Experimental Economics

This paper studies product adoption as modeled by Katz and Shapiro (1986) in an experimental setting. Two sellers offer competing, incompatible technologies and two groups of buyers make purchase decisions sequentially in a two-stage game of complete information. Value to a buyer from purchasing a technology depends on the total number of buyers of that technology (installed base). There is mixed evidence that the results are qualitatively consistent with equilibrium predictions laid out in theory. Buyers of technology display behavior close to equilibrium predictions. However, the sellers in the laboratory do not exploit their installed bases significantly.

Many competitions require investment of nonrefundable resources, e.g., political campaigns, financial markets, sports or courting rituals. One contestant wins the prize for the invested amount, while all others forfeit their investments without receiving compensation. Frequently, contests are asymmetric, due to differing resources or prize valuations. This could lead weaker contestants to avoid investing, and stronger ones to lower their investment. Two experiments explored the effects of asymmetry between the contestants - arising from their endowments or prizes - on investments. Subjects played both symmetric and asymmetric contests, enabling direct within-subject comparisons. We observed an effect of asymmetry only when it concerned endowments: Subjects invested less when their endowments were asymmetric, whereas (a-)symmetry in the prizes did not influence investments. The changes between consecutive investments can be explained by reactions to the previous outcome (win or loss) in terms of regret over the previous investment being too much or too little.

"Opposing interests, bounded rationality and decisional bias may severely hinder conflict resolution. When the commitment  for  an  agreement  is  high,  opponents  can  resort  to  the  intervention  of  a  third  party,  such as  a mediator. We propose a methodology to enhance conflict resolution, which  is based on the Analytic Hierarchy Process  (AHP)  and  takes  into  account  the psychological  attitudes  of  the  conflicting  parties.  The  “AHP Technique for Highly Eligible Negotiation Agreements” (ATHENA) supports a third party in selecting, among potential negotiation agreements, those proposals having  the  best  chances  to be accepted by adverse parties.
We  illustrate  an  implementation  of  ATHENA  that  involved  160  students  simulating  "Union  versus Management" negotiations.  A  control group of 40 couples negotiated without any  Decision Support System, while the other 40 couples were supported by ATHENA. The results show that the procedure implementation
outperformed unsupported negotiation by increasing  the number and the fairness of agreements."

In many organizations the measurement of job performance can not rely on easily quantifiable information. In such cases, supervising managers often use subjective performance evaluations. We use laboratory experiments to study whether the way employees are assigned to a manager affects managers’ and co-employees’ subjective evaluations of employees. Employees can either be hired by the manager, explicitly not hired by him and nevertheless assigned to him or exogenously assigned to him. We present data from three different treatments. For all three we find escalation bias both by managers and by co-employees. Managers exhibit a positive bias towards those employees they have hired or a negative one towards those they have explicitly not hired. Managers’ and employees’ biases are connected. Exogenously assigned employees are biased in favor of employees hired by the manager and against those explicitly not hired.

We conduct a laboratory experiment to study how, after a history of decay in cooperation, organizations can revive cooperation in a repeated voluntary contribution game in an enduring way. Simply starting the repeated game over - a pure restart - leads to an initial increase of cooperation, but to a subsequent new decay to the previous level. Motivated by cooperation failure in organizations we study the potential of three interventions of triggering higher and sustained cooperation. We find that a change in leader and a detailed explanation of the causes of the decay in cooperation combined with a clearly formulated advice do not have an effect beyond that of just starting over. In contrast, a one-way free form communication message sent by the leader to the followers strongly revives cooperation. Repeated free form communication by the leader further strengthens the reviving effect on cooperation by eliminating the decline in contributions over time almost completely.

In this paper we use an experimental approach to investigate whether and how linguistic conventions can emerge in a society without explicit agreement. As a starting point we consider the signaling game introduced by Lewis. We find that in experimental settings, small groups can quickly develop conventions of signal meaning in these games. We also investigate versions of the game where the theoretical literature indicates that meaning will be less likely to arise when there are more than two states for actors to transfer meaning about and when some states are more likely than others. In these cases, we find that actors are less likely to arrive at strategies where signals have clear conventional meaning. We conclude with a proposal for extending the use of the  methodology of experimental economics in experimental philosophy.

"There is widespread interest in measuring risk attitudes and incorporating such measures into broader econometric analyses. We consider three elicitation procedures currently in use. We find considerable variability within – and even more, between – the results they produce. We suggest that this reflects the way that different instruments interact with imprecise underlying preferences. The short run implication is that such procedures need to be used with caution and are likely to be highly context‐specific. The longer run implication is that adding ‘white noise’ to deterministic models is inadequate: we need to develop models that allow for imprecision and procedural variation."

This study measures risk and loss aversion using Prospect Theory and the impact of emotions on those parameters. Our controlled experiment at two universities in Mexico City, using uncompensated students as research subjects, found results similar to those obtained by Tanaka et al. (2010). In order to study the role of emotions, we provided subjects with randomly varied information on rising deaths due to drug violence in Mexico and also on youth unemployment. In agreement with previous studies, we find that risk aversion on the gains domain decreases with age and income. We also find that loss aversion decreases with income and is less for students in public universities. With regard to emotions, risk aversion increases with sadness and loss aversion is negatively influenced by anger. On the loss domain, anger dominates sadness. On average, anger reduces loss aversion by half.

Strong reciprocity is characterized by the willingness to altruistically reward cooperative acts and to altruistically punish norm-violating, defecting behaviours. Recent evidence suggests that subtle reputation cues, such as eyes staring at subjects during their choices, may enhance prosocial behaviour. Thus, in principle, strong reciprocity could also be affected by eye cues. We investigate the impact of eye cues on trustees' altruistic behaviour in a trust game and find zero effect. Neither the subjects who are classified as prosocial nor the subjects who are classified as selfish respond to these cues. In sharp contrast to the irrelevance of subtle reputation cues for strong reciprocity, we find a large effect of explicit, pecuniary reputation incentives on the trustees' prosociality. Trustees who can acquire a good reputation that benefits them in future interactions honour trust much more than trustees who cannot build a good reputation. These results cast doubt on hypotheses suggesting that strong reciprocity is easily malleable by implicit reputation cues not backed by explicit reputation incentives.

We use experimental data from variants of public good games to test for household efficiency among married couples in rural Uganda. Spouses frequently do not maximise surplus from cooperation and perform better when women are in charge of allocating the common pool. Women contribute less to this household common pool than men and opportunism is widespread. These results cast doubts on many models of household decision making. Experimental results are correlated with socio-economic attributes and suggest that assortative matching improves household efficiency. Developing non-cooperative household models sensitive to the context-specificity of gender relations emerges as a promising future research agenda.

Experiments measuring risk and time preferences in developing countries have tended to have relatively small samples and geographically concentrated sampling. This large-scale field experiment uses a Holt-Laury mechanism to elicit the preferences of 1289 randomly selected subjects from 94 villages covering six out of seven agro-climatic zones across rural Uganda. As in previous studies we find evidence of risk aversion and loss aversion amongst most subjects. In addition we find significant heterogeneity in risk attitudes across agro-climatic zones. Especially, the farmers in the agro-climatically least favourable zone, the uni-modal rainfall zone, are the most risk averse, loss averse and impatient. We also find significant relationships between risk attitudes and village level predictors such as the distance to town and the road conditions. After controlling for the village level factors, we find that the level of schooling still positively correlates with the individual’s level of loss tolerance and patience. The main results are not altered by allowing for probability weighting in subjects’ choices. Overall the results provide clear evidence that within one country there may be significant regional variations in risk and time attitudes. We conjecture that the agro-climatic conditions that affect farmers’ livelihoods may also affect their risk and time preferences and village level development in infrastructure could improve the household perception of investment related policies.