(forthcoming) How Risk Sharing May Enhance Efficiency in English Auctions Economic Journal PDF-file We investigate the possibility of enhancing efficiency by awarding premiums to a set of highest bidders in an English auction---in a setting that extends Maskin and Riley (1984, Econometrica 52: 1473-1518) in three aspects: (i) the seller can be risk averse, (ii) the bidders can have heterogeneous risk preferences, and (iii) the auction can have a binding reserve price. Our analysis reveals that the premium has an intricate joint effect on risk sharing and expected revenue, which in general benefits risk averse bidders. When the seller is more risk averse than the pivotal bidder -- a condition often verifiable by deduction prior to the auction-- the premium also benefits the seller and therefore leads to a Pareto improvement of the English auction. The advantage of such premium tactics is directly related to (a) the seller's degree of risk aversion, (b) the reserve price, (c) the riskiness of the object for sale, (d) the degree of heterogeneity in risk preferences among the bidders, and (e) the number of the potential bidders.
(forthcoming) Predictably Angry: Facial cues provide a credible signal of destructive behavior Management Science PDF-file Evolutionary explanations of anger as a commitment device hinge on two key assumptions. The first is that it is observable ex-ante whether someone will get angry when feeling badly treated. The second is that anger is associated with destructive behavior. We test the validity of these assumptions by studying whether observers are able to detect who rejected a low offer in an ultimatum game. We collected photos and videos of responders in an ultimatum game before they were informed about the game that they would be playing. We showed pairs of photos or videos, consisting of one responder who rejected a low offer and one responder who accepted a low offer, to an independent group of observers. We find support for the two assumptions. Observers do better than chance at detecting who rejected the low offer, especially for rejecters who get angry at low offers. (forthcoming) Defaults, normative anchors and the occurrence of risky and cautious shifts Journal of Risk and Uncertainty PDF-file Choice shifts occur when individuals advocate a risky (safe) decision when acting as part of a group even though they prefer a safe (risky) decision when acting as individuals. Even though research in psychology and economics has produced a mass of evidence on this puzzling phenomenon,
there is no agreement about which mechanism produces choice shifts. In an experiment, we investigate the performance of two prominent mechanisms that have been proposed to explain the phenomenon; (i)rank-dependent utility and (ii) a desire to conform to the wishes of the majority.
The evidence provides clear support for the conformity explanation.
(2017) Discrimination in the Labor Market: the Curse of Competition between Workers Economic Journal 127, 1433-1466 Link to article In an experiment we identify a crucial factor that determines whether employers engage in statistical discrimination of ex-ante equal groups. In the standard no-competition setup of Coate and Loury (1993), we do not find systematic evidence for statistical discrimination. When we introduce competition between workers of different groups for the same job, the non-discrimination equilibrium ceases to be stable. In line with this theoretical observation, we find systematic discrimination in the experimental treatment with competition. Nevertheless, a substantial minority of the employers refuses to discriminate even when it is in their best interest to do so.
(2017) Fostering cooperation through the enhancement of own vulnerability Games and Economic Behavior 101, 273-290 Link to article We consider the possibility that cooperation in a prisoner's dilemma is fostered by people's voluntarily enhancement of their own vulnerability. The vulnerability of a player determines the effectiveness of possible punishment by the other. In the Gradual mechanism, players may condition their incremental enhancements of their vulnerability on the other's choices. In the Leap mechanism, they unconditionally choose their vulnerability. In our experiment, subjects only learn to cooperate when either one of these mechanisms is allowed. In agreement with theory, subjects aiming for cooperation choose higher vulnerability levels in Gradual than in Leap, which maps into higher mutual cooperation levels. (2017) The Sources of the Communication Gap Management Science 63, 2833-2846 Link to article Face-to-face communication drastically increases cooperation rates in social dilemmas. We test which factors are the most important drivers of this communication gap. We distinguish three main categories. First, communication may decrease social distance. Second, communication may enable subjects to assess their opponent’s cooperativeness (“type detection”) and condition their own action on that information. Third, communication allows subjects to make promises, which create commitment for subjects who do not want to break a promise. We find that communication increases cooperation by 56 percentage points. Roughly 74% of this effect can be attributed to type detection, the remaining 26% to a commitment value. We do not find evidence that social distance plays a role.
(2016) Discretionary Sanctions and Rewards in the Repeated Inspection Game Management Science 62, 502-517 Link to article We experimentally investigate a repeated “inspection game” where, in the stage game, an employee can either work or shirk and an employer simultaneously chooses to inspect or not inspect. Combined payoffs are maximized when the employee works and the employer does not inspect. However, the unique equilibrium of the stage game is in mixed strategies with positive probabilities of shirking/inspecting. We examine the effects of allowing the employer to sanction or reward the employee after she has inspected the employee. We find that rewards or sanctions can both discourage shirking, and have similar effects on joint earnings. In games allowing sanctions a reduction in shirking is accomplished with a lower inspection rate and the efficiency gains accrue to employers. In games allowing rewards employers actively reward employees for working and the efficiency gains are shared more equitably. A treatment where employers can combine sanctions and rewards leads to efficiencies similar to the single-instrument treatments, and outcomes more closely resemble those of the reward treatment in that the efficiency gains are shared. (2016) Lossed in Translation: An Off-the-Shelf Method to Recover Probabilistic Beliefs from Loss-Averse Agents Experimental Economics 19, 1-30 Link to article Although strictly proper rules are designed to truthfully elicit subjective
probabilistic beliefs, experimental results have shown that risk aversion causes agents to bias
their reports towards the rule's baseline probability of 1/2, and a conservative preference
for certain outcomes leads agents with moderate beliefs to simply report 1/2. While both
of these distortions make recovery of true beliefs dicult, the second eect is particularly
pernicious because it leaves the assessor unable to discriminate amongst a broad range of
moderate probabilities. Applying a prospect theory model of risk preferences, we show that
loss aversion can explain both of these behavioral phenomena. Using the insights of this
model, we develop a modified off-the-shelf probability assessment mechanism that corrects
these distortions and allows the assessor to recover an accurate estimate of an agent's true
beliefs. In an experiment, we demonstrate the eectiveness of this modication in both
eliminating uninformative reports and eliciting true probabilistic beliefs.
(2015) How to subsidize contributions to public goods - Does the frog jump out of the boiling water? European Economic Review 74, 98-108 Link to article According to popular belief, frogs are boiled to death when the water is heated gradually. In this paper, we investigate how humans respond to a very slow versus a very steep increase of a subsidy on contributions to a public good. In an experiment, we vary the mode of the increase (gradual versus quick). When the subsidy is raised to an intermediate level, we see a modest effect in either treatment. When the subsidy is raised to a substantial level, there is a strong effect of a quick increase and a modest effect of a gradual increase in the subsidy. (2015) Money talks? An experimental investigation of cheap talk and burned money International Economic Review 56, 1385-1426 PDF-file We experimentally study the strategic transmission of information in a setting
where both cheap talk and money can be used for communication purposes. Theoretically
a large number of equilibria exist side by side, in which senders either
use costless messages, money, or a combination of the two. We find that senders
prefer to communicate through costless messages. Only when the interest disalignment
between sender and receiver increases, cheap talk tends to break down and
high sender types start burning money to enhance the credibility of their costless
messages. A behavioral model due to Kartik (2009) assuming that sellers bear a
cost of lying fits the data best. (2015) Equilibrium Selection in Experimental Cheap Talk Games Games and Economic Behavior 91, 14-25 PDF-file Extended version In the past, many refinements have been proposed to select equilibria in cheap talk games. Usually, these refinements were motivated by a discussion of how rational agents would reason in some particular cheap talk games. In this paper, we propose a new refinement and stability measure that is intended to predict actual behavior in a wide range of cheap talk games. According to our Average Credible Deviation Criterion (ACDC), the stability of an equilibrium is determined by the frequency and size of credible deviations. ACDC organizes the results from several cheap talk experiments in which behavior converged to equilibrium, even in cases where other criteria do not make a prediction.
(2014) An Experimental Study of Credible Deviations and ACDC Experimental Economics 17, 173-199 PDF-file Extended version We test the Average Credible Deviation Criterion (ACDC), a stability measure and refinement for cheap talk equilibria introduced in De Groot Ruiz, Offerman & Onderstal (2011). ACDC has been shown to be predictive under general conditions and to organize data well in previous experiments meant to test other concepts. In a new experimental setting, we provide the first systematic test of whether and to which degree credible deviations matter for the stability of cheap talk equilibria. Our principal experimental result is that in a setting where existing concepts are silent, credible deviations matter and matter gradually, as predicted by ACDC. (2014) Encouraging Compliance: Bonuses versus Fines in Inspection Games Journal of Law, Economics, and Organization 30, 632-648 PDF-file In this paper we examine the effectiveness of bonuses and fines in an ‘inspection game’, where costly inspection allows an authority to detect whether or not an individual complies with some standard of behavior. Standard game theoretic analysis predicts that in the inspection game non-compliant behavior is deterred by fines targeted at non-compliant individuals, but encouraged by bonuses awarded to compliant individuals. In an experiment we find that fines are effective in deterring non-compliance. However, in agreement with recent behavioral theories, we find that the effect of bonuses on compliance is much weaker than predicted.
(2013) Demand Reduction and Preemptive Bidding in License Auctions Experimental Economics 16, 52-87 PDF-file Multi-unit ascending auctions allow for equilibria in which bidders strategically reduce their demand and split the market at low prices. At the same time, they allow for preemptive bidding by incumbent bidders in a coordinated attempt to exclude entrants from the market. We consider an environment where both demand reduction and preemptive bidding are supported as equilibrium phenomena of the ascending auction. In a series of experiments, we compare its performance to that of the discriminatory auction. Strategic demand reduction is quite prevalent in the ascending auction even when entry imposes a (large) negative externality on incumbents. As a result, the ascending auction performs worse than the discriminatory auction both in terms of revenue and efficiency, while entrants' chances are similar across the two formats.
(2011) Fighting Collusion in Auctions: An Experimental Investigation International Journal of Industrial Organization 29, 84-96 PDF-file The danger of collusion presents a serious challenge for auctioneers. In this paper, we compare the collusive properties of two standard auctions, the English auction and the first-price sealed-bid auction, and a lesser-known format, the Amsterdam (second-price) auction. In the Amsterdam auction, the highest losing bidder earns a premium for stirring up the price. We study two settings: in one, all bidders can collude, and in another, only a subset is eligible. The experiments show that the Amsterdam auction triggers less collusion than the standard auctions. We compare experimental results to theoretical predictions, and provide an explanation where they differ. (2011) Noisy Signaling: Theory and Experiment Games and Economic Behavior 73, 402-428 PDF-file instructions We investigate a noisy signaling game, in which nature adds random noise to the message chosen. Theoretically, with an unfavorable prior the separating equilibrium vanishes for low noise. It reappears for intermediate and high noise, where messages increase with noise. A pooling equilibrium always exists. In our experiment, noise works as an empirical equilibrium selection device. When noise increases, the separating equilibrium loses ground to the pooling equilibrium. Subjects separate for low noise where no separating equilibrium exists. Conditional on aiming for separation, high-quality senders choose messages that increase monotonically with noise. A simple behavioral explanation organizes the data well. (2011) Premium Auctions and Risk Preferences Journal of Economic Theory 146, 2420-2439 PDF-file In a premium auction, the seller offers some "pay back," called premium, to the highest bidders. This paper investigates how the performance of such premium tactic is related to the participants' risk preferences. By developing an English premium auction model with symmetric interdependent values, where both the seller and the buyers may be risk averse (or preferring), we show that a) the premium reduces the riskiness of revenue regardless of the bidders' risk preferences, and b) the premium causes the expected revenue to increase in the bidders' risk tolerance. A "net-premium effect" and a "second-order stochastic dominance effect" are key to these results.
(2009) Imitation and Luck: An Experimental Study on Social Sampling Games and Economic Behavior 65, 461-502
In this paper, we present the results of two experiments on social sampling. In both experiments, people are asked to make a risky decision in a situation where an idiosyncratic luck term affects their performance. Before they make their decision, people have the opportunity to sample others who have done exactly the same problem before them. These previous participants are ranked on the basis of their success. In the first experiment, we find that, by and large, subjects sample and imitate lucky risk seekers, while they could have sampled others to retrieve information that is valuable to solve their problem rationally. The simple behavioral rule of imitating the best appears to be robust to the setting of the problem. In the second experiment, we find that subjects tend to imitate successful others in both the winner's curse version and the loser's curse version of the Bazerman-Samuelson takeover game. Because of the way these problems are constructed, imitation exacerbates the winner's curse while it alleviates the loser's curse. In all problems, social sampling makes people look more risk seeking than the people who do not have the opportunity to sample.
(2009) A Truth-Serum for Non-Bayesians: Correcting Proper Scoring Rules for Risk Attitudes Review of Economic Studies 76, 1461-1489 Background material Link to article Proper scoring rules provide convenient and highly efficient tools for incentive compatible elicitations of subjective beliefs. As traditionally used, however, they are valid only under expected value maximization. This paper shows how they can be generalized to modern (“nonexpected utility”) theories of risk and ambiguity, yielding mutual benefits: people using proper scoring rules can benefit from the empirical realism of nonexpected utility, and people analyzing ambiguity attitudes can benefit from the efficient measurements through proper scoring rules. An experiment demonstrates the feasibility of our generalized proper scoring rule.
(2008) Explaining the comparative statistics in step-level public good games C.R. Plott and V.L. Smith (eds) The Handbook of Experimental Economics Results volume 1 Amsterdam: North-Holland
(2008) Creating Competition Out of Thin Air: An Experimental Study of Right-to-Choose Auctions Games and Economic Behavior 62, 383-416 PDF-file This paper presents an experimental study of a mechanism that is commonly used to sell multiple heterogenous goods. The novel feature of this procedure is that instead of selling each good in a separate auction, the seller executes a single auction in which buyers, who may be interested in completely different goods, compete for the right to choose a good. We provide experimental evidence that a Right-to-Choose (RTC) auction can generate more revenue than the theoretically optimal auction. Moreover, in contrast to the "optimal" auction, the RTC auction is approximately efficient in the sense that the surplus it generates is close to the maximal one. Furthermore, a seller who would like to retain some of his goods can generate more revenue with a restricted RTC auction in which not all rights-to-choose are sold, than with the theoretically optimal auction.
(2006) Does Auctioning of Entry Licenses Induce Collusion? An Experimental Study Review of Economic Studies 73, 769-791 PDF-file We use experiments to examine whether the auctioning of entry rights affects the behavior of
market entrants. Standard economic arguments suggest that the license fee paid at the auction
will not affect pricing since it constitutes a sunk cost. This argument is not uncontested though
and this paper puts it to an experimental test. Our results indicate that an auction of entry licenses may affect prices in oligopoly but not in monopoly. In oligopoly, the payment of an entry fee increases the probability that the market entrants tacitly coordinate on a collusive price path. (2006) Using First-Price Auctions to Sell Heterogeneous Licenses International Journal of Industrial Organization 24, 555-581 PDF-file This paper considers three alternative ways to sell heterogenous licenses via a first-price format when there is single unit demand. It has been suggested that incorporating a first-price element may bolster competition in this case (Klemperer, 2002). In a controlled laboratory setting, we compare the performance of the simultaneous first-price auction, the sequential first-price auction and the simultaneous descending auction with that of the simultaneous ascending auction. The experiments involve several bidding environments of varying complexity. We find that the simultaneous ascending auction achieves the highest levels of efficiency but also has drawbacks: (i) its revenues are low and variable, (ii) per-license profits vary, and (iii) the incidence of winner's curse outcomes is high. Seller's revenues are highest when the licenses are sold in a sequential first-price auction, in decreasing order of quality.
(2004) The Amsterdam Auction. Econometrica 72, 281-94
The Amsterdam auction has been used to sell real estate in the Dutch capital for centuries. By awarding a premium to the highest losing bidder, the Amsterdam auction favors weak bidders without having the implementation difficulties of Myerson s (1981) optimal auction. In a series of experiments, we compare the standard first-price and English auctions, the optimal auction, and two variants of the Amsterdam auction. With strongly asymmetric bidders, the second-price Amsterdam auction raises substantially more revenues than standard formats and only slightly less than the optimal auction.
(2004) What's Causing Overreaction? An Experimental Investigation of Recency and the Hot Hand Effect Scandinavian Journal of Economics 106, 533-553 Link to article A substantial body of empirical literature provides evidence for overreaction in markets. Past losers outperform past winners in stock markets as well as in sports markets. Two hypotheses are consistent with this observation. The recency hypothesis states that traders overweight recent information. Thus, they are too optimistic about winners and too pessimistic about losers. According to the hot hand hypothesis, traders try to discover trends in the past record of a firm or a team, and thereby overestimate the autocorrelation in the series. An experimental design allows us to distinguish between these hypotheses. The evidence is consistent with the hot hand hypothesis. Experience slightly reduces the observed phenomenon of overreaction.
(2003) Competitive Bidding in Auctions with Private and Common Values. Economic Journal 113, 598-613 Link to article The objects for sale in most auctions possess both private and common value elements. This salient feature has not yet been incorporated into a strategic analysis of equilibrium bidding behaviour. This paper reports such an analysis for a stylised model in which bidders receive a private value signal and an independent common value signal. We show that more uncertainty about the common value has a negative effect on efficiency. Information provided by the seller decreases uncertainty, which raises efficiency and seller s revenues. Efficiency and revenues are also higher when more bidders enter the auction. (2003) Winner s Curse without Overbidding. European Economic Review 47, 625-44 Link to article We report the results of a series of second-price auction experiments where each bidder s signal is given by a normally distributed value plus a normally distributed error. While bidders values differ in one treatment they are the same in another, which allows for a direct test of the winner s curse irrespective of confounding factors. Bidders may also fall prey to a news curse when they do not sufficiently take into account that signals and errors are correlated. We find that the effects of the winner s curse are mitigated by a news curse and loss or risk aversion.
(2002) Efficiency in Auctions with Private and Common Values: An Experimental Study. American Economic Review 92, 625-43
Auctions are generally not efficient when the object s expected value depends on private and common value information. We report a series of first-price auction experiments to measure the degree of inefficiency that occurs with financially motivated bidders. While some subjects fall prey to the winner s curse, they weigh their private and common value information in roughly the same manner as rational bidders, with observed efficiencies close to predicted levels. Increased competition and reduced uncertainty about the common value positively affect revenues and efficiency. The public release of information about the common value also raises efficiency, although less than predicted.
(2002) Hurting Hurts More Than Helping Helps. European Economic Review 46, 1423-37 Link to article Previous experimental work suggests that both a dislike for an unequal division of payoffs and intentionality play a role to explain reciprocal behavior. This paper focuses on intentionality, and in particular on the question of whether negative intentionality matters more than positive intentionality. Experimental evidence obtained in the
(2002) Imitation and Belief Learning in an Oligopoly Experiment. Review of Economic Studies 69, 973-97
We examine the force of three types of behavioural dynamics in quantity-setting triopoly experiments: (1) mimicking the successful firm, (2) rules based on following the exemplary firm, and (3) rules based on belief learning. Theoretically, these three types of rules lead to the competitive, the collusive, and the Cournot-Nash outcome, respectively. In the experiment we employ three information treatments, each of which is hypothesized to be conducive to the force of one of the three dynamic rules. To a large extent, the results are consistent with the hypothesized relationships between treatments, behavioural rules, and outcomes.
(2002) Are family transfers crowded out by public transfers? Scandinavian Journal of Economics 104, 587-604
(2002) Competition For vs On the Rails: A Laboratory Experiment International Economic Review 43, 709-736
Several European countries and Japan are in various stages of privatizing and/or introducing more competition in passenger rail service. This process has been furthered by a directive from the Commission of the European Communities (1991) requiring member states to separate operations from infrastructure on the books and give international groupings of trains access to their infrastructure. In the Netherlands, the Ministry of Transport, Public Works, and Water Management was assigned responsibility for making a recommendation to Parliament for choosing between competition for the rails and competition on the rails in increasing competition in the supply of passenger rail service. The Ministry commissioned the experiments reported here in order to acquire better understanding of the properties of the two alternative types of competition in the context of a simple stylized rail network. The experimental rail network includes station complementarity and time slot substitutability. It also includes tradeoffs between local and express trains. Competition on the rails involves allocation of rights to use station and time slot routes by price bids in a combinatorial auction. Competition for the rails involves allocation of rights to regional monopolies by fare-structure bids for supplying a pre-specified minimum transport schedule. The experiments include both allocation of rights and scheduling of trains on the network. The two forms of competition are evaluated with various criteria developed by the Ministry, including market prices and allocative efficiency.
(2001) Cooperation in an Overlapping Generations Experiment. Games and Economic Behavior 36, 264-75 Link to article Recent theoretical work shows that folk theorems can be developed for infinite overlapping generations games. Cooperation in such games can be sustained as a Nash equilibrium. But, of course, there are other equilibria. This paper investigates experimentally whether cooperation actually occurs in a simple overlapping generations game. Subjects both play the game and formulate strategies. Our main finding is that subjects fail to exploit the intertemporal structure of the game. Even when we provided subjects with a recommendation to play the grim trigger strategy, most of the subjects still employed safe history-independent strategies. (2001) Expectation Formation in Step-Level Public Good Games. Economic Inquiry 39, 250-69 Link to article This article focuses on the process of expectation formation. Specifically, the question is addressed whether individuals think strategically when they form beliefs about other players behavior. Most belief learning models assume that people abstract from strategic considerations. Using an incentive-compatible mechanism, experimental data are obtained on subjects expectations in a step-level public good game and in a game against nature. Beliefs in the interactive games develop in the same way as in the game against nature, providing evidence that strategic considerations do not play a role. The evidence is consistent with predictions derived from the naive Bayesian model.
(1999) Strategic Behavior in Public Good Games: When Partners Drift Apart. Economics Letters 62, 35-41 Expanded working paper Link to article (Abstract of the expanded Working Paper) We use a new design to (re)examine the occurrence of strategic behavior in voluntary contributions mechanism experiments. Subjects are in groups that remain constant for a number of periods before they change. The change is public knowledge and always consists of one member switching to another group. Moreover, everyone knows that this individual will not be grouped with any of the members again. In this sense 'partners' really become 'strangers'. We find considerable evidence of strategic behavior in these relatively simple games. Subjects who leave their group contribute less than in the previous period and less than in the next period in their new group. Contribution levels decline with the number of periods remaining for the group. The results can be explained by the occurrence of conditional cooperators, who are willing to contribute if and only if enough others do the same. The presence of these subjects elicits strategic (forward looking) behavior from others.
(1998) Learning by Experience and Learning by Imitating Successful Others. Journal of Economic Behavior and Organization 34, 559-75 Link to article It is examined whether individuals learn from experience and/or by imitation. Usually individual judgmental learning displays systematic biases against the ideal Bayesian model. Imitation of successful others may decrease such effects. In an experiment, subjects make investment decisions and report expectations. The profitability of an investment depends on the realization of a stationary distribution of states of the world. In the baseline, subjects do not receive information about others expectations; in the other conditions, subjects perceive the expectations of others who observed either exactly the same events or different events from the same distribution. The results indicate that people learn both from experience and by imitating successful others. (1998) Quantal Response Models in Step-Level Public Good Games. European Journal of Political Economy 14, 89-100 Link to article The effect of adding noise to both an equilibrium model and a naive Bayesian model of behavior in step-level public good games is studied. Quantal response equilibria are derived for these games and a naive Bayesian quantal response function is presented. The models are fit for experimental data from such a game and compared. The results seem more promising for the naive Bayesian model than for the equilibrium model. (1998) Public Good Provision and Public Bad Prevention: The Effect of Framing. Journal of Economic Behavior and Organization 34, 143-61 Link to article An experimental analysis of voluntary, binary contributions for step-level public goods/bads is presented. Alternatively, the situation is presented as the provision of a public good or the prevention of a public bad. From a strategic point of view, these presentations are equivalent. In early periods of the twenty round experiments, behavior is indeed observed to be similar in both cases but, after about five periods, differences start to occur that grow larger. A simple learning model is developed that replicates the patterns in the experiments. Extrapolation beyond twenty periods show that the pattern observed reflects an equilibrium selection.
(1997) Beliefs and Decision Rules in Public Good Games Theory and Experiments Kluwer, Dordrecht/Boston/London
(1996) Value Orientations, Expectations and Voluntary Contributions in Public Goods. Economic Journal 106, 817-45 Link to article An experimental analysis of voluntary, binary contributions for step-level public goods is presented. Independent information is obtained on individual value orientation and expectations about the behavior of other subjects using incentive compatible mechanisms. The effects of increasing payoffs for the public good and of decreasing groupsize are investigated. Attention is focused on the determination of expectations, the use of expectations when deciding on behavior, and differences in expectations and behavior between individuals with different value orientations.