nep-exp New Economics Papers
on Experimental Economics
Issue of 2016‒08‒14
fourteen papers chosen by
Daniel Houser
George Mason University

  1. Bringing Real Market Participants' Real Preferences into the Lab: An Experiment that Changed the Course Allocation Mechanism at Wharton By Eric Budish; Judd B. Kessler
  2. Peer Information and Risk-taking under Competitive and Non-competitive Pay Schemes By Philip Brookins; Jennifer Brown; Dmitry Ryvkin
  3. An Experimental Study of Bond Market Pricing By Matthias Weber; John Duffy; Arthur Schram
  4. External and Internal Validity of a Geographic Quasi-Experiment Embedded in Cluster-Randomized Experiment By Sebastian Galiani; Patrick J. McEwan; Brian Quistorff
  5. Cognitive Droughts By Lichand, Guilherme; Mani, Anandi
  6. Dynamic Behavior and Player Types in Majoritarian Multi-Battle Contests By Alan Gelder; Dan Kovenock
  7. Heads or Tails: The Impact of a Coin Toss on Major Life Decisions and Subsequent Happiness By Steven D. Levitt
  8. Resolving Persistent Uncertainty by Self-Organized Consensus to Mitigate Market Bubbles By Didier Sornette; Sandra Andraszewicz; Ryan O. Murphy; Philipp B. Rindler; Dorsa Sanadgol
  9. The Political Economy of Public Debt: A Laboratory Study By Marco Battaglini; Salvatore Nunnari; Thomas R. Palfrey
  10. Learning to Coordinate: Co-Evolution and Correlated Equilibrium By Alejandro Lee-Penagos
  11. The Morale Effects of Pay Inequality By Emily Breza; Supreet Kaur; Yogita Shamdasani
  12. Measuring Time Preferences By Jonathan D. Cohen; Keith Marzilli Ericson; David Laibson; John Myles White
  13. Salience Theory of Judicial Decisions By Bordalo, Pedro; Gennaioli, Nicola; Shleifer, Andrei
  14. Information and Preferences for Public Spending: Evidence from Representative Survey Experiments By Lergetporer, Philipp; Schwerdt, Guido; Werner, Katharina; Woessmann, Ludger

  1. By: Eric Budish; Judd B. Kessler
    Abstract: This paper reports on an experimental test of a new market design that is attractive in theory but makes the common and potentially unrealistic assumption that “agents report their type”; that is, that market participants can perfectly report their preferences to the mechanism. Concerns about preference reporting led to a novel experimental design that brought real market participants’ real preferences into the lab, as opposed to endowing experimental subjects with artificial preferences as is typical in market design. The experiment found that market participants were able to report their preferences “accurately enough” to realize efficiency and fairness benefits of the mechanism even while preference reporting mistakes meaningfully harmed mechanism performance. The experimental results persuaded the Wharton School to adopt the new mechanism and helped guide its practical implementation. It is hoped that the experimental design methodology may be of use to other market design researchers, either for evaluating or improving preference reporting for existing mechanisms or for bringing other new mechanisms that utilize rich preference information from theory to practice.
    JEL: C78 C9 D47
    Date: 2016–07
  2. By: Philip Brookins; Jennifer Brown; Dmitry Ryvkin
    Abstract: Incentive schemes that reward participants based on their relative performance are often thought to be particularly risk-inducing. Using a novel, real-effort task experiment in the laboratory, we find that the relationship between incentives and risk-taking is more nuanced and depends critically on the availability of information about peers’ strategies and outcomes. Indeed, we find that when no peer information is available, relative rewards schemes are associated with significantly less risk-taking than non-competitive rewards. In contrast, when decision-makers receive information about their peers’ actions and/or outcomes, relative incentive schemes are associated with more risk-taking than non-competitive schemes. The nature of the feedback—whether subjects receive information about peers’ strategies, outcomes, or both—also affects risk-taking. We find no evidence that competitors imitate their peers when they face only feedback about other subjects’ risk-taking strategies. However, decision-makers take more risk when they see the gaps between their performance score and their peers’ scores grow. Combined feedback about peers’ strategies and performance—from which subjects may assess the overall relationship between risk-taking and success—is associated with more risk-taking when rewards are based on relative performance; we find no similar effect for non-competitive rewards.
    JEL: C72 C91 C92 D81 G17 M52
    Date: 2016–08
  3. By: Matthias Weber (Bank of Lithuania and Faculty of Economics, Vilnius University); John Duffy (Department of Economics, University of California-Irvine); Arthur Schram (University of Amsterdam and European University Institute)
    Abstract: An important feature of bond markets is the relationship between initial public offering prices and the probability of the issuer defaulting. First, this probability affects the bond prices. Second, IPO prices determine the default probability. Though market equilibrium has been shown to predict well for other assets, it is a priori unclear whether markets will yield competitive prices when such interaction with the default probability occurs. We develop a flexible bond market model that is easily implemented in the laboratory and examine how subjects price bonds. We find that subjects learn to price bonds well after only a few repetitions.
    Keywords: Bond markets; Experimental finance; Experimental markets; Asset pricing; Learning
    JEL: C92 C90 D47 G12
    Date: 2016–08
  4. By: Sebastian Galiani; Patrick J. McEwan; Brian Quistorff
    Abstract: This paper analyzes a geographic quasi-experiment embedded in a cluster-randomized experiment in Honduras. In the experiment, average treatment effects on school enrollment and child labor were large—especially in the poorest blocks—and could be generalized to a policy-relevant population given the original sample selection criteria. In contrast, the geographic quasi-experiment yielded point estimates that, for two of three dependent variables, were attenuated. A judicious policy analyst without access to the experimental results might have provided misleading advice based on the magnitude of point estimates. We assessed two main explanations for the difference in point estimates, related to external and internal validity.
    JEL: O22
    Date: 2016–07
  5. By: Lichand, Guilherme (Harvard University); Mani, Anandi (University of Warwick)
    Abstract: This paper tests whether uncertainty about future rainfall affects farmers’ decision-making through cognitive load. Behavioral theories predict that rainfall risk could impose a psychological tax on farmers, leading to material consequences at all times and across all states of nature, even within decisions unrelated to consumption smoothing, and even when negative rainfall shocks do not materialize down the line. Using a novel technology to run lab experiments in the field, we combine survey experiments with recent rainfall shocks to test the effects of rainfall risk on farmers’ cognition, and find that it decreases farmers’ attention, memory and impulse control, and increases their susceptibility to a variety of behavioral biases. Effects are quantitatively important, equivalent to losing 25% of one’s harvest at the end of the rainy season. Evidence that farmer’s cognitive performance is relatively less impaired in tasks involving scarce resources suggests that the effects operate through the mental bandwidth mechanism.
    Keywords: JEL Classification:
    Date: 2016
  6. By: Alan Gelder (Economic Science Institute, Chapman University); Dan Kovenock (Economic Science Institute, Chapman University)
    Abstract: In a dynamic contest where it is costly to compete, a player who is behind must decide whether to surrender or to keep fighting in the face of bleak odds. We experimentally examine the game theoretic prediction of last stand behavior in a multi-battle contest with a winning prize and losing penalty, as well as the contrasting prediction of surrendering in the corresponding contest with no penalty. We find varied evidence in support of these hypotheses in the aggregated data, but more conclusive evidence when scrutinizing individual player behavior. Players’ realized strategies tend to conform to one of several “types”. We develop a taxonomy to classify player types and study how these types interact and how their incidence varies across treatments. Contrary to the theoretical prediction, escalation is the predominant behavior, but last stand and surrendering behaviors also arise at rates responsive to the importance of losing penalties.
    Keywords: Dynamic Contest, Multi-Battle Contest, Player Type, Experiment, All-Pay Auction, Escalation, Last Stand, Maximin
    JEL: C73 C92 D44 D72 D74
    Date: 2016
  7. By: Steven D. Levitt
    Abstract: Little is known about whether people make good choices when facing important decisions. This paper reports on a large-scale randomized field experiment in which research subjects having difficulty making a decision flipped a coin to help determine their choice. For important decisions (e.g. quitting a job or ending a relationship), those who make a change (regardless of the outcome of the coin toss) report being substantially happier two months and six months later. This correlation, however, need not reflect a causal impact. To assess causality, I use the outcome of a coin toss. Individuals who are told by the coin toss to make a change are much more likely to make a change and are happier six months later than those who were told by the coin to maintain the status quo. The results of this paper suggest that people may be excessively cautious when facing life-changing choices.
    JEL: D12 D81
    Date: 2016–08
  8. By: Didier Sornette (Swiss Finance Institute; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)); Sandra Andraszewicz (ETH Zurich); Ryan O. Murphy (University of Zurich - Department of Economics); Philipp B. Rindler (EBS Universität für Wirtschaft und Recht - EBS Business School); Dorsa Sanadgol (ETH Zurich)
    Abstract: We propose a new paradigm to study coordination in complex social systems, such as financial markets, that accounts for fundamental uncertainty. This new context has features from prediction markets that have been shown previously to mitigate price bubbles in classical asset market experiments. Our setup is more realistic as it offers multiple securities that are continuously traded over days and, importantly, there is no "true" underlying price. Nonetheless, the market is designed such that its rationality can be evaluated. Quick consensus emerges early yielding pronounced market bubbles. The overpricing diminishes over time, indicating learning, but does not disappear completely. Traders' price estimates become progressively more independent via a collective realization of communal ignorance, pushing the market much closer to rationality, with forecasts that are close to the realized outcomes.
    Keywords: Experimental Economics, Experimental Asset Market, Bubble, Uncertainty, Complete Contingent Market
    JEL: C18 C90 C92 D70 D81 G17
  9. By: Marco Battaglini; Salvatore Nunnari; Thomas R. Palfrey
    Abstract: This paper reports the results from a laboratory experiment designed to study political distortions in the accumulation of public debt. A legislature bargains over the levels of a public good and of district specific transfers in two periods. The legislature can issue or purchase risk-free bonds in the first period and the level of public debt creates a dynamic linkage across policymaking periods. In line with the theoretical predictions, we find that public policies are inefficient and efficiency is increasing in the size of the majority requirement, with higher investment in public goods and lower debt associated with larger majority requirements. Also in line with the theory, we find that debt is lower when the probability of a negative shock to the economy in the second period is higher, evidence that debt is used to smooth consumption.
    JEL: C92 H11 H41
    Date: 2016–07
  10. By: Alejandro Lee-Penagos (School of Economics, University of Nottingham)
    Abstract: In a coordination game such as the Battle of the Sexes, agents can condition their plays on external signals that can, in theory, lead to a Correlated Equilibrium that can improve the overall payoffs of the agents. Here we explore whether boundedly rational, adaptive agents can learn to coordinate in such an environment. We find that such agents are able to coordinate, often in complex ways, even without an external signal. Furthermore, when a signal is present, Correlated Equilibrium are rare. Thus, even in a world of simple learning agents, coordination behavior can take on some surprising forms.
    Keywords: Battle of the Sexes, Correlated Equilibrium, Evolutionary Game Theory, Learning Algorithms, Coordination Games, Adaptive Agents
    Date: 2016–11
  11. By: Emily Breza; Supreet Kaur; Yogita Shamdasani
    Abstract: The idea that worker utility is affected by co-worker wages has potentially broad labor market implications. In a month-long experiment with Indian manufacturing workers, we randomize whether co-workers within production units receive the same flat daily wage or different wages (according to baseline productivity rank). For a given absolute wage, pay inequality reduces output and attendance by 0.24 standard deviations and 12%, respectively. These effects strengthen in later weeks. Pay disparity also lowers co-workers’ ability to cooperate in their self-interest. However, when workers can clearly observe productivity differences, pay inequality has no discernible effect on output, attendance, or group cohesion.
    JEL: D03 E24 J3 O15
    Date: 2016–08
  12. By: Jonathan D. Cohen; Keith Marzilli Ericson; David Laibson; John Myles White
    Abstract: We review research that measures time preferences – i.e., preferences over intertemporal tradeoffs. We distinguish between studies using financial flows, which we call “money earlier or later” (MEL) decisions and studies that use time-dated consumption/effort. Under different structural models, we show how to translate what MEL experiments directly measure (required rates of return for financial flows) into a discount function. We summarize empirical regularities found in MEL studies and the predictive power of those studies. We explain why MEL choices are driven in part by some factors that are distinct from underlying time preferences.
    JEL: D03 D9
    Date: 2016–07
  13. By: Bordalo, Pedro; Gennaioli, Nicola; Shleifer, Andrei
    Abstract: We present a model of judicial decision making in which the judge overweights the salient facts of the case. The context of the judicial decision, which is comparative by nature, shapes which aspects of the case stand out and draw the judge’s attention. By focusing judicial attention on such salient aspects of the case, legally irrelevant information can affect judicial decisions. Our model accounts for a range of recent experimental evidence that bears on the psychology of judicial decisions, including anchoring effects in the setting of damages, decoy effects in choice of legal remedies, and framing effects in the decision to litigate. The model also offers a new approach to positive analysis of damage awards in torts.
    Date: 2015
  14. By: Lergetporer, Philipp (University of Munich); Schwerdt, Guido (University of Konstanz); Werner, Katharina (University of Munich); Woessmann, Ludger (University of Munich)
    Abstract: The electorates’ lack of information about the extent of public spending may cause misalignments between voters’ preferences and the size of government. We devise a series of representative survey experiments in Germany that randomly provide treatment groups with information on current spending levels. Results show that such information strongly reduces support for public spending in various domains from social security to defense. Data on prior information status on school spending and teacher salaries shows that treatment effects are strongest for those who initially underestimated spending levels, indicating genuine information effects rather than pure priming effects. Information on spending requirements also reduces support for specific education reforms. Preferences on spending across education levels are also malleable to information.
    Keywords: public spending, information, preferences, education spending, survey experiment JEL Classification: H11, D83, D72, H52, I22, P16
    Date: 2016

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