nep-hpe New Economics Papers
on History and Philosophy of Economics
Issue of 2017‒04‒16
twenty papers chosen by
Erik Thomson
University of Manitoba

  1. Humans' (incorrect) distrust of reflective decisions By Cabrales, Antonio; Espin, Antonio; Kujal, Praveen; Rassenti, Stephen
  2. A ‘Model’ Model: McCloskey and the Craft of Economics By Joshua C. Hall
  3. An Economic Approach to Alleviate the Crisis of Confidence in Science: With an Application to the Public Goods Game By Luigi Butera; John List
  4. Fair Utilitarianism By Marc Fleurbaey; Stephane Zuber
  5. Common Belief Foundations of Global Games By Stephen Morris; Hyun Song Shin; Muhamet Yildiz
  6. A Review of the Recent Literature on the Institutional Economics Analysis of the Long-Run Performance of Nations By Peter Lloyd; Cassey Lee
  7. A Study of the Triggers of Conflict and Emotional Reactions By Caldara, Michael; McBride, Michael; McCarter, Matthew; Sheremeta, Roman
  8. Crises: Equilibrium Shifts and Large Shocks By Stephen Morris; Muhamet Yildiz
  9. The Valuation of Moral Rights: A Field Experiment By Stefan Bechtold; Christoph Engel
  10. Economics and psychology. The framing of decisions By Schilirò, Daniele
  11. Happiness in the Air: How Does a Dirty Sky Affect Mental Health and Subjective Well-being? By Zhang, Xin; Zhang, Xiaobo; Chen, Xi
  12. Belief-Free Rationalizability and Informational Robustness By Dirk Bergemann; Stephen Morris
  13. Collusion and Information Revelation in Auctions By Llorente-Saguer, Aniol; Zultan, Ro'i
  14. A “Pencil Sharpening†Algorithm for Two Player Stochastic Games with Perfect Monitoring By Dilip Abreu; Benjamin Brooks; Yuliy Sannikov
  15. Equality of Opportunity, Moral Hazard and the Timing of Luck By Lefranc, Arnaud; Trannoy, Alain
  16. Inequality Indices as Tests of Fairness By Kanbur, Ravi; Snell, Andy
  17. Fair Management of Social Risk By Marc Fleurbaey; Stephane Zuber Zuber
  18. What Can We Learn From Experiments? Understanding the Threats to the Scalability of Experimental Results By Omar Al-Ubaydli; John List; Dana Suskind
  19. Fifty years of household income and wealth surveys: history, methods and future prospects By Alberto Baffigi; Luigi Cannari; Giovanni D’Alessio
  20. Financial Literacy and Attitudes to Redistribution By Montagnoli, Alberto; Moro, Mirko; Panos, Georgios A.; Wright, Robert E.

  1. By: Cabrales, Antonio; Espin, Antonio; Kujal, Praveen; Rassenti, Stephen
    Abstract: Recent experiments suggest that social behavior may be shaped by the time available for decision making. It is known that fast decision making relies more on intuition whereas slow decision making is affected by reflective processes. Little is known, however, about whether people correctly anticipate the effect of intuition vs. reflection on others' decision making. This is important in everyday situations where anticipating others' behavior is often essential. A good example of this is the extensively studied Trust Game where the trustor, by sending an amount of money to the trustee, runs the risk of being exploited by the trusteee's subsequent action. We use this game to study how trustors' choices are affected by whether trustees are externally forced to respond quickly or slowly. We also examine whether trustors' own tendency to stop and reflect on their intuitions (as measured by the Cognitive Reflection Test) moderates how they anticipate the effect of reflection on the behavior of trustees. We find that the least reflective trustors send less money when trustees are forced to respond "reflectively" rather than "intuitively" , but we also argue that this is a wrong choice. In general, no group, including the ones with the largest number of reflective individuals, is good at anticipating the (positive) effect of forced delay on others' trustworthiness.
    Keywords: beliefs; dual-process; intuition; reflection; Trust; trustworthiness
    Date: 2017–04
  2. By: Joshua C. Hall (West Virginia University, Department of Economics)
    Abstract: In this essay, I highlight some of the contributions of Deirdre McCloskey to the practice of economics as a teacher and scholar. I highlight her influence on my teaching and scholarship in the areas of economic education and economic freedom.
    Keywords: rhetoric, economic freedom, storytelling
    JEL: A00 A11 A23 B31
    Date: 2017–04
  3. By: Luigi Butera; John List
    Abstract: Novel empirical insights by their very nature tend to be unanticipated, and in some cases at odds with the current state of knowledge on the topic. The mechanics of statistical inference suggest that such initial findings, even when robust and statistically significant within the study, should not appreciably move priors about the phenomenon under investigation. Yet, a few well-conceived independent replications dramatically improve the reliability of novel findings. Nevertheless, the incentives to replicate are seldom in place in the sciences, especially within the social sciences. We propose a simple incentive-compatible mechanism to promote replications, and use experimental economics to highlight our approach. We begin by reporting results from an experiment in which we investigate how cooperation in allocation games is affected by the presence of Knightian uncertainty (ambiguity), a pervasive and yet unexplored characteristic of most public goods. Unexpectedly, we find that adding uncertainty enhances cooperation. This surprising result serves as a test case for our mechanism: instead of sending this paper to a peer-reviewed journal, we make it available online as a working paper, but we commit never to submit it to a journal for publication. We instead offered co-authorship for a second, yet to be written, paper to other scholars willing to independently replicate our study. That second paper will reference this working paper, will include all replications, and will be submitted to a peer- reviewed journal for publication. Our mechanism allows mutually-beneficial gains from trade between the original investigators and other scholars, alleviates the publication bias problem that often surrounds novel experimental results, and accelerates the advancement of economic science by leveraging the mechanics of statistical inference.
    Date: 2017
  4. By: Marc Fleurbaey (Princeton University); Stephane Zuber (Paris School of Economics)
    Abstract: Utilitarianism is a prominent approach to social justice that has played a central role in economic theory. A key issue for utilitarianism is to define how utilities should be measured and compared. This paper draws on Harsanyi’s approach (Harsanyi, 1955) to derive utilities from choices in risky situations. We introduce a new normalization of utilities that ensures that: 1) a transfer from a rich to a poor is welfare enhancing, and 2) populations with more risk averse people have lower welfare. We propose normative principles that reflect these fairness requirements and characterize fair utilitarianism. We also study some implications of fair utilitarianism for risk sharing and collective risk aversion.
    Keywords: Fairness, utilitarianism, risk sharing, collective risk aversion
    JEL: D63 D81
    Date: 2017–01
  5. By: Stephen Morris (Princeton University); Hyun Song Shin (Bank for International Settlements); Muhamet Yildiz (M.I.T.)
    Abstract: We study coordination games under general type spaces. We characterize rationalizable actions in terms of the properties of the belief hierarchies and show that there is a unique rationalizable action played whenever there is approximate common certainty of rank beliefs, defined as the probability the players assign to their payoff parameters being higher than their opponents'. We argue that this is the driving force behind selection results for the specific type spaces in the global games literature.
    JEL: C70 D83
    Date: 2015–11
  6. By: Peter Lloyd (University of Melbourne); Cassey Lee (ISEAS – Yusof Ishak Institute, Singapore)
    Abstract: This paper reviews the recent (post-2000) literature which assesses the importance of institutions as a factor determining cross-country differences in growth rates or in the contemporary level of “prosperity”. It first sketches how institutional economics has evolved. It then examines critically the methods of analysis employed in the recent literature. The paper finds that this literature has made a major contribution to the analysis of the causes of economic growth but the relative importance of institutions as a determinant of long-run growth and prosperity is still a wide open question.
    Keywords: institutions, policies, long-run performance, instruments
    JEL: O43 B52
    Date: 2016–01
  7. By: Caldara, Michael; McBride, Michael; McCarter, Matthew; Sheremeta, Roman
    Abstract: We study three triggers of conflict and explore their resultant emotional reactions in a laboratory experiment. Economists suggest that the primary trigger of conflict is monetary incentives. Social psychologists suggest that conflicts are often triggered by fear. Finally, evolutionary biologists suggest that a third trigger is uncertainty about opponent’s desire to cause harm. Consistent with the predictions from economics, social psychology, and evolutionary biology, we find that conflict originates from all three triggers. The three triggers differently impact the frequency of conflict, but not the intensity. Also, we find that the frequency and intensity of conflict decrease positive emotions and increase negative emotions, and that conflict impacts negative emotions more than positive emotions.
    Keywords: conflict, incentives, fear, uncertainty, laboratory experiment, reverse dictator game, joy of destruction game
    JEL: C72 C91 D74
    Date: 2017–03–30
  8. By: Stephen Morris (Princeton University); Muhamet Yildiz (Massachusetts Institute of T echnology)
    Abstract: A coordination game with incomplete information is played through time. In each period, payoffs depend on a fundamental state and an additional idiosyncratic shock. Fundamentals evolve according to a random walk where the changes in fundamentals (namely common shocks) have a fat tailed distribution. We show that majority play shifts either if fundamentals reach a critical threshold or if there are large common shocks, even before the threshold is reached. The fat tails assumption matters because it implies that large shocks make players more unsure about whether their payoffs are higher than others. This feature is necessary for large shocks to matter
    JEL: E32 G01
    Date: 2016–11
  9. By: Stefan Bechtold (ETH Zürich); Christoph Engel (Max Planck Institute for Research on Collective Goods)
    Abstract: U.S. intellectual property law is firmly rooted in utilitarian principles. Copyright law is viewed as a means to give proper monetary incentives to authors for their creative effort. Many European copyright systems pursue additional goals: Authors have the right to be named as author, to control alterations and to retract their work in case their artistic beliefs have changed. Protecting these “moral rights” might be justified by the preferences of typical authors. We present the first field experiment on moral rights revealing the true valuation of these rights by over 200 authors from 24 countries. A majority of authors are not willing to trade moral rights in the first place. They demand substantial prices in case they decide to trade. The differences between authors from the U.S. and Europe are small. These results call into question whether moral rights protection should differ across the Atlantic and whether a purely profit-based theory of copyright law is sufficient to capture the complex relationship between human behavior and creativity.
    Keywords: intellectual property, copyright, creativity, invention, moral right, willingness to pay
    JEL: C93 D03 K11 L82 O31 O34 O38
    Date: 2017–03
  10. By: Schilirò, Daniele
    Abstract: In the Theory of Rational Decision Making the psychological aspects are set aside. This contribution seeks to point out the relevance of psychology into economic decisions. The essay treats the "framing of decisions", which is a pillar of Kahneman's behavioral theory. Framing must be considered a special case of the more general phenomenon of dependency from the representation. The best-known risky choice-framing problem, i.e. the "Asian Disease Problem", is shown where an essential aspect of rationality: invariance, is violated. In addition, the contribution explains Kahneman and Tversky's Prospect Theory and illustrates their value function. Finally, it discusses the reversals of preference in framing and framing of contingencies. The framing manipulation is viewed as a public tool for influencing the decision maker's private framing of the problem in terms of gains or losses, which determines the decision maker's evaluation of the options. In conclusion, the psychology of choice is relevant both for the descriptive question of how decisions are made and for the normative question of how decisions ought to be made.
    Keywords: Behavioral Economics; Framing of Decisions; Prospect Theory; Daniel Kahneman.
    JEL: D01 D03 D81
    Date: 2016–12
  11. By: Zhang, Xin; Zhang, Xiaobo; Chen, Xi
    Abstract: Previous studies evaluating the welfare cost of air pollution have not paid much attention to its potential effect on mental health and subjective well-being (SWB). This paper attempts to fill the gap by investigating the impact of air pollution on several key dimensions, including mental health status, depressive symptoms, moment-to-moment happiness, and evaluative happiness. We match a nationwide longitudinal survey in China with local air quality and rich weather conditions according to the exact time and place of survey. By making use of variations in exposure to air pollution for the same individuals over time, we show that air pollution reduces hedonic happiness and increases the rate of depressive symptoms, while life satisfaction has little to do with the immediate air quality. Our results shed light on air pollution as an important contributor to the Easterlin paradox that economic growth may not bring more happiness.
    Keywords: mental health,depression,hedonic happiness,life satisfaction,air pollution,Easterlin paradox
    JEL: I31 Q53 Q51
    Date: 2017
  12. By: Dirk Bergemann (Yale University); Stephen Morris (Princeton University)
    Abstract: Fixing a game with uncertain payoffs, information design identifies the information structure and equilibrium that maximizes the payoff of an information designer. We show how this perspective unifies existing work, including that on communication in games (Myerson (1991)), Bayesian persuasion (Kamenica and Gentzkow (2011)) and some of our own recent work. Information design has a literal interpretation, under which there is a real information designer who can commit to the choice of the best information structure (from her perspective) for a set of participants in a game. We emphasize a metaphorical interpretation, under which the information design problem is used by the analyst to characterize play in the game under many different information structures.
    JEL: C72 C82 D83 C79
    Date: 2016–12
  13. By: Llorente-Saguer, Aniol; Zultan, Ro'i
    Abstract: The theoretical literature on collusion in auctions suggests that the first-price mechanism can deter the formation of bidding rings. However, such analyses neglect to consider the effects of failed collusion attempts, wherein information revealed in the negotiation process may affect bidding behavior. We experimentally test a setup in which theory predicts no collusion and no information revelation in first-price auctions. The results reveal a hitherto overlooked failing of the first-price mechanism: failed collusion attempts distort bidding behavior, resulting in a loss of seller revenue and efficiency. Moreover, the first-price mechanism does not result in less collusion than the second-price mechanism. We conclude that, while the features of the first-price mechanism may have the potential to deter bidder collusion, the role of beliefs in guiding bidding behavior make it highly susceptible to distortions arising from the informational properties of collusive negotiation. Auction designers should take this phenomenon into account when choosing the auction mechanism.
    Keywords: auctions; Collusion; Experiment
    JEL: C72 C91 D44
    Date: 2017–03
  14. By: Dilip Abreu (Princeton University); Benjamin Brooks (Becker Friedman Institute and Univ ersity of Chicago); Yuliy Sannikov (Princeton University)
    Abstract: We study the subgame perfect equilibria of two player stochastic games with perfect monitoring and geometric discounting. A novel algorithm is developed for calculating the discounted payoffs that can be attained in equilibrium. This algorithm generates a sequence of tuples of payoffs vectors, one payoff for each state, that move around the equilibrium payoff sets in a clockwise manner. The trajectory of these "pivot" payoffs asymptotically traces the boundary of the equilibrium payoff correspondence. We also provide an implementation of our algorithm, and preliminary simulations indicate that it is more efficient than existing methods. The theoretical results that underlie the algorithm also yield a bound on the number of extremal equilibrium payoffs.
    JEL: C63 C72 C73 D90
    Date: 2016–02
  15. By: Lefranc, Arnaud (University of Cergy-Pontoise); Trannoy, Alain (EHESS, Paris)
    Abstract: Equality of opportunity is usually defined as a situation where the effect of circumstances on outcome is nullified (compensation principle) and effort is rewarded (reward principle). We propose a new version of the reward principle based on the idea that effort deserves reward for it is costly. We show that luck can be introduced in two ways in the definition of these principles, depending on whether the correlation between luck and circumstances should be nullified and whether the correlation between luck and effort should be rewarded. In this regard, the timing of luck with respect to effort decisions is crucial, as is exemplified by moral hazard where effort choice influences the lottery of future uncertain events.
    Keywords: equality of opportunity, effort, luck, timeline, moral hazard, reward
    JEL: D63 J62 C14
    Date: 2017–03
  16. By: Kanbur, Ravi; Snell, Andy
    Abstract: Standard income inequality indices can be interpreted as a measure of welfare loss entailed in departures from equality of outcomes, for egalitarian social welfare functions defined on the distribution of outcomes. But such a welfare interpretation has been criticized for a long time on the grounds that these indices are snap shot outcomes-based measures which do not take into account the process generating the observed distribution. Rather than focusing on outcomes, it is argued, we should be interested in whether the underlying process is "fair". Following this line of argument, this paper develops statistical tests for fairness within well define income distribution generating processes and a well specified notion of fairness. We find that the likelihood ratio (LR) test for fairness versus unfairness within two such processes are proportional to Theil's first and second inequality indices respectively. The LR values may either be used as a test statistic or to approximate a Bayes factor that measures the posterior probabilities of the fair version of the processes over that of the unfair. The answer to the process versus outcomes critique is thus not to stop calculating inequality measures, but to interpret their values differently - to compare them to critical values for a test of the null hypothesis of fairness, or to use them directly as a measure of the chance that the process was fair relative to the chance it was unfair. We also apply this perspective to measurement of "inequality of opportunity".
    Keywords: Bayes Factor; Fair versus Unfair Process; Likeliood Ratio Test of Fairness; Process versus Outcomes; Snapshot Inequality Indices
    JEL: A10 A13 C01 C12 D63
    Date: 2017–03
  17. By: Marc Fleurbaey (Princeton University); Stephane Zuber Zuber (Paris School of Economics)
    Abstract: We provide a general method for extending social preferences defined for riskless economic environments to the context of risk and uncertainty. We apply the method to the problems of managing unemployment allowances (in the context of macroeconomic fluctuations) and catastrophic risks (in the context of climate change). The method guarantees ex post fairness and pays attention to individuals’ risk attitudes, while ensuring rationality properties for social preferences, revisiting basic ideas from Harsanyi’s celebrated aggregation theorem (Harsanyi, 1955). The social preferences that we obtain do not always take the form of an expected utility criterion, but they always satisfy statewise dominance. When we require social preferences to be expected utilities, we obtain a variant of Harsanyi’s result under a weak version of the Pareto principle, and a maximin criterion under a stronger Pareto requirement, whenever the ex post social ordering does not depend on people risk attitudes. We also show how non-expected utility individual preferences can be accommodated in the approach.
    JEL: D63
    Date: 2016–12
  18. By: Omar Al-Ubaydli; John List; Dana Suskind
    Date: 2017
  19. By: Alberto Baffigi (Banca d'Italia); Luigi Cannari (Banca d'Italia); Giovanni D’Alessio (Banca d'Italia)
    Abstract: The paper describes the evolution of the Survey of Household Income and Wealth from the early sixties until today. It shows how the innovations that have taken place over time have improved the quality of the data collected and expanded the possibilities for analysis. The work also examines in detail how the survey data compare to those drawn from other sources (national accounts, tax data, censuses, other sample surveys and so on), summarizing the main results of several works on this subject. The conclusion recalls the survey’s main developments, which highlight the need to pursue greater integration with other surveys at international level, sample and administrative sources in Italy and aggregate statistics.
    Keywords: household income and wealth distribution, sample surveys, microdata
    JEL: C81 C83 D31
    Date: 2016–12
  20. By: Montagnoli, Alberto (University of Sheffield); Moro, Mirko (University of Stirling); Panos, Georgios A. (University of Glasgow); Wright, Robert E. (University of Strathclyde)
    Abstract: This study combines novel financial-literacy data with measures of attitudes to redistribution from the British Election Study. We find a significant negative relationship between financial literacy and attitudes in favour of government intervention for income redistribution. The effect is robust to several specifications, samples, longitudinal models and instrumental variable regressions. Falsification tests show that these results are independent of generic attitudes towards other types of inequality/discrimination, e.g. based on gender, race or sexual orientation. An inquiry into the mechanisms of the effect indicates that the homo oeconomicus effect does not exert an impact on attitudes to redistribution for the less financially literate.
    Keywords: financial literacy, redistribution, inequality, attitudes, Great Britain
    JEL: D14 D31 I24
    Date: 2017–03

This nep-hpe issue is ©2017 by Erik Thomson. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.