Economic Theory Commons^™

Why Real Leisure Really Matters: Incentive Effects On Real Effort In The Laboratory, Brice Corgnet, Roberto Hérnan-Gonzalez, Eric Schniter

ESI Publications

On-the-job leisure is a pervasive feature of the modern workplace. We studied its impact on work performance in a laboratory experiment by either allowing or restricting Internet access. We used a 2x2 experimental design in which subjects completing real-effort work tasks could earn cash according to either individual- or team-production incentive schemes. Under team pay, production levels were significantly lower when Internet browsing was available than when it was not. Under individual pay, however, no differences in production levels were observed between the treatment in which Internet was available and the treatment in which it was not. In line with …

Game-Theoretic Foundations Of Monetary Equilibrium, Gabriele Camera, Alessandro Gioffré

Economics Faculty Articles and Research

According to theory, money supports trade in a world without enforcement and, in particular, in large societies, where gift-exchange is unsustainable. It is demonstrated that, in fact, monetary equilibrium breaks down in the absence of adequate enforcement institutions and it collapses as societies that lack external enforcement grow large. This unique result is derived by unveiling the existence of a tacit enforcement assumption in the literature that explains the advantages from monetary exchange, and by integrating monetary theory with the theory of repeated games and social norms.

Horizontal Product Differentiation In Auctions And Multilateral Negotiations, Charles J. Thomas, Bart J. Wilson

Economics Faculty Articles and Research

We experimentally compare first-price auctions and multilateral negotiations after introducing horizontal product differentiation into a standard procurement setting. Both institutions yield identical surplus for the buyer, a difference from prior findings with homogeneous products that results from differentiation's influence on sellers' pricing behaviour. The data are consistent with this finding being driven by concessions from low-cost sellers in response to differentiation reducing their likelihood of being the buyer's surplus-maximizing trading partner. Further analysis shows that introducing product differentiation increases the intensity of price competition among sellers, which contrasts with the conventional wisdom that product differentiation softens competition.

Understanding The Distributional Impact Of Long-Run Inflation, Gabriele Camera, Yili Chen

Economics Faculty Articles and Research

The impact of fully anticipated inflation is systematically studied in heterogeneous agent economies with an endogenous labor supply and portfolio choices. In stationary equilibrium, inflation nonlinearly alters the endogenous distributions of income, wealth, and consumption. Small departures from zero inflation have the strongest impact. Three features determine how inflation impacts distributions and welfare: financial structure, shock persistence, and labor supply elasticity. When agents can self-insure only with money, inflation reduces wealth inequality but may raise consumption inequality. Otherwise, inflation reduces consumption inequality but may raise wealth inequality. Given persistent shocks and an inelastic labor supply, inflation may raise average welfare. …

Fair And Impartial Spectators In Experimental Economic Behavior, Vernon L. Smith, Bart J. Wilson

Economics Faculty Articles and Research

Our primary purpose in this article is to draw upon the literature of classical liberal economy to show how it informs and is informed by the results from experimental economics. Adam Smith's first great book, The Theory of Moral Sentiments, serves as our chief source of insights for understanding and interpreting modern laboratory research in terms of the conventions that govern human conduct in personal exchange.~ At the same time, we wish to demonstrate how today's economic experiments elucidate a reading of Adam Smith.

Effort And Performance: What Distinguishes Interacting And Noninteracting Groups From Individuals?, Tibor Besedeš, Cary Deck, Sarah Quintanar, Sudipta Sarangi

Economics Faculty Articles and Research

We study how group membership affects behavior both when group members can and cannot interact with each other. Our goal is to isolate the contrasting forces that spring from group membership: a free-riding incentive leading to reduced effort and a sense of social responsibility that increases effort. In an environment with varying task difficulty and individual decision making as the benchmark, we show that the free-riding effect is stronger. Group members significantly reduce their effort in situations where they share the outcome but are unable to communicate. When group members share outcomes and can interact, they outperform groups without conmmnication …

The Coordination Value Of Monetary Exchange: Experimental Evidence, Gabriele Camera, Marco Casari

Economics Faculty Articles and Research

What institutions can sustain cooperation in groups of strangers? Here we study the role of monetary systems. In an experiment, subjects sometimes needed help and sometimes could incur a cost to help an anonymous counterpart. In the absence of money, the intertemporal exchange of help, which could be supported by a norm of community punishment of defectors, did not emerge. Introducing intrinsically worthless tokens substantially altered patterns of behavior. Monetary trade emerged, which increased predictability of play and promoted cooperation when strangers could trade help for a token.

A Tractable Analysis Of Contagious Equilibria, Gabriele Camera, Alessandro Gioffré

Economics Faculty Articles and Research

This paper studies contagious equilibrium in infinitely repeated matching games. The innovation is to identify a key statistic of contagious punishment that, used together with a recursive formulation, generates tractable closed-form expressions for continuation payoffs, off equilibrium. This allows a transparent characterization of the dynamic incentives created by contagious punishment schemes.

Uniqueness Of Equilibrium In Directed Search Models, Jaehong Kim, Gabriele Camera

Economics Faculty Articles and Research

We study a decentralized trading model as in [7], where a finite number of heterogeneous capacity-constrained sellers compete for a finite number of homogeneous buyers, by posting prices. This "directed search" model is known to admit symmetric equilibria; yet, uniqueness has proved elusive. This study makes two contributions: a substantive contribution is to establish uniqueness of symmetric equilibrium; a methodological contribution is to develop a tool based on directional derivatives to characterize equilibrium.

Predictable And Predictive Emotions: Explaining Cheap Signals And Trust Re-Extension, Eric Schniter, Roman M. Sheremeta

ESI Publications

Despite normative predictions from economics and biology, unrelated strangers will often develop the trust necessary to reap gains from one-shot economic exchange opportunities. This appears to be especially true when declared intentions and emotions can be cheaply communicated. Perhaps even more puzzling to economists and biologists is the observation that anonymous and unrelated individuals, known to have breached trust, often make effective use of cheap signals, such as promises and apologies, to encourage trust re-extension. We used a pair of trust games with one-way communication and an emotion survey to investigate the role of emotions in regulating the propensity to …

Divided Loyalists Or Conditional Cooperators? Creating Consensus About Cooperation In Multiple Simultaneous Social Dilemmas, Matthew W. Mccarter, Anya Samek, Roman M. Sheremeta

ESI Publications

The current social dilemma literature lacks theoretical consensus regarding how individuals behave when facing multiple simultaneous social dilemmas. The divided-loyalty hypothesis, from organizational theory, predicts that cooperation will decline as individuals experience multiple social dilemmas with different compared to the same group members. The conditional-cooperation hypothesis, from behavioral economics, predicts that cooperation will increase as individuals experience multiple social dilemmas with different compared to the same group members. We employ a laboratory experiment to create consensus between these literatures and find support for the conditional-cooperation hypothesis. The positive effect of interacting with different group members comes from participants having an …

Decision Making In A Sequential Game: The Case Of Pitting In Nascar, Alan Deck, Cary Deck, Zhen Zhu

ESI Publications

This article uses data from NASCAR to examine strategic decision making with professional players and high stakes. The authors look at driver decisions to pit, enabling car performance to be improved at the cost of track position. Unlike other sports choices that have been used to test game-theoretic play, pitting decisions occur sequentially. Therefore, optimal decision making should result in the sub-game perfect equilibrium outcome. After estimating the likelihood of successfully passing another driver, the authors find some evidence that drivers make optimal decisions; however, driver behavior is also consistent with a simple heuristic of following the preceding car.

The Evolutionary Fitness Of Personality Traits In A Small-Scale Subsistence Society, Michael Gurven, Christopher Von Rueden, Jonathan Stieglitz, Hillard Kaplan, Daniel Eid Rodriguez

ESI Publications

"Personality, or “behavioral syndromes”, are relatively stable dispositional traits and behaviors that have now been identified in a myriad of social species (Gosling, 2001; Sih et al., 2004), and with clear consequences on fitness (Smith & Blumstein, 2008). The canalization of personality during development and relative stability thereafter, despite varying circumstances over the life course that might otherwise favor greater plasticity, is an important problem attracting much theoretical and empirical attention (Dall et al., 2004; Dingemanse et al., 2010). Further, personality is highly heritable, yet how heritable genetic variation in personality traits is maintained over generations remains another conundrum (Buss …

Double Bubbles In Assets Markets With Multiple Generations, Cary Deck, David Porter, Vernon L. Smith

ESI Publications

We construct an asset market in a finite horizon overlapping-generations environment. Subjects are tested for comprehension of their fundamental value exchange environment and then reminded during each of 25 periods of the environment's declining new value. We observe price bubbles forming when new generations enter the market with additional liquidity and bursting as old generations exit the market and withdrawing cash. The entry and exit of traders in the market creates an M shaped double bubble price path over the life of the traded asset. This finding is significant in documenting that bubbles can reoccur within one extended trading horizon …

Money Is More Than Memory, Maria Bigoni, Gabriele Camera, Marco Casari

ESI Working Papers

Impersonal exchange is the hallmark of an advanced society. One key institution for impersonal exchange is money, which economic theory considers just a primitive arrangement for monitoring past conduct in society. If so, then a public record of past actions—or memory—supersedes the function performed by money. This intriguing theoretical postulate remains untested. In an experiment, we show that the suggested functional equality between money and memory does not translate into an empirical equivalence. Monetary systems perform a richer set of functions than just revealing past behaviors, which proves to be crucial in promoting large-scale cooperation.

Skill Ontogeny Among Tsimane Forager-Horticulturalists, Eric Schniter, Michael Gurven, Hillard Kaplan, Nathaniel Wilcox, Paul Hooper

ESI Working Papers

No abstract provided.

Experimenting With Behavior Based Pricing, Zuzana Brokesova, Cary Deck, Jana Peliova

ESI Working Papers

Many purchases of differentiated goods are repeated, giving sellers the opportunity to engage in price discrimination based upon the shopper’s previous behavior by either offering loyalty discounts to repeat buyers or introductory rates to new customers. Recent theoretical work suggests that loyalty discounts are likely to be implemented when customer preferences are not stationary and sellers can pre-commit to prices for repeat buyers, but otherwise repeat buyers can be expected to pay the same or more than new buyers. This paper reports the results of a series of controlled laboratory experiments designed to empirically test the impact of these factors …

People Do Not Discount Heavily In Strategic Settings, But They Believe Others Do, Cary Deck, Salar Jahedi

ESI Working Papers

Several studies have shown that people greatly discount future bene ts and costs. However, most of the direct laboratory evidence of this phenomenon has focused on individual choice experiments. This paper investigates the degree to which the timing of payments a ects behavior in four commonly studies strategic settings: a Prisoner's Dilemma game, a Stag-Hunt game, a First Price Auction and a Second Price Auction. In all four settings, a two week delay in payo s has a comparable e ect to a 20% reduc- tion in current payo s. A follow-up study suggests that it is an individual's strategic …

Single- And Double-Elimination All-Pay Tournaments, Cary Deck, Erik O. Kimbrough

ESI Working Papers

Tournaments consisting of iterative matches are a common mechanism for determining how to allocate a prize. While participants are focused on their own outcomes, tournament organizers often have objectives such as maximizing the total investment or effort by the participants over the course of the tournament. For this reason it is important for organizers to understand the behavioral as well as the theoretical properties of different tournament structures. Given that laboratory experiments have consistently found high levels of overbidding in contests, one might suspect that double-elimination tournaments would generate substantially more total investment than single-elimination tournaments despite the two types …

Accounting Standards And Financial Market Stability: An Experimental Examination, Shengle Lin, Glenn Pfeiffer, David Porter

ESI Working Papers

We examine the effect on asset mispricing of different accounting methods in an experimental asset market characterized by bubbles and crashes. In particular, we study three alternative asset value reporting treatments: (1) Fair Value (also known as Mark-to-Market – M2M), (2) Historical Cost (HC) and (3) Marked to Fundamental Value (M2F). In addition, each of these treatments is replicated in two different financial leverage conditions. In the first condition (No Loan) traders must purchase assets from their available cash balances without the option of borrowing. In the second condition, (Loan), traders are given the option of taking out loans based …

A Dynamic Model Of Competitive Entry Response, Matthew Selove

Business Faculty Articles and Research

I develop a dynamic investment game with a “memoryless” research and development process in which an incumbent and an entrant can invest in a new technology, and the entrant can also invest in the old technology. I show that an increase in the probability of successfully implementing a technology can cause the incumbent to reduce its investment. Under certain conditions, if the success probability is high, the incumbent allows the entrant to win the new technology so that firms reach an equilibrium in which they use different technologies, and threats of retaliation prevent attacks; but if the success probability is …

Do Market Incentives Crowd Out Charitable Giving?, Cary Deck, Erik O. Kimbrough

Economics Faculty Articles and Research

Donations and volunteerism can be conceived as market transactions with a zero explicit price. However, evidence suggests people may not view zero as just another price when it comes to pro-social behavior. Thus, while markets might be expected to increase the supply of assets available to those in need, some worry such financial incentives will crowd out altruistic giving. This paper reports laboratory experiments directly investigating the degree to which market incentives crowd out large, discrete charitable donations in a setting related to deceased organ donation. The results suggest markets increase the supply of assets available to those in need. …

Dynamical Structure Of A Traditional Amazonian Social Network, Paul L. Hooper, Simon Dedeo, Ann E. Caldwell Hooper, Michael Gurven, Hillard Kaplan

ESI Publications

Reciprocity is a vital feature of social networks, but relatively little is known about its temporal structure or the mechanisms underlying its persistence in real world behavior. In pursuit of these two questions, we study the stationary and dynamical signals of reciprocity in a network of manioc beer (Spanish: chicha; Tsimane’: shocdye’) drinking events in a Tsimane’ village in lowland Bolivia. At the stationary level, our analysis reveals that social exchange within the community is heterogeneously patterned according to kinship and spatial proximity. A positive relationship between the frequencies at which two families host each other, controlling for kinship and …

How Do Firms Become Different? A Dynamic Model, Matthew Selove

Business Faculty Articles and Research

This paper presents a dynamic investment game in which firms that are initially identical develop assets that are specialized to different market segments. The model assumes that there are increasing returns to investment in a segment, for example, as a result of word-of-mouth or learning curve effects. I derive three key results: (1) Under certain conditions there is a unique equilibrium in which firms that are only slightly different focus all of their investment in different segments, causing small random differences to expand into large permanent differences. (2) If, on the other hand, sufficiently large random shocks are possible, firms …

Human Economic Choice As Costly Information Processing, John Dickhaut, Vernon L. Smith, Baohua Xin, Aldo Rustichini

Accounting Faculty Articles and Research

We develop and test a model that provides a unified account of the neural processes underlying behavior in a classical economic choice task. The model describes in a stylized way brain processes engaged in evaluating information provided by the experimental stimuli, and produces a consistent account of several important features of the decision process in different environments: e.g., when the probability is specified or not (ambiguous choices). These features include the choices made, the time to decide, the error rate in choice, and the patterns of neural activation. The model predicts that the further two stimuli are from each other …

The "Play-Out" Effect And Preference Reversals: Evidence For Noisy Maximization, Joyce E. Berg, John Dickhaut, Thomas A. Rietz

Accounting Faculty Articles and Research

In this paper, we document a "play-out" effect in preference reversal experiments. We compare data where preferences are elicited using (1) purely hypothetical gambles, (2) played-out, but unpaid gambles and (3) played-out gambles with truth-revealing monetary payments. We ask whether a model of stable preferences with random errors (e.g., expected utility with errors) can explain the data. The model is strongly rejected in data collected using purely hypothetical gambles. However, simply playing-out the gambles, even in the absence of payments, shifts the data pattern so that noisy maximization is no longer rejected. Inducing risk preferences using a lottery procedure, using …

Patterns Of Senescence In Human Cardiovascular Fitness: Vo2 Max In Subsistence And Industrialized Populations, Anne C. Pisor, Michael Gurven, Aaron D. Blackwell, Hillard Kaplan, Gandhi Yetish

ESI Publications

Objectives—This study explores whether cardiovascular fitness levels and senescent decline are similar in the Tsimane of Bolivia and Canadians, as well as other subsistence and industrialized populations. Among Tsimane, we examine whether morbidity predicts lower levels and faster decline of cardiovascular fitness, or whether their lifestyle (e.g., high physical activity) promotes high levels and slow decline. Alternatively, high activity levels and morbidity might counterbalance such that Tsimane fitness levels and decline are similar to those in industrialized populations.

Methods—Maximal oxygen uptake (VO2max) was estimated using a step test heart rate method for 701 participants. We compared these estimates …

Age-Independent Increases In Male Salivary Testosterone During Horticultural Activity Among Tsimane Forager-Farmers, Benjamin C. Trumble, Daniel K. Cummings, Kathleen A. O'Connor, Darryl J. Holman, Eric A. Smith, Hillard Kaplan, Michael D. Gurven

ESI Publications

Testosterone plays an important role in mediating male reproductive trade-offs in many vertebrate species, augmenting muscle and influencing behavior necessary for male-male competition and mating-effort. Among humans, testosterone may also play a key role in facilitating male provisioning of offspring as muscular and neuromuscular performance are deeply influenced by acute changes in testosterone. This study examines acute changes in salivary testosterone among 63 Tsimane men ranging in age from 16–80 (mean 38.2) years during one-hour bouts of treechopping while clearing horticultural plots. The Tsimane forager-horticulturalists living in the Bolivian Amazon experience high energy expenditure associated with food production, have high …

Comparative Approaches To Studying Strategy: Towards An Evolutionary Account Of Primate Decision Making, Sarah F. Brosnan, Michael J. Beran, Audrey E. Parrish, Sara A. Price, Bart J. Wilson

Economics Faculty Articles and Research

How do primates, humans included, deal with novel problems that arise in interactions with other group members? Despite much research regarding how animals and humans solve social problems, few studies have utilized comparable procedures, outcomes, or measures across different species. Thus, it is difficult to piece together the evolution of decision making, including the roots from which human economic decision making emerged. Recently, a comparative body of decision making research has emerged, relying largely on the methodology of experimental economics in order to address these questions in a cross-species fashion. Experimental economics is an ideal method of inquiry for this …

Endogenous Group Formation Via Unproductive Costs, Jason A. Aimone, Laurence R. Iannaccone, Michael D. Makowsky, Jared Rubin

Economics Faculty Articles and Research

Sacrifice is widely believed to enhance cooperation in churches, communes, gangs, clans, military units, and many other groups. We find that sacrifice can also work in the lab, apart from special ideologies, identities, or interactions. Our subjects play a modified VCM game—one in which they can voluntarily join groups that provide reduced rates of return on private investment. This leads to both endogenous sorting (because free-riders tend to reject the reduced-rate option) and substitution (because reduced private productivity favours increased club involvement). Seemingly unproductive costs thus serve to screen out free-riders, attract conditional cooperators, boost club production, and increase member …