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The Conservatism Principle And Asymmetric Preferences Over Reporting Errors, Jivas Chakravarthy, Timothy W. Shields
The Conservatism Principle And Asymmetric Preferences Over Reporting Errors, Jivas Chakravarthy, Timothy W. Shields
ESI Working Papers
At present, accounting conservatism is generally viewed from a measurement or reporting perspective. In contrast, we consider whether it relates to a moral rule of conduct. Conservatism has been described as deriving from a preference for reporting errors to be in the direction of understatement rather than overstatement. We experimentally pair Reporters who provide information with Users who rely on the information. We posit that under misaligned incentives that motivate aggressive reporting, Users view an aggressive report as reflecting Reporters’ exploitative intent and expect that a social norm prohibiting aggressive reporting applies. We predict that Users use noisy reporting errors …
A Capital Asset Pricing Model With Idiosyncratic Risk And The Sources Of The Beta Anomaly, Mark Schneider, Manuel A. Nunez
A Capital Asset Pricing Model With Idiosyncratic Risk And The Sources Of The Beta Anomaly, Mark Schneider, Manuel A. Nunez
ESI Working Papers
We introduce a generalization of the classical capital asset pricing model in which market uncertainty, market sentiment, and forms of idiosyncratic volatility and idiosyncratic skewness are priced in equilibrium. We derive two versions of the model, one based on a representative agent who cares about three criteria (risk, robustness, and expected returns), and the other with a microfoundation based on three types of investors (speculators, hedgers, and arbitrageurs). We apply the resulting capital asset pricing model with idiosyncratic risk (IR-CAPM) to provide a new theoretical account of the beta anomaly, one of the most fundamental and widely studied empirical limitations …
Financial Reporting And Moral Sentiments, Radhika Lunawat, Timothy W. Shields, Gregory B. Waymire
Financial Reporting And Moral Sentiments, Radhika Lunawat, Timothy W. Shields, Gregory B. Waymire
ESI Working Papers
Dating back at least to Adam Smith (1790), philosophers and researchers expect that people will behave differently when they know their actions are observable to others. We hypothesize that financial reporting reveals managers’ actions and leads them to take different actions that are better aligned with investor interests. We posit that the reason why is the activation of our internal mental self-evaluation that Smith refers to as an “Impartial Spectator.” We test this hypothesis with an experiment in which we manipulate the availability of a financial report that makes managerial actions transparent. Our evidence shows that financial reporting leads a …
Speed Traps: Algorithmic Trader Performance Under Alternative Market Structures, Yan Peng, Jason Shachat, Lijia Wei, S. Sarah Zhang
Speed Traps: Algorithmic Trader Performance Under Alternative Market Structures, Yan Peng, Jason Shachat, Lijia Wei, S. Sarah Zhang
ESI Working Papers
Using laboratory experiments, we illustrate that trading algorithms that prioritize low latency pose certain pitfalls in a variety of market structures and configurations. In hybrid double auctions markets with human traders and trading agents, we find superior performance of trading agents to human traders in balanced markets with the same number of human and Zero Intelligence Plus (ZIP) buyers and sellers only, thus providing a partial replication of Das et al. (2001). However, in unbalanced markets and extreme market structures, such as monopolies and duopolies, fast ZIP agents fall into a speed trap and both human participants and slow ZIP …
A Theory Of Cultural Revivals, Murat Iyigun, Jared Rubin, Avner Seror
A Theory Of Cultural Revivals, Murat Iyigun, Jared Rubin, Avner Seror
ESI Working Papers
Why do some societies have political institutions that support productively inefficient outcomes? And why does the political power of elites vested in these outcomes often grow over time, even when they are unable to block more efficient modes of production? We propose an explanation centered on the interplay between political and cultural change. We build a model in which cultural values are transmitted inter-generationally. The cultural composition of society, in turn, determines public good provision as well as the future political power of elites from different cultural groups. We characterize the equilibrium of the model and provide sufficient conditions for …
An Experimental Investigation Of Health Insurance Policy And Behavior, J. Dustin Tracy, Hillard Kaplan, Kevin A. James, Stephen Rassenti
An Experimental Investigation Of Health Insurance Policy And Behavior, J. Dustin Tracy, Hillard Kaplan, Kevin A. James, Stephen Rassenti
ESI Working Papers
We introduce a new experimental approach to measuring the effects of health insurance policy alternatives on behavior and health outcomes over the life course. Cash-motivated subjects are placed in a virtual environment where they earn income and allocate it across multi-period lives. We compare behavior across age, income and insurance plans—one priced according to an individual’s expected cost and the other uniformly priced through employer-implemented cost sharing. We find that 1) subjects in the employer-implemented plan purchased insurance at higher rates; 2) the employer-based plan reduced differences due to income and age; 3) subjects in the actuarial plan engaged in …
An Elementary Humanomics Approach To Boundedly Rational Quadratic Models, Michael J. Campbell, Vernon L. Smith
An Elementary Humanomics Approach To Boundedly Rational Quadratic Models, Michael J. Campbell, Vernon L. Smith
ESI Working Papers
We take a refreshing new look at boundedly rational quadratic models in economics using some elementary modeling of the principles put forward in the book Humanomics by Vernon L. Smith and Bart J. Wilson. A simple model is introduced built on the fundamental Humanomics principles of gratitude/resentment felt and the corresponding action responses of reward /punishment in the form of higher/lower payoff transfers. There are two timescales: one for strictly self-interested action, as in economic equilibrium, and another governed by feelings of gratitude/resentment. One of three timescale scenarios is investigated: one where gratitude /resentment changes much more slowly than economic …
Intertemporal Choice Experiments And Large-Stakes Behavior, Diego Aycinena, Szabolcs Blazsek, Lucas Rentschler, Charles Sprenger
Intertemporal Choice Experiments And Large-Stakes Behavior, Diego Aycinena, Szabolcs Blazsek, Lucas Rentschler, Charles Sprenger
ESI Working Papers
Intertemporal choice experiments are increasingly implemented to make inference about discounting and marginal utility, yet little is known about the predictive power of resulting measures. This project links standard experimental choices to a decision on the desire to smooth a large-stakes payment | around 10% of annual income | through time. In a sample of around 400 Guatemalan Conditional Cash Transfer recipients, we find that preferences over large-stakes payment plans are closely predicted by experimental measures of patience and diminishing marginal utility. These represent the first findings in the literature on the predictive content of such experimentally elicited measures of …
Menu-Dependent Food Choices And Food Waste, Hongxing Liu, Joaquín Gómez-Miñambres, Danyi Qi
Menu-Dependent Food Choices And Food Waste, Hongxing Liu, Joaquín Gómez-Miñambres, Danyi Qi
ESI Working Papers
We use a combination of randomized field experiments and online surveys to test how the menu design affects food choices and food waste. In our field experiment, participants face one of two menus: a narrow menu that only displays a small portion of food, or a broad menu that also contains bigger portions. While all options are equally available in both menus, they differ in how easy and fast the different choices can be made. Our results show that, compared to the broad menu, participants in the narrow menu ordered smaller portions of food. Importantly, food intake was similar across …
A Notion Of Prominence For Games With Natural-Language Labels, Alessandro Sontuoso, Sudeep Bhatia
A Notion Of Prominence For Games With Natural-Language Labels, Alessandro Sontuoso, Sudeep Bhatia
ESI Working Papers
We study games with natural-language labels (i.e., strategic problems where options are denoted by words), for which we propose and test a measurable characterization of prominence. We assume that – ceteris paribus – players find particularly prominent those strategies that are denoted by words more frequently used in their everyday language. To operationalize this assumption, we suggest that the prominence of a strategy-label is correlated with its frequency of occurrence in large text corpora, such as the Google Books corpus (“n-gram” frequency). In testing for the strategic use of word frequency, we consider experimental games with different incentive structures (such …
Trust And Trustworthiness In Procurement Contracts With Retainage, Matthew J. Walker, Elena Katok, Jason Shachat
Trust And Trustworthiness In Procurement Contracts With Retainage, Matthew J. Walker, Elena Katok, Jason Shachat
ESI Working Papers
In complex procurement projects, it is difficult to write enforceable contracts that condition price upon quality. Supplier non-performance becomes an acute risk, particularly when there is intense competition for the contract. An established incentive mechanism used to mitigate the problem of supplier non-performance is retainage, in which the buyer sets aside a portion of the purchase price. After project completion, the buyer determines the amount of retainage that is released to the seller, considering any defects that arise. While generally a feasible contract form to implement, the practical difficulties in assessing completion introduce a moral hazard for the buyer. We …
The Impact Of The Covid-19 Pandemic On Economic Behaviours And Preferences: Experimental Evidence From Wuhan, Jason Shachat, Matthew J. Walker, Lijia Wei
The Impact Of The Covid-19 Pandemic On Economic Behaviours And Preferences: Experimental Evidence From Wuhan, Jason Shachat, Matthew J. Walker, Lijia Wei
ESI Working Papers
We examine how the emergence of Covid-19 in Wuhan, and the ramifications of associated events, influence pro-sociality, trust and attitudes towards risk and ambiguity. We assess these influences using an experiment consisting of financially incentivized economic tasks. We establish causality via the comparison of a baseline sample collected pre-epidemic with five sampling waves starting from the imposition of a stringent lock- down in Wuhan and completed six weeks later. We find significant long-term increases - measured as the difference between the baseline and final wave average responses - in altruism, cooperation, trust and risk tolerance. Participants who remained in Wuhan …
Does Free Information Provision Crowd Out Costly Information Acquisition? It’S A Matter Of Timing, Diego Aycinena, Alexander Elbittar, Andrei Gomberg, Lucas Rentschler
Does Free Information Provision Crowd Out Costly Information Acquisition? It’S A Matter Of Timing, Diego Aycinena, Alexander Elbittar, Andrei Gomberg, Lucas Rentschler
ESI Working Papers
We consider the issue of how timing of provision of additional information affects information-acquisition incentives. In environments with costly attention, a sufficiently confident agent may choose to act based on the prior, without incurring those costs. However, a promise of additional information in the future may be used to encourage additional attentional effort. This may be viewed as a novel empirical implication of rational inattention. In a lab experiment designed to test this theoretical prediction, we show that promise of future “free” information induces subjects to acquire information which they would not be acquiring without such a promise.
The Impact Of Taxes And Wasteful Government Spending On Giving, Roman Sheremeta, Neslihan Uler
The Impact Of Taxes And Wasteful Government Spending On Giving, Roman Sheremeta, Neslihan Uler
ESI Working Papers
We examine how taxes impact charitable giving and how this relationship is affected by the degree of wasteful government spending. In our model, individuals make donations to charities knowing that the government collects a flat-rate tax on income (net of charitable donations) and redistributes part of the tax revenue. The rest of the tax revenue is wasted. The model predicts that a higher tax rate increases charitable donations. Surprisingly, the model shows that a higher degree of waste decreases donations (when the elasticity of marginal utility with respect to consumption is high enough). We test the model’s predictions using a …
The Economics Of Babysitting A Robot, Aleksandr Alekseev
The Economics Of Babysitting A Robot, Aleksandr Alekseev
ESI Working Papers
I study the welfare effect of automation on workers in a setting where technology is complementary but imperfect. Using a modified task-based framework, I argue that imperfect complementary automation can impose non-pecuniary costs on workers via a behavioral channel. The theoretical model suggests that a critical factor determining the welfare effect of imperfect complementary automation is the automatability of the production process. I confirm the model's predictions in an experiment that elicits subjects' revealed preference for automation. Increasing automatability leads to a significant increase in the demand for automation. I explore additional drivers of the demand for automation using machine …
Forecasting Skills In Experimental Markets: Illusion Or Reality?, Brice Corgnet, Cary Deck, Mark Desantis, David Porter
Forecasting Skills In Experimental Markets: Illusion Or Reality?, Brice Corgnet, Cary Deck, Mark Desantis, David Porter
ESI Working Papers
Using experimental asset markets, we study the situation of a financial analyst who is trying to infer the fundamental value of an asset by observing the market’s history. We find that such capacity requires both standard cognitive skills (IQ) as well as social and emotional skills. However, forecasters with high emotional skills tend to perform worse when market mispricing is high as they tend to give too much emphasis to the noisy signals from market data. By contrast, forecasters with high social skills perform especially well in markets with high levels of mispricing in which their skills could help them …
Public Leaderboard Feedback In Sampling Competition: An Experimental Investigation, Stanton Hudja, Brian Roberson, Yaroslav Rosokha
Public Leaderboard Feedback In Sampling Competition: An Experimental Investigation, Stanton Hudja, Brian Roberson, Yaroslav Rosokha
ESI Working Papers
We investigate the role of performance feedback, in the form of a public leaderboard, in a sequential-sampling contest with costly observations. The player whose sequential random sample contains the observation with the highest value wins the contest and obtains a prize with a fixed value. We find that there exist parameter configurations such that in the subgame perfect equilibrium of contests with a fixed ending date (i.e., finite horizon), providing public performance feedback results in fewer expected observations and a lower expected value of the winning observation. We conduct a controlled laboratory experiment to test the theoretical predictions, and find …
Trust, Reciprocity, And Social History: New Pathways Of Learning When Max U (Own Reward) Fails Decisively, Vernon L. Smith
Trust, Reciprocity, And Social History: New Pathways Of Learning When Max U (Own Reward) Fails Decisively, Vernon L. Smith
ESI Working Papers
"This evaluation begins with the BDM protocol—itself a methodological contribution—and the experimental findings. The question of the replicability and robustness of these unexpected results is addressed next in a summary of two subsequent experimental papers. We follow with a discussion of two attempts to explain qua understand the BDM findings; both, however, have methological deficiencies—Reciprocity and Social Preference explanations. Finally, we offer a brief on Adam Smith’s (1759; 1853; hereafter in the text, Sentiments) model of human sociability, based on strictly self-interested actors, that culminates in propositions that (1) account for trust game choices, and (2) predict action in new …
Strategic Problems With Risky Prospects, Alessandro Sontuoso, Cristina Bicchieri, Alexander Funcke, Einav Hart
Strategic Problems With Risky Prospects, Alessandro Sontuoso, Cristina Bicchieri, Alexander Funcke, Einav Hart
ESI Working Papers
We study “hypothetical reasoning” in games where the impact of risky prospects (chance moves with commonly-known conditional probabilities) is compounded by strategic uncertainty. We embed such games in an environment that permits us to verify if risk-taking behavior is affected by information that reduces the extent of strategic uncertainty. We then test some implications of expected utility theory, while making minimal assumptions about individuals’ (risk or ambiguity) attitudes. Results indicate an effect of the information on behavior: this effect is triggered in some cases by a belief-revision about others’ actions, and in other cases by a reversal in risk …
Trade Facilitation And Tariff Evasion, Cosimo Beverelli, Rohit Ticku
Trade Facilitation And Tariff Evasion, Cosimo Beverelli, Rohit Ticku
ESI Working Papers
This paper investigates the extent to which trade facilitation measures included in the WTO Trade Facilitation Agreement affect tariff evasion. In a dataset covering 121 countries and the whole set of HS6 product categories in 2012, 2015, and 2017, the paper shows that trade facilitation measures that improve legal certainty for traders moderate tariff evasion. Holding tariff rate constant at its mean, one standard deviation improvement in trade facilitation measures related to legal certainty reduces tariff evasion, as measured by missing imports in trade statistics, by almost 12%. In a counterfactual with full trade liberalization, countries with higher scores on …
Trust And Trustworthiness After Negative Random Shocks, Hernán Bejerano, Joris Gillet, Ismael Rodriguez-Lara
Trust And Trustworthiness After Negative Random Shocks, Hernán Bejerano, Joris Gillet, Ismael Rodriguez-Lara
ESI Working Papers
We investigate experimentally the effect of a negative endowment shock in a trust game to assess whether different causes of inequality have different effects on trust and trustworthiness. In our trust game there may be inequality in favor of the second mover and this may (or may not) be the result of a negative random shock (i.e., the outcome of a die roll) that decreases the endowment of the first-mover. Our findings suggest that inequality leads to differences in behavior. First-movers send more of their endowment and second-movers return more when there is inequality. However, we do not find support …
An Experiment On The Neolithic Agricultural Revolution. Causes And Impact On Inequality, Antonio J. Morales, Ismael Rodriguez-Lara
An Experiment On The Neolithic Agricultural Revolution. Causes And Impact On Inequality, Antonio J. Morales, Ismael Rodriguez-Lara
ESI Working Papers
Testing causal relationships expressed by mathematical models on facts about human behaviour across history is challenging. A prominent example is the Neolithic agricultural revolution [1]. Many theoretical models of the adoption of agriculture has been put forward [2] but none has been tested. The only exception is [3], that uses a computational approach with agent-based simulations of evolutionary games. Here, we propose two games that resemble the conditions of human societies before and after the agricultural revolution. The agricultural revolution is modelled as an exogenous shock in the lab (n=180, 60 independent groups), and the transition from foraging to farming …
Religion In Economic History: A Survey, Sascha O. Becker, Jared Rubin, Ludger Woessmann
Religion In Economic History: A Survey, Sascha O. Becker, Jared Rubin, Ludger Woessmann
ESI Working Papers
This chapter surveys the recent social science literature on religion in economic history, covering both socioeconomic causes and consequences of religion. Following the rapidly growing literature, it focuses on the three main monotheisms—Judaism, Christianity, and Islam—and on the period up to WWII. Works on Judaism address Jewish occupational specialization, human capital, emancipation, and the causes and consequences of Jewish persecution. One set of papers on Christianity studies the role of the Catholic Church in European economic history since the medieval period. Taking advantage of newly digitized data and advanced econometric techniques, the voluminous literature on the Protestant Reformation studies its …
Age Appropriate Wisdom? Ethnobiological Knowledge Ontogeny In Pastoralist Mexican Choyeros, Eric Schniter, Shane J. Macfarlan, Juan J. Garcia, Gorgonio Ruiz-Campos, Diego Guevara Beltran, Brenda B. Bowen, Jory C. Lerbak
Age Appropriate Wisdom? Ethnobiological Knowledge Ontogeny In Pastoralist Mexican Choyeros, Eric Schniter, Shane J. Macfarlan, Juan J. Garcia, Gorgonio Ruiz-Campos, Diego Guevara Beltran, Brenda B. Bowen, Jory C. Lerbak
ESI Working Papers
We investigate whether age profiles of ethnobiological knowledge development are consistent with predictions derived from life history theory about the timing of productivity and reproduction. Life history models predict complementary knowledge profiles developing across the lifespan for women and men as they experience changes in embodied capital and the needs of dependent offspring. We evaluate these predictions using an ethnobiological knowledge assessment tool developed for an off-grid pastoralist population, known as Choyeros, from Baja California Sur, Mexico. Our results indicate that while individuals acquire knowledge of most dangerous items and edible resources by early adulthood, knowledge of plants and animals …
Shutdown Policies And Worldwide Conflict, Nicolas Berman, Mathieu Couttenier, Nathalie Monnet, Rohit Ticku
Shutdown Policies And Worldwide Conflict, Nicolas Berman, Mathieu Couttenier, Nathalie Monnet, Rohit Ticku
ESI Working Papers
We provide real-time evidence on the impact of Covid-19 restrictions policies on conflicts globally. We use daily information on conflict events and government policy responses to limit the spread of coronavirus to study how conflict levels vary following shutdown and lockdown policies. We use the staggered implementation of restriction policies across countries to identify their effect on conflict incidence and intensity. Our results show that imposing a nation-wide shutdown reduces the likelihood of daily conflict by around 9 percentage points. The reduction is driven by a drop in the incidence of battles, protests and violence against civilians. Across actors the …
Information Aggregation And The Cognitive Make-Up Of Traders, Brice Corgnet, Mark Desantis, David Porter
Information Aggregation And The Cognitive Make-Up Of Traders, Brice Corgnet, Mark Desantis, David Porter
ESI Working Papers
We assess the effect of the cognitive make-up of traders on the informational efficiency of markets. We put forth that cognitive skills, such as cognitive reflection, are crucial for ensuring the informational efficiency of markets because they endow traders with the ability to infer others’ information from prices. Using laboratory experiments, we show that information aggregation is significantly enhanced when (i) all traders possess high levels of cognitive sophistication and (ii) this high level of cognitive sophistication is common information for all traders. Our findings shed light on the cognitive and informational constraints underlying the efficient market hypothesis.
Neoclassical Supply And Demand, Experiments, And The Classical Theory Of Price Formation, Sabiou M. Inoua, Vernon L. Smith
Neoclassical Supply And Demand, Experiments, And The Classical Theory Of Price Formation, Sabiou M. Inoua, Vernon L. Smith
ESI Working Papers
"The 1870s neoclassical marginal revolution in economics culminated a century later in a striking conclusion: The core utility maximization principle of neoclassical economics was shown to have no interesting implication for aggregate market behavior (Sonnenschein, 1972, 1973a, 1973b; Debreu, 1974; Mantel, 1974; Kirman, 1989; Shafer & Sonnenschein, 1993; Rizvi, 2006). We argue that neoclassical price theory was founded on two axioms—price-taking behavior and the law of one price in a market—that, if imposed on the theory, were logically inconsistent with a theory of market price formation. This logical gap in neoclassical theory was filled essentially with thought experiments: Jevons derives …
Institutions, Opportunism And Prosocial Behavior: Some Experimental Evidence, Antonio Cabrales, Irma Clots-Figueras, Roberto Hernán-González, Praveen Kujal
Institutions, Opportunism And Prosocial Behavior: Some Experimental Evidence, Antonio Cabrales, Irma Clots-Figueras, Roberto Hernán-González, Praveen Kujal
ESI Working Papers
Formal or informal institutions have long been adopted by societies to protect against opportunistic behavior. However, we know very little about how these institutions are chosen and their impact on behavior. We experimentally investigate the demand for different levels of institutions that provide low to high levels of insurance and its subsequent impact on prosocial behavior. We conduct a large-scale online experiment where we add the possibility of purchasing insurance to safeguard against low reciprocity to the standard trust game. We compare two different mechanisms, the private (purchase) and the social (voting) choice of institutions. Whether voted or purchased, we …
A Test Of The Modigliani-Miller Theorem, Dividend Policy And Algorithmic Arbitrage In Experimental Asset Markets, Tibor Neugebauer, Jason Shachat, Wiebke Szymczak
A Test Of The Modigliani-Miller Theorem, Dividend Policy And Algorithmic Arbitrage In Experimental Asset Markets, Tibor Neugebauer, Jason Shachat, Wiebke Szymczak
ESI Working Papers
Modigliani and Miller showed that the market value of the company is in dependent of its capital structure, and suggested that dividend policy makes no difference to this law of one price. We experimentally test the MM theorem in a complete market with two simultaneously traded assets, employing two experimental treatment variations. The first variation involves the dividend stream. According to this variation the dividend payout order is either identical or independent. The second variation involves the market participation, or not, of an algorithmic arbitrageur. We find that Modigliani-Miller's law of one price can be supported on average with or …
Viral Social Media Videos Can Raise Pro-Social Behaviours When An Epidemic Arises, Youting Guo, Jason Shachat, Matthew J. Walker, Lijia Wei
Viral Social Media Videos Can Raise Pro-Social Behaviours When An Epidemic Arises, Youting Guo, Jason Shachat, Matthew J. Walker, Lijia Wei
ESI Working Papers
At the onset of an epidemic, can viral social media videos induce the high levels of trust and pro-sociality required for a successful community response? Shortly after the outbreak of the COVID-19 virus in Wuhan, China, we conducted an experiment assessing the impact of viral videos on individual preferences and pro-social behaviour. Prior to the experiment, participants viewed one of three videos culled from Chinese social media: a central government leader visiting a local hospital and supermarket, health care volunteers transiting to Wuhan, or an emotionally neutral video unrelated to the emergency. Viewing one of the first two videos leads …