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Articles 1 - 25 of 25
Full-Text Articles in Economic Theory
New Hampshire Effect: Behavior In Sequential And Simultaneous Multi-Battle Contests, Shakun D. Mago, Roman M. Sheremeta
New Hampshire Effect: Behavior In Sequential And Simultaneous Multi-Battle Contests, Shakun D. Mago, Roman M. Sheremeta
ESI Working Papers
Sequential multi-battle contests are predicted to induce lower expenditure than simultaneous contests. This prediction is a result of a “New Hampshire Effect” – a strategic advantage created by the winner of the first battle. Although our laboratory study provides evidence for the New Hampshire Effect, we find that sequential contests generate significantly higher (not lower) expenditure than simultaneous contests. This is mainly because in sequential contests, there is significant over-expenditure in all battles. We suggest sunk cost fallacy and utility of winning as two complementary explanations for this behavior and provide supporting evidence.
Information (Non)Aggregation In Markets With Costly Signal Acquisition, Brice Corgnet, Cary Deck, Mark Desantis, David Porter
Information (Non)Aggregation In Markets With Costly Signal Acquisition, Brice Corgnet, Cary Deck, Mark Desantis, David Porter
ESI Working Papers
Markets are often viewed as a tool for aggregating disparate private knowledge, a stance supported by past laboratory experiments. However, traders’ acquisition cost of information has typically been ignored. Results from a laboratory experiment involving six treatments varying the cost of acquiring signals of an asset’s value suggest that when information is costly, markets do not succeed in aggregating it. At an individual level, having information improves trading performance, but not enough to offset the cost of obtaining the information. Although males earn more through trading than females, this differential is offset by the greater propensity of males to buy …
No Mere Tautology: The Division Of Labor Is Limited By The Division Of Labor, Andrew Smyth, Bart J. Wilson
No Mere Tautology: The Division Of Labor Is Limited By The Division Of Labor, Andrew Smyth, Bart J. Wilson
ESI Working Papers
We explore the intersection of growth theory and the theory of the firm with an experiment. Economic growth is possible in our experiment when agents specialize to exploit increasing returns. We find that low opportunity costs are sufficient for Marshallian internal economies, but that Marshallian external economies are slow to emerge in four probing treatment conditions. Transaction costs do not hamper external economies as we anticipated prior to collecting data. When external economies falter, it is because new ideas about the cost and value of more extensive specialization fail to emerge. Ideas are what make further divisions of the …
The Attack And Defense Of Weakest Link Networks, Dan Kovenock, Brian Roberson, Roman M. Sheremeta
The Attack And Defense Of Weakest Link Networks, Dan Kovenock, Brian Roberson, Roman M. Sheremeta
ESI Working Papers
We experimentally test the qualitatively different equilibrium predictions of two theoretical models of attack and defense of a weakest-link network of targets. In such a network, the attacker’s objective is to successfully attack at least one target and the defender’s objective is to defend all targets. The models differ in how the conflict at each target is modeled — specifically, the lottery and auction contest success functions (CSFs). Consistent with equilibrium in the auction CSF model, attackers utilize a stochastic “guerrilla-warfare” strategy, which involves randomly attacking at most one target with a random level of force. Inconsistent with equilibrium in …
Loss Aversion And The Quantity-Quality Tradeoff, Jared Rubin, Anya Samek, Roman M. Sheremeta
Loss Aversion And The Quantity-Quality Tradeoff, Jared Rubin, Anya Samek, Roman M. Sheremeta
ESI Working Papers
Firms face an optimization problem that requires a maximal quantity output given a quality constraint. But how do firms incentivize quantity and quality to meet these dual goals, and what role do behavioral factors, such as loss aversion, play in the tradeoffs workers face? We address these questions with a theoretical model and an experiment in which participants are paid for both quantity and quality of a real effort task. Consistent with basic economic theory, higher quality incentives encourage participants to shift their attention from quantity to quality. However, we also find that loss averse participants shift their attention from …
Exchange In The Absence Of Legal Enforcement: Reputation And Multilateral Punishment Under Uncertainty, Aidin Hajikhameneh, Jared Rubin
Exchange In The Absence Of Legal Enforcement: Reputation And Multilateral Punishment Under Uncertainty, Aidin Hajikhameneh, Jared Rubin
ESI Working Papers
Prinicpal-agent problems can reduce gains from exchange available in long distance trade. One solution to mitigate this problem is multilateral punishment, whereby groups of principals jointly punish cheating agents by giving them bad reputations. But how does such punishment work when there is uncertainty regarding whether an agent actually cheated or was just the victim of bad luck? And how might such uncertainty be mitigated—or exacerbated—by nonobservable, pro-social behavioral characteristics? We address these questions by designing a simple modified trust game with uncertainty and the capacity for principals to employ multilateral punishment. We find that a modest amount of uncertainty …
How Product Innovation Can Affect Price Collusion, Andrew Smyth
How Product Innovation Can Affect Price Collusion, Andrew Smyth
ESI Working Papers
Price conspiracies appear endemic in many markets. This paper conjectures that low expected returns from product innovation can affect price collusion in certain markets. This conjecture is tested—and supported—by both archival and experimental data. In particular, average market prices in low innovation experiments are significantly greater than those in high innovation, but otherwise identical experiments, because price collusion is more successful in the low innovation experiments.
The Optimal Defense Of Networks Of Targets, Dan Kovenock, Brian Roberson
The Optimal Defense Of Networks Of Targets, Dan Kovenock, Brian Roberson
ESI Working Papers
This paper examines a game-theoretic model of attack and defense of multiple networks of targets in which there exist intra-network strategic complementarities among targets. The defender’s objective is to successfully defend all of the networks and the attacker’s objective is to successfully attack at least one network of targets. Although there are multiple equilibria, we characterize correlation structures in the allocations of forces across targets that arise in all equilibria. For example, in all equilibria the attacker utilizes a stochastic ‘guerrilla warfare’ strategy in which a single random network is attacked.
War And Conflict In Economics: Theories, Applications, And Recent Trends, Erik O. Kimbrough, Kevin Laughren, Roman M. Sheremeta
War And Conflict In Economics: Theories, Applications, And Recent Trends, Erik O. Kimbrough, Kevin Laughren, Roman M. Sheremeta
ESI Working Papers
We review the main economic models of war and conflict. These models vary in details, but their implications are qualitatively consistent, highlighting key commonalities across a variety of conflict settings. Recent empirical literature, employing both laboratory and field data, in many cases confirms the basic implications of conflict theory. However, this literature also presents important challenges to the way economists traditionally model conflict. We finish our review by suggesting ways to address these challenges.
Equilibrium Play In Voluntary Ultimatum Games: Beneficence Cannot Be Extorted, Vernon L. Smith, Bart J. Wilson
Equilibrium Play In Voluntary Ultimatum Games: Beneficence Cannot Be Extorted, Vernon L. Smith, Bart J. Wilson
ESI Working Papers
One robust result in experimental economics is the failure to observe equilibrium play in the ultimatum game. A heretofore unnoticed feature of the game is that neither player voluntarily chooses to play the game. Motivated by Adam Smith’s proposition that beneficence—like that of non‐ equilibrium play in the ultimatum game—cannot be extorted by force, we offer the responder the opportunity to opt out of the game for a mere $1 payoff for both players. We observe high rates of equilibrium play with highly unequal splits when responders choose to play such ultimatum games with both fixed and variable sums.
Bondholder Reorganization Of Systemically Important Financial Institutions, Steven Gjerstad
Bondholder Reorganization Of Systemically Important Financial Institutions, Steven Gjerstad
ESI Working Papers
This paper describes a resolution process for faltering financial firms that quickly allocates losses to bondholders and transfers ownership of the firm to them. This process overcomes the most serious flaws in resolution plans submitted by banks under Dodd-Frank Title I and in the FDIC receivership procedure in Dodd-Frank Title II by restoring the balance sheet of a failing financial institution and immediately replacing the management and board of directors who allowed its demise. In almost all bank failures, this process would eliminate the need for government involvement beyond court certification of the reorganization. The procedure overcomes the serious incentive …
Gender, Punishment, And Cooperation: Men Hurt Others To Advance Their Interests, Terence C. Burnham
Gender, Punishment, And Cooperation: Men Hurt Others To Advance Their Interests, Terence C. Burnham
ESI Working Papers
A laboratory experiment that reports on gender, cooperation, and punishment in two repeated public goods game using high-powered punishment. In a repeated public goods game with punishment, no statistically significant differences between men and women are reported. In a modified game that adds an explicit payoff for relative performance, men punish more than women, men obtain higher rank, and punishment by males decreases payoffs for both men and for women. These results contribute to the debate about the origins and maintenance of cooperation.
Profitable Horizontal Mergers Without Efficiencies Can Increase Consumer Surplus, Charles J. Thomas
Profitable Horizontal Mergers Without Efficiencies Can Increase Consumer Surplus, Charles J. Thomas
ESI Working Papers
In a simple model I show consumer surplus can increase after competing sellers consummate a profitable merger that generates no cost savings. This finding contrasts sharply with the conventional wisdom that horizontal mergers without efficiencies must enhance sellers’ market power to be profitable, thereby harming buyers. The model fits industries in which individual buyers conduct distinct procurement contests for which sellers incur costs to participate, say to assess their product’s fit with the buyer’s preferences. Mergers benefit buyers by inducing stronger contest-level entry, echoing common claims from merging parties that their merger is beneficial because it creates a stronger competitor.
The Ideological Roots Of Institutional Change, Murat Iyigun, Jared Rubin
The Ideological Roots Of Institutional Change, Murat Iyigun, Jared Rubin
ESI Working Papers
Why do some societies fail to adopt more efficient institutions in response to changing economic conditions? And why do such conditions sometimes generate ideological backlashes and at other times lead to transformative sociopolitical movements? We propose an explanation that highlights the interplay--or lack thereof--between new technologies, ideologies, and institutions. When new technologies emerge, uncertainty results from a lack of understanding how the technology will fit with prevailing ideologies and institutions. This uncertainty discourages investment in institutions and the cultural capital necessary to take advantage of new technologies. Accordingly, increased uncertainty during times of rapid technological change may generate an ideological …
The Cultural Transmission Of Trust Norms: Evidence From A Lab In The Field On A Natural Experiment, Jared Rubin, Elira Karaja
The Cultural Transmission Of Trust Norms: Evidence From A Lab In The Field On A Natural Experiment, Jared Rubin, Elira Karaja
ESI Working Papers
We conduct trust games in three villages in a northeastern Romanian commune. From 1775-1919, these villages were arbitrarily assigned to opposite sides of the Habsburg and Ottoman/Russian border despite being located seven kilometers apart. Russian and Ottoman Öscal institutions were more rapacious than Habsburg institutions, which may have eroded trust of outsiders (relative to co-villagers). Our design permits us to rigorously test this conjecture, and more generally, whether historically institutionalized cultural norms are transmitted intergenerationally. We Önd that participants on the Ottoman/Russian side are indeed less likely to trust outsiders but more likely to trust co-villagers.
Deception And Reception: The Behavior Of Information Providers And Users, Roman M. Sheremeta, Timothy W. Shields
Deception And Reception: The Behavior Of Information Providers And Users, Roman M. Sheremeta, Timothy W. Shields
ESI Working Papers
We investigate the behavior of information providers (underwriters) and users (investors) in a controlled laboratory experiment where underwriters have incentives to deceive and investors have incentives to avoid deception. Participants play simultaneously as underwriters and investors in one-shot information transmission games. The results of our experiment show a significant proportion of both deceptive and non-deceptive underwriters. Despite the presence of deceptive underwriters, investors are receptive to underwriters’ reports, gleaning information content, albeit overly optimistic. Within our sample, deception by underwriters and reception by investors are the most profitable strategies. Moreover, participants who send deceptive reports to investors, but at the …
Monitoring Institutions In Indefinitely Repeated Games, Gabriele Camera, Marco Casari
Monitoring Institutions In Indefinitely Repeated Games, Gabriele Camera, Marco Casari
ESI Working Papers
Does monitoring past conduct facilitate intertemporal cooperation? We designed an experiment characterized by strategic uncertainty and multiple equilibria where coordinating on the efficient outcome is a challenge. Participants, interacting anonymously in a group, could pay a cost either to obtain information about their counterparts, or to create a freely available public record of individual conduct. Both monitoring institutions were actively employed. However, groups were unable to attain higher levels of cooperation compared to a treatment without monitoring. Information about past conduct alone thus appears to be ineffective in overcoming coordination challenges.
Targeted Campaign Competition, Loyal Voters, And Supermajorities, Pierre C. Boyer, Kai A. Konrad, Brian Roberson
Targeted Campaign Competition, Loyal Voters, And Supermajorities, Pierre C. Boyer, Kai A. Konrad, Brian Roberson
ESI Working Papers
We consider campaign competition in which candidates compete for votes among a continuum of voters by engaging in persuasive efforts that are targetable. Each individual voter is persuaded by campaign effort and votes for the candidate who targets more persuasive effort to this voter. Each candidate chooses a level of total campaign effort and allocates their effort among the set of voters. We completely characterize equilibrium for the majoritarian objective game and compare that to the vote-share maximizing game. If the candidates are symmetric ex ante, both types of electoral competition dissipate the rents from once in expectation. However, the …
The Paradox Of Power: Principal-Agent Problems And Fiscal Capacity In Absolutist Regimes, Debin Ma, Jared Rubin
The Paradox Of Power: Principal-Agent Problems And Fiscal Capacity In Absolutist Regimes, Debin Ma, Jared Rubin
ESI Working Papers
Tax extraction in Qing China was low relative to Western Europe. It is not obvious why: China was much more absolutist and had stronger rights over property and people. Why did the Chinese not convert their absolute power into revenue? We propose a model, supported by historical evidence, which suggests that i) the center could not ask its tax collecting agents to levy high taxes because it would incentivize agents to overtax the peasantry; ii) the center could not pay agents high wages in return for high taxes because the center had no mechanism to commit to refrain from confiscating …
Investing In The Presence Of Massive Flows, Terence C. Burnham, Harry Gakidis, Jeffrey Wurgler
Investing In The Presence Of Massive Flows, Terence C. Burnham, Harry Gakidis, Jeffrey Wurgler
ESI Working Papers
Approximately $10 trillion is benchmarked to Morgan Stanley Capital International’s Developed, Emerging, Frontier, and standalone market indexes. Reclassifications from one index to another require thousands of investors to decide how to react. We study a comprehensive sample of past reclassifications to guide this decision. Reclassified markets’ prices substantially overshoot between the announcement and effective dates—prices fall when a market moves from an index with more benchmarked ownership to one with less, such from Emerging to Frontier, and vice-versa—but revert within a year. We identify alpha-maximizing responses to reclassifications for both tightly benchmarked and more flexible investors.
Risk Preference, Time Preference, And Salience Perception, Jonathan Leland, Mark Schneider
Risk Preference, Time Preference, And Salience Perception, Jonathan Leland, Mark Schneider
ESI Working Papers
A model of decision making is introduced that provides a unified approach for predicting choices under risk and over time. The model predicts systematic departures from expected utility and discounted utility using the same mathematical structure and the same psychological intuition and shows that a dozen diverse choice anomalies can be given a common underlying explanation. The model weights attribute differences both by their importance (consistent with expected utility and discounted utility) and by their salience or similarity (consistent with procedural models based on heuristics), and so provides a bridge between rational and heuristic representations of decision making.
Bubbles In Experimental Asset Markets, Praveen Kujal, Owen Powell
Bubbles In Experimental Asset Markets, Praveen Kujal, Owen Powell
ESI Working Papers
"One can define a bubble as a persistent increase in the price of an asset over and above its fundamental value with an abrupt fall in prices when no buyers are available to make purchases. The occurrence of market bubbles has a long history, starting with the Dutch Tulip Mania (1624-1637) to the South Sea and Mississippi Bubble (1716-1720), the British Railway Mania (1840´s) to the crash of 1929. Recent events have been the crash of 1987, the dot-com bubble (1990s) to the most recent housing crisis in early 2000. Even though bubbles, and a subsequent crash, may reallocate resources …
Humans’ (Incorrect) Distrust Of Reflective Decisions, Antonio Cabrales, Antonio M. Espín, Praveen Kujal, Stephen Rassenti
Humans’ (Incorrect) Distrust Of Reflective Decisions, Antonio Cabrales, Antonio M. Espín, Praveen Kujal, Stephen Rassenti
ESI Working Papers
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 trustee’s …
A Flexible And Customizable Method For Assessing Cognitive Abilities, Andrea Civelli, Cary Deck
A Flexible And Customizable Method For Assessing Cognitive Abilities, Andrea Civelli, Cary Deck
ESI Working Papers
Raven's Progressive Matrices are a broadly used tool for measuring cognitive ability. This paper develops and validates a set of nonverbal puzzles that can be viewed as an extension of or substitute for the well-known Ravens tasks. Specifically, we describe the characteristics of our puzzles and provide a calibration of the matrices in terms of response accuracy and response time as a function of these characteristics. Then we directly compare within-subject performance on our puzzles and Ravens tasks. Finally, we replicate a previous experimental paper, substituting our puzzles for the Ravens matrices, and show the two tools have similar predictive …
Minimal Frames And Transparent Frames For Risk, Time, And Uncertainty, Jonathan Leland, Mark Schneider, Nathaniel Wilcox
Minimal Frames And Transparent Frames For Risk, Time, And Uncertainty, Jonathan Leland, Mark Schneider, Nathaniel Wilcox
ESI Working Papers
It has been argued that behavior differs between transparent and nontransparent representations of a decision. However, the notion of a ‘transparent representation’ has not been precisely defined. We address this gap by providing formal definitions of ‘transparent frames’ for risk and time, establishing their uniqueness, presenting an approach to construct such frames, and comparing these framesto the ‘standard’ presentation format. Our typology of frames provides a logic for predicting systematic shifts in risk and time preferences as well as changes in the violation rates of rational choice theory. We conduct an experiment for choice under risk to investigate the framing …