nep-exp New Economics Papers
on Experimental Economics
Issue of 2013‒01‒19
24 papers chosen by
Daniel Houser
George Mason University

  1. Self-Image and Moral Balancing - An Experimental Analysis By Matteo. Ploner; Tobias Regner
  2. The Effect of Earned vs. House Money on Price Bubble Formation in Experimental Asset Markets By Brice Corgnet; Roberto Hernán González; Praveen Kujal; David Porter
  3. The Impact of Forward Trading on Tacit Collusion: Experimental Evidence By Schubert, Jens
  4. Temporal stability of risk preference measures By Katerina Straznicka
  5. You Can’t Put Old Wine in New Bottles: The Effect of Newcomers on Coordination in Groups By Roman M. Sheremeta; Matthew W. McCarter
  6. Contagious Bank Runs: Experimental Evidence By Martin Brown; Stefan Trautmann; Razvan Vlahu
  7. Investment Incentives under Emission Trading: An Experimental Study By Eva Camacho-Cuena; Till Requate; Israel Waichman
  8. Bubbles and Incentives : An Experiment on Asset Markets By Stéphane Robin; Katerina Straznicka; Marie Claire Villeval
  9. Three-Player Trust Game with Insider Communication By Roman M. Sheremeta; Jingjing Zhang
  10. In the long-run we are all dead: On the benefits of peer punishment in rich environments By Engelmann, Dirk; Nikiforakis, Nikos
  11. Information and Learning in Oligopoly: An Experiment By Bigoni, Maria; Fort, Margherita
  12. A theoretical framework for trading experiments By Maxence Soumare; Jørgen Vitting Andersen; Francis Bouchard; Alain Elkaim; Dominique Guegan; Justin Leroux; Michel Miniconi; Lars Stentoft
  13. Multi-Object Auctions with Resale: An Experimental Analysis By Pagnozzi, Marco; Saral, Krista Jabs
  14. Preference for Randomization: Empirical and Experimental Evidence By Nadja Dwenger; Dorothea Kübler; Georg Weizsäcker;
  15. Peer Pressure and Moral Hazard in Teams: Experimental Evidence By Brice Corgnet; Roberto Hernán González; Stephen Rassenti
  16. Gender discrimination and social identity: experimental evidence from urban Pakistan By Adeline Delavande; Basit Zafar
  17. The Effect of Income on the Importance of Money: Survey and Experimental Evidence By DeVoe, Sanford E.; Pfeffer, Jeffrey; Lee, Byron Y.
  18. What Does "Intending to Vote" Mean? By Rogers, Todd; Aida, Masa
  19. Money Doctors By Nicola Gennaioli; Andrei Shleifer; Robert Vishny
  20. Cognitive Sinergy as Determinant of Poverty Reduction By William Prieto Bustos
  21. Are Risk Attitudes Fixed Factors or Fleeting Feelings? By Cho, In Soo
  22. Are Retirement Decisions Vulnerable to Framing Effects? Empirical Evidence from NL and the US By Federica Teppa; Maarten van Rooij
  23. Variable Temptations and Black Mark Reputations By Aperjis, Christina; Miao, Yali; Zeckhauser, Richard J.
  24. Evolutionary Exploration of the Finitely Repeated Prisoners' Dilemma--The Effect of Out-of-Equilibrium Play By Lindgren, Kristian; Verendel, Vilhelm

  1. By: Matteo. Ploner (University of Trento, CEEL, Italy); Tobias Regner (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany)
    Abstract: In our experiment, a dictator game variant, the reported outcome of a die roll determines the endowment (low/high) in a subsequent dictator game. In one treatment the experimenter is present and no cheating is possible, while in another subjects can enter the result of the roll themselves. Moral self-image is also manipulated in the experiment preceding ours. The aim of this experimental set up is to analyze dynamic aspects of moral behavior. When cheating is possible, substantially more high endowments are claimed and transfers of high-endowed dictators are bigger than when cheating is not possible (mediated by the preceding moral self-image manipulation). The preceding manipulations also have a direct effect on generosity, when subjects have to report the roll of the die truthfully. Moral balancing appears to be an important factor in individual decision making.
    Keywords: honesty, moral balancing, self-image, dictator game, experiments, ethical behavior
    JEL: C91 D03
    Date: 2013–01–08
  2. By: Brice Corgnet (Argyros School of Business and Economics, Chapman University); Roberto Hernán González (Universidad de Granada); Praveen Kujal (Universidad Carlos III); David Porter (Economic Science Institute, Chapman University)
    Abstract: Can “house money” explain asset market bubbles? We test this hypothesis in an asset market experiment with a certain dividend. We compare experiments where the initial portfolio of cash and shares is given to subjects, i.e. house money, to a treatment in which individual initial portfolios are constructed using subject earned money from a real effort task. We find that bubbles still occur; however trading volumes are significantly abated and the dispersion of earnings is significantly lower when subjects earn their starting endowments. We further investigate the role of cognitive ability in accounting for the differences in earnings distribution across treatments by using the Cognitive Reflection Test (CRT). We find that high CRT subjects earned more money on average than the initial value of their portfolio while low CRT subjects earned less. Subjects with low CRT scores were net purchasers (sellers) of shares when the price was above (below) fundamental value while the opposite was true for subjects with high CRT scores.
    Date: 2013
  3. By: Schubert, Jens
    Abstract: This article reports the results of a laboratory experiment that examines the strategic effect of forward contracts on market power in infinitely repeated duopolies. Two competing effects motivate the experimental design. Allaz and Vila (1993) argue that forward markets act like additional competitors in that they increase quantity competition among firms. Conversely, Liski and Montero (2006) argue that forward contracting can facilitate collusive outcomes by enabling firms to soften competition. The experiment provides a first simultaneous test of these rival effects. Contrary to previous experimental studies, the results do not support the quantity-competition effect. Further, the findings provide evidence in support of the collusive hypothesis.
    Keywords: Cournot oligopoly; Collusion; Experiments; Forward markets; Electricity markets
    JEL: L13 Q49 D43 C91 C72
    Date: 2013–01–01
  4. By: Katerina Straznicka (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: We examine the temporal stability of risk preference measures obtained by different elicitation methods in a controlled laboratory experiment at two distinct times. Our results indicate remarkable temporal stability of risk measures at the aggregated level and temporal instability at the individual level. We control for the impact of, first, personality traits, and second, performance realized in a market game. When better market performers demonstrate more stable risk preferences, the impact of personality traits is marginal.
    Keywords: Time stability, Risk Preferences, Personality Theory, Experimental economics
    JEL: C9 D8 D9
    Date: 2012
  5. By: Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University); Matthew W. McCarter (Argyros School of Business and Economics, Chapman University)
    Abstract: A common finding in social sciences is that member change hinders group functioning and performance. However, questions remain as to why member change negatively affects group performance and what are some ways to alleviate the negative effects of member change on performance? To answer these questions we conduct an experiment in which we investigate the effect of newcomers on a group’s ability to coordinate efficiently. Participants play a coordination game in a four-person group for the first part of the experiment, and then two members of the group are replaced with new participants, and the newly formed group plays the game for the second part of the experiment. Our results show that the arrival of newcomers decreases trust among group members and this decrease in trust negatively affects group performance. Knowing the performance history of the arriving newcomers mitigates the negative effect of their arrival, but only when newcomers also know the oldtimers performance history. Surprisingly, in groups that performed poorly prior to the newcomers’ arrival, the distrust generated by newcomers is mainly between oldtimers about each other rather than about the newcomers.
    Keywords: coordination, group performance, oldtimers, newcomers, trust, experiments
    JEL: C72 C91
    Date: 2013
  6. By: Martin Brown; Stefan Trautmann; Razvan Vlahu
    Abstract: We conduct a laboratory experiment to examine under which circumstances a depositor-run at one bank may lead to a depositor-run at another bank. We implement two-person coordination games which capture the essence of the Diamond-Dybvig (1983) bank-run model. Subjects in the roles of followers observe the deposit withdrawal decisions of leaders before they make their own deposit withdrawal decisions. In one treatment followers know that there are no economic linkages between the leaders’ and the followers’ banks. In a second treatment followers know that there are economic linkages between the leaders’ and the followers’ banks. Our results suggest that deposit withdrawals are strongly contagious across banks only when depositors know that there are economic linkages between banks. The contagion of withdrawals is by a change in beliefs about bank asset quality and in beliefs about the behavior of other depositors, with the latter channel being more pronounced. Our results reconcile panic-based and information-based explanations of bank runs.
    Keywords: Contagion; Bank runs; Systemic risk
    JEL: D81 G21 G28
    Date: 2012–12
  7. By: Eva Camacho-Cuena (LEE & Economics Department, Universitat Jaume I, Castellón, Spain); Till Requate (Economics Department, University of Kiel, Germany); Israel Waichman (Department of Economics, University of Heidelberg, Germany)
    Abstract: This paper presents the results of an experimental investigation on incentives to adopt advanced abatement technology under emissions trading. Our experimental design mimics an industry with small asymmetric polluting firms regulated by different schemes of tradable permits. We consider three allocation/auction policies: auctioning off (costly) permits through an ascending clock auction, grandfathering permits with re-allocation through a single-unit double auction, and grandfathering with reallocation through an ascending clock auction. Our results confirm both dynamic and static theoretical equivalence of auctioning and grandfathering. We nevertheless find that although the market institution used to reallocate permits does not impact the dynamic efficiency from investment, it affects the static efficiency from permit trading.
    Keywords: Environmental policy, abatement technology, taxes, permit trading, auctions opportunity, Ultimatum Game
    JEL: C92 D44 L51 Q28 Q55
    Date: 2012
  8. By: Stéphane Robin (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Katerina Straznicka (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Marie Claire Villeval (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: We explore the effects of competitive incentives and of their time horizon on the evolution of both asset prices and trading activity in experimental asset markets. We compare i) a no-bonus treatment based on Smith, Suchanek and Williams (1988) ; ii) a short-term bonus treatment in which bonuses are assigned to the best performers at the end of each trading period ; iii) a long-term bonus treatment in which bonuses are assigned to the best performers at the end of the 15 periods of the market. We find that the existence of bonus contracts does not increase the likelihood of bubbles but it affects their severity, depending on the time horizon of bonuses. Markets with long-term bonus contracts experience lower price deviations and a lower turnover of assets than markets with either no bonuses or long-term bonus contracts. Short-term bonus contracts increase price deviations but only when markets include a higher share of male traders. At the individual level, the introduction of bonus contracts increases the trading activity of males, probably due to their higher competitiveness. Finally, both mispricing and asset turnover are lower when the pool of traders is more risk-averse.
    Keywords: Asset market, bubbles, incentives, bonuses, risk attitudes, experiment
    JEL: C92 M52
    Date: 2012
  9. By: Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University); Jingjing Zhang (University of Zurich)
    Abstract: We examine behavior in a three-player trust game in which the first player may invest in the second and the second may invest in the third. Any amount sent from one player to the next is tripled. The third player decides the final allocation among three players. The baseline treatment with no communication shows that the first and second players send significant amounts and the third player reciprocates. Allowing insider communication between the second and the third players increases cooperation between these two. Interestingly, there is an external effect of insider communication: the first player who is outside communication sends 54% more and receives 289% more than in the baseline treatment. As a result, insider communication increases efficiency from 44% to 68%.
    Keywords: three-player trust games, experiments, reciprocity, communication
    JEL: C72 C91 D72
    Date: 2013
  10. By: Engelmann, Dirk; Nikiforakis, Nikos
    Abstract: We investigate whether peer punishment is an efficient mechanism for enforcing cooperation in an experiment with a long time horizon. Previous evidence suggests that the costs of peer punishment can be outweighed by the benefits of higher cooperation, if (i ) there is a sufficiently long time horizon and (ii ) punishment cannot be avenged. However, in most instances in daily life, when individuals interact for an extended period of time, punishment can be retaliated. We use a design that imposes minimal restrictions on who can punish whom or when, and allows participants to employ a wide range of punishment strategies including retaliation of punishment. Similar to previous research, we find that, when punishment cannot be avenged, peer punishment leads to higher earnings relative to a baseline treatment without any punishment opportunities. However, in the more general setting, we find no evidence of group earnings increasing over time relative to the baseline treatment. Our results raise questions under what conditions peer punishment can be an efficient mechanism for enforcing cooperation.
    Keywords: altruistic punishment , counter-punishment , public good game , feuds
    JEL: C92 D70 H41
    Date: 2012
  11. By: Bigoni, Maria (University of Bologna); Fort, Margherita (University of Bologna)
    Abstract: This paper presents an experiment on learning in repeated games, which complements the analysis of players' actual choices with data on the information acquisition process they follow. Subjects play a repeated Cournot oligopoly, with limited a priori information. The econometrics hinges on a model built upon Experience Weighted Attraction learning, and the simultaneous analysis of data on the information gathered and on actions taken by the subjects. Results suggest that learning is a composite process, in which different components coexist. Adaptive learning emerges as the leading element, but when subjects look at the strategies individually adopted by their competitors they tend to imitate the most successful behavior, which makes markets more competitive. Reinforcement learning also plays a role, as subjects favor strategies that have yielded higher profits in the past.
    Keywords: information, imitation, Cournot oligopoly, EWA learning
    JEL: L13 C92 C72
    Date: 2013–01
  12. By: Maxence Soumare (JAD - Laboratoire Jean Alexandre Dieudonné - CNRS : UMR6621 - Université Nice Sophia Antipolis (UNS)); Jørgen Vitting Andersen (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne); Francis Bouchard (HEC - Institute for Applied Economics - HEC MONTRÉAL); Alain Elkaim (HEC - Institute for Applied Economics - HEC MONTRÉAL); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne); Justin Leroux (HEC - Institute for Applied Economics - HEC MONTRÉAL); Michel Miniconi (JAD - Laboratoire Jean Alexandre Dieudonné - CNRS : UMR6621 - Université Nice Sophia Antipolis (UNS)); Lars Stentoft (HEC - Institute for Applied Economics - HEC MONTRÉAL)
    Abstract: A general framework is suggested to describe human decision making in a certain class of experiments performed in a trading laboratory. We are in particular interested in discerning between two different moods, or states of the investors, corresponding to investors using fundemental investment strategies, technical analysis investment strategies respectively. Our framework accounts for two opposite situations already encountered in experimental setups : i) the rational expectations case, and ii) the case of pure speculation. We consider new experimental conditions which allow both elements to be present in the decision making process of the traders, thereby creating a dilemma in terms of investment strategy. Our theoretical framework allows us to predict the outcome of this type of trading experiments, depending on such variables as the number of people trading, the liquidity of the market, the amount of information used in technical analysis strategies, as well as the dividends attributed to an asset. We find that it is possible to give a qualitative prediction of trading behavior depending on a ratio that quantifies the fluctuations in the model.
    Keywords: Decision making; game theory; complex systems theory; technical analysis; rational expectations
    Date: 2012–11
  13. By: Pagnozzi, Marco; Saral, Krista Jabs
    Abstract: We analyze the effects of resale through bargaining in multi-object uniform-price auctions with asymmetric bidders. The possibility of resale affects bidders' strategies, and hence the allocation of the objects on sale and the seller's revenue. Our experimental design consists of four treatments: one without resale and three resale treatments that vary both the bargaining mechanism and the amount of information available in the resale market. As predicted by theory: (i) without resale, asymmetry among bidders reduces demand reduction; (ii) resale increases demand reduction by high-value bidders; (iii) low-value bidders speculate by bidding more aggressively with resale. Therefore, resale induces speculation and demand reduction which reduce auction efficiency. In contrast to what is usually argued, resale does not necessarily increase final efficiency and may not reduce the seller's revenue. Features of the resale market that tend to increase its efficiency also reduce the seller's revenue.
    Keywords: multi-object auctions; resale; asymmetric bidders; bargaining; economic experiments
    JEL: D44 C90
    Date: 2013–01
  14. By: Nadja Dwenger; Dorothea Kübler; Georg Weizsäcker;
    Abstract: We investigate violations of consequentialism in the form of the stochastic dominance property. The property is shared by many theories of choice and implies that the decision-maker prefers receiving the best outcome for sure over all lotteries that involve multiple outcomes. We run experiments to demonstrate that dominated randomization can be attractive. In treatments where decision-makers are asked to submit multiple decisions without knowing which one is relevant, many participants submit contradictory sets of decisions and thereby induce a dominated lottery between outcomes. Explicit choice of non-consequentialist randomization is observed in a separate treatment. A possible reason for the eect is the desire to avoid having to make the decision. A large data set on (high-stake) university applications in Germany shows patterns that are consistent with a preference for randomization.
    Keywords: Stochastic dominance violations, individual decision making, university choice, matching
    JEL: D03 D01
    Date: 2013–01
  15. By: Brice Corgnet (Argyros School of Business and Economics, Chapman University); Roberto Hernán González (Universidad de Granada); Stephen Rassenti (Economic Science Institute, Chapman University)
    Abstract: Holmström (1982) established that free riding behaviors are pervasive whenever people are paid according to aggregate measures of output such as team incentives. However, team incentives have been found to be particularly effective both in the lab and in the field. In this paper we show, in line with Holmström (1982), that shirking behaviors in teams are indeed pervasive. Production levels were significantly lower under team incentives than under individual incentives while the time dedicated to on-the-job leisure activities (Internet usage) was significantly larger under team incentives than under individual incentives. Subsequently, we find that a very weak form of peer monitoring (anonymous and without physical proximity, verbal threats or face to face interactions) allowed organizations using team incentives to perform as well as those using individual incentives. This provides strong evidence for the conjecture of Kandel and Lazear (1992) that peer pressure may resolve the moral hazard in teams problem.
    Keywords: Incentives, free-riding, monitoring, peer pressure, organization theory
    JEL: C92 D23 M52
    Date: 2013
  16. By: Adeline Delavande; Basit Zafar
    Abstract: Gender discrimination in South Asia is a well-documented fact. However, gender is only one of an individual’s many identities. This paper investigates how gender discrimination depends on the social identities of interacting parties. We use an experimental approach to identify gender discrimination by randomly matching 2,836 male and female students pursuing bachelor’s-equivalent degrees in three different types of institutions—Madrassas (religious seminaries), Islamic universities, and liberal universities—that represent distinct identities within the Pakistani society. Our main finding is that gender discrimination is not uniform in intensity and nature across the educated Pakistani society and varies as a function of the social identity of both individuals who interact. While we find no evidence of higher-socioeconomic-status men discriminating against women, men of lower socioeconomic status and higher religiosity tend to discriminate against women--but only women of lower socioeconomic status who are closest to them in social distance. Moreover, this discrimination is largely taste-based. Our findings suggest that social policies aimed at empowering women need to account for the intersectionality of gender with social identity.
    Keywords: Sex discrimination against women ; Stereotype (Psychology) ; Social choice ; Women - Education
    Date: 2013
  17. By: DeVoe, Sanford E. (University of Toronto); Pfeffer, Jeffrey (Stanford University); Lee, Byron Y. (Renmin University of China)
    Abstract: The authors investigate how both the amount and source of income affects the importance placed on money using a longitudinal analysis of the British Household Panel Survey and evidence from two laboratory experiments. Larger amounts of money received for labor were associated with individuals placing greater importance on money, but this effect did not hold for money unrelated to work. The longitudinal survey analysis demonstrated these differential effects of the source of income on money's importance while holding constant stable individual differences. The experiments provide evidence that the source of income has a causal effect on the importance of money as well as on the effort expended to earn more money. Even as individual differences in the importance placed on money may affect peoples' income, our results suggests that, depending upon its source, income can also affect the importance people place on money.
    Date: 2012–11
  18. By: Rogers, Todd (Harvard University); Aida, Masa (Greenberg Quinlan Rosner Research)
    Abstract: How accurate are responses to questions about intentions to vote in an upcoming election? Questions of this type are studied in a range of work in political science to understand the effects of other factors on political engagement, as well as in public opinion research. We analyze six phone surveys conducted over two elections which include pre-election vote intention and postelection vote validation (N=24,303). As expected, many who report intending to vote actually do not vote (13% and 54% for the two elections). More surprisingly, high rates people who predicted they would not vote actually do vote (56% and 39%). For both forms of inaccurate self-prediction, respondents were much more accurate when predicting that they would behave consistently with their past behavior than when predicting that they would behave inconsistently with their past behavior. We discuss implications for political science research, behavioral prediction, election administration, and public opinion.
    Date: 2012–11
  19. By: Nicola Gennaioli; Andrei Shleifer; Robert Vishny
    Abstract: We present a new model of money management, in which investors delegate portfolio management to professionals based not only on performance, but also on trust. Trust in the manager reduces an investor?s perception of the riskiness of a given investment, and allows managers to charge higher fees to investors who trust them more. Money managers compete for investor funds by setting their fees, but because of trust the fees do not fall to costs. In the model, 1) managers consistently underperform the market net of fees but investors still prefer to delegate money management to taking risk on their own, 2) fees involve sharing of expected returns between managers and investors, with higher fees in riskier products, 3) managers pander to investors when investors exhibit biases in their beliefs, and do not correct misperceptions, and 4) despite long run benefits from better performance, the profits from pandering to trusting investors discourage managers from pursuing contrarian strategies relative to the case with o trust. We show how trust-mediated money management renders arbitrage less effective, and may help destabilize financial markets.
    Date: 2012
  20. By: William Prieto Bustos
    Abstract: The following document describes an experimental methodological design implemented to test the cognitive synergy hypothesis regarding poverty reduction proposed by Boiser (2010). The cognitive synergy hypothesis refers to social, cultural accumulation altogether with informal and formal knowledge accumulation hidden in local environment nets as a key determinant in reducing poverty levels. Albeit cognitive synergy and social and cultural capital accumulation seem to be related, the former comes from an outsider regulator who induces latent resources for reaching development goals meanwhile the latter comes without inducing a development strategy upon a specific territory. The experimental methodological design is implemented where a continental sample of inhabitants is compared with an island sample of inhabitants that are exposed to an induced development strategy. Main findings indicate that cognitive synergy caused by a development strategy based on capital, social and technological accumulation in the islander population carried on by a non-profit organization is statistically significant reducing poverty in a data panel model adjusted for 2007 and 2009 economic and social data for the islander population.
    Date: 2012–12–30
  21. By: Cho, In Soo
    Abstract: We investigate the stability of measured risk attitudes over time, using a 13-year longitudinal sample of individuals in the NLSY79. We find that an individual’s risk aversion changes systematically in response to personal economic circumstances.  Risk aversion increases with lengthening spells of employment and time out of labor force, and decreases with lengthening unemployment spells.  However, the most important result is that the majority of the variation in risk aversion is due to changes in measured individual tastes over time and not to variation across individuals.  These findings that measured risk preferences are endogenous and subject to substantial measurement errors suggest caution in interpreting coefficients in models relying on contemporaneous, one-time measures of risk preferences.  
    Keywords: risk aversion; stability; variance decomposition; within; measurement error; between; fixed effects
    JEL: C23 D81
    Date: 2013–01–10
  22. By: Federica Teppa; Maarten van Rooij
    Abstract: This study investigates whether individual choices in the pension domain are vulnerable to the way alternatives are communicated to respondents. The analysis is based on a set of hypothetical questions posed in the DNB House-hold Survey as well as in the RAND American Life Panel on pension premium contributions and pension savings investment profiles. The design of the questions presented to the respondent in several alternative ways allows to test for the potential role of framing effects, as well as order and choice set effects. We find that framing has a significant and robust impact on individuals decisions. The effect is particularly strong for the alternative labeled as ‘standard’ option. In contrast, the answer categories order does not seem to be always significantly relevant. We also find that hypothetical preferences are consistent with the individual risk profile and actual portfolio allocations. The findings suggest that the presence of framing effects is strongly correlated with the complexity of decisions to be made and highlight the importance of communication with respect to retirement decisions.
    Keywords: Framing effects; Individual decision making; Retirement behavior and pensions
    JEL: C5 C9 D12 G11
    Date: 2012–12
  23. By: Aperjis, Christina (HP Labs, Palo Alto, CA); Miao, Yali (Jane Street Capital, Tokyo); Zeckhauser, Richard J. (Harvard University)
    Abstract: In a world of imperfect information, reputations often guide the sequential decisions to trust and to reward trust. We consider two-player situations, where the players meet but once. One player--the truster--decides whether to trust, and the other player--the temptee--has a temptation to betray when trusted. The strength of the temptation to betray may vary from encounter to encounter, and is independently distributed over time and across temptees. We refer to a recorded betrayal as a black mark. We study how trusters and temptees interact in equilibrium when past influences current play only through its effect on certain summary statistics. We first focus on the case that players only condition on the number of black marks of a temptee and study the different equilibria that emerge, depending on whether the trusters, the temptees, or a social planner has the ability to specify the equilibrium. We then show that conditioning on the number of interactions as well as on the number of black marks does not prolong trust beyond black marks alone. Finally, we consider more general summary statistics of a temptee's past and identify conditions under which there exist equilibria where trust is possibly suspended only temporarily.
    Date: 2012–11
  24. By: Lindgren, Kristian; Verendel, Vilhelm
    Abstract: The finitely repeated Prisoners' Dilemma is a good illustration of the discrepancy between the strategic behaviour suggested by a game-theoretic analysis and the behaviour often observed among human players, where cooperation is maintained through most of the game. A game-theoretic reasoning based on backward induction eliminates strategies step by step until defection from the first round is the only remaining choice, reflecting the Nash equilibrium of the game. We investigate the Nash equilibrium solution for two different sets of strategies in an evolutionary context, using replicator-mutation dynamics. The first set consists of conditional cooperators, up to a certain round, while the second set in addition to these contains two strategy types that react differently on the first round action: The "Convincer" strategies insist with two rounds of initial cooperation, trying to establish more cooperative play in the game, while the "Follower" strategies, although being first round defectors, have the capability to respond to an invite in the first round. For both of these strategy sets, iterated elimination of strategies shows that the only Nash equilibria are given by defection from the first round. We show that the evolutionary dynamics of the first set is always characterised by a stable fixed point, corresponding to the Nash equilibrium, if the mutation rate is sufficiently small (but still positive). The second strategy set is numerically investigated, and we find that there are regions of parameter space where fixed points become unstable and the dynamics exhibits cycles of different strategy compositions. The results indicate that, even in the limit of very small mutation rate, the replicator-mutation dynamics does not necessarily bring the system with Convincers and Followers to the fixed point corresponding to the Nash equilibrium of the game. We also perform a detailed analysis of how the evolutionary behaviour depends on payoffs, game length, and mutation rate.
    Keywords: backward induction; rationality; prisoners' dilemma; evolutionary dynamics
    JEL: C7 C73 C72
    Date: 2013–01–04

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