuous variable. Wage level, monitoring intensity and consequently the desired enforceable effort level are jointly determined by the maximization problem of the firm. As a result, monitoring and pay should be complements. In our experiment, between and within treatment variation is qualitatively in line with the normative predictions of the model under standard assumptions. Yet, we also find evidence for reciprocal behavior. Our data analysis shows, however, that it does not pay for the employer to solely rely on the reciprocity of employees.
    Keywords: incentive contracts; supervision; efficiency wages;experiment; incomplete contracts; reciprocity
    JEL: C91 J31 J41
    Date: 2011–01
  4. By: Thomas Dohmen (ROA, Maastricht University); Armin Falk (University of Bonn)
    Abstract: This paper studies the impact of incentives on worker self-selection in a controlled laboratory experiment. Subjects face the choice between a fixed and a variable payment scheme. Depending on the treatment, the variable payment is a piece rate, a tournament or a revenue-sharing scheme. We find that output is higher in the variable pay schemes (piece rate, tourna- ment, and revenue sharing) compared to the fixed payment scheme. This difference is largely driven by productivity sorting. In addition personal attitudes such as willingness to take risks and relative self-assessment as well as gender affect the sorting decision in a systematic way. Moreover, self-reported effort is significantly higher in all variable pay conditions than in the fixed wage condition. Our lab findings are supported by an additional analysis using data from a large and representative sample. In sum, our findings underline the importance of multi-dimensional sorting, i.e., the tendency for different incentive schemes to systematically attract people with different individual characteristics.
    Keywords: Relational Sorting, Incentives, Piece Rates, Tournament, Revenue-Sharing, Risk Preferences, Social Preferences, Gender, Experiment, Field Evidence
    JEL: J3 M52 C91 D81 J16
    Date: 2011–05
  5. By: Armin Falk (University of Bonn and IZA); David Huffman (Swarthmore College and IZA); W. Bentley Macleod (Columbia University and IZA)
    Abstract: We provide evidence on how two important types of institutions – dismissal barriers, and bonus pay – affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded.
    Keywords: incomplete contracts, bonus pay, efficiency wages, employment protection, firing costs, experiment
    JEL: J41 J3 C9 D01
    Date: 2011–05
  6. By: Glenn W. Harrison; J. Todd Swarthout
    Abstract: The most popular experimental method for eliciting time preferences involves subjects making choices over smaller, sooner amounts of money and larger, later amounts of money. Under some theoretically possible configurations of preferences and procedures, the discount rates inferred from these choices could lead to misleading inferences about time preferences for consumption. Using a direct empirical test, we show that those configurations of preferences are empirically implausible.
    Date: 2011–05
  7. By: Craig Holmes (Department of Economics, University of Oxford)
    Abstract: The behavioral economics literature on time discounting has suggested that individuals may systematically undersave when planning for retirement. Hence, pension systems have developed to enable, or indeed force, individuals to save more for retirement. Of course, the saving aspect and the timing of retirement are connected, in the sense that the expected length of retirement determines what is meant by adequate post-retirement resources, and vice versa. Despite this, the timing aspect rarely enters into policy discussions, although the same behavioural phenomena that lead to undersaving – in this paper, myopia and present bias – may also have implications for the retirement decision. Moreover, the form of pension payments may also affect the timing decision when individuals do not have time consistent preferences. This paper presents a model of saving and retirement timing where saving rates are mandated, and pension payment may come in either a lump-sum or an annuity. It tests the model using data collected through a new experiment. The experiment presented has a particular novel feature which made it uniquely suited for testing the theoretical model. Specifically, participants in the experiment came back to the laboratory on a weekly basis over a two month period. This decision to return to the laboratory (or, to leave the experiment and collect a pension) became in itself the main variable of interest. The experiment therefore exploited the effort it takes for participants to come to the laboratory to capture preferences over time-use and leisure. The results shown that plans over leaving the experiment tend not to reflect preferences, whilst actual leaving times were lower for more impulsive individuals and those who gave up more time to participate. This suggests a tradeoff between increasing saving through pension systems and earlier retirement. Payment group had no effect on retirement timing, most likely because the small rewards meant participants were indifferent between the two forms of payment. The results suggest individuals may have time-inconsistent preferences over leisure choices, leading to the incidences of unplanned early retirement.
    Keywords: Retirement, Quasi-hyperbolic discounting, Pension payments, Laboratory experiment
    JEL: J26 D91 C91
    Date: 2011–03
  8. By: Jeffrey R. Brown; Arie Kapteyn; Olivia S. Mitchell
    Abstract: Eligible participants in the U.S. Social Security system may claim benefits anytime from age 62-70, with benefit levels actuarially adjusted based on the claiming age. This paper shows that individual intentions with regard to Social Security claiming ages are sensitive to how the early versus late claiming decision is framed. Using an experimental design, we find that the use of a “break-even analysis” has the very strong effect of encouraging individuals to claim early. We also show that individuals are more likely to report they will delay claiming when later claiming is framed as a gain, and when the information provides an anchoring point at older, rather than younger, ages. Moreover, females, individuals with credit card debt, and workers with lower expected benefits are more strongly influenced by framing. We conclude that some individuals may not make fully rational optimizing choices when it comes to choosing a claiming date.
    JEL: D12 D14 H55
    Date: 2011–05
  9. By: Marielle Brunette (Laboratoire d'Economie Forestiere, Nancy, France); Laure Cabantous (Nottingham University Business School); Stéphane Couture (Unité de Biométrie et Intelligence Artificielle (UBIA), Toulouse, France)
    Abstract: In this paper, we build on the emerging literature on group decision-making to study the so-called ‘group shift’ effect, i.e., groups are less risk-averse than individuals. Our study complements past research in two ways. First, we study the group shift effect under two sources of uncertainty, namely risk where probabilities are known, and ambiguity where probabilities are imprecise. Second, we study the impact of the group decision rule (unanimity and majority) on group shift. Results from a lottery-choice experiment show a general tendency for the group shift effect, regardless of the decision rule. The group shift effect, however, is found to be significant only under risk in the unanimity treatment. Our study hence provides a clear test of the effect of the decision rule on the group shift effect under both risk and ambiguity.
    Keywords: Collective decision, Unanimity, Majority, Preferences, Risk, Ambiguity
    JEL: C91 C92
    Date: 2011–05–06
  10. By: South Asian Network for Development SANDEE
    Abstract: The study looks at the relationship between indigenous people and their forest homes using a novel field field experiments approach. [Policy Brief No. 48-10]. URL:[ /documents/publication/906_PUB_Policy_Br ief_48_Rucha.pdf].
    Keywords: indigenous people, forest homes, field experiment, India, community management, environment, nagpur, research, development, villages, maharashtra, india
    Date: 2011
  11. By: Birkeland d.y., Sigbjørn (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: The effect of possible third party settlement on negotiation behaviour is studied in an economic bargaining experiment. The bargaining phase is preceded by a production phase that allows for different fairness principles to guide the division of the total production value. The experimental results show that a possible third party settlement lowers the dispute costs by reducing the number of rounds of alternating offers. In the presence of a third party, negotiators make first offers that are more strongly related to their production, which reduces the number of rounds of bargaining. The production phase has an effect on the distributional property of the settlements. In negotiations where third party settlement is an option, the negotiation outcome shifts towards a more unequal outcome, more in line with each person's contribution.
    Keywords: Arbitration; Bargaining effciency; Experiment.
    JEL: C78 D63 J52
    Date: 2010–11–15
  12. By: Charles D. Kolstad
    Abstract: Why cooperation occurs when noncooperation appears to be individually rational has been an issue in economics for at least a half century. In the 1960’s and 1970’s the context was cooperation in the prisoner’s dilemma game; in the 1980’s concern shifted to voluntary provision of public goods; in the 1990’s, the literature on coalition formation for public goods provision emerged, in the context of coalitions to provide transboundary pollution abatement. The problem is that theory suggests fairly low (even zero) levels of contributions to the public good and high levels of free riding. Experiments and empirical evidence suggests higher levels of cooperation. This is a major reason for the emergence in the 1990’s and more recently of the literature on other-regarding preferences (also known as social preferences). Such preferences tend to involve higher levels of cooperation (though not always). This paper contributes to the literature on coalitions, public good provision and other-regarding preferences. For standard preferences, the marginal per capita return (MPCR) to investing in the public good must be greater than one for contributing to be individually rational. We find that Charness-Rabin preferences tend to reduce this threshold for individual contributions. We also find that Charness-Rabin preferences reduce the equilibrium size of a coalition of agents formed to provide the public good. In addition to theoretical results, some experimental implications of the theoretical model are provided. In contrast to much of the literature, we treat the wealth of agents as heterogeneous.
    JEL: H4 H41 Q5
    Date: 2011–05
  13. By: Centorrino, Samuele; Djemaï, Elodie; Hopfensitz, Astrid; Milinski, Manfred; Seabright, Paul
    Abstract: We test the hypothesis that "genuine" or "convincing" smiling is a costly signal that has evolved to induce cooperation in situations requiring mutual trust. Potential trustees in a trust game made video clips for viewing by potential trusters before the latter decided whether to send them money. Ratings of the genuineness of smiles vary across clips; it is difficult to make convincing smiles to order. We argue that smiling convincingly is costly, because smiles from trustees playing for higher stakes are rated as significantly more convincing, so that rewards appear to induce effort. We show that it induces cooperation: smiles rated as more convincing strongly predict judgments about the trustworthiness of trustees, and willingness to send them money. Finally, we show that it is a honest signal: those smiling convincingly return more money on average to senders. Convincing smiles are to some extent a signal of the intrinsic character of trustees: less honest individuals find smiling convincingly more difficult. They are also informative about the greater amounts that trustees playing for higher stakes have available to share: it is harder to smile convincingly if you have less to offer.
    Date: 2011–04
  14. By: Loukas Balafoutas; Adrian Beck; Rudolf Kerschbamer; Matthias Sutter
    Abstract: Credence goods are characterized by informational asymmetries between sellers and consumers that invite fraudulent behavior by sellers. This paper presents the results of a natural field experiment on taxi rides in Athens, Greece, set up to measure different types of fraud and to examine the influence of passengers’ presumed information and income on the extent of fraud. Results reveal that taxi drivers cheat passengers in systematic ways: Passengers with inferior information about optimal routes are taken on longer detours while asymmetric information on the local tariff system leads to manipulated bills. Higher income seems to lead to more fraud.
    Keywords: Credence goods, expert services, natural field experiment, taxi rides, fraud, asymmetric information
    JEL: C93 D82
    Date: 2011–04
  15. By: Ximena Cadena; Antoinette Schoar
    Abstract: We report the results from a field experiment with a micro lender in Uganda to test the effectiveness of privately implemented incentives for loan repayment. Using a randomized control trial we measure the impact of three different treatments: Borrowers are either given a lump sum cash reward upon completion of the loan (equivalent to a 25% interest rate reduction on the current loan), a 25% reduction of the interest rate in the next loan the borrower takes from the bank, or a monthly text message reminder before the loan payment is due (SMS). We find that on average the size of the treatment effect is similar across all the treatment groups: borrowers in the treatment groups have a 7-9% increase in the probability of paying on time and the average days late drop by 2 days a month. The results suggest that simple text messages which help borrowers to better manage their repayment dates have similar effects as large changes in the cost of capital of 25% of interest. The impact of the cash back incentives are stronger for customers with smaller loans and less banking experience, the reduced future interest rate seemed to be most effective for customers with larger loans, while the SMS text messages were particularly effective for younger customers.
    JEL: G21 O16
    Date: 2011–05
  16. By: Jana Luisa Diels; Nicole Wiebach
    Abstract: Out-of-Stock (OOS) is a prevalent problem customers face at the POS. In this paper, we demonstrate both theoretically and empirically how OOS-induced substitution patterns can be explained and predicted by means of context and phantom theory. We further analyze the relevance of promotions, for which OOS is most pronounced, as essential driver of differences in customers’ OOS reactions. The results of an online experiment demonstrate that customers substitute unavailable items in accordance to a negative similarity effect which is reduced, however, for OOS items on promotion. The empirical findings further suggest that customers’ OOS responses differ for promoted vs. non-promoted items. We find that customers being affected by a stock-out of promotional products significantly more often postpone purchases and tend to avoid substitution resulting in severe losses for the retailer. However, for non-promoted items, customers easily switch to alternative brands. That way, manufacturers lose profit and possibly loyal customers.
    Keywords: Out-of-Stock, Context Effects, Phantoms, Promotion, Consumer Decision Making
    JEL: M31 C12 C13 C81
    Date: 2011–05
  17. By: Laurens CHERCHYE; Thomas DEMUYNCK; Bram DE ROCK
    Abstract: We present a revealed preference analysis of the testable implications of the Nash bargaining solution. Our specific focus is on a two-player game involving consumption decisions. We consider a setting in which the empirical analyst has information on both the threat points bundles and the bargaining outcomes. We first establish a revealed preference characterization of the Nash bargaining solution. This characterization implies conditions that are both necessary and sufficient for consistency of observed consumption behavior with the Nash bargaining model. However, these conditions turn out to be nonlinear in unknowns and therefore difficult to verify. Given this, we subsequently present necessary conditions and sufficient conditions that are linear (and thus easily testable). We illustrate the practical usefulness of these conditions by means of an application to experimental data. Such an experimental setting implies a most powerful analysis of the empirical goodness of the Nash bargaining model for describing consumption decisions. To our knowledge, this provides a first empirical test of the Nash bargaining model on consumption data. Finally, we consider the possibility that threat point bundles are not observed. This obtains testable conditions for the Nash bargaining model that can be used in non-experimental (e.g. household consumption) settings, which often do not contain information on individual consumption bundles in threat points.
    Date: 2011–04

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