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on Experimental Economics |
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Issue of 2012‒03‒21
twenty-two papers chosen by |
| By: | Marco Cipriani; Ana Fostel; Daniel Houser |
| Abstract: | This is the first paper to test the asset pricing implication of leverage in a laboratory. We show that as theory predicts, leverage increases asset prices: When an asset can be used as collateral (that is, when the asset can be bought on margin), its price goes up. This increase is significant, and quantitatively close to what theory predicts. However, important deviations from the theory arise in the laboratory. First, the demand for the asset shifts when it can be used as a collateral, even though agents do not exhaust their purchasing power when collateralized borrowing is not allowed. Second, the spread between collateralizable and noncollateralizable assets does not increase during crises, in contrast to what theory predicts. |
| Keywords: | Asset pricing ; Financial leverage |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:548&r=exp |
| By: | James C. Cox; Maroš Servátka; Radovan Vadovic |
| Abstract: | Both the law and culture make a central distinction between acts of commission that overturn the status quo and acts of omission that uphold it. In everyday life acts of commission often elicit stronger reciprocal responses than do acts of omission. In this paper we compare reciprocal responses to both types of acts and ask whether behavior of subjects in two experiments is consistent with existing theory. The design of the experiments focuses on the axioms of revealed altruism theory (Cox, Friedman, and Sadiraj, 2008) that make it observationally distinct from other theories, Axiom R (for reciprocity) and Axiom S (for status quo). We find support for this theory in both experiments. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:exc:wpaper:2012-03&r=exp |
| By: | Dean Karlan (Economic Growth Center, Yale University); Margaret A. McConnell (Harvard School of Public Health) |
| Abstract: | Theories abound for why individuals give to charity. We conduct a field experiment with donors to a Yale University service club to test the impact of a promise of public recognition on giving. Some may claim that they respond to an offer of public recognition not to improve their social standing, but rather to motivate others to give. To tease apart these two theories,we conduct a laboratory experiment with undergraduates, and found no evidence to support the alternative, altruistic motivation. We conclude that charitable gifts increase in response to the promise of public recognition primarily because of individuals' desire to improve their social image. |
| Keywords: | endowments, prosocial behavior, experiments, voluntary contributions, social image |
| JEL: | D64 C90 L30 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:1006&r=exp |
| By: | Dohmen, Thomas (ROA, Maastricht University); Falk, Armin (University of Bonn); Huffman, David (Swarthmore College); Sunde, Uwe (University of St. Gallen) |
| Abstract: | We compare different designs that have been used to test for an impact of time horizon on discounting, using real incentives and two representative data sets. With the most commonly used type of design we replicate the typical finding of declining (hyperbolic) discounting, but with other designs find constant or increasing discounting. As a whole, the data are not consistent with any of these usual candidate discounting assumptions, and they also imply a violation of transitivity. The results have implications for interpreting previous evidence, and pose an important puzzle for understanding inter-temporal choice. |
| Keywords: | time preference, hyperbolic discounting, self-control, dynamic inconsistency, intransitivity |
| JEL: | D01 D90 D03 E21 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6385&r=exp |
| By: | Tonin, Mirco (University of Southampton); Vlassopoulos, Michael (University of Southampton) |
| Abstract: | We conduct an experiment in which subjects make a series of decisions of allocating an endowment of £10 between themselves and a passive recipient that is either a charity or the experimenter. When making these decisions subjects are informed that one of them will be chosen randomly at the end to determine payoffs. After all decisions have been made and it has been revealed which decision will determine payoffs we offer subjects an opportunity to opt out from their initial decision and receive £10 instead. We find that around one third of subjects choose to opt out. The fact that a subject decides to revise a decision to give and chooses instead to exit and keep the whole amount – an option that was available when she made the first decision and was not exercised – indicates that giving in the first instance was not motivated solely by altruism toward the recipient. We argue that opting out indicates that giving is also motivated by self-image concerns. |
| Keywords: | dictator game, charitable giving, opting-out, self-image |
| JEL: | C91 D03 D64 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6388&r=exp |
| By: | Anastasios Koukoumelis (Max Planck Institute of Economics, Jena); M. Vittoria Levati (Max Planck Institute of Economics, Jena, and Department of Economics, University of Verona) |
| Abstract: | We report on an experiment designed to explore whether and how anger affects future levels of cooperation. Participants play three consecutive one-shot games. In between two identical two-person public goods games there is a mini dictator game that, depending on the treatment, either gives or does not give the recipient the opportunity to scold the dictator via a text message. We find that the recipients that receive an unfair offer contribute significantly less in the second public goods game. Yet, such contribution cuts are less frequent and notably smaller when messaging is allowed for. We conclude that although anger has a lasting negative effect on cooperation, giving voice to it helps to curtail selfishness. |
| Keywords: | Dictator minigame, Public goods game, Emotions, Cooperation |
| JEL: | C72 C91 C92 D63 |
| Date: | 2012–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2012-007&r=exp |
| By: | Marco Faillo (Department of Economics, University of Trento); Daniela Grieco (Department of Economics (University of Verona)); Luca Zarri (Department of Economics (University of Verona)) |
| Abstract: | Is culture an important variable to explain whether groups can successfully provide public goods? A wealth of empirical evidence on both industrialized and developing countries shows that cooperation levels decrease in the presence of ethnic divisions. Although several laboratory works deal with cultural differences, so far most studies restrict their attention to cross-cultural comparisons among internally homogeneous societies. We depart from these contributions and conduct an intercultural public goods game with punishment experiment in Italy, a country where immigration is a quite recent, but politically hot phenomenon. We investigate the effects of introducing a varying number of foreign participants within a homogeneous pool of native subjects. Our results indicate that foreigners contribute significantly less than natives, natives react lowering their own contribution levels, and, consequently, the degree of cultural diversity negatively affects the overall level of cooperation. In terms of sanctioning, we observe no difference in the overall amount of assigned and received punishment points; however, behaving mostly as free-riders, foreigners are more likely to use anti-social punishment. In the absence of institutional restrictions ruling out anti-social punishment, this might amplify the documented detrimental effect on cooperation. |
| Keywords: | Experimental Economics; Public Good Games; Cooperation; Cultural Diversity; Anti-social Punishment. |
| JEL: | C72 C91 C92 D64 D71 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:09/2012&r=exp |
| By: | Miriam Krieger; Thomas Mayrhofer |
| Abstract: | We study risk aversion and prudence in medical treatment decisions. In a laboratory experiment, we investigate the frequency and intensity of second- and third-order risk preferences, as well as the effect of the medical decision context. Risk preferences are assessed through treatment thresholds (the indifference point between not treating and treating). Under diagnostic risk, medical decision theory predicts lower thresholds for risk-averse than risk-neutral decision makers. Given a comorbidity risk, prudent individuals have an even lower threshold. Our results demonstrate risk-averse and prudent behavior in medical decisions, which reduce the (average) treatment threshold by 41% relative to risk neutrality (from 50.0% to 29.3% prevalence rate). Risk aversion accounts for 3/4 of this effect, prudence for 1/4. The medical decision framing does not affect risk aversion, but is associated with more and stronger prudent behavior. These findings have consequences for treatment thresholds, diagnostics, and QALYs, and thus for clinical guidelines. |
| Keywords: | Medical decision making; treatment thresholds; risk aversion; prudence; laboratory experiment |
| JEL: | I10 C91 D81 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0321&r=exp |
| By: | Neri, Claudia; Manski, Charles |
| Abstract: | We study first- and second-order subjective expectations (beliefs) in strategic decisionmaking.We propose a method to elicit probabilistically both first- and second-order beliefs and apply the method to a Hide-and-Seek experiment. We study the relationship between choice and beliefs in terms of whether observed choice coincides with the optimal action given elicited beliefs. We study the relationship between first- and second-order beliefs under a coherence criterion. Weak coherence requires that if an event is assigned, according to first-order beliefs, a probability higher/lower/equal to the one assigned to another event, then the same holds according to second-order beliefs. Strong coherence requires the probability assigned according to first- and second-order beliefs to coincide. Evidence of heterogeneity across participants is reported. Verbal comments collected at the end of the experiment shed light on how subjects think and decide in a complex environment that is strategic, dynamic and populated by potentially heterogeneous individuals. |
| Keywords: | Decision-making, beliefs, subjective expectations, experiments |
| JEL: | D81 D83 D84 C92 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2012:06&r=exp |
| By: | Smith, John; Bezrukova, Katerina |
| Abstract: | It is commonly assumed that identification with a social group is constant throughout the play of a one-shot game in the absence of feedback. We provide evidence which challenges this assumption. We direct subjects to play one of two versions of the prisoner's dilemma game. These versions are distinguished by the relative attractiveness of the uncooperative action. We refer to the version with a relatively attractive uncooperative action as the Easy Game and the other as the Difficult Game. We find that for the subjects who play the Difficult Game, their change in group identification is significantly related to their action selected. No such relationship exists within the Easy Game. Additionally, we find that the change primarily occurs after the action is selected rather than upon inspection of the game. We discuss the implications of our findings to settings both inside and outside of the laboratory. |
| Keywords: | Group Identification; Experimental Game Theory; Endogenous Preferences; Social Identity; Decision Difficulty |
| JEL: | Z10 C91 C72 |
| Date: | 2012–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37356&r=exp |
| By: | Paulina Granados Zambrano |
| Abstract: | The recognition that information is, most of the time, incomplete and imperfect is essential in understanding the nature of the formation of beliefs. To understand human behavior in the area of (academic) performance, the beliefs individuals sustain about their ability become crucial. Before performing a certain task, the agent never knows his/her true ability. He/she only has an ex-ante notion of his/her believed ability and the truth is only revealed ex-post. Once the true ability is known and the payoffs realized, we observe different reactions that range from disappointment to happiness. The logical question is then, who would have preferred not to know the truth? This paper deals with the information acquisition decisions of individuals who face uncertainty about their own ability. At a theoretical level (Bénabou and Tirole, 2002), it has been shown that overconfident individuals (people with beliefs about themselves higher than reality) with time inconsistent preferences have more at stake when they face the decision of learning the truth about themselves than more pessimistic agents. To test this prediction, a field experiment is designed and implemented, where students face the decision of learning, or not, their true ability before performing a test. It will be shown that overconfident students indeed more often decide not to learn their true ability. |
| Keywords: | overconfidence; beliefs; ability; information acquisition; field experiment |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2012/04&r=exp |
| By: | Gharad Bryan (London School of Economics); Dean Karlan (Economic Growth Center, Yale University); Jonathan Zinman (Dartmouth College) |
| Abstract: | We examine a randomized trial that allows separate identification of peer screening and enforcement of credit contracts. A South African microlender offered half its clients a bonus for referring a friend who repaid a loan. For the remaining clients, the bonus was conditional on loan approval. After approval, the repayment incentive was removed from half the referrers in the first group and added for half those in the second. We find large enforcement effects, a $12 (100 Rand) incentive reduced default by 10 percentage points from a base of 20%. In contrast, we find no evidence of screening. |
| Keywords: | Information asymmetries; credit market failures; peer networks; social capital; social networks |
| JEL: | C93 D12 D14 D82 O12 O16 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:1009&r=exp |
| By: | Booth, Alison L. (Australian National University); Nolen, Patrick J. (University of Essex) |
| Abstract: | Risk theories typically assume individuals make risky choices using probability weights that differ from objective probabilities. Recent theories suggest that probability weights vary depending on which portion of a risky environment is made salient. Using experimental data we show that salience affects young men and women differently, even after controlling for cognitive and non-cognitive skills. Men are significantly more likely than women to switch from a certain to a risky choice once the upside of winning is made salient, even though the expected value of the choice remains the same. |
| Keywords: | gender, salience, risk-aversion, probability weights, cognitive ability |
| JEL: | D8 D81 J16 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6400&r=exp |
| By: | Giusti, Giovanni; Jiang, Janet Hua; Xu, Yiping |
| Abstract: | The seminal work of Smith Suchanek and Williams (1988) finds price bubbles are frequently observed in an experimental asset market where a single asset with a finite lifetime is traded. Ever since, many studies have been carried out to understand the reason why bubbles occur in such an environment and to find mechanisms to eliminate bubbles.In this paper, we introduce an interest-bearing savings account to the experimental asset market. We find bubbles disappear with high interest rates. The effect of the interest rate potentially works in two ways. First, the savings account increases the opportunity cost of buying shares, which in turn, reduces the incentive to speculate and alleviates the “active participation” problem as raised in Lei, Noussair and Plott (2001). Second, fixing the dividend process and terminal value of the asset, the time trend of the fundamental value of the asset becomes positive with a high interest rate. An increasing fundamental value is more compatible with subjects’ perception that asset prices tend to be flat or increasing in the long run. Therefore, subjects are more likely to follow the fundamental value when they trade and over-pricing is lessened. To disentangle the effects through the two channels, we run a second set of experiments with high interest rate but a lower terminal value to induce the fundamental value of the asset to decrease over time. Bubbles reappear in these sessions, which suggests the time path of the fundamental value is more important for reducing bubbles. |
| Keywords: | Asset Bubbles; Experimental Economics |
| JEL: | C90 G10 |
| Date: | 2012–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37321&r=exp |
| By: | Martin G. Kocher; Wolfgang J. Luhan; Matthias Sutter |
| Abstract: | Empirical work on Akerlof’s theory of gift exchange in labor markets has concentrated on the fair wage-effort hypothesis. In fact, however, the theory also contains a social component that stipulates that homogenous agents that are employed for the same wage level will exert more effort, resulting in higher rents and higher market efficiency, than agents that receive different wages. We present the first test of this component, which we call the fair uniform-wage hypothesis. In our laboratory experiment, we establish the existence of a significant efficiency premium of uniform wages. However, it is not the consequence of a stronger level of reciprocity by agents, but of the retrenchment of sanctioning options on the side of principals with uniform wages. Hence, implementing limitations to contractual freedom can have efficiency-enhancing effects. |
| Keywords: | gift exchange, multiple agents, uniform contracts, collective wage, experiment |
| JEL: | C72 C91 C92 D21 J31 J50 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2012-02&r=exp |
| By: | Kocher, Martin G.; Luhan, Wolfgang J.; Sutter, Matthias |
| Abstract: | Empirical work on Akerlof’s theory of gift exchange in labor markets has concentrated on the fair wage-effort hypothesis. In fact, however, the theory also contains a social component that stipulates that homogenous agents that are employed for the same wage level will exert more effort, resulting in higher rents and higher market efficiency, than agents that receive different wages. We present the first test of this component, which we call the fair uniform-wage hypothesis. In our laboratory experiment, we establish the existence of a significant efficiency premium of uniform wages. However, it is not the consequence of a stronger level of reciprocity by agents, but of the retrenchment of sanctioning options on the side of principals with uniform wages. Hence, implementing limitations to contractual freedom can have efficiency-enhancing effects. |
| Keywords: | gift exchange; multiple agents; uniform contracts; collective wage; experiment |
| JEL: | C72 C91 C92 D21 J31 J50 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:12816&r=exp |
| By: | Ana Conte (University of Westminster, London, UK, and Max-Planck-Institute of Economics, Jena); John D. Hey (University of York, UK) |
| Abstract: | The recent spate of theoretical models of behaviour under ambiguity can be partitioned into two sets : those involving multiple priors (in which the probabilities of the various events are not known but probabilities can be attached to the various possible values for the probabilities) and those not involving multiple priors. This paper concentrates on the first set and provides an experimental investigation into recently proposed theories. Using an appropriate experimental interface, in which the probabilities on the various possibilities are explicitly stated, we examine the fitted and predictive power of the various theories. We first estimate subject-by-subject, and then we estimate and predict using a mixture model over the contending theories. The individual estimates suggest that 25% of our 149 subjects have behaviour consistent with Expected Utility, 54% with the Smooth Model (of Klibanoff et al, 2005), 12% with Rank Dependent Expected Utility and 9% with the Alpha Model (of Ghirardato et al 2004); these figures are very close to the mixing proportions obtained from the mixture estimates. However, if we classify our subjects through the posterior probabilities (given all the evidence) of each of them being of the various types: using the estimates we get 36%, 19%, 28% and 11% (for EU, Smooth, Rank Dependent and Alpha); while using the predictions 36%, 19%, 33% and 16%. Interestingly the older models (EU and RD) seem to fare relatively better, suggesting that representing ambiguity through multiple priors is not perceived as the correct representation by subjects. |
| Keywords: | Alpha Model, Ambiguity, Expected Utility, Mixture Models, Rank Dependent Expected Utility, Smooth Model |
| JEL: | D81 C91 C23 |
| Date: | 2012–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-068&r=exp |
| By: | Drichoutis, Andreas; Nayga, Rodolfo |
| Abstract: | We revisit the claims about the biological underpinnings of economic behavior by specifically exploring if observed gender differences in risk/time preferences can be explained by natural fluctuations in progesterone/estradiol levels during the menstrual cycle and by prenatal exposure to testosterone levels. Results suggest that natural fluctuations in progesterone levels have a direct effect on discount rates and that estradiol/progesterone levels can indirectly affect time preferences by changing the curvature of the utility function. Using measured D2:D4 digit ratio, results imply that subjects with low digit ratio exhibit higher discount rates and risk loving preferences. |
| Keywords: | discount rates; risk aversion; lab experiment; menstrual cycle; D2:D4 ratio; hormones; estradiol; progesterone; testosterone |
| JEL: | D81 C91 |
| Date: | 2012–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37320&r=exp |
| By: | Luis José Blas Moreno Garrido (Dpto. Fundamentos del Análisis Económico); Ismael Rodríguez Lara (Universidad de Alicante) |
| Abstract: | We expand upon the previous models of inequity aversion of Fehr and Schmidt (1999) and Frohlich, Oppenheimer and Kurki (2004), which assume that dictators get disutility if the final allocation of the surplus deviates from the equal split (egalitarian principle) or from the subjects’ production (libertarian principle). In our model, dictators may also account for the way in which the surplus was generated. More precisely, our model incorporates the idea of the liberal egalitarian ethics into the analysis, making it possible for dictators to divide the surplus according to the accountability principle, which states that subjects should only be rewarded for factors under their control. This fairness ideal does not hold subjects responsible for factors beyond their control in the production of the surplus, an idea that is absent in the models of inequity aversion cited above. |
| Keywords: | social preferences, inequity aversion, inequality aversion, egalitarian principle, libertarian principle, accountability principle. |
| JEL: | D3 D63 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2012-04&r=exp |
| By: | Federica Alberti (Max Planck Institute of Economics, Strategic Interaction Group, Jena); Edward J. Cartwright (School of Economics, University of Kent, Canterbury); Anna Stepanova (School of Economics, University of Kent, Canterbury) |
| Abstract: | We propose and develop a model of behavior in threshold public good games. The model draws on learning direction theory and impulse balance theory. We find good support for the model and demonstrate that it can explain the success rates observed in threshold public good experiments. The model is applied in a variety of dierent settings : we compare games with a full refund to those with no refund, consider changes in relative endowment, and consider changes in the step return and net reward. |
| Keywords: | Public good, threshold, learning direction theory, impulse balance theory, counterfactual thinking |
| JEL: | C72 H41 C92 |
| Date: | 2012–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-062&r=exp |
| By: | Olivier Armantier; Scott Nelson; Giorgio Topa; Wilbert van der Klaauw; Basit Zafar |
| Abstract: | Understanding the formation of consumer inflation expectations is considered crucial for managing monetary policy. This paper investigates how consumers form and update their inflation expectations using a unique “information” experiment embedded in a survey. We first elicit respondents’ expectations for future inflation either in their own consumption basket or for the economy overall. We then randomly provide a subset of respondents with inflation-relevant information: either past-year food price inflation, or a median professional forecast of next-year overall inflation. Finally, inflation expectations are re-elicited from all respondents. This design creates unique panel data that allow us to identify the effects of new information on respondents’ inflation expectations. We find that respondents revise their inflation expectations in response to information, and do so meaningfully: revisions are proportional to the strength of the information signal, and inversely proportional to the precision of prior inflation expectations. We also find systematic differences in updating across demographic groups and by question wording, underscoring how different types of information may be more or less relevant for different groups, and how the observed impact of information may depend on methods used to elicit inflation expectations. |
| Keywords: | Inflation (Finance) ; Consumer behavior ; Information theory ; Consumer surveys |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:543&r=exp |
| By: | Mariam Bruhn (World Bank); Dean Karlan (Economic Growth Center, Yale University); Antoinette Schoar (MIT) |
| Abstract: | We test whether managerial human capital has a first order effect on the performance and growth of small enterprise in emerging markets. In a randomized control trial in Puebla, Mexico, we randomly assigned 150 out of 432 small and medium size enterprises to receive subsidized consulting services, while the remaining 267 enterprises served as a control group that did not receive any subsidized training. Treatment enterprises were matched with one of nine local consulting firms and met with their consultants once a week for four hours over a one year period. Results from a follow-up survey, conducted after the intervention, show that the consulting services had a large impact on the performance of the enterprises in the treatment group: monthly sales went up by about 80 percent; similarly, profits and productivity increased by 120 percent compared to the control group. We also see a significant increase in the entrepreneurial spirit index for the treatment group, a set of questions designed to illicit the SME owners’ confidence in their ability to manage their business and deal with any future difficulties. However, we do not find any significant increase in the number of workers employed in the treatment group. |
| Keywords: | enterprise growth, entrepreneurship, managerial capital |
| JEL: | D21 D24 L20 M13 O12 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:10010&r=exp |