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on Experimental Economics |
| By: | Ernst Fehr; Holger Herz; Tom Wilkening |
| Abstract: | Authority and power permeate political, social, and economic life, but empirical knowledge about the motivational origins and consequences of authority is limited. We study the motivation and incentive effects of authority experimentally in an authority- delegation game. Individuals often retain authority even when its delegation is in their material interest - suggesting that authority has non-pecuniary consequences for utility. Authority also leads to over-provision of effort by the controlling parties, while a large percentage of subordinates under-provide effort despite pecuniary incentives to the contrary. Authority thus has important motivational consequences that exacerbate the inefficiencies arising from suboptimal delegation choices. |
| Keywords: | Organizational behavior, incentives, experiments and contracts |
| JEL: | C92 D83 D23 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:099&r=exp |
| By: | Alain Cohn; Ernst Fehr; Lorenz Goette |
| Abstract: | The presence of workers who reciprocate higher wages with greater effort can have important consequences for labor markets. Knowledge about the determinants of reciprocal effort choices is, however, incomplete. We investigate the role of fairness perceptions and social preferences in workers’ performance in a field experiment in which workers were hired for a one-time job. We show that workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, while those who feel adequately paid or overpaid at the base wage do not change their performance. Moreover, we find that only workers who display positive reciprocity in a lab experiment show reciprocal performance responses in the field, while workers who lack positive reciprocity in the lab do not respond to the wage increase even if they feel underpaid at the base wage. Our findings suggest that fairness perceptions and social preferences are key in workers’ performance response to a wage increase. They are the first direct evidence of the fair-wage effort hypothesis in the field and also help interpret previous contradictory findings in the literature. |
| Keywords: | Fairness perception, positive reciprocity, field experiment, wage increase |
| JEL: | C93 J31 M52 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:107&r=exp |
| By: | Björn Bartling; Ernst Fehr; Klaus M. Schmidt |
| Abstract: | Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing them to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972) critique of the Coasian approach. |
| Keywords: | Theory of the firm, transaction cost economics, authority, power abuse, employment relation, fairness, reputation |
| JEL: | C91 D23 D86 M5 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:098&r=exp |
| By: | Schmidt, Klaus M.; Spann, Martin; Zeithammer, Robert |
| Abstract: | Pay What You Want (PWYW) can be an attractive marketing strategy to price discriminate between fair-minded and selfish customers, to fully penetrate a market without giving away the product for free, and to undercut competitors that use posted prices. We report on laboratory experiments that identify causal factors determining the willingness of buyers to pay voluntarily under PWYW. Furthermore, to see how competition affects the viability of PWYW, we implement markets in which a PWYW seller competes with a traditional seller. Finally, we endogenize the market structure and let sellers choose their pricing strategy. The experimental results show that outcome-based social preferences and strategic considerations to keep the seller in the market can explain why and how much buyers pay voluntarily to a PWYW seller. We find that PWYW can be viable in isolation, but it is less successful as a competitive strategy because it does not drive traditional posted-price sellers out of the market. Instead, the existence of a posted-price competitor reduces buyers’ payments and prevents the PWYW seller from fully penetrating the market. If given the choice, the majority of sellers opt for setting a posted price rather than a PWYW pricing. We discuss the implications of these results for the use of PWYW as a marketing strategy. |
| Keywords: | customer-driven pricing mechanisms; pay what you want; revenue management; price discrimination; social preferences |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:393&r=exp |
| By: | Holger Herz; Daniel Schunk; Christian Zehnder |
| Abstract: | Recent field evidence suggests a positive link between overconfidence and innovative activities. In this paper we argue that the connection between overconfidence and innovation is more complex than the previous literature suggests. In particular, we show theoretically and experimentally that different forms of overconfidence may have opposing effects on innovative activity. While overoptimism leads to an innovation enhancing effect, judgmental overconfidence inhibits innovation. Our results indicate that future research is well advised to take into account that the relationship between innovation and overconfidence may crucially depend on what type of overconfidence is most prevalent in a particular context. |
| Keywords: | Innovation, entrepreneurship, overconfidence, experiment |
| JEL: | C92 D83 D23 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:106&r=exp |
| By: | Cary Deck (University of Arkansas & Chapman University); David Porter (Economic Science Institute, Chapman University) |
| Abstract: | The idea that there is wisdom from the collective has been forcefully described in “The Wisdom of the Crowds” by James Surowiecki, who argues that the aggregation of information in groups results in better decisions than those that are afforded by any single member of the group. Markets, like opinion polls, are one mechanism for aggregating disparate pieces of information. The aggregation properties of prices were first noted by Hayek (1945) and were formally examined by Muth (1961). In particular, Hayek argues that market prices serve the purpose of sharing and coordinating local and personal knowledge, while Muth shows that markets do not waste information and that the current price contains all the information available from market participants. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:13-05&r=exp |
| By: | Tiziana Assenza (Catholic University of Milan); Peter Heemeijer (University of Amsterdam, and ABN AMRO); Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam) |
| Abstract: | The way in which individual expectations shape aggregate macroeconomic variables is crucial for the transmission and effectiveness of monetary policy. We study the individual expectations formation process and the interaction with monetary policy, within a standard New Keynesian model, by means of laboratory experiments with human subjects. Three aggregate outcomes are observed: convergence to some equilibrium level, persistent oscillatory behavior and oscillatory convergence. We fit a heterogeneous expectations model with a performance-based evolutionary selection among heterogeneous forecasting heuristics to the experimental data. A simple heterogeneous expectations switching model fits individual learning as well as aggregate macro behavior and outperforms homogeneous expectations benchmarks. Moreover, in accordance to theoretical results in the literature on monetary policy, we find that an interest rate rule that reacts more than point for point to inflation has some stabilizing effects on inflation in our experimental economies, although convergence can be slow in presence of evolutionary learning. |
| Keywords: | Experiments; New Keynesian Macro Model; Monetary Policy; Expectations; Heterogeneity |
| JEL: | C91 C92 D84 E52 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20130016&r=exp |
| By: | Di Bartolomeo Giovanni; Papa Stefano |
| Abstract: | Our paper aims to investigate conditional and unconditional motivations in investment games by using a counterfactual methodology and attitudinal survey and self-reported information about participants’ behavior. We have combined different methodologies to verify the coherence between participants’ actions, beliefs and perceptions |
| Keywords: | Conditional and unconditional other-regarding preferences, triadic approach, investment game, frame effect |
| JEL: | D03 C91 D83 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0099&r=exp |
| By: | Gianandrea Staffiero (Universitat Pompeu Fabra, Department of Economics and Business); Filippos Exadaktylos (BELIS, Murat Sertel Center for Advanced Economic Studies, Istanbul Bilgi University); Antonio M. Espín (Department of Economic Theory and Economic History, University of Granada.) |
| Abstract: | The rejection of unfair proposals in ultimatum games is often quoted as evidence of other-regarding preferences. In this paper we focus on those responders who accept any proposals, setting the minimum acceptable offer (MAO) at zero. While this behavior could result from the randomization between the two payoff-maximizing strategies (i.e. setting MAO at zero or at the smallest positive amount), it also implies that the opponent’s payoff is maximized and the “pie” remains intact. We match subjects’ behavior as ultimatum responders with their choices in the dictator game, in two large-scale experiments. We find that those who set MAO at zero are the most generous dictators. Moreover, they differ substantially from responders whose MAO is the smallest positive offer, who are the greediest dictators. Thus, an interpretation of zero MAOs in terms of selfish, payoff-maximizing behavior could be misleading. Our evidence indicates that the restraint from punishing others can be driven by altruism and by the desire to maximize social welfare. |
| Keywords: | ultimatum game, dictator game, altruism, social welfare, costly punishment, selfishness, social preferences. |
| Date: | 2013–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:13/01&r=exp |
| By: | Mare Sarr and Mintewab Bezabih |
| Abstract: | To the extent that diversifying income portfolio is used as a strategy for shielding against production risk, both individual risk preferences and weather uncertainty could affect crop diversification decisions. This paper is concerned with empirically assessing the effects of risk preferences and rainfall variability on farm level diversity. Unique panel data from Ethiopia consisting of experimentally generated risk preference measures combined with rainfall data are employed in the analysis. The major contribution of this study is its explicit treatment of individual risk preferences in the decision to diversify, simultaneously controlling for environmental risk in the form of rainfall variability. Covariate shocks from rainfall variability are found to positively contribute to an increased level of diversity with individual risk aversion having a positive but less significant role. We find that rainfall variability in spring has a greater effect than rainfall variability summer—the major rainy season. This finding is in line with similar agronomic-meteorological studies. These results imply that in situ biodiversity conservation could be effective in areas with high rainfall variability. However, reduction in risk aversion, which is associated with poverty reduction, is likely to reduce in situ conservation. |
| Keywords: | Crop diversity, Experimental risk preferences, Rainfall, Uncertainty |
| JEL: | Q57 Q56 C33 C35 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:322&r=exp |
| By: | Demombynes, Gabriel; Gubbins, Paul; Romeo, Alessandro |
| Abstract: | The proliferation of mobile phones in developing countries has generated a wave of interest in collecting high-frequency socioeconomic surveys using this technology. This paper considers lessons from one such survey effort in a difficult environment -- the South Sudan Experimental Phone Survey, which gathered data on living conditions, access to services, and citizen attitudes via monthly interviews by phones provided to respondents. Non-response, particularly in later rounds of the survey, was a substantial problem, largely due to erratic functioning of the mobile network. However, selection due to non-response does not appear to have markedly affected survey results. Response rates were much higher for respondents who owned their own phones. Both compensation provided to respondents in the form of airtime and the type of phone (solar-charged or traditional) were varied experimentally. The type of phone was uncorrelated with response rates and, contrary to expectation, attrition was slightly higher for those receiving the higher level of compensation. The South Sudan Experimental Phone Survey experience suggests that mobile phones can be a viable means of data collection for some purposes, that calling people on their own phones is preferred to handing out phones, and that careful attention should be given to the potential for selective non-response. |
| Keywords: | E-Business,ICT Policy and Strategies,Social Analysis,Housing&Human Habitats,Social Accountability |
| Date: | 2013–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6321&r=exp |
| By: | Jeffrey V. Butler; Enrica Carbone; Pierluigi Conzo; Giancarlo Spagnolo |
| Abstract: | This paper reports results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We propose a procurement model with reputation and entry assigning to the entrant a reputational advantage of varying size across treatments. There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new (smaller or foreign) firms in public procurement markets. Our results suggest that while some reputational mechanisms indeed reduce the frequency of entry, appropriately designed reputation mechanisms actually stimulate it. Since quality increases but not prices, our data also suggest that the introduction of reputation may generate large welfare gains for the buyer. |
| Keywords: | Entry, Feedback mechanisms, Governance, Incomplete contracts, Limited enforcement, Incumbency, Multidimensional competition, Participation, Past performance, Procurement, Quality, Reputation, Vendor rating. |
| JEL: | H57 L14 L15 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:usi:labsit:045&r=exp |