Experimental and Behavorial Economics: Volume 13

Cover of Experimental and Behavorial Economics
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Table of contents

(10 chapters)

As the demand to substantiate predictions from economic theory with causal empirical evidence increases, economists have begun relying on controlled laboratory experiments. As this field has blossomed it has provided evidence confirming some of the key predictions of economic theory, exposing some of the weaker theoretical predictions, and highlighting the importance of non-pecuniary incentives such as trust and reciprocity in economic decision-making. This has resulted in a symbiotic relationship where experimental evidence is not only used to support theoretical conclusions but has pointed economists into bold and exciting new areas of investigation. In this volume I am pleased to present some of the most recent stimulating work in this field.

This chapter investigates the difference between ultimatum games over gains and over losses. Although previous research in decision making has found that individuals treat losses and gains differently, losses have not previously been investigated in strategic situations. In the field, however, the problem of negotiating over losses is as unavoidable and problematic as the problem of negotiating over gains. In addition, data on how we bargain over losses can shed some theoretical light on fairness preferences. Two experiments use within-subject designs, the first in the U.S. and the second in the U.S., China and Japan. We find that offers and demands are higher in losses than in gains, and that these results hold across the three countries. We adapt Bolton's (1991) model of fairness to explain the results. Specifically, we extend prospect theory's loss aversion to unfairness, suggesting that unfairness in losses looms larger than unfairness in gains.

Networks are natural tools for understanding social and economic phenomena. For example, all markets are characterized by agents connected by complex, multilateral information networks, and the network structure influences economic outcomes. In an earlier study, we undertook an experimental investigation of learning in various three-person networks, each of which gives rise to its own learning patterns. In the laboratory, learning in networks is challenging and the difficulty of solving the decision problem is sometimes massive even in the case of three persons. We found that the theory can account surprisingly well for the behavior observed in the laboratory. The aim of the present paper is to investigate important and interesting questions about individual and group behavior, including comparisons across networks and information treatments. We find that in order to explain subjects’ behavior, it is necessary to take into account the details of the network architecture as well as the information structure. We also identify some “black spots” where the theory does least well in interpreting the data.

We examine the effects of pre-play communication in an experimental game with conflicting risk-dominant and payoff-dominant equilibria. We find that most players condition their choices on the messages received, and do so in an intuitive way, announcing an intention to play the payoff-dominant action, and choosing the payoff-dominant action if the opponent expresses the same intention. However, a significant minority of players misrepresent their intentions. In some sessions where these players appear, behavior converges to an equilibrium in which subjects misrepresent their intentions and play the risk-dominant equilibrium.

For organizations to be effective, their employees need to rely upon each other even when they do not trust each other. One tool managers can use to promote trust-like behavior is monitoring. In this chapter, we report results from a laboratory study that describes the relationship between monitoring and trust behavior. We randomly and anonymously paired participants (n=210) with the same partner, and had them make 15 rounds of trust game decisions. We find predictable main effects (e.g. frequent monitoring increases trust behavior) as well as interesting strategic behavior. Specifically, we find that anticipated monitoring schemes (i.e. when participants know before they make a decision that they either will or will not be monitored) significantly increase trust behavior in monitored rounds, but decrease trust behavior overall. Participants in our study also reacted to information they learned about their counterpart differently as a function of whether or not monitoring was anticipated. Participants were less trusting when they observed trustworthy behavior in an anticipated monitoring period, than when they observed trustworthy behavior in an unanticipated monitoring period. In many cases, participants in our study systematically anticipated their counterpart's untrustworthy behavior. We discuss implication of these results for models of trust and offer managerial prescriptions.

We test whether party affiliation or ideological leanings influence subjects' behavior in public goods experiments and trust games. In general, party is unrelated to behavior, and ideology is not related to contributions in the public goods experiment. However, there is some evidence that self-described liberals are both more trusting and more trustworthy.

Companies are starting to capitalize on the potential of experimental economics as a decision-making tool. Hewlett-Packard (HP) is one of such pioneering companies. Experiments, conducted at HP Labs, were used to test retailer contract policies in three areas: return, minimum advertised-price (MAP), and market development funds. The experimental design models the multifaceted contemporary market of consumer computer products. While the model is quite complex, participants were found to be effective decisions-makers and that their behavior is sensitive to variations in policies. Based on the experimental results, HP changed its policies; for example, it made the consequences for minimum advertisement price violations forward-looking as well as backward-looking. This line of research appears promising for complex industrial environments. In addition, methodological issues are discussed in the context of differences between business and academic economics experiments. Finally, the author speculates about potential future business applications.

We present results of several experiments that deal with endogenous entry in auctions and auction valuation. One observation that is constant across all the experiments we report is that laboratory subjects have a difficult time evaluating potential gains from auctions. Even after they are given some experience with particular auctions, the uncertainty inherent in the auctions (the probability of winning as well as the potential gains from winning) makes it difficult for subjects to compare different auction mechanisms. This highlights the need for new experimental procedures to be used for testing theories that involve endogenous auction entry in the laboratory.

Cover of Experimental and Behavorial Economics
DOI
10.1016/S0278-0984(2005)13
Publication date
2005-07-21
Book series
Advances in Applied Microeconomics
Editor
Series copyright holder
Emerald Publishing Limited
ISBN
978-0-76231-194-1
eISBN
978-1-84950-337-2
Book series ISSN
0278-0984