nep-exp New Economics Papers
on Experimental Economics
Issue of 2015‒08‒13
27 papers chosen by
Daniel Houser
George Mason University

  1. The impact of financial education on adolescents' intertemporal choices By Melanie Lührmann; Marta Serra-Garcia; Joachim Winter
  2. Comparing Decisions under Compound Risk and Ambiguity: The Importance of Cognitive Skills By Sasha Prokosheva
  3. For love or reward? Characterising preference for giving to parents in an experimental setting By Maria Porter; Abi Adams
  4. Who is audited? Experimental study on rule-based tax auditing schemes By Yoshio Kamijo; Takehito Masuda; Hiroshi Uemura
  5. The Impact of Monitoring in Infinitely Repeated Games: Perfect, Public, and Private By Masaki Aoyagi; V. Bhaskar; Guillaume R. Frechette
  6. What if women earned more than their spouse? An experimental investigation of work division in couples By Cochard, François; Couprie, Hélène; Hopfensitz, Astrid
  7. Social Responsibility in Market Interaction By Irlenbusch, Bernd; Saxler, David
  8. Who knows it is a game? On strategic awareness and cognitive ability By Fehr, Dietmar; Huck, Steffen
  9. Political Identity and Trust By Pablo Hernandez; Dylan Minor
  10. Dealing with risk: Gender, stakes, and probability effects By Irene Comeig; Charles A. Holt; Ainhoa Jaramillo-Gutiérrez
  11. Do Schools Discriminate Against Homosexual Parents? Evidence from an Internet Field Experiment By Díaz Serrano, Lluís; Meix Llop, Enric
  12. Stability in Network Formation Games with Streams of Payoffs: An Experimental Study By Mariya Teteryatnikova; James Tremewan
  13. Market games as social dilemmas By Iván Barreda-Tarrazona; Aurora García-Gallego; Nikolaos Georgantzis; Nicholas Ziros
  14. The influence of collective action on the demand for voluntary climate change mitigation in hypothetical and real situations By Sturm, Bodo; Uehleke, Reinhard
  15. Monetary Policy under Behavioral Expectations: Theory and Experiment By Cars Hommes; Domenico Massaro; Matthias Weber
  16. Who should be treated? Empirical welfare maximization methods for treatment choice By Toru Kitagawa; Aleksey Tetenov
  17. Building Trust in Rural Producer Organizations in Senegal: Results from a Randomized Controlled Trial By Bernard, Tanguy; Frölich, Markus; Landmann, Andreas; Unte, Pia Naima; Viceisza, Angelino; Wouterse, Fleur
  18. Anticipating Preference Reversal" By Le Yaouanq, Yves
  19. Technology Adoption Under Uncertainty: Take-Up and Subsequent Investment in Zambia By B. Kelsey Jack; Paulina Oliva; Christopher Severen; Elizabeth Walker; Samuel Bell
  20. Cold Turkey vs. gradualism: Evidence on disinflation strategies from a laboratory experiment By Giamattei, Marcus
  21. Are Reemployment Services Effective? Experimental Evidence from the Great Recession By Marios Michaelides; Peter Mueser
  22. Now you see it, now you don’t: How to make the Allais Paradox appear, disappear, or reverse By Pavlo Blavatskyy; Andreas Ortmann; Valentyn Panchenko
  23. Challenges to promoting social inclusion of the extreme poor: evidence from a large scale experiment in Colombia By Laura Abramovsky; Orazio Attanasio; Kai Barron; Pedro Carneiro; George Stoye
  24. The Power of (Non) Positive Thinking: Self-Employed Pessimists Earn More than Optimists By Dawson, Christopher; de Meza, David Emmanuel; Henley, Andrew; Arabsheibani, Reza
  25. It’s the Cost Credibility, Stupid! A Comment on “Consequentiality: A Theoretical and Experimental Exploration of a Single Binary Choice” By Rheinberger, Christoph; Schläpfer, Felix
  26. Estimating the production function for human capital: results from a randomized controlled trial in Colombia By Orazio Attanasio; Sarah Cattan; Emla Fitzsimons; Costas Meghir; Marta Rubio Codina
  27. Does an Uncertain Tax System Encourage "Aggressive Tax Planning"? By James Alm

  1. By: Melanie Lührmann (Institute for Fiscal Studies); Marta Serra-Garcia (Institute for Fiscal Studies); Joachim Winter (Institute for Fiscal Studies and Ludwig-Maximilians-Universität München)
    Abstract: We study the impact of financial education on intertemporal choice in adolescence. The program was randomly assigned among high-school students and intertemporal choices were measured using an incentivized experiment. Students who participated in the program display a decrease in time inconsistency; an increase in the allocation of payment to a single payment date, compared to spreading payment across two dates; and increased consistency of choice with the law of demand. These findings suggest that the effect of such educational programs is to increase comprehension and decrease bracketing in intertemporal choice. This working paper was updated in May 2015.
    JEL: D14 D91 C93
    Date: 2014–07
  2. By: Sasha Prokosheva
    Abstract: I investigate the relationship between attitudes towards ambiguity and ability to reduce compound risks. The evidence from an experiment on adolescents shows that patterns identified in the previous literature are susceptible to experimental design and subject sample characteristics. Overall for a 20% of my subject sample, I do not observe a significant relationship between ambiguity-neutral behavior and reduction of compound lotteries. The relationship also varies with subjects' cognitive skills and the way lotteries are presented. My results caution about theoretical studies which model ambiguity preferences by relaxing the assumption of compound risk reduction, and add to the evidence against the use of compound lotteries to represent ambiguity in experiments.
    Keywords: ambiguity; cognitive ability; reduction of compound lotteries;
    JEL: C91 D81
    Date: 2014–12
  3. By: Maria Porter (Institute for Fiscal Studies); Abi Adams (Institute for Fiscal Studies and University of Oxford)
    Abstract: This paper examines the motivation for intergenerational transfers between adult children and their parents, and the nature of preferences for such giving behaviour, in an experimental setting. Participants in our experiment play a series of dictator games with parents and strangers, in which we vary endowments and prices for giving to each recipient. We fiÂ…nd that preferences for giving are typically rational. When parents are recipients as opposed to strangers, participants display greater sensitivity to the price of giving, and a higher relative proclivity for giving. Our Â…findings also provide evidence of reciprocal motivations for giving, as players give more to parents who have full information regarding the context in which giving occurs.
    Date: 2014–07
  4. By: Yoshio Kamijo (School of Economics and Management, Kochi University of Technology); Takehito Masuda (Japan Society for the Promotion of Science); Hiroshi Uemura (School of Economics and Management, Kochi University of Technology)
    Abstract: In this study, we employ a game theoretic framework to formulate and analyze tax audit schemes. We test the theoretical predictions in a laboratory experiment. We compare audit schemes based on three audit rules: random audit rule, cut-off audit rule, and lowest income reporter audited rule (LIRA). While the cut-off audit rule is known to be optimal in theory, it has not been examined in a controlled laboratory experimental setting. The primary experimental finding is that LIRA rule yields the highest degree of truthful reporting among the rules, contrary to the theory. Moreover, the regression analysis shows that individual social norms regarding tax payment as well as the cut-off rule and the LIRA significantly increase the degree of truthful reporting. Our experimental finding that the LIRA yields the highest degree of truthful reporting is practically important because the tax authority in most countries assigns higher priority for enhancing tax compliance.
    Keywords: audit schemes, tax evasion, laboratory experiment, cut-off rule, lowest income reporter audited rule
    JEL: C91 D81 H26
    Date: 2015–07
  5. By: Masaki Aoyagi; V. Bhaskar; Guillaume R. Frechette
    Abstract: This paper uses a laboratory experiment to study the effect of a monitoring structure on the play of the infinitely repeated prisoner's dilemma. Keeping the stage game fixed, we examine the behavior of subjects when information about past actions is perfect (perfect monitoring), noisy but public (public monitoring), and noisy and private (private monitoring). We find that the subjects sustain cooperation in every treatment, but that their strategies differ substantially in the three treatments. Specifically, we observe that the strategies are more complex under public and private monitoring than under perfect monitoring. We also find that the strategies under private monitoring are more lenient than under perfect monitoring, and less forgiving than under public monitoring.
    Date: 2015–07
  6. By: Cochard, François; Couprie, Hélène; Hopfensitz, Astrid
    Abstract: Female specialization on household work and male specialization on labor-market work is a widely observed phenomenon across time and countries. Gender differences regarding characteristics (preferences, productivity) and context (wage rates, social norms) are generally recognized to explain this fact. We experimentally investigate work division by true co-habiting couples participating in a newly developed specialization task. Efficiency in this task comes at the cost of inequality, giving higher earnings to the “advantaged” player. We compare behavior when men (or women) are in the advantaged position, which correspond to the traditional (or power) couple case where he (or she) earns more. We show that women do not contribute more than men to the household public good whatever the situation. This result allows us to rule-out some of the standard explanations of the work division puzzle.
    Keywords: Experiment on couples, Time allocation, Work division
    JEL: C99 D13 J16
    Date: 2015–07–30
  7. By: Irlenbusch, Bernd (University of Cologne); Saxler, David (University of Cologne)
    Abstract: A recent debate raises the question whether market interaction erodes social responsibility. In an experiment, we disentangle three major characteristics of market interaction, diffusion of responsibility, social information, and market framing, and provide evidence for how these characteristics influence behavior when trade harms uninvolved parties. We model the negative externalities from trade by reducing donations to a charity that provides meals to needy children. Our results show that diffusion of responsibility tends to encourage subjects to make purely self-interested decisions. This holds to a much larger extent if the economic trans- action is framed as a market. In contrast, social information increases social responsibility in our setting. Observing the behavior of others seems to convince a substantial fraction of people to behave steadfastly, i.e., they avoid trading a good that comes with negative externalities, even if gains from trade are high.
    Keywords: social responsibility, diffusion of responsibility, social information, market framing, experiment
    JEL: C92 D62 M14
    Date: 2015–07
  8. By: Fehr, Dietmar; Huck, Steffen
    Abstract: We introduce the notion of strategic awareness in experimental games which captures the idea that subjects realize they are playing a game and thus have to form beliefs about others' actions. The concept differs from both, rule understanding and rationality. We then turn to experimental evidence from a beauty contest game where we elicit measures of cognitive ability and beliefs about others' cognitive ability. We show that the effect of cognitive ability is highly non-linear. Subjects' behavior below a certain threshold choose numbers in the whole interval and does not correlate with beliefs about others ability. In contrast, choices of subjects who exceed the threshold avoid choices above 50 and react very sensitively to beliefs about others' cognitive ability.
    Abstract: In diesem kurzen Artikel führen wir das Konzept von strategic awareness in Experimenten ein. Dieses neue Konzept beschreibt die Fähigkeit von Experimentteilnehmer, strategische Situationen zu erkennen und daher Erwartungen über das Verhalten von anderen zu bilden. Das Konzept unterscheidet sich sowohl von Rationalität als auch vom bloßen Verstehen von den Regeln eines Experiments. Wir demonstrieren das Konzept empirisch mit Hilfe von Daten eines Beauty Contest Games, in dem wir die kognitiven Fähigkeiten der Teilnehmer und ihre Einschätzungen über die kognitiven Fähigkeiten der anderen Teilnehmer erheben. Die Resultate zeigen, dass kognitive Fähigkeiten einen starken nicht-linearen Effekt auf die Entscheidungen in dem Beauty Contest Game haben. Das Verhalten von Experimentteilnehmer, die unter einer bestimmten Schwelle liegen, kann nicht von zufälligen Entscheidungen unterschieden werden und korreliert auch nicht mit deren Einschätzung über die kognitiven Fähigkeiten der anderen Teilnehmer. Im Gegensatz dazu vermeiden Teilnehmer, die über dieser Schwelle liegen, dominierte Entscheidungen und basieren ihre Entscheidungen auf ihrer Einschätzung über die kognitiven Fähigkeiten der anderen Teilnehmer.
    Keywords: strategic awareness,cognitive ability,beauty contest
    JEL: C7 C9 D0
    Date: 2014
  9. By: Pablo Hernandez (New York University AD); Dylan Minor (Harvard Business School, Strategy Unit)
    Abstract: We explore how political identity affects trust. Using an incentivized experimental survey conducted on a representative sample of the U.S. population, we vary information about partners' partisan identity to elicit trust behavior, beliefs about trustworthiness, and actual reciprocation. By eliciting beliefs, we are able to assess whether differences in trust rates are due to stereotyping or a "taste for discrimination." By measuring actual trustworthiness, we are able to determine whether beliefs are statistically correct. We find that trust is pervasive and depends on the partisan identity of the trustee. Differential trust rates are explained by incorrect stereotypes about the other's lack of trustworthiness rather than by a "taste for discrimination." Given the importance of beliefs, we run additional treatments in which we disclose previous reciprocation rates before participants decide whether to trust. We find that beliefs are slightly more optimistic compared with the previous treatments, suggesting that incorrect stereotypes are hard to change.
    Keywords: Trust, Beliefs, Social Preferences, Political Ideology
    Date: 2015–07
  10. By: Irene Comeig (ERICES and University of Valencia); Charles A. Holt (University of Virginia); Ainhoa Jaramillo-Gutiérrez (ERICES and Jaume I University, Castellón)
    Abstract: This paper investigates how subjects deal with financial risk, both "upside" (with a small chance of a high payoff) and "downside" (with a small chance of a low payoff). We find that the same people who avoid risk in the downside setting tend to make more risky choices in the upside one. The experiment is designed to disentangle the probability-weighting and utility-curvature components of risk attitudes, and to differentiate settings in which gender differences arise from those in which they do not. Women are more risk averse for downside risks, but gender differences are diminished for upside risks.
    Keywords: risk aversion, probability weighting, rank-dependent utility, gender differences, experiments
    JEL: C91 G02
    Date: 2015–03
  11. By: Díaz Serrano, Lluís; Meix Llop, Enric
    Abstract: The recognition of homosexual rights is a controversial issue in many countries. Spain was the third country in the world (after Netherlands and Belgium) to introduce a law recognizing homosexual marriage and adoption of children. In this paper, we examine for the first time whether schools are more hesitant to give feedback to homosexual parents during children's pre-registration period in Spain. In order to do that, we designed an internet field experiment to be conducted in schools. We created three types of fictitious couples; one heterosexual, one male homosexual and one female homosexual, and send emails to schools making sexual orientation explicit. Our results show that men homosexual couples had a significant lower probability to receive and answer than heterosexual couples (22.5 percentage points less). No statistically significant differences in the response rate were found between female homosexual and heterosexual couples. This result suggests that male homosexual couples might be penalized because of the lack of a maternal figure. Keywords: Discrimination, field experiment, schools, homosexual rights. JEL codes: H41, I20, K36
    Keywords: Homofòbia, Espanya, Discriminació sexual en l'educació, Famílies homoparentals, 316 - Sociologia. Comunicació, 37 - Educació. Ensenyament. Formació. Temps lliure,
    Date: 2015
  12. By: Mariya Teteryatnikova; James Tremewan
    Abstract: We run a novel network formation experiment with a stream of payos and relatively unstructured link formation process, and test the performance of a number of theoretical stability concepts in this environment. We focus especially on the issue of myopic versus farsighted behaviour in network formation. A subtle treatment variation demonstrates clearly the power of myopic stability concepts in identifying the most stable networks. However, we also nd support for farsighted concepts of stability, especially those that assume players are pessimistic about the eventual outcome of a deviation.
    JEL: A14 C71 C92 D85
    Date: 2015–07
  13. By: Iván Barreda-Tarrazona; Aurora García-Gallego; Nikolaos Georgantzis; Nicholas Ziros
    Abstract: We study an experimental exchange market based on Shapley and Shubik (1977). Two types of players with different preferences and endowments independently submit quantities of the goods they wish to exchange in the market. We implement a case in which the Nash equilibrium involves minimum exchange or no trade at all. This is almost never confirmed by our laboratory data. On the contrary, after a sufficiently large number of periods, convergence close to full trade is obtained, which can be supported as an epsilon symmetric strategy evolutionary stable equilibrium. We also study cheap talk communication within pairs of traders from the same (horizontal) and opposite (vertical) sides of the market. As predicted by the theory, horizontal communication restricts trade, whereas vertical communication leads to higher bids, but always lower or equal than those achieved tacitly by learning alone. Vertical messages limit the collusive effect of horizontal communication when the former precede the latter. Results do not differ when players are allowed to choose the communication mode.
    Keywords: Efficiency, strategic market games, experiments, vertical communication, horizontal communication.
    Date: 2015–08
  14. By: Sturm, Bodo; Uehleke, Reinhard
    Abstract: In this experiment, we investigate determinants of the individual demand for voluntary climate change mitigation. Subjects decide between a cash prize and an allowance from the EU Emissions Trading Scheme for one ton of CO2 that will be deleted afterwards. We vary the incentives of the decision situation in which we distinguish between real monetary incentives and a hypothetical decision situation with and without a cheap talk script. Furthermore, decisions were implemented either as purely individual or as a collective action using majority voting. We observe a significant hypothetical bias in the demand for voluntary climate change mitigation. In case of the individual decision situation this bias is caused solely by subjects with low income. Collective decision making affects demand positively in the hypothetical decision situation only.
    Keywords: demand for voluntary climate change mitigation,public goods,collective action,hypothetical bias
    JEL: Q51 Q54 C93
    Date: 2015
  15. By: Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam); Matthias Weber (University of Amsterdam)
    Abstract: Expectations play a crucial role in modern macroeconomic models. We replace the common assumption of rational expectations in a New Keynesian framework by the assumption that expectations are formed according to a heuristics switching model that has performed well in earlier work. We show how the economy behaves under these assumptions with a special focus on inflation volatility. Contrary to comparable models based on full rationality, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions with a learning to forecast experiment. The experimental results support the behavioral model and the claim that reacting to the output gap in addition to inflation can indeed lower inflation volatility.
    Keywords: Experimental Macroeconomics; Heterogeneous Expectations; Learning to forecast Experiment; Trade-off Inflation and Output Gap
    JEL: C90 E52 D84
    Date: 2015–07–27
  16. By: Toru Kitagawa (Institute for Fiscal Studies and cemmap and UCL); Aleksey Tetenov (Institute for Fiscal Studies)
    Abstract: One of the main objectives of empirical analysis of experiments and quasi-experiments is to inform policy decisions that determine the allocation of treatments to individuals with different observable covariates. We propose the Empirical Welfare Maximization (EWM) method, which estimates a treatment assignment policy by maximizing the sample analog of average social welfare over a class of candidate treatment policies. The EWM approach is attractive in terms of both statistical performance and practical implementation in realistic settings of policy design. Common features of these settings include: (i) feasible treatment assignment rules are constrained exogenously for ethical, legislative, or political reasons, (ii) a policy maker wants a simple treatment assignment rule based on one or more eligibility scores in order to reduce the dimensionality of individual observable characteristics, and/or (iii) the proportion of individuals who can receive the treatment is a priori limited due to a budget or a capacity constraint. We show that when the propensity score is known, the average social welfare attained by EWM rules converges at least at n^(-1/2) rate to the maximum obtainable welfare uniformly over a minimally constrained class of data distributions, and this uniform convergence rate is minimax optimal. In comparison with this benchmark rate, we examine how the uniform convergence rate of the average welfare improves or deteriorates depending on the richness of the class of candidate decision rules, the distribution of conditional treatment effects, and the lack of knowledge of the propensity score. We provide an asymptotically valid inference procedure for the population welfare gain obtained by exercising the EWM rule. We offer easily implementable algorithms for computing the EWM rule and an application using experimental data from the National JTPA Study
    Keywords: Randomized experiments, statistical treatment rules, minimax rate optimality,VC-dimension
    JEL: C21 C44 C14
    Date: 2015–03
  17. By: Bernard, Tanguy (IFPRI, International Food Policy Research Institute); Frölich, Markus (University of Mannheim); Landmann, Andreas (University of Mannheim); Unte, Pia Naima (University of Mannheim); Viceisza, Angelino (Spelman College); Wouterse, Fleur (IFPRI, International Food Policy Research Institute)
    Abstract: Trust is crucial for successful collective action. A prime example is collective commercialization of agricultural produce through producer organizations. We conduct a cluster-randomized controlled trial in rural Senegal in which we vary the number and the type of smallholder farmers – members and/or leaders of local producer organizations – invited to a three-day training on collective commercialization. We use this variation to identify effects on intra-group trust, both direct treatment effects of having participated in the training and spillover effects on farmers who did not partake. Looking at different measures of trust in leaders' competence and motives and of trust in members we find that participating in the training significantly enhances both trust in leaders and trust in members. For trust in leaders, we also find a strong spillover effect. Our findings suggest that relatively soft and non-costly interventions such as a group training appear to be able to positively affect trust within producer organizations.
    Keywords: rural producer organizations, smallholder farmers, trust, Senegal
    JEL: D71 O12 Q13
    Date: 2015–07
  18. By: Le Yaouanq, Yves
    Abstract: This paper studies the consistency between a decision-maker's choices over menus in a first period and inside menus at a later date. The main result shows that the comparison of commitment decisions and actual subsequent choices reveals whether future taste contingencies are correctly anticipated: a sophisticated individual chooses exactly the right commitment options, whereas a naive decision-maker overlooks some profitable opportunities. The paper provides absolute and comparative measures of naivete and shows under which conditions pessimistic behavior can be attributed to the presence of self-control costs. Finally, I implement an experimental protocol based on the theoretical analysis and find substantial evidence of naivete at the individual level.
    Keywords: Self-control, Naivete, Temptation, Stochastic choice, Random Strotz
    JEL: C91 D81 D90
    Date: 2015–06
  19. By: B. Kelsey Jack; Paulina Oliva; Christopher Severen; Elizabeth Walker; Samuel Bell
    Abstract: Many technology adoption decisions are made under uncertainty about the costs or benefits of subsequent investments in the technology after the initial take-up. As new information is realized, agents may prefer to abandon a technology that appeared profitable at the time of take-up. Low rates of follow-through (engagement in subsequent investments) are particularly problematic when subsidies are used to increase adoption, in part because they may attract users with a lower value for the technology. We use a field experiment with two stages of randomization to generate exogenous variation in the payoffs associated with taking up and following through with a new technology: a tree species that provides private fertilizer benefits to adopting farmers. Our empirical results show high rates of abandoning the technology, even after paying a positive price to take it up. The experimental variation offers a novel source of identification for a structural model of intertemporal decision making under uncertainty. Estimation results indicate that the farmers experience idiosyncratic shocks to net payoffs after take-up, which increase take-up but lower average per farmer tree survival. We simulate counterfactual outcomes under different levels of uncertainty and observe that subsidizing take-up of the technology affects the composition of adopters only when the level of uncertainty is relatively low. Thus, uncertainty provides an additional explanation for why many subsidized technologies may not be utilized even when take-up is high.
    JEL: D81 O13 Q12
    Date: 2015–07
  20. By: Giamattei, Marcus
    Abstract: Disinflation can be implemented gradually or via Cold Turkey - an immediate change of policy - with the latter being mainly recommended by theory and empirical literature. But Cold Turkey may only be superior because it is endogenously selected for favorable environments. To eliminate this endogeneity and to disentangle the credible push through of a disinflation policy from ex-ante credibility, I run an experiment where a central banker has to decide for a disinflationary strategy and four forecasters try to coordinate on it. The design abstracts from any rigidities and provides full information so that Cold Turkey is the Nash equilibrium. But Cold Turkey fails to be the most successful strategy because forecasters react sluggishly due to limited reasoning. Cold Turkey does not speed up learning or increase reasoning, is less successful and is reversed more often.
    Keywords: Disinflation,Credibility,Cold Turkey,Gradualism,Limited Reasoning,Endogenous Treatments
    JEL: E52 E58 C72 C92
    Date: 2015
  21. By: Marios Michaelides; Peter Mueser
    Abstract: We report the results of a random assignment study of a reemployment program implemented in the United States during the Great Recession. The program expedited participant exit from Unemployment Insurance (UI), produced significant UI savings, and improved participant employment rates and earnings. These effects are associated with: (1) increased participant UI exit prior to services receipt, indicating an effect due to participant efforts to avoid program requirements; and (2) greater exit subsequent to services, implying that the services themselves helped participants conduct an effective job search. Our findings provide compelling evidence that reemployment programs can be effective during recessions.
    Keywords: Great Recession, job search services, unemployment, unemployment compensation, program evaluation
    Date: 2015–07
  22. By: Pavlo Blavatskyy (School of Management and Governance, Murdoch University); Andreas Ortmann (School of Economics, UNSW Business School, UNSW); Valentyn Panchenko (School of Economics, UNSW Business School, UNSW)
    Abstract: The Allais Paradox, or Common Consequence Effect to be precise, is one of the most wellknown behavioral regularities in individual decision making under risk. A common perception in the literature, which motivated the development of numerous generalized non‐expected utility theories, is that the Allais Paradox is a robust empirical finding. We argue that such a perception does not accurately reflect the experimental evidence on the Allais Paradox and show how specific choices of parameters can make it appear, disappear, or reverse. For example, our results suggest that the Allais Paradox is likely to disappear when lotteries involve relatively small outcomes under real financial incentives and probability distributions are described as compound lotteries or in a frequency format (rather than as reduced‐form simple lotteries). We also find that the Allais Paradox is likely to get reversed when lotteries are designed with an even division of the probability mass between the lowest and the highest outcomes.
    Keywords: Decision under risk; the Allais Paradox; Common Consequence Effect; Expected Utility; Fanning-out; Experimental Practices
    JEL: D01 D81
    Date: 2015–07
  23. By: Laura Abramovsky (Institute for Fiscal Studies); Orazio Attanasio (Institute for Fiscal Studies and University College London); Kai Barron (Institute for Fiscal Studies and University College London); Pedro Carneiro (Institute for Fiscal Studies and cemmap and UCL); George Stoye (Institute for Fiscal Studies)
    Abstract: We evaluate the large scale pilot of an innovative and major welfare intervention in Colombia, which combines homes visits by trained social workers to households in extreme poverty with preferential access to social programs. We use a randomized control trial and a very rich dataset collected as part of the evaluation to identify program impacts on the knowledge and take-up of social programs and the labor supply of targeted households. We find no consistent impact of the program on these outcomes, possibly because the way the pilot was implemented resulted in very light treatment in terms of home visits. Importantly, administrative data indicates that the program has been rolled out nationally in a very similar fashion, suggesting that this major national program is likely to fail in making a significant contribution to reducing extreme poverty. We suggest that the program should undergo substantial reforms, which in turn should be evaluated.
    Date: 2014–11
  24. By: Dawson, Christopher (University of Bath); de Meza, David Emmanuel (London School of Economics); Henley, Andrew (Aberystwyth University); Arabsheibani, Reza (Swansea University)
    Abstract: Developing further the accumulating evidence that self-employment attracts optimists, this paper investigates the relationship between earnings and prior optimism. It finds that self-employed optimists earn less than self-employed realists. Amongst employees, optimists earn more. These results are consistent with biased expectations leading to entry errors. As a test of validity, we find that amongst the married, future divorcees have higher financial expectations but their realisations are no worse, suggesting our optimism measure captures an intrinsic psychological trait associated with rash decisions.
    Keywords: financial optimism, expectations, self-employment
    JEL: D84 M13
    Date: 2015–07
  25. By: Rheinberger, Christoph; Schläpfer, Felix
    Abstract: This comment takes up the discussion about the incentive compatibility of contingent valuation surveys revived by a recent paper of Carson, Groves and List (2014) in this journal. We feel that the conclusions the authors draw from their theoretical and experimental work cannot be generalized to contingent valuation (CV) surveys. We single out the lack of cost credibility as the principal obstacle to incentive compatibility and propose some amendments to the survey protocol that foster the cost credibility of random-bid CV studies.
    Keywords: Contingent valuation, cost credibility, incentive compatibility
    JEL: D81 D82 Q51
    Date: 2015–05
  26. By: Orazio Attanasio (Institute for Fiscal Studies and University College London); Sarah Cattan (Institute for Fiscal Studies); Emla Fitzsimons (Institute for Fiscal Studies and Institute of Education, University of London); Costas Meghir (Institute for Fiscal Studies and Yale University); Marta Rubio Codina (Institute for Fiscal Studies)
    Abstract: We examine the channels through which a randomized early childhood intervention in Colombia led to significant gains in cognitive and socio-emotional skills among a sample of disadvantaged children. We estimate production functions for cognitive and socio-emotional skills as a function of maternal skills and child's past skills, as well as material and time investments that are treated as endogenous. The effects of the program can be fully explained by increases in parental investments, which have strong effects on outcomes and are complementary to both maternal skills and child's past skills.
    Keywords: Development, childhood, human capital, Colombia
    Date: 2015–02
  27. By: James Alm (Department of Economics, Tulane University)
    Abstract: "Aggressive tax planning" (ATP) is typically characterized as a tax scheme that reduces the effective tax rate of a particular type of income to a level below the one sought by fiscal policy for this income. One motivation often suggested for its use is the uncertainty in tax liabilities introduced by a complicated and ever changing tax system. In this paper, I examine the impact of an uncertainty on the use of such tax schemes; by implication, I also examine how a simpler and more stable tax system that reduced this uncertainty might affect ATP. In this analysis, I draw upon some of my own work on tax avoidance and tax evasion, and then I extend this work to the related but separate area of ATP. Importantly, I introduce and model both individual and group motivations, incorporating insights from behavioral economics in these new analyses. Taxpayers are clearly motivated in part by narrowly defined financial considerations as shaped by the tax, audit, and penalty rates that they face, all of which I classify as individual motivations. However, individuals are also often influenced by many other factors that go beyond self-interest and that have as their main foundation some aspects of social norms, morality, altruism, fairness, or the like. In their entirety, I lump these factors together as group motivations, and I argue that they are shaped by the dynamic social context in which, and the process by which, decisions emerge. My main conclusion is that there is much in theory to suggest that uncertainty leads to more use of ATP, especially when both individual and group motivations are considered.
    Keywords: tax avoidance, tax evasion, uncertainty, risk, behavioral economics, experimental economics
    JEL: H2 H26 D03 C9
    Date: 2014–02

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