The Effect of Safe Experience on a Warning's Impact: Sex, Drugs and Rock-n-Roll
(with Greg Barron and Jennifer Stack) OBHDP (2008)
Abstract: In many contexts we are warned against engaging in risky behavior only after having past safe experience. We examine the effect of safe experience on a warning's impact by comparing warnings received after having safe personal experience with those received before people start making choices. A series of five experiments studies this question with a paradigm that combines both descriptive information (i.e. the warning) and experiential information (safe outcomes). The results demonstrate two separate advantages to an early warning that go beyond the warning's mere informational content. When an early warning coincides with the beginning of a decision-making process, the warning is both weighted more heavily in future decisions (the Primacy Effect) and induces safer behavior that becomes the status quo for future choices (the Initial History Effect). While both effects operate indirectly through choice inertia, the primacy effect also operates directly on choices. This pattern of behavior is inconsistent with the "ideal" Bayesian for whom the order of information revelation does not influence subsequent behavior. The effect was robust across settings with and without forgone payoffs and when the consequences for risk taking are delayed until the end of the experiment. The results imply that, even after being adequately warned, some people may continue to take risks simply because they incurred good outcomes from the same choice in the past. Implications for policy and theory are discussed.
Directed Altruism and Enforced Reciprocity in Social Networks
(with Markus Mobius, Tanya Rosenblat and Q.A. Do) QJE (2009)
Abstract: We conduct online field experiments in large real-world social networks in order to decompose prosocial giving into three components: (1) baseline altruism toward randomly selected strangers, (2) directed altruism that favors friends over random strangers, and (3) giving motivated by the prospect of future interaction. Directed altruism increases giving to friends by 52 percent relative to random strangers, while future interaction effects increase giving by an additional 24 percent when giving is socially efficient. This finding suggests that future interaction affects giving through a repeated game mechanism where agents can be rewarded for granting efficiency enhancing favors. We also find that subjects with higher baseline altruism have friends with higher baseline altruism.
What Do We Expect From Our Friends?
(with Markus Mobius, Tanya Rosenblat and Q.A. Do) JEEA (2010)
Abstract: We conduct a field experiment in a large real-world social network to examine how subjects expect to be treated by their friends and by strangers who make allocation decisions in modified dictator games. While recipients' beliefs accurately account for the extent to which friends will choose more generous allocations than strangers (i.e. directed altruism), recipients are not able to anticipate individual differences in the baseline altruism of allocators (measured by giving to an unnamed recipient, which is predictive of generosity towards named recipients). Recipients who are direct friends with the allocator, or even recipients with many common friends, are no more accurate in recognizing intrinsically altruistic allocators. Recipient beliefs are significantly less accurate than the predictions of an econometrician who knows the allocator's demographic characteristics and social distance, suggesting recipients do not have information on unobservable characteristics of the allocator.
The Role of Experience in the Gambler's Fallacy
(with Greg Barron) JBDM (2010)
Abstract: Recent papers have demonstrated that the way people acquire information about a decision problem, by experience or by abstract description, can affect their behavior. We examined the role of experience over time in the emergence of the Gambler's Fallacy in binary prediction tasks. Theories of the Gambler's Fallacy and models of binary prediction suggest that recency bias, elicited by experience over time, may play a significant role. An experiment compared a condition where participants sequentially predicted the colored outcomes of a virtual roulette wheel spin with a condition where the wheel's past outcomes were presented all at once. In a third condition outcomes were presented sequentially in an automatic fashion without intervening predictions. Subjects were yoked so that the same history of outcomes was observed in all conditions. The results revealed the Gambler's Fallacy when outcomes were experienced (with or without predictions). However, the Gambler's Fallacy was attenuated when the same outcomes were presented all at once. Observing the Gambler's Fallacy in the third condition suggests that the presentation of information over time is a significant antecedent of the bias. A second experiment demonstrated that, while the bias can emerge with an all-at-once presentation that makes recent outcomes salient (Burns and Corpus, 2004), the bias did not emerge when the presentation did not draw attention to recent outcomes.
Kidneys For Sale: Who Finds That Repugnant, and Why?
(with Alvin E. Roth) AJT (2010)
Abstract: The shortage of transplant kidneys has spurred debate about legalizing monetary payments to donors to increase the number of available kidneys. However, buying and selling organs faces widespread disapproval. We survey a representative sample of Americans to assess disapproval for several forms of kidney market, and to understand why individuals disapprove by identifying factors that predict disapproval, including disapproval of markets for other body parts, dislike of increased scope for markets and distrust of markets generally. Our results suggest that while the public is potentially receptive to compensating kidney donors, among those who oppose it, general disapproval toward certain kinds of transactions is at least as important as concern about specific policy details. Between 51% and 63% of respondents approve of the various potential kidney markets we investigate, and between 42% and 58% want such markets to be legal. A total of 38% of respondents disapprove of at least one market. Respondents who distrust markets generally are not more disapproving of kidneymarkets; howeverwe find significant correlations between kidney market disapproval and attitudes reflecting disapproval toward certain transactions - including both other body markets andmarket encroachment into traditionally nonmarket exchanges, such as food preparation.
Norms and Contracting
(with Judd Kessler) MS (2012)
Abstract: We argue that very incomplete contracts do more than their enforceable components imply, they can also induce relationship-specific norms. We find experimentally, across four games, that the most effective contract always includes an unenforceable "handshake" agreement to take the first best action. In three games, a totally unenforceable contract consisting of only a handshake agreement is (at least weakly) optimal. These results are particularly strong in games with strategic complements, where even selfish subjects increase their actions. Our results highlight an alternative explanation for contractual incompleteness: establishing a norm can effectively substitute for weak enforceable restrictions.
Contractual and Organizational Structure with Reciprocal Agents
(with Florian Englmaier) AEJ-Micro (2012)
Abstract: Empirically, compensation systems generate substantial effort despite weak monetary incentives. We consider reciprocal motivations as a source of incentives. We solve for the optimal contract in the basic principal-agent problem and show that reciprocal motivations and explicit performance-based pay are substitutes. A firm endogenously determines the mix of the two sources of incentives to best induce effort from the agent. Analyzing extended versions of the model allows us to examine how organizational structure impacts the effectiveness of reciprocity and to derive specific empirical predictions. We use the UK-WERS workplace compensation data set to confirm the predictions of our extended model.
Why Do Firms Use Non-Linear Incentive Schemes? Experimental Evidence on Sorting and Overconfidence
(with Ian Larkin) AEJ-Micro (2012)
Abstract: Non-linear incentive schemes are commonly used to determine employee pay, despite their distortionary impact. We investigate possible reasons for their widespread use by examining the relationship between convex pay schemes and overconfidence. In a laboratory experiment, subjects chose between a piece rate and a convex pay scheme. We find that overconfident subjects are more likely than others to choose the convex scheme, even when it leads to lower pay. Overconfident subjects also persist in making the mistake despite clear feedback. These results suggest non-linear pay schemes may help companies select and retain overconfident workers, and may reduce the wage bill.
Contracts, Biases and Consumption of Access Services
(with Ozge Sahin) (forthcoming)
Abstract: We study theoretically and empirically the consumption of access services. We demonstrate that consumption is affected by contract structure (pay-per-use vs. three part tariffs) even if the optimal consumption plans are identical. We find that a majority of individuals correctly use a threshold policy that is similar to a nearly optimal heuristic, however they use the free units too quickly leading to overconsumption and lost surplus. These errors are partially driven by mistaken beliefs about the value distribution. We also measure subjects' willingness to pay for a contract with free access units, and we find that nearly half of subjects are willing to pay at least the full per-unit price, with a substantial fraction willing to overpay. In response, the optimal firm strategy offers a three-part tariff at a very small discount, which increases revenue by 8-15% compared to only offering a pay-per-use contract.
Temptation in Vote-Selling: Evidence from a Field Experiment in the Philippines
(with Allen Hicken, Nico Ravanilla and Dean Yang) (2014)
Abstract: We test the predictions of a behavioral model of transactional electoral politics in the context of a randomized anti-vote-selling intervention in the Philippines. We model selling one’s vote as a temptation good: it creates positive utility for the future self at the moment of voting, but not for past selves who anticipate the vote-sale. We also allow keeping or breaking promises regarding vote-selling to affect utility. Voters who are at least partially sophisticated about their vote-selling temptation can thus use promises not to vote-sell as a commitment device. An invitation to promise not to vote-sell is taken up by a majority of respondents, reduces vote-selling, and has a larger effect in electoral races with smaller vote-buying payments. The more effective promise treatment reduces vote-selling in the smallest-stakes election by 10.9 percentage points. Inviting voters to make another type of promise – to accept vote-buying payments, but to nonetheless “vote your conscience” – is significantly less effective. The results are consistent with voters being partially (but not fully) sophisticated about their vote-selling temptation.
Capacity Investment in Supply Chains: Contracts and the Hold-Up Problem
(with Andrew Davis) (2014)
Abstract: Suppliers are often reluctant to invest in capacity if they feel that they will be unable to recover their initial investment costs in subsequent negotiations with buyers. In theory, a number of different coordinating contracts can solve this form of hold-up problem and induce first best investment levels by the supplier. In this study, we experimentally evaluate the performance of these contracts in a two-stage supply chain. We develop a novel experimental design where retailers and suppliers bargain over contract terms, and both roles have the ability to make multiple back-and-forth offers while also providing feedback on the offers they receive. Our main result suggests that an option contract is best at increasing investment levels, and thus increasing overall supply chain profits. Furthermore, after investigating the evolution of offers during bargaining, we observe that participants tend to place particular emphasis on "superficial fairness." Specifically, participants focus more on setting a wholesale price that is in the middle of the available contracting space, while largely ignoring the coordinating contract parameter. We show that this behavioral tendency drives the favorable performance of the option contract, as there is a large set of coordinating terms which, conditional on having a superficially fair wholesale price, generate the proper incentives for suppliers to invest, and thus increase the total expected supply chain profit.
Procedural Fairness and the Cost of Control
(with Judd Kessler) (2014)
Abstract: A large and growing literature has demonstrated that imposing control on agents has the potential to backfire, leading agents to withhold effort. Consistent with principles of procedural fairness, we find that the way in which control is imposed — in particular whether control is imposed symmetrically on both principals and agents and whether both parties have a say in whether control is imposed — affects how agents respond to control. In our setting, control leads agents to withhold effort only when control is imposed unilaterally with an asymmetric affect on the agent.
A Meeting of the Minds: Contracts and Social Norms
(with Erin Krupka and Ming Jiang) (2014)
Abstract: Using coordination games we elicit social norms directly for two different games where either an agreement to take the first best action has been reached or where no such agreement exists. We combine the norms and choice data to predict changes in behavior and demonstrate that including social norms as a utility component significantly improves predictive performance. We estimate that honoring an agreement in the Double Dictator Game is worth giving up approximately 20% of their earnings, and more than 300% in the Bertrand Game. We show that informal agreements affect behaviour through their effect on social norms.
Bargaining in Supply Chains
(with William Lovejoy) (2013)
Abstract: We study experimentally bargaining in a multiple-tier supply chain with horizontal competition and sequential bargaining between tiers. Our treatments vary the cost difference between firms in tiers 1 and 2, with larger cost differences reflecting increased bargaining power. We measure how these underlying costs influence the efficiency, negotiated prices and profit distribution across the supply chain, and the extent to which these outcomes are influenced by personal characteristics such as risk aversion, altruism, selfishness, inequity aversion and social welfare concerns. We find that Retailer profits are hurt by decreased competition in either the Manufacturer or the Supplier tier. Additionally, Manufacturers and Suppliers benefit by decreased competition in their tier, while Manufacturers are hurt by decreased competition in the Supplier tier. We find that the Balanced Principal model of supply chain bargaining does a good job explaining our data, and significantly out performs the common assumption of leader-follower negotiations. Finally, we find that the structural issue of cost differentials dominates personal characteristics in explaining outcomes.
Gift Exchange in the Lab - It is not (only) how much you give...
(with Florian Englmaier) (2012)
Abstract: An important aspect in determining the effectiveness of gift exchange relations is the ability of the worker to "repay the gift" to the employer. To test this hypothesis, we conduct a real effort laboratory experiment where we vary the wage and the effect of the worker's effort on the manager's payoff. Furthermore we collect additional information that allows us to control for the workers' ability and whether they can be classified as reciprocal or not. Our agency model of reciprocal motivation predicts high and low ability workers are differently affected by our experimental variations. These predictions are borne out by our results. Furthermore, we document that exactly those individuals we classify as reciprocal are the ones driving these results.
Managerial Payoff and Gift Exchange in the Field
(with Florian Englmaier) (2012)
Abstract: We conduct a field experiment where we vary both the presence of a gift exchange wage and the effect of the worker's effort on the manager's payoff. The results indicate a strong complementarity between the initial wage gift and the agent's ability to "repay the gift". We collect information on ability to control for differences and on reciprocal inclination to show that gift exchange is more effective with more reciprocal agents. We present a simple principal-agent model with reciprocal subjects that motivates our empirical findings. Our results offer an avenue to reconcile the recent conflicting evidence on the efficacy of gift exchange outside the lab; we suggest that the significance of gift exchange relations depends on details of the environment.
Does Experience Always Pay? Welfare and Distribution Effects in Games with Heterogeneously Experienced Players
(with Robert Slonim) 2006