Stephen Leider

Publications

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 (forthcoming)

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 (forthcoming)

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 (forthcoming)

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.

Working Papers

Gift Exchange in the Lab - It is not (only) how much you give...
(with Florian Englmaier) 2009

Abstract: An important aspect in determining the effectiveness of gift exchange relations in labor markets 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. From our agency model of reciprocal motivation we derive non-trivial predictions about which is the marginal worker (in terms of ability) affected by our experimental variation and how different types of individuals, selfish and reciprocal, will react to it. Our model does substantially better than other theories in organizing the data.

Gift Exchange in the Field - It is not (only) how much you give...
(with Florian Englmaier) [in preparation]

Contracts, Biases and Consumption of Access Services
(with Ozge Sahin) 2011

Abstract: We consider a consumer consumption model that takes into account the valuation and demand uncertainties that consumers face while using access services. Typical examples of such services include extended warranties for consumer electronics, club memberships, and telecommunication services. Recent research shows that the consumer's consumption is affected by the structure of the contract (i.e. two part vs. three part tariffs) although ex ante the contracts result in the same consumption and expected utility. This suggests that consumers experience biases while maximizing their utility from the consumption of access services. Identifying biases that derive this consumption behavior has important ramifications for marketing and optimal contract design. We study consumption models that take into account behavioral aspects of decision making and test these models with a set of laboratory experiments. We find that a majority of individuals correctly use a threshold policy, however they use their initial allotment of free units too quickly. These errors appear to be partially driven by mistaken beliefs about the value distribution that leads subjects to underestimate the value of future consumption opportunities. 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. The optimal firm strategy is therefore to offer a contract that presells access units at a very small discount; this strategy increases revenue by 8 - 15% compared to only offering a pay-per-use contract.

A Meeting of the Minds: Contracts and Social Norms
(with Erin Krupka and Ming Jiang) [in preparation]

Other Papers

Does Experience Always Pay? Welfare and Distribution Effects in Games with Heterogeneously Experienced Players
(with Robert Slonim) 2006