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on Experimental Economics |
| By: | Rau, Holger A. |
| Abstract: | This paper experimentally studies the disposition effects of teams and individuals. The disposition effect describes the phenomenon that investors are reluctant to realize losses, whereas winners are sold too early. Our experiments compare the investments of two-person teams to a setting where investors trade alone. We find that subjects investing jointly exhibit more pronounced disposition effects than individuals. A closer look reveals that investor teams hardly realize losses and predominately sell winners. The data suggest that decision-dependent emotions may explain the differences. That is, teams reporting high levels of regret exhibit significantly higher disposition effects than individuals. |
| Keywords: | Decision-dependent emotions,Disposition Effect,Experiment,Team Decision Making |
| JEL: | C92 D70 G12 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:256&r=all |
| By: | Landeo, Claudia (University of Alberta, Department of Economics); Spier, Kathryn (Harvard Law School) |
| Abstract: | This paper reports the results of an experiment on incentive contracts for teams. The agents, whose efforts are complementary, are rewarded according to a sharing rule chosen by the principal. Depending on the sharing rule, the agents confront endogenous prisoner's dilemma or stag-hunt environments. Our main findings are as follows. First, we demonstrate that ongoing interaction among team members positively affects the principal's payoff . Greater team cooperation is successfully induced with less generous sharing rules in infinitely-repeated environments. Second, we provide evidence of the positive effects of communication on team cooperation in the absence of ongoing team interaction. Fostering communication among team members does not significantly affect the principal's payoff , suggesting that agents' communication is an imperfect substitute for ongoing team interaction. Third, we show that offering low sharing rules can back re. The agents are willing to engage in costly punishment (shirking) as retaliation for low offers from the principal. Our findings suggest that offering low sharing rules is perceived by the agents as unkind behavior and hence, triggers negative reciprocity. |
| Keywords: | Moral Hazard in Teams; Prisoners Dilemma; Stag-Hunt Games; Infinitely-Repeated Games; Communication; Reciprocity; Laboratory Experiments |
| JEL: | C72 C90 D86 K10 L23 |
| Date: | 2015–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2015_009&r=all |
| By: | Christopher Cotton (Queen's University); Brent Hickman (University of Chicago); Joseph Price (Brigham Young University) |
| Abstract: | Pre-College human capital investment occurs within a competitive environment and depends on market incentives created by Affirmative Action (AA) in college admissions. These policies affect mechanisms for rank-order allocation of college seats, and alter the relative competition between blacks and whites. First, we develop a theory of AA in university admissions, showing how the effects of AA on human capital investment differ by student ability and demographic group. Second, we then conduct a field experiment designed to mimic important competitive aspects of investment prior to the college market. We pay students based on relative performance on a national mathematics exam in order to test the incentive effects of AA, and track student study efforts on an online mathematics practice and tutorial site. Consistent with theory, AA increases average human capital investment and exam performance for the majority of disadvantaged students targeted by the policy, by mitigating so-called "discouragement effects." The experimental evidence suggests that AA can promote greater equality of market outcomes and narrow achievement gaps at the same time. |
| Keywords: | Affirmative action, university admissions, field experiment, lab in the field, human capital, all-pay auction, studying, student effort |
| JEL: | J15 J24 C93 D44 D82 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1349&r=all |
| By: | Colasante, Annarita; Palestrini, Antonio; Russo, Alberto; Gallegati, Mauro |
| Abstract: | The present work analyzes the individual behavior in an experimental asset market in which the only task of each player is to predict the future price of an asset. To form their expectations, players see the past realization of the asset price in the market and the current information about the mean dividend and the interest rate. We investigate the mechanism of expectation formation in two different contexts: one with a constant fundamental value, and one in which the fundamental price increases over repetitions. Results show that there is heterogeneity both within and between Treatments. Considering an increasing fundamental value has no impact on the individual expectations but it increases the volatility of the market price. We investigate in depth the reasons behind the observed heterogeneity between groups in the same treatment and results show that the heterogeneity of players' expectations is the main cause of the heterogeneity in the realized price. Looking at the coordination, we find out that homogeneous expectations is not a sufficient condition to have high degree of coordination. We analyze the individual forecasting errors as a determinant of the coordination within group and results show that a positive and significant correlation between individual errors strongly influence the level of coordination. |
| Keywords: | Laboratory experiment, expectations, forecasting, heterogeneity, coordination. |
| JEL: | C91 C92 D84 G12 |
| Date: | 2015–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66578&r=all |
| By: | Enrique Fatas (University of East Anglia); Antonio J. Morales (University of Malaga); Ainhoa Jaramillo-Gutierrez (University Jaume I of Castellon) |
| Abstract: | We offer theoretical and experimental evidence suggesting that social competition has a first order effect in low-information Cournot markets. Using data from a stylized laboratory experiment, we show that firms use average market profits as a reference point to assess their relative performance following a simple but powerful logic: earnings above the market reinforces their current choice; scoring below the market prompts dissatisfaction and experimentation with new quantities. This "win-stay, lose-shift" heuristics converges to the competitive outcome because the Walrasian quantity is the unique action that never yields profits below the average profits in the market. This prediction is neatly confirmed in the lab. Social competition leads to Walrasian quantities even when firms do not receive information about the most successful rival, and imitation is not possible. |
| Keywords: | experiments, Cournot competition, Walrasian convergence, social comparison |
| JEL: | C9 L13 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:uea:wcbess:15-15&r=all |
| By: | Hideo Akabayashi (Faculty of Economics, Keio University); Akiko Kamesaka (School of Business Administration, Aoyama Gakuin University); Ryosuke Nakamura (Graduate School of Economics, Hitotsubashi University); Masao Ogaki (Faculty of Economics, Keio University); Teruyuki Tamura (Graduate School of Economics, Sophia University) |
| Abstract: | In the standard intergenerational altruism model in which the child's utility level is an argument in the parent's utility function, there are no conflicts of interests between the parent and the child if they need to reach an agreement about the amount and the timing of a present that child receives from a third party. On the other hand, in the intergenerational altruism models of cultural transmission of preferences, this may not be true. This difference in two classes of the models can be used to distinguish between them in experiments. We conducted a time preference experiment to compare individual and joint decision makings with parent-child pairs in which (1)the child alone, (2) the parent alone, and (3) the parent-child pair as a group make decisions about the amount and the timing of the payment to the child. The experimental results are not consistent with the standard intergenerational altruism model but consistent with models of cultural transmission of preferences. |
| Keywords: | intergenerational altruism, model of cultural transmission of preferences, time preference experiment, individual and joint decisions |
| JEL: | C93 D14 E2 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:keo:dpaper:2014-005&r=all |
| By: | Moser, Stefan; Mußhoff, Oliver |
| Abstract: | Palm oil production creates negative externalities, e.g., through intensive fertiliser applica-tion. If policy wants to limit externalities, an effective, sustainable and efficient measure seems desira-ble. Embedded in a framed field experiment in Indonesia, we apply a business simulation game to test ex ante several incentives for reducing the use of fertiliser in palm oil production. These incentives are arranged in the form of different designs, i.e., either a reward or punishment, varying in their magni-tude and probability of occurrence but constant in the effect on expected income. Results show that participants react significantly different depending on the incentive design. A high reward with a low probability to occur has been found to be the most effective and sustainable incentive design. For effi-ciency, a low and certain reward is indicated to be the best design. |
| Keywords: | policy influence analysis,effective incentive,framed field experiment,business simulation game,palm oil production,Indonesia |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:crc990:5&r=all |
| By: | Cary Deck (Department of Economics, University of Arkansad and Economic Science Institute, Chapman University); Roman M. Sheremeta (Economic Science Institute, Chapman University and Weatherhead School of Management, Case Western Reserve University) |
| Abstract: | Tug-of-war is a multi-battle contest often used to describe extended interactions in economics, management, political science, and other disciplines. While there has been some theoretical work, there is scant empirical evidence regarding behavior in a tug-of-war game. To the best of our knowledge, this paper provides the first experimental study of the tug-of-war. The results show notable deviations of behavior from theory. In the first battle of the tug-of-war, subjects exert fewer resources, while in the follow-up battles, they exert more resources than predicted. Also, contrary to the theoretical prediction, resource expenditures tend to increase in the duration of the tug-of-war. Finally, extending the margin necessary to win the tug-of-war causes more discouragement than either a reduction in the prize or greater impatience despite all three having the same expected effect. Potential behavioral explanations for these findings are also discussed. |
| Keywords: | tug-of-war, all-pay auction, multi-stage contest, laboratory experiment |
| JEL: | C91 D72 D74 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:15-14&r=all |
| By: | Kenju Kamei; Louis Putterman |
| Abstract: | Reputation is a commonly cited check on opportunism in economic and social interactions. But it is often unclear what would motivate an agent to report another’s behavior when the pool of potential partners is large and it is easy enough for an aggrieved player to move on. We argue that behavioral or social preference motivations may solve this conundrum. In a laboratory experiment in which subjects lack any private material incentive to report partners’ actions, we find that most cooperators incur a cost to report a defecting partner when this has the potential to deprive the latter of future gains and to help his next partner. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2015-9&r=all |
| By: | Cueva, Carloa (Universidad de Alicante); Iturbe-Ormaetxe, Iñigo (Universidad de Alicante); Mata-Pérez, Esther (Universidad de Alicante); Ponti, Giovanni (Universidad de Alicante); Sartarelli, Marcello (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica); Yu, Haihan (Universidad de Alicante); Zhukova, Vita (Universidad de Alicante) |
| Abstract: | We study how cognitive abilities correlate with behavioral choices by collecting evidence from almost 1,200 subjects across eight experimental projects concerning a wide variety of tasks, including some classic risk and social preference elicitation protocols. The Cognitive Reflection Test (CRT) has been administered to all our experimental subjects, which makes our dataset one of the largest in the literature. We partition our subject pool into three groups depending on their CRT performance. Reflective subjects are those answering at least two of the three CRT questions correctly. Impulsive subjects are those who are unable to suppress the instinctive impulse to follow the intuitive -although incorrect- answer in at least two 2 questions. The remaining subjects form a residual group. We find that females score significantly less than males in the CRT and that, in their wrong answers, impulsive ones are observed more frequently. The 2D-4D ratio, which is higher for females, is correlated negatively with subject's CRT score. We also find that differences in risk attitudes across CRT groups crucially depend on the elicitation task. Finally, impulsive subjects have higher social (inequity-averse) concerns, while reflective subjects are more likely to satisfy basic consistency requirements in lottery choices. |
| Keywords: | behavioral economics; cognitive reflection; gender effects; experiments |
| JEL: | C91 D81 J16 |
| Date: | 2015–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:ris:qmetal:2015_006&r=all |
| By: | Christopher Cotton (Queen's University); Brent R. Hickman (University of Chicago); Joseph P. Price (Brigham Young University) |
| Abstract: | Pre-College human capital investment occurs within a competitive environment and depends on market incentives created by Affirmative Action (AA) in college admissions. These policies affect mechanisms for rank-order allocation of college seats, and alter the relative competition between blacks and whites. We present a theory of AA in university admissions, showing how the effects of AA on human capital investment differ by student ability and demographic group. We then conduct a field experiment designed to mimic important aspects of competitive investment prior to the college market. We pay students based on relative performance on a mathematics exam in order to test the incentive effects of AA, and track study efforts on an online mathematics website. Consistent with theory, AA increases average human capital investment and exam performance for the majority of disadvantaged students targeted by the policy, by mitigating so-called "discouragement effects." The experimental evidence suggests that AA can promote greater equality of market outcomes and narrow achievement gaps at the same time. |
| Keywords: | Contest Theory, Human Capital, Study Effort, Field Experiment, College Admissions, Affirmative Action, All-Pay Auction |
| JEL: | D44 D82 C93 J24 J15 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1350&r=all |
| By: | Landeo, Claudia (University of Alberta, Department of Economics); Spier, Kathryn (Harvard Law School) |
| Abstract: | This paper experimentally studies stipulated damages as a rent-extraction mechanism. We demonstrate that contract renegotiation induces the sellers to propose the lowest stipulated damages and the entrants to offer the highest price more frequently. We show that complete information about the entrant’s cost lowers exclusion of high-cost entrants. Unanticipated findings are observed. The majority of sellers make more generous offers than expected. Rent extraction also occurs in renegotiation environments. Our findings from the dictatorial seller and buyer-entrant communication treatments suggest the presence of social preferences. |
| Keywords: | Stipulated Damages; Rent Extraction; Market Foreclosure; Renegotiation; Social Preferences; Experiments |
| JEL: | C72 C91 D86 K12 K21 L42 |
| Date: | 2015–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2015_010&r=all |
| By: | Wolfgang Luhan (Ruhr University Bochum); Anders Poulsen (University of East Anglia); Michael Roos (Ruhr University Bochum) |
| Abstract: | We report experimental data from a bargaining situation where two decision makers tacitly make their decisions, and earn and cumulate their payoffs in real time. Examples include fishermen choosing fishing spots, interaction among neighbors who prefer not to talk, military conflict, and tacit duopoly. The data can be organized and explained in terms of focal properties of feasible payoffs, and the complexity of coordinating on the intertemporal behavior required to achieve these payoffs. Bargainers trade off payoff focality and coordination complexity, and behavior can be systematically inefficient. |
| Keywords: | bargaining, real time interaction, payoff focality, coordination complexity, bounded rationality |
| JEL: | C70 C72 C92 |
| Date: | 2015–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:uea:wcbess:15-11&r=all |
| By: | Landeo, Claudia (University of Alberta, Department of Economics) |
| Abstract: | In tort litigation, delayed settlement or impasse imposes high costs on the parties and society. Litigation institutions might influence social welfare by affecting the likelihood of out-of-court settlement and the potential injurers’ investment in product safety. An appropriate design of litigation institutions and tort reform requires good knowledge of the factors that affect litigants’ behavior. The combination of theoretical and experimental law and economics, which represents the cornerstone of the application of the scientific method, might enhance our understanding of the effects of litigation institutions and tort reform on settlement and deterrence. We evaluate the interaction between theoretical and experimental law and economics in the study of tort litigation institutions. Special attention is devoted to liability, litigation and tort reform institutions, and behavioral factors that might affect impasse. Our analysis suggests a productive interaction between theoretical and experimental law and economics. In particular, findings from experimental economics work on litigation institutions indicate the presence and robustness of cognitive biases, and provide evidence of the effects of litigants’ biased beliefs on the likelihood of impasse. These findings have motivated the construction of new economic models of litigation involving more empirically-relevant assumptions about litigants’ beliefs. As a result of the application of the scientific method, the contributions of law and economics to the design of legal institutions might be strengthened. |
| Keywords: | Law and Economics; Experimental Law and Economics; Scientific Method; Civil Litigation; Institutional Design; Settlement; Litigation; Asymmetric Information; Self-Serving Bias; Pretrial Bargaining; Incentives for Care; Experiments; Caps on Non-Economic Damages; Motivated Reasoning; Divergent Beliefs; Motivated Anchoring; Non-Cooperative Games; Disputes |
| JEL: | C72 C90 C91 D62 D82 D86 J52 J58 K12 K21 K41 L12 L40 L42 |
| Date: | 2015–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2015_012&r=all |
| By: | Lu Dong (Department of Economics, University of Nottingham); Maria Montero (Department of Economics, University of Nottingham); Alex Possajennikov (Department of Economics, University of Nottingham) |
| Abstract: | Using experimental methods, this paper investigates the limits of communication and leadership in aiding group coordination in a minimum effort game. Choosing the highest effort is the payoff dominant Nash equilibrium in this game, and communication and leadership are expected to help in coordinating on such an equilibrium. We consider an environment in which the benefits of coordination are low compared to the cost of mis-coordination. In this environment, players converge to the most inefficient equilibrium in the absence of a leader. We look at two types of leaders: a cheap-talk leader-communicator who suggests an effort level but is free to choose a different level from the one suggested, and a first-mover leader whose choice of effort is observed by the rest of the group. We study whether leadership can prevent coordination failure and whether leadership allows coordination on a higher effort after a history of coordination fail- ure. We find that in this tough environment both types of leadership are insufficient to escape from the low-effort equilibrium but leadership has some (limited) ability to prevent coordination failure. With the help of the strategy method for the followers' responses we find that the main reason for the persistence of coordination failure in this environment is the presence of followers who do not follow (or would not have followed) the leader. |
| Keywords: | minimum effort game, coordination failure, communication, leadership |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2015-17&r=all |
| By: | A. Dust; K. Evans; C. Lausberg; M. Schmid; F. Viruly |
| Abstract: | Any appraiser is subject to many potentially biasing influences which compromise the accu-racy of the appraisal. One of the most prominent biases is the anchoring heuristic: appraisers involuntarily anchor to reference points such as their previous valuation, the value opinion of the seller, or the last transaction price. While many studies have proven the existence and importance of the anchoring effect in real estate appraisals, very few studies have suggested practical means to counter it (Ã’debiasingÓ). In this paper we demonstrate that the anchoring effect can be reduced with a computer software supporting the valuers in their decision-making. In our experiments we asked experienced valuers and novices to perform a valuation of a commercial property, based on a set of documents and with the help of a self-written valua-tion software. Each proband received one of three versions of the software with different fea-tures for debiasing to test its influence on the appraised values. The experiments were carried out in Germany and South Africa using two variants of the income approach as the valuation method. Two of the properties were fictitious, one was real and for sale when the experiment was carried out. The comparison of the sub-samples adds to our understanding of how decision support systems can reduce valuation variance. |
| Keywords: | Anchoring Heuristic; Appraisal Bias; Debiasing; Decision Support System; Valuation Variation |
| JEL: | R3 |
| Date: | 2015–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2015_203&r=all |