Testing subgame perfection apart from fairness in ultimatum games

We present an experiment designed to separate the two commonplace explanations for behavior in ultimatum games—subjects’ concern for fairness versus the failure of subgame perfection as an equilibrium refinement. We employ a tournament structure of the bargaining interaction to eliminate the potential for fairness to influence behavior. Comparing the results of the tournament game with two control treatments affords us a clean test of subgame perfection as well as a measure fairness-induced play. We find after 10 iterations of play that about half of all non-subgame-perfect demands are due to fairness, and the rest to imperfect learning. However, as suggested by models of learning, we also confirm that the ultimatum game presents an especially difficult environment for learning subgame perfection. Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C91, D64, J52     

Contracting inside an organization: An experimental study

In this paper we propose and test a contracting mechanism, Multi-Contract Cost Sharing (MCCS), for use in the management of a sequence of projects. The mechanism is intended for situations where (1) the contractor knows more about the true costs of various projects than does the contracting agency (adverse selection), and (2) unobservable effort on the part of the contractor may lead to cost reductions (moral hazard). The proposed process is evaluated in an experimental environment that includes the essential economic features of the NASA process for the acquisition of Space Science Strategy missions. The environment is complex and the optimal mechanism is unknown. The design of the MCCS mechanism is based on the optimal contract for a simpler related environment. We compare the performance of the proposed process to theoretical benchmarks and to an implementation of the current NASA ‘cost cap’ procurement process. The data indicate that the proposed MCCS process generates significantly higher value per dollar spent than using cost caps, because it allocates resources more efficiently among projects and provides greater incentives to engage in cost-reducing innovations. Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C72, C92, D82, L32     

A minimum effort coordination game experiment in continuous time

We conduct an experiment on a minimum effort coordination game in a (quasi-)continuous time-frame, where effort choices can be switched freely during a 60-s period. The cooperation levels of the continuous time treatments are not significantly different from the discrete time treatments. Providing subjects with the information on the effort choices of all group members increases the average effort level in continuous time only. The minimum effort level in continuous time with full information feedback is also substantially higher than that with limited information feedback, but the difference is statistically insignificant. With limited information feedback, subjects rarely coordinate to increase their efforts simultaneously to change the group minimum within a period. Our findings imply that continuous time games are not behaviorally equivalent to infinitely repeated discrete time games.     

Learning and sophistication in coordination games

This paper studies the role of strategic teaching in coordination games and whether changing the incentives of players to teach leads to more efficient coordination. We ran experiments where subjects played one of four coordination games in constant pairings, where the incentives to teach were varied along two dimensions—the short run cost of teaching and the long run benefit to teaching. We show which aspects of the game lead subjects to adopt long run teaching strategies, and show that subjects try to manipulate their opponent’s actions to pull them out of a situation of coordination failure. We also show that extending a model of decision making by introducing a forward-looking component helps to track teachers’ behaviour more accurately, and describes the way players behave in a more unified way across both teachers and learners.     

Dictator game giving: altruism or artefact?

Experimental dictator games have been used to explore unselfish behaviour. Evidence is presented here, however, that subjects’ generosity can be reversed by allowing them to take a partner’s money. Dictator game giving therefore does not reveal concern for consequences to others existing independently of the environment, as posited in rational choice theory. It may instead be an artefact of experimentation. Alternatively, evaluations of options depend on the composition of the choice set. Implications of these possibilities are explored for experimental methodology and charitable donations respectively. The data favour the artefact interpretation, suggesting that demand characteristics of experimental protocols merit investigation, and that economic analysis should not exclude context-specific social norms.

---

Electronic Supplementary Material  The online version of this article () contains supplementary material, which is available to authorized users.      

A network experiment in continuous time: The influence of link costs

In recent work on non-cooperative network formation star-shaped networks play an important role. In a particular theoretical model of Bala and Goyal (2000) center-sponsored stars are the only strict Nash networks. In testing this theoretical model, Falk and Kosfeld (2003) do not find experimental evidence that players select the center-sponsored star. Based on a slight modification of Bala and Goyal’s model, we design a network formation experiment in which, depending on link costs, periphery-sponsored stars and the empty network are the only strict Nash networks. We observe that almost all groups not only reach a strict Nash network once but also switch the center player in periphery-sponsored stars several times. The main innovation in our experiment is to use a continuous time framework which we believe to be a more realistic setting to study behavior in network formation situations and which makes coordination on stars much easier than simultaneous strategy adaptation in discrete time. Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9125-1. JEL Classification C72 · C92 · D81     

Voice matters in a dictator game

We conducted a laboratory experiment to study the effects of communication in a dictator game, while maintaining subjects’ anonymity. In the experiment, the recipient has an opportunity to state a payoff-irrelevant request for his/her share before the dictator dictates his/her offer. We found that the independence hypothesis that voice does not matter is rejected. In particular, if the request is for less than half of the pie, the dictator’s offer increases as the recipient’s request increases. Additionally, there is no dictator who is other-regarding and, at the same time, does not react to the recipient’s request.

---

Electronic Supplementary Material  The online version of this article () contains supplementary material, which is available to authorized users.      

Rage against the machines: how subjects play against learning algorithms

We use a large-scale internet experiment to explore how subjects learn to play against computers that are programmed to follow one of a number of standard learning algorithms. The learning theories are (unbeknown to subjects) a best response process, fictitious play, imitation, reinforcement learning, and a trial & error process. We explore how subjects’ performances depend on their opponents’ learning algorithm. Furthermore, we test whether subjects try to influence those algorithms to their advantage in a forward-looking way (strategic teaching). We find that strategic teaching occurs frequently and that all learning algorithms are subject to exploitation with the notable exception of imitation.     

Leadership and overcoming coordination failure with asymmetric costs

We study how the heterogeneity of agents affects the extent to which changes in financial incentives can pull a group out of a situation of coordination failure. We focus on the connections between cost asymmetries and leadership. Experimental subjects interact in groups of four in a series of weak-link games. The treatment variable is the distribution of high and low effort cost across subjects. We present data for one, two and three low-cost subjects as well as control sessions with symmetric costs. The overall pattern of coordination improvement is common across treatments. Early coordination improvements depend on the distribution of high and low effort costs across subjects, but these differences disappear with time. We find that initial leadership in overcoming coordination failure is not driven by low-cost subjects but by subjects with the most common cost type. This conformity effect may be due to a kind of group identity or to the cognitive simplicity of acting with identical others.      

Are we nice(r) to nice(r) people?—An experimental analysis

We experimentally investigate whether individuals can reliably detect cooperators (the nice(r) people) in an anonymous decision environment involving “connected games.” Participants can condition their choices in an asymmetric prisoners’ dilemma and a trust game on past individual (their partner’s donation share to a self-selected charity) and social (whether their partner belongs to a group with high or low average donations) information. Thus, the two measures of niceness are the individual donation share in the donation task, and the cooperativeness of one’s choice in the two games. We find that high donors achieve a higher-than-average expected payoff by cooperating predominantly with other high donors. Group affiliation proved to be irrelevant. Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C91, C72, D3     

THE EFFECTS OF FEEDBACK ON SELF‐ASSESSMENT

It is a well‐known phenomenon that people have difficulties in assessing their ability correctly. Often they overestimate their (relative) abilities. We conduct an experiment to test whether the self‐assessment of individuals improves when they receive feedback and there are incentives to make a correct self‐assessment. We investigate the subjects' reactions to feedback in several subsequent rounds to see not only if, but also when and how they react. Our main finding is that feedback influences subjects' decisions and can improve their overall self‐assessment. The effects, however, depend on the kind of feedback. Furthermore, we observe differences in the reactions of subjects (e.g., to what extent they follow feedback), the robustness of their belief about their relative ability, and how they process feedback.     

The impact of instructions and procedure on reducing confusion and bubbles in experimental asset markets

In 1988 Smith, Suchanek, and Williams (henceforth SSW) introduced a very influential model to test the efficiency of experimental asset markets. They and many subsequent studies observe that bubbles are robust to many treatment changes. Instead, bubbles are avoided only when subjects are experienced in the same setting, when the dividend-process is experienced by subjects beforehand, or when the fundamental value-process (FV) is presented in a well understandable context to reduce subjects’ confusion. We extend this line of research and show that even marginal changes in the experimental instructions/procedure can eliminate bubbles in the SSW-model. In particular, we show that mispricing is significantly reduced and overvaluation is eliminated completely (i) when the fundamental value process is displayed in a graph instead of a table or (ii) when subjects are asked about the current fundamental value at the beginning of each period. From a questionnaire conducted at the end of the experiment we infer that these treatment changes help to improve subjects’ understanding of the FV-process. We conclude that all bubble reducing factors have one common feature: they allow subjects to understand the non-intuitive declining FV-process of the SSW-model better and thus reduce subjects’ confusion about the FV-process.     

The control of game form recognition in experiments: understanding dominant strategy failures in a simple two person “guessing” game

This paper focuses on instructions and procedures as the reasons that subjects fail to behave according to the predictions of game theory in two-person “guessing game” (beauty contest game) experiments. In this game, two individuals simultaneously choose a number between 0 and 100. The winner is the person whose chosen number is the closest to 2/3 of the average of the two numbers. The weakly dominant strategy is zero. Because of the simplicity of the game, the widespread failure of subjects to choose the weakly dominant strategy has been interpreted as evidence of some fundamental inability to behave strategically. By contrast, we find that subjects’ behavior reflects a lack of understanding of the game form, which we define as the relationships between possible choices, outcomes and payoffs. To a surprising degree, subjects seem to have little understanding of the experimental environment in which they are participating. If subjects do not understand the game form, the experimental control needed for testing game theory is lost. The experiments reported here demonstrate that the failure to act strategically is related to how the game is presented. We test how well subjects are able to recognize the game under a variety of different presentations of the game. Some subjects fail to recognize the game form when it is presented abstractly. When the game is transformed into a simple isomorphic game and presented in a familiar context, subjects do choose weakly dominant strategies. While our results confirm the ability of subjects to make strategic decisions, they also emphasize the need to understand the limitations of experimental subjects’ ability to grasp the game as the experimenter intends. Given these limitations, we provide suggestions for better experimental control.     

Evidence on learning in coordination games

This paper reports an experiment designed to detect the influence of strategic uncertainty on behavior in order statistic coordination games, which arise when a player’s best response is an order statistic of the cohort’s action combination. Unlike previous experiments using order statistic coordination games, the new experiment holds the payoff function constant and only changes cohort size and order statistic.

---

Electronic Supplementary Material The online version of this article () contains supplementary material, which is available to authorized users. Related research available at     

Solving coordination failure with “all-or-none” group-level incentives

Coordinating activity among members is an important problem faced by organizations. When firms, or units within firms, are stuck in bad equilibria, managers may turn to the temporary use of simple incentives—flat punishments or rewards—in an attempt to transition the firm or unit to a more efficient equilibrium. We investigate the use of incentives in the context of the “minimum-effort,” or “weak-link,” coordination game. We allow groups to reach the inefficient equilibrium and then implement temporary, flat, “all-or-none” incentives to encourage coordination on more efficient equilibria. We vary whether incentives are positive (rewards) or negative (penalties), whether they have substantial or nominal monetary value, and whether they are targeted to a specific outcome (the efficient equilibrium) or untargeted (apply to more than one outcome). Overall, incentives of all kinds are effective at improving coordination while they are in place, but there is little long-term persistent benefit of incentives—once incentives are removed, groups tend to return to the inefficient outcome. We find some differences between different kinds of incentives. Finally, we contrast our results to other recent work demonstrating greater long-term effectiveness of temporary incentives.      

Misperceiving the value of information in predicting the performance of others

Economic models typically allow for “free disposal” or “reversibility” of information, which implies non-negative value. Building on previous research on the “curse of knowledge” we explore situations where this might not be so. In three experiments, we document situations in which participants place positive value on information in attempting to predict the performance of uninformed others, even when acquiring that information diminishes their earnings. In the first experiment, a majority of participants choose to hire informed—rather than uninformed—agents, leading to lower earnings. In the second experiment, a significant number of participants pay for information—the solution to a puzzle—that hurts their ability to predict how many others will solve the puzzle. In the third experiment, we find that the effect is reduced with experience and feedback on the actual performance to be predicted. We discuss implications of our results for the role of information and informed decision making in economic situations. Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9128-y. JEL Classification C91, D83     

Communication and coordination in the laboratory collective resistance game

This paper presents a laboratory collective resistance (CR) game to study how different forms of non-binding communication among responders can help coordinate their collective resistance against a leader who transgresses against them. Contrary to the predictions of analysis based on purely self-regarding preferences, we find that non-binding communication about intended resistance increases the incidence of no transgression even in the one-shot laboratory CR game. In particular, we find that the incidence of no transgression increases from 7 percent with no communication up to 25–37 percent depending on whether communication occurs before or after the leader’s transgression decision. Responders’ messages are different when the leaders can observe them, and the leaders use the observed messages to target specific responders for transgression.

---

Electronic Supplementary Material The online version of this article () contains supplementary material, which is available to authorized users.      

Incentives and Female Entrepreneurial Activity: Evidence from Panel Firm Level Data

The goal of this paper is to investigate entrepreneurial activity and to analyze the incentives of female participation in the labor market. Female entrepreneurial activity is closely related to social and economic issues. They represent a driving force, active and effective members of economic, political, professional and managerial societies. On the other hand, they have families with serious maternal responsibilities and inelastic household obligations, roles which they are trying to balance effectively. To that reason, specific actions and carefully designed measures are essential in encouraging and promoting them to engage into entrepreneurial activity. To investigate the issue of entrepreneurial activity, personal characteristics and various motivation incentives are examined in order to determine the major factors that may influence female entrepreneurial spirit in Greece. Obtaining data from 1600 industrial firms located in the prefecture of Piraeus over the period 1999–2009, this study makes use of the panel methodology approach to provide evidence about the main determinants of female entrepreneurship. What is found is that a combination of pull and push motives and effective mentoring framework, in addition to a set of personal characteristics such as risk of failure, educational level, creativity, innovativeness, ambitiousness and marital status, seem important for the encouragement of women entrepreneurship in Greece to start up a new business. The implications seem very substantial for the formulation and implementation of effective support policies and measures for female entrepreneurs’ vital start up and early stage period.     

Dynamic labor contracts with temporary layoffs and permanent separations

Summary. We study the implications of optimal dynamic contracts in private information environments for fluctuations in effort and employment across time and productivity states. To this end, we incorporate temporary layoffs and permanent separations as well as on-the-job effort variations into a dynamic model of moral hazard. We consider two different “commitment” environments. In a “full commitment” environment, although the firm can temporarily lay a worker off, neither party can dissolve the contractual relationship once it has been initiated. On the other hand, in a “limited commitment” environment, both parties can dissolve the relationship at the beginning of any period in order to pursue an outside option. We use our model to study the implications of optimal contracts for incentives, employment histories, layoffs and separations across full information, full commitment and limited commitment settings. We compute solutions to the relevant principal-agent problems, endogenously determining the set of states in which separations occur and the domain of the firm's value function, as well as the value function itself. Received: February 28, 2000; revised version: January 21, 2001