nep-exp New Economics Papers
on Experimental Economics
Issue of 2014‒11‒01
fifteen papers chosen by
Daniel Houser
George Mason University

  1. A Futures Market Reduces Bubbles but Allows Greater Profit for More Sophisticated Traders By Charles Noussair; Steven J.Tucker; Yilong Xu
  2. Voting to Tell Others By Gautam Rao; Stefano DellaVigna; John List; Ulrike Malmendier
  3. Eye-image in Experiments: Social Cue or Experimenter Demand Effect? By Subhasish M. Chowdhury; Joo Young Jeon; Bibhas Saha
  4. Car License Auction: Theory and Experimental Evidence By Lijia Tan; Lijia Wei
  5. Medical Insurance and Free Choice of Physician Shape Patient Overtreatment. A Laboratory Experiment By Steffen Huck; Gabriele Lünser; Florian Spitzer; Jean-Robert Tyran
  6. Compensated Discount Functions: An Experiment on the Influence of Expected Income on Time Preferences By Attila Ambrus; Tinna Laufey Ãsgeirsdóttir; Jawwad Noor; László Sándor
  7. Misperception of Consumption: Evidence from a Choice Experiment By Seeun Jung; Yasuhiro Nakamoto,; Masayuki Sato; Katsunori Yamada
  8. Alternation bias and reduction in St. Petersburg gambles By Kim Kaivanto; Eike Kroll
  9. How does risk management influence production decisions? evidence from a field experiment By Cole, Shawn; Gine, Xavier; Vickery, James
  10. Clean substitutes and the effectiveness of Carbon Footprint Labels vs. Pigovian Subsidies: Evidence from a Field Experiment By Bruno Lanz; Jules-Daniel Wurlod; Luca Panzone; Timothy Swanson
  11. Social Comparison and Peer effects with Heterogeneous Ability By Aurélie BONEIN
  12. Price Formation of Exhaustible Resources: An Experimental Investigation of the Hotelling Rule By Mathias Erlei; Christoph Neumann
  13. Macroinsurance for microenterprises : a randomized experiment in post-revolution Egypt By Groh, Matthew; McKenzie, David
  14. Should Paris Hilton Receive a Lighter Prison Sentence Because She’s Rich? An Experimental Study By Josef Montag; Tomas Sobek
  15. Asset Valuation in an Experimental Market: Comment Creation Date: 1982 By D. Friedman; G.W. Harrison; J.W. Salmon

  1. By: Charles Noussair (Tilburg University); Steven J.Tucker (University of Waikato); Yilong Xu (Tilburg University)
    Abstract: We study the effect of the addition of a futures market, in which contracts maturing in the last period of the life of the asset can be traded. Our experiment has two treatments, one in which a spot market operates on its own, and a second treatment in which a spot and futures market are active simultaneously. We find that the futures market reduces spot market mispricing among a trader population prone to bubbles, while having no effect on mispricing in a group not prone to it. Thus, overall, futures markets aid price discovery in the spot market, although the futures markets themselves exhibit considerable overpricing. Individuals with higher cognitive reflection test (CRT) scores achieve greater earnings, as they tend to sell in the overpriced futures market, while traders with lower CRT score make purchases in the futures market. We also consider the predictive power of an enhanced CRT measure (ECRT), which weightstwo types of incorrect answers differently.
    Keywords: asset market experiment; market institution; futures market
    JEL: C91 G13
    Date: 2014–10–13
  2. By: Gautam Rao; Stefano DellaVigna; John List; Ulrike Malmendier
    Abstract: Why do people vote? We argue that social image plays a signiï¬cant role in explaining�turnout: people vote because others will ask. The expectation of being asked motivates�turnout if individuals derive pride from telling others that they voted, or feel shame from�admitting that they did not vote, provided that lying is costly. We design a ï¬eld experiment�to estimate the effect of social image concerns on voting. In a door-to-door survey about�election turnout, we experimentally vary (i) the informational content and use of a flyer pre-announcing the survey, (ii) the duration and payment for the survey, and (iii) the incentives�to lie about past voting. Our estimates suggest signiï¬cant social image concerns. For a�plausible range of lying costs, we estimate the monetary value of voting ‘because others willask’ to be in the range of $5-$15 for the 2010 Congressional election. In a complementary�get-out-the-vote experiment, we inform potential voters before the election that we will ask�them later whether they voted. We ï¬nd suggestive evidence that the treatment increases�turnout.
    Date: 2014–07
  3. By: Subhasish M. Chowdhury (University of East Anglia); Joo Young Jeon (University of East Anglia); Bibhas Saha (Durham University)
    Abstract: It is observed in neuroscience, economics and psychology experiments that the presence of an image of a pair of eyes may result in higher level of altruistic behavior by subjects. It is hence concluded that the eye-image serves as a `social Êcue'. We test this against an alternative hypothesis that the higher level of altruism may occur since the eye-image triggers an experimenter demand effect in the same direction with the perceived altruism. We run a `Taking game' with and without eye-image in which the recipient owns some money, and the dictator can take any amount from that. In such a case the social cue and the experimenter demand effect go in opposite directions. We find no overall difference in the amount taken in those treatments. However, males take significantly less and females take insignificantly more under the treatment with eye-image. We conclude that the presence of eyes may have both the social cue and the experimental demand effects, and the net effect depends on the relative magnitude and the direction of the two. For males, the social cue effect is more prominent.
    Date: 2014–10
  4. By: Lijia Tan (The Wang Yanan Institute for Studies in Economics and MOE Key Laboratory in Econometrics, Xiamen University); Lijia Wei (School of Economics and Management, Wuhan University)
    Abstract: In Singapore and many Chinese cities, tens of thousands of people participate in car license auctions each month. In a car license auction, many car licenses are sold but each participant can only bid for one license. We examine the theoretical properties of three auction formats: Shanghai auction, Guangzhou auction, and Singapore auction. Our main results are that (1) No equilibrium of the Shanghai auction can guarantee an efficient allocation, (2) the Singapore auction allocates objects efficiently if and only if a unique market clearing price does not exist, and (3) the Guangzhou auction is efficient if bidders are symmetric. The experimental evidence confirms our theoretical prediction. Our experiment also shows that the learning effects over time are quite different among these auction formats.
    Keywords: Auction; Car License; Laboratory Experiment
    JEL: C92 D02 D04 D44
    Date: 2014–09–02
  5. By: Steffen Huck (Wissenschaftszentrum Berlin für Sozialforschung (WZB)); Gabriele Lünser (University College London - Centre for Economic Learning and Social Evolution (ELSE)); Florian Spitzer (Department of Economics, Vienna Center for Experimental Economics (VCEE), University of Vienna); Jean-Robert Tyran (Department of Economics, Copenhagen University)
    Abstract: In a laboratory experiment designed to capture key aspects of the interaction between physicians and patients in a stylized way, we study the effects of medical insurance and competition in the guise of free choice of physician. Medical treatment is an example of a credence good: only the physician (but not the patient) knows the appropriate treatment, and even after consulting, the patient is not sure whether he got proper treatment or got an unnecessary treatment, i.e. was overtreated. We find that with insurance, moral hazard looms on both sides of the market: patients consult more often and physicians overtreat more often than in the baseline condition. Competition decreases overtreatment compared to the baseline and patients therefore consult more often. When the two institutions are combined, competition is found to partially offset the adverse effects of insurance: most patients seek treatment, but overtreatment is moderated.
    Keywords: Credence good, Patient, Physician, Overtreatment, Competition, Insurance, Moral hazard
    JEL: C91 I11 I13
    Date: 2014–09–30
  6. By: Attila Ambrus; Tinna Laufey Ãsgeirsdóttir; Jawwad Noor; László Sándor
    Abstract: This paper examines the empirical question of whether subjects’ static choices among rewards received at different times are influenced by their expected income levels at those times. Moreover, we recover time preferences after compensating for possible income effects. Besides eliciting subjects’ preference between standard delayed rewards, the experimental design also elicited their preferences over delayed rewards that are received only if the subject’s income remains approximately constant. These preferences, along with elicited subjective probabilities of satisfying the condition, make the correction possible. We conducted the experiments in Iceland, where our prompt access to income tax records enabled us to condition delayed rewards on income realizations. We find that background income is associated with preferences over unconditional delayed rewards. While most people exhibited present bias when comparing unconditional delayed rewards, subjects with stable income did not. The results are similar for the entire sample once we correct subjects’ discount functions for income effects. This suggests that income expectations have an effect on choices between future rewards, and that this may account for some of the present-bias observed in experiments.
    Date: 2014–09
  7. By: Seeun Jung; Yasuhiro Nakamoto,; Masayuki Sato; Katsunori Yamada (Université de Cergy-Pontoise, THEMA)
    Abstract: We investigate people's dierent conceptions of the economic term consump- tion when comparing with others. An Internet-based hypothetical discrete choice experiment was conducted with Japanese participants. As in other relative income comparison studies, we found that own consumption and own saving had a positive impact on utility, whereas the consumption and saving of a reference person had a negative impact on utility. However, the results show that the magnitudes of consumption and saving dier in size; saving could aect utility much more than consumption for the Japanese subjects. By using scope tests, we found that the impact of own consumption is not monotonic and so does not necessarily increase utility. This calls into question the conventional assumption of the monotonicity of \the utility of consumption"; consumption could be perceived as a negative good. Our results, therefore, provide some evidence that, in reality, people understand and perceive the economic terms dierently from what economists would expect. Furthermore, when considering the consumption of others as well as their own, the size of the discrepancy is even bigger.
    Keywords: Relative Utility; Choice Experiment; Misperception of Economic Terms
    JEL: C91 A13 D91 J17
    Date: 2014
  8. By: Kim Kaivanto; Eike Kroll
    Abstract: Reduction of compound lotteries is implicit both in the statement of the St. Petersburg Paradox and in its resolution by Expected Utility (EU).We report three real-money choice experiments between truncated compound-form St. Petersburg gambles and their reduced-form equivalents. The first tests for differences in elicited Certainty Equivalents. The second develops the distinction between ‘weak-form’ and ‘strong-form’ rejection of Reduction, as well as a novel experimental task that verifiably implements Vernon Smith’s dominance precept. The third experiment checks for robustness against range and increment manipulation. In all three experiments the null hypothesis of Reduction is rejected, with systematic deprecation of the compound form in favor of the reduced form. This is consistent with the predictions of alternation bias. Together these experiments offer evidence that the Reduction assumption may have limited descriptive validity in modelling St. Petersburg gambles, whether by EU or non-EU theories.
    Keywords: St. Petersburg Paradox, reduction axiom, alternation bias, dominance precept, law of small numbers, test of indifference
    JEL: D81 C91
    Date: 2014
  9. By: Cole, Shawn; Gine, Xavier; Vickery, James (Federal Reserve Bank of New York)
    Abstract: Weather is a key source of income risk, particularly in emerging market economies. This paper uses a randomized controlled trial involving a sample of Indian farmers to study how an innovative rainfall insurance product affects production decisions. We find that insurance provision induces farmers—particularly educated farmers—to shift production toward higher-return but higher-risk cash crops. Our results support the view that financial innovation can mitigate the real effects of uninsured production risk. Addressing the puzzle of low adoption, we show that payouts improve trust in the product and that farmers shield payouts from claims by relatives.
    Keywords: risk management; financial constraints
    JEL: G22 G32
    Date: 2014–09–01
  10. By: Bruno Lanz; Jules-Daniel Wurlod (Centre for International Environmental Studies, The Graduate Institute); Luca Panzone; Timothy Swanson
    Abstract: We study how substitutability between clean and dirty alternatives affects the effectiveness of environmental regulation in a field experiment that controls for the choice set of respondents. We consider four product categories with clean and dirty alternatives: (i) cola products in plastic bottles vs. in aluminum cans; (ii) skimmed vs. whole milk; (iii) chicken meat vs. beef meat; and (iv) margarine vs. butter. We employ two neutrally framed treatments to quantify the willingness to substitute between clean and dirty alternatives in each product market, namely a change in relative prices and the removal of the dirty alternative, leaving respondents the option of buying one of the remaining clean alternatives or nothing. We then compare the impact of a carbon footprint label and a Pigovian subsidy to the clean alternatives. While both instruments increase the market share of the clean products, their impact is higher when clean and dirty alternatives are close substitutes. We also find evidence that motivation crowding is present and increases with substitutability. Our results highlight the importance of product markets in the design of consumer-orientated policies.
    Keywords: Field experiments; Environmental policy; Market-based instruments; Information provision; Clean substitutes; Motivation crowding; Carbon footprint.
    JEL: C25 C91 D12 D64 L15 L50 Q58
    Date: 2014–10–01
  11. By: Aurélie BONEIN (CREM UMR CNRS 6211, University of Rennes 1, France)
    Abstract: Whether and how the observability of a coworker’s effort influences an employer’s wage decisions and workers’ effort decisions is a central issue for labor organizations. We conduct an experiment using a three-person gift-exchange game to investigate this matter in the context of wage transparency and heterogeneous abilities. We find that showing a coworker’s effort increases both wages and the difference in wages between two heterogeneously skilled workers when the more able worker is observed. The knowledge of a coworker’s effort increases the level of reciprocity exhibited by observed workers (peer effects), whereas it reduces that exhibited by workers who are observers. Overall, displaying coworker’s effort has a beneficial effect on reciprocity. Regardless of their ability, workers exert levels of effort that are positively related to those of their coworkers. This strategic complementarity of efforts is partially explained by inequity aversion.
    Keywords: Heterogeneous ability, Gift-exchange game, Social comparison, Peer effect, Reciprocity
    JEL: C91 D03 J24 J31 J82
    Date: 2014–08
  12. By: Mathias Erlei; Christoph Neumann (Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal))
    Abstract: In 1931 Harold Hotelling published his seminal contribution to the economic theory of exhaustible resources. His major insight states that the prices of exhaustible resources - more specifically the scarcity rent - will rise at the rate of interest, and consumption will decline over time. The equilibrium implies social optimality. However, empirical analysis shows that market prices of exhaustible resources rarely follow the predicted pattern. Yet our experimental investigation provides support for the position that the Hotelling rule is relevant for the long term development of resource prices.
    Keywords: Exhaustible resource, Hotelling rule, Intertemporal Allocation Problem, Continuous Double Auction, Experiment
    Date: 2014
  13. By: Groh, Matthew; McKenzie, David
    Abstract: Firms in many developing countries cite macroeconomic instability and political uncertainty as major constraints to their growth. Economic theory suggests uncertainty can cause firms to delay investments until uncertainty is resolved. A randomized experiment was conducted in post-revolution Egypt to measure the impact of insuring microenterprises against macroeconomic and political uncertainty. Demand for macroeconomic shock insurance was high; 36.7 percent of microentrepreneurs in the treatment group purchased insurance. However, purchasing insurance does not change the likelihood that a business takes a new loan, the size of the loan, or how the loan is invested. This lack of effect is attributed to microenterprises largely investing in inventories and raw materials rather than irreversible investments like equipment. These results suggest that, contrary to what some firms profess, macroeconomic and political risk is not inhibiting the investment behavior of microenterprises. However, insurance may still be of value to help firms cope with shocks when they do occur, but the paper is unable to examine this dimension, because the insurance product did not pay out over the course of the pilot.
    Keywords: Debt Markets,Climate Change Economics,Access to Finance,Bankruptcy and Resolution of Financial Distress,Insurance Law
    Date: 2014–09–01
  14. By: Josef Montag; Tomas Sobek
    Abstract: The ‘equal punishment for the same crime’ principle is generally agreed upon—yet its implementation differs radically depending on whether the punishment is measured purely in nominal terms or the subjective perspective of the punishee is accounted for. This is simply because different people may experience the same punishment with differing intensity. Legal scholars have recently been proposing that improvements in scientific knowledge and advancing technologies (such as functional magnetic resonance imaging), which allow us to measure subjective perceptions and feelings, need and should be incorporated in our penal systems. This would facilitate calibrating the punishment not only to the crime but also to the offender’s persona, so that different people experience equally tough punishment for the same crime. However, such a substantial change in criminal law and policy necessitates a certain amount of public legitimacy and understanding among constituents. We run a simple experiment in order to learn how people understand punishment and to ascertain whether such legitimacy exists. We find that it may be, in the case of pecuniary punishments. With regard to incarceration policies, however, the likelihood of popular acceptance of proposed innovations is rather remote. Our findings therefore point out a serious challenge to the existing literature and may complicate the implementation of suggested reforms, even if legal scholars find them worthwhile.
    Keywords: punishment; objectivism; subjectivism;
    JEL: K
    Date: 2014–08
  15. By: D. Friedman; G.W. Harrison; J.W. Salmon

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