Relative Performance Incentives and Price Bubbles in Experimental Asset Markets

We study experimental markets in which participants face incentives modeled upon those prevailing in markets for managed funds. Each participant's portfolio is periodically evaluated at market value and ranked by relative performance as measured by short‐term paper returns. Those who rank highly attract a larger share of new fund inflows. In an environment in which prices are typically close to intrinsic value, the effect of these incentives is mild. However, in an environment in which markets are prone to bubble, mispricing is greatly exacerbated by relative performance incentives and becomes even more pronounced with experience.     

Social Information “Nudges”: An Experiment with Multiple Group References

Social information “nudges” concerning how others perform typically boost individual performances in experiments with one group reference point. However, in many natural settings, sometimes due to policy, there are several such group reference points. We address the complications that such multiple group social information might introduce through an experiment. The boost to average performance is significant and comparable to the one group case. Between‐group inequality does not change. Individual inequality falls, however, because the boost is largest among the pre‐“nudge” very poor performers. Finally, the boost to average performance is highest when individuals freely choose their group affiliations.     

Multi‐battle Contests: An Experimental Study

We examine behavior of subjects in simultaneous and sequential multi‐battle contests, where each individual battle is modeled as an all‐pay auction with complete information. In simultaneous best‐of‐three contests, subjects are predicted to make positive bids in all three battles, but we find that subjects often make positive bids in only two battles. In sequential contests, theory predicts sizable bids in the first battle and no bids in the subsequent battles. Contrary to this prediction, subjects significantly underbid in the first battle and overbid in subsequent battles. Consequently, instead of always ending in the second battle, contests often proceed to the third battle. Finally, although the aggregate bid in simultaneous contests is similar to that in sequential contests, in both settings, subjects make higher aggregate bids than predicted. The observed behavior of subjects can be rationalized by a combination of multidimensional iterative reasoning and a nonmonetary utility of winning.     

Asset Price Bubbles: Existence,Persistence and Migration

Econometric tests are performed for the detection and migration of asset‐price bubbles in the housing, currency and stock markets of seven countries. This set of countries includes both developed and emerging economies that have good historical data on housing prices. Our empirical results suggest that this type of exuberant behaviour in prices occurs more frequently in the housing market than in the currency and stock markets. Additionally, we find significant evidence of bubble migration across markets within some of the studied countries.     

Trust among the Avatars: A Virtual World Experiment,with and without Textual and Visual Cues

We invited “residents” of a virtual world who vary in real‐world age and occupation to play a trust game with stakes comparable to “in‐world” wages. In different treatments, the lab wall was adorned with an emotively suggestive photograph, a suggestive text was added to the instructions, or both a photo and text were added. We find high levels of trust and reciprocity that appear still higher for non‐student and older subjects. Variation of results by treatment suggests that both photographic and textual cues influenced the level of trust but not that of trustworthiness.     

Reservation Values and Regret in Laboratory First‐Price Auctions: Context and Bidding Behavior

Recent articles hypothesize that an asymmetry in regret motivates aggressive bidding in laboratory first‐price auctions. Subjects emphasize potential earnings foregone from being outbid. Proposed motivators of this asymmetry include the one‐to‐one relationship in the auction between winning and positive earnings and the ex post knowledge that bidders who do not win the auction know they earned less than the winning bidder. We design a novel implementation of the first‐price auction environment in which these characteristics are not present, while leaving unchanged the expected‐earnings maximizing bidding strategy against any fixed beliefs about the bidding behavior of others. Bidding is significantly less aggressive in this treatment. These findings support the hypothesis that aggressive bidding is motivated in part by features of the protocol for incentivizing subjects that are not essential to the auction environment.     

The Sound of Others: Surprising Evidence of Conformist Behavior

In this article we use the “Click” version of the Bomb Risk Elicitation Task to explore preferences for conformism. In the task subjects can infer the behavior of others from the mass of clicks heard. This signal is uninformative about the precise choices of the other participants, and never mentioned in the instructions. We control the exposure of subjects to clicks by implementing treatments with and without earmuffs. We further test the effect of the introduction of a common rather than individual resolution of uncertainty, still keeping individual payoffs independent of other subjects’ choices. We find strong evidence of conformist behavior even in such an inhospitable environment. Simply hearing the others clicking marginally affects subjects behavior. Introducing a common random draw results in a dramatic shift of the average choices toward risk loving, in particular by women, which is consistent with social preference considerations.     

Effects of a Management–Labor Context and Team Play on Ultimatum Game Outcomes

Laboratory experiments are usually done on individuals, but many business decisions involve groups. Therefore, we ran ultimatum games using individuals and two‐person teams. We primed business roles with the labels “labor” and “management,” or we used the generic labels of “proposer” and “responder.” With business labels, individuals offered lower shares at higher stakes with no significant differences in acceptance rates. For teams, business labels had no significant effect on shares offered, with significantly lower acceptance rates at higher stakes. Teams offered less than individuals, along with higher acceptance rates with generic labels, compared to no significant differences with business labels.     

Intergenerational Transfers and Asset Inequality in Japan: Empirical Evidence from New Survey Data

This paper quantitatively examines the impact of intergenerational transfers on asset inequality among Japanese households. We estimate an intergenerational asset transfer function with various control variables, using a unique micro dataset taken from a survey conducted by the Economic and Social Research Institute, Cabinet Office. Employing three different models, a Tobit model, an interval regression model and an ordered probit model, to ensure that our results are independent of the specific econometric approach used, we investigate whether asset transfers received are correlated with households’ financial strength. We find that higher income households are likely to receive larger asset transfers. However, the contribution of intergenerational transfers to asset inequality appears to be small.     

Certainty of Punishment versus Severity of Punishment: An Experimental Investigation

Compliance with laws and regulations depends on the expected penalty facing violators. The expected penalty depends on both the probability of punishment and the severity of the punishment if caught. A key question in the economics of crime literature is whether increasing the probability of punishment is a more effective deterrent than increasing the severity of punishment. This article uses laboratory experiments to investigate this issue and finds that increasing the severity of punishment is a more effective deterrent than an equivalent increase in the probability of punishment. This result contrasts with the findings of the empirical crime literature.     

Gender Differences in the Giving and Taking Variants of the Dictator Game

We run between‐subject dictator games with exogenously specified “give” or “take” frames involving a balanced pool of male and female dictators and constant payoff possibilities. We find the following: Females allocate more under the taking frame than under the giving frame. Males allocate more under the giving frame than under the taking frame. In the taking frame females are more generous than males. But in the giving frame both are equally generous. Finally, when the combined population of males and females is considered, giving is found to be equivalent to “not taking,” because the opposing gender effects offset each other.     

Focal Points and Economic Efficiency: The Role of Relative Label Salience

Coordination games represent coordination problems that arise across social science disciplines. Focal points have been found to be an effective way to solve many of these coordination problems. We experimentally analyze the efficiency‐enhancing power of focal points in 2 × 2 Pareto‐ranked coordination games. We find that the power of focal labels, when attached to the Pareto‐efficient strategy, to promote efficiency critically depends upon the alternative strategy's label salience. When the relative salience of our focal labels is considerably weaker, focal labels mostly fail to raise expected efficiency beyond the mixed‐strategy prediction. But when the relative salience of our focal labels is markedly stronger, focal labels raise expected efficiency much beyond the mixed‐strategy prediction. Furthermore, we find that the efficiency‐enhancing power of focal labels decreases as a measure of risk‐dominance increases across games.     

Powerful Chief Executive Officers and Firm Performance: Integrating Agency and Stewardship Theory

Do agency and stewardship behaviors coexist at firms, or does one dominate the other? We use data from listed companies in China over the period 2007–2016 to show that powerful chief executive officers (CEOs) simultaneously incur self‐interested agency costs while acting as stewards to benefit the firm. In balancing the push‐and‐pull forces of stewardship and agency behaviors, powerful CEOs in Chinese firms ultimately improve short‐term and long‐term firm performance. Our results have important implications for understanding how CEOs affect firms and how cultural factors can motivate CEOs to work in the interest of the firm.     

Risk‐Taking Behavior: An Experimental Analysis of Individuals and Dyads

The decision to undertake risk is often made by pairs (dyads), while much of the economics literature on risk taking focuses on the individual. We report the results of controlled laboratory experiments that compare behavior between individuals and pairs. Using the 2002 procedure and a within‐subjects design, we find that pair choices are largely consistent with subjects bargaining over the outcome rather than the pairs taking a more extreme stance than the individual members. Further, gender and age but not personality seem to influence relative bargaining weight. We also find that individuals are more willing to take risks after making decisions as part of a pair than beforehand. Both the personality of one's partner and nontask social interaction influence subsequent individual risk‐taking behavior.     

Market Interaction and Pro-Social Behavior: An Experimental Study

When actions generate negative externalities for third parties, incentives exist to pass these “morally costly” decisions to others. In laboratory experiments, we investigate how market interaction affects allocations when the right to divide a sum of money between oneself and a passive recipient is commoditized. Allocation to recipients is reduced by more than half when determined by subjects who purchase or keep the right to make the division as compared to a control where subjects are directly assigned the right. Sellers report accurate beliefs about recipient allocations and do not report feeling less responsible the more often they sell the allocation right. The market allocates the right to make divisions more frequently to buyers who allocate more to recipients, but sellers who allocate less to recipients tend to sell less often. Selection cannot solely explain the results, suggesting market interaction itself may directly impact behavior.     

The over‐weighting of unfair tie in all‐pay contest: An experimental study

This paper examines experimentally a contest in which the organizer takes a share of the prize if there is a tie. Our hypothesis is that contestants perceive this as unfair and that this perception has a non‐proportional effect on the bids. The results indicate that despite the very low probability of a tie, contestants over‐weight its importance and sharply decrease their bids if the organizer takes a share. We show that a fair contest is the optimal strategy for the organizer since the increase in the average bid in a “fair” contest is higher than the organizer's decrease in expected value from losing his share in a tie.     

Salience and the Disposition Effect: Evidence from the Introduction of “Cash‐Outs” in Betting Markets

The disposition effect describes the tendency of investors to sell assets that have increased in value since purchase, and hold those that have not. We analyze the introduction of betting market “Cash‐Outs,” which provide a continual update—and therefore increase the salience—of bettors' paper profits/losses on each bet. We find that the introduction of Cash‐Out increased the disposition effect in this market, as punters sold their profitable bets with greater frequency than before. We do not, however, find that the disposition effect has any impact on asset prices, either before or after this intervention.     

The Effect of SNAP and School Food Programs on Food Security,Diet Quality,and Food Spending: Sensitivity to Program Reporting Error

There is an extensive research literature on the effects of the Supplemental Nutrition Assistance Program (SNAP) on food‐related outcomes which has shown somewhat mixed results but generally favorable effects. However, most of the research has used data sets whose information on SNAP participation is gathered from responses on household surveys, and such responses are subject to reporting error. This study uses the National Household Food Acquisition and Purchase Survey data set to examine the effect of reporting error on food‐related outcomes, for that data set contains information on SNAP participation gathered from government administrative records. Our analysis shows that the degree of reporting error is small and has little effect on the estimated impact of participation in the SNAP program on food security, diet quality, and food spending. A supplemental analysis of the effect of school food programs likewise shows no difference in using survey or administrative data in the analysis.     

Renting Goodwill in International Marketing Channels: An Analysis of Pricing Strategies and Bargaining Power

This paper investigates the pricing decisions of foreign manufacturers in international markets within a bargaining framework with asymmetric information and the rental of goodwill. The key findings are: first, the foreign manufacturer follows a mark-up pricing strategy in which its gross margin and the quality premium over the domestic product are shared with the importer. Second, a manufacturer–importer contract occurs only when the manufacturer’s bargaining power is within an admissible range which shrinks as transaction costs increase. Third, the domestic consumer will only purchase the foreign product if the importer’s goodwill in the domestic market is sufficiently large to signal quality. The paper contributes to the literature on exchange relationships between foreign manufacturers and importers.     

Income and Price Elasticities of Demand in South Africa: An Application of the Linear Expenditure System

This paper investigates the expenditure patterns of South African households using detailed cross‐sectional expenditure and price data that varies across region and time. Linear expenditure system parameter estimates are used to calculate income and price elasticities for a number of product categories at different points of the income distribution. We find substantial variation in the price and income elasticities of demand for items across the income distribution, with the bottom quartile being extremely sensitive to increases in the price of food and clothing items, and the top quartile being as sensitive as households in developed countries.