[show abstract][hide abstract] ABSTRACT: Firms often cooperate explicitly in certain dimensions, such as research joint ventures, while competing in other markets. Cooperation in research and development can allow firms to internalize the external benefits of knowledge creation and increase the returns from R&D expenditures. Such cooperation may spill over to facilitate collusion in other markets, however, leading to losses in welfare and efficiency. This paper uses a laboratory experiment to examine if sellers successfully coordinate to fund a joint research project to reduce their costs, and how this collaboration affects pricing and efficiency in their market. The motivating example context is research collaborations to reduce costs of abating greenhouse gas emissions, and the potential impact on an emissions permit market. The experiment includes control treatments with separate R&D cooperation and markets. Our results show that although subjects usually cooperate when given an opportunity, cooperative actions are less common when they also compete in the market. This suggests that market competition can spill over to hinder cooperation. Communication between individuals improves cooperation in all environments, particularly when the market is present. Nevertheless, the data indicate little support for market collusion. This weak evidence for behavioural spillovers suggests that policy makers could promote R&D collaborations and still expect robust market competition.
[show abstract][hide abstract] ABSTRACT: This paper presents an experimental study of two mechanisms that influence incentives to reduce ambient pollution levels. In the formal mechanism individuals face a penalty if the group generates total pollution that exceeds a specified target, whereas in the informal mechanism individuals can choose to incur costs to punish each other after observing their group members' emissions. We examine the effectiveness of these mechanisms, in isolation and in combination. The results suggest that the formal targeting mechanism is significantly more effective than informal peer punishment in reducing pollution and increasing efficiency. Peer punishment however improves the performance of the formal mechanism.
Journal of Environmental Economics and Management 05/2013; 65(3):469–484. · 2.17 Impact Factor
[show abstract][hide abstract] ABSTRACT: This article reports a duopoly experiment in which sellers compete to sell to a potentially patient buyer. Each period sellers simultaneously post prices and the buyer costlessly observes either one or both prices. The buyer can then either accept an observed price or reject all offers. Following a rejection, sellers may have an opportunity to post prices again in another round. We study how the duopolists' pricing behavior responds to changes in the likelihood of the buyer observing multiple prices, γ, and the probability of continuing to another round, δ. The unique stationary equilibrium features mixed strategies. Consistent with the equilibrium, observed prices are decreasing in γ and δ. Contrary to the equilibrium, however, buyers sometimes reject profitable price offers, and average prices are lower than predicted when only one round of offers is possible and higher than predicted in the multiple‐round game.
[show abstract][hide abstract] ABSTRACT: This study reports a simple experiment using induced-value items to assess the accuracy of the Becker, DeGroot, Marschak (BDM) method (1964 Behavioral Science) for measuring preferences. Although the BDM mechanism is incentive compatible the data indicate that it can be empirically unreliable due to subject misconceptions about the game form. Subject choices appear to reflect preferences constructed through framing processes, but further analysis reveals types of misconceptions through specific patterns of behavior. The data are more consistent with a hypothesis that the choices represent mistakes, such as a misconception that the BDM is a first-price auction mechanism. This highlights that preferences should be considered as distinct from choices unless misconceptions are eliminated. Neglecting misconceptions and related mistakes can lead the theory of framing and the theory of revealed preference to result in incorrect interpretations of data. The paper is focused on an interpretation of data from a simple version of the BDM rather than techniques for improving the BDM. As discussed in the paper, a theoretical controversy clouds a discussion of BDM improvements and does not have a clear resolution at this time. We hope that the facts and analysis here will provide a foundation for such a discussion. .
[show abstract][hide abstract] ABSTRACT: This study provides a unified framework to compare three canonical forms of competition: winner-take-all contests won by the best performer, winner-take-all lotteries where probability of success is proportional to performance, and proportional-prize contests in which rewards are shared in proportion to performance. Performance is affected by random noise, reflecting imperfect information. We derive equilibria and observe outcomes from each contest in a laboratory experiment. Equilibrium and observed efforts are highest in winner-take-all contests. Lotteries and proportional-prize contests have the same Nash equilibrium, but empirically, lotteries induce contestants to choose higher efforts and receive lower, more unequal payoffs. This result may explain why contest designers who seek only to elicit effort offer lump-sum prizes, even though contestants would be better off with proportional rewards.
[show abstract][hide abstract] ABSTRACT: Costless pre-play communication has been found to effectively facilitate coordination and enhance efficiency in games with Pareto-ranked equilibria. We report an experiment in which two groups compete in a weakest-link contest by expending costly efforts. Allowing intra-group communication leads to more aggressive competition and greater coordination than control treatments without any communication. On the other hand, allowing inter-group communication leads to less destructive competition. As a result, intra-group communication decreases while inter-group communication increases payoffs. Our experiment thus provides evidence that communication can either reduce or increase efficiency in competitive coordination games depending on different communication boundaries. This contrasts sharply with experimental findings from public goods and other coordination games, where communication always enhances efficiency and often leads to socially optimal outcomes.
Games and Economic Behavior 01/2012; 76:26-43. · 0.83 Impact Factor
[show abstract][hide abstract] ABSTRACT: Over the past two decades, experimental methods have entered the mainstream as one of the empirical methodologies of economic
science. Early experimental work focused on issues in individual decision-making and industrial organization, but in recent
years economists have applied laboratory methods to study topics in macroeconomics, international economics, information economics,
finance, and other fields. Applied economists have also conducted experiments to gather data expressly for use in policy debates.
The broadening of the domain of experimental economics has created several clearly identifiable branches of the field. The
focus of this volume is one of these branches, the study of the behavior of markets. The papers in this volume represent several
current directions of research on experimental markets.
[show abstract][hide abstract] ABSTRACT: Purpose – The chapter reports a laboratory emissions trading experiment with imperfect enforcement that introduces environmental framing as a treatment variable.Methodology – The research uses the methodology of laboratory experimental economics. In the current design, subjects self-reported their “emissions” at the end of each trading period and were inspected probabilistically and fined when they underreported.Findings – Transaction volume and compliance rates were significantly lower in the environmentally framed condition, compared to the more standard neutrally framed control.Practical implications – The latter result suggests that environmental framing reduced subjects' incentives to honestly report “pollution” to the experimental “regulator.” As experimenters employ more “framed field experiments” outside the lab, it may be important to evaluate such pure framing effects in the lab if a main research goal is to compare lab and field experiment outcomes.Originality/value – Experimental economics research rarely manipulates environmental framing as a treatment variable. The substantial impact of framing on subject behavior documented in this study highlights its importance, particularly in the presence of moral concerns such as honest reporting.
Research in Experimental Economics 05/2011; 14:77-114.
[show abstract][hide abstract] ABSTRACT: Motivated by problems of coordination failure observed in weak-link games, we experimentally investigate behavioral spillovers for order-statistic coordination games. Subjects play the minimum- and median-effort coordination games simultaneously and sequentially. The results show the precedent for cooperative behavior spills over from the median game to the minimum game when the games are played sequentially, but not when they are played simultaneously. Moreover, spillover occurs even when group composition changes, although the effect is not as strong. We also find that the precedent for uncooperative behavior does not spill over from the minimum game to the median game. These findings suggest guidelines for increasing cooperative behavior within organizations.
[show abstract][hide abstract] ABSTRACT: Many new and proposed emissions trading systems involve multiple countries and regions. The introduction of interregional trading raises questions about how flexible state- or national-level authorities should be in allowing individual firms to trade with firms or authorities in other states or countries. This paper uses laboratory methods to evaluate the efficiency and pricing performance of linking trading across regions at the firm-to-firm level. In one treatment, individual firms trade directly with firms or authorities in other regions. We compare performance in this treatment to an intergovernmental trading treatment, where emissions trading is restricted to occur only between intermediaries. A baseline treatment of autarky, where firms only trade with other firms in their country or region, provides a benchmark to assess the efficiency benefits of allowing linking. Although efficiency and price discovery are both improved by allowing intermediation in linked permit markets, we find that further gains can be realized through direct firm to firm trading. Buyers in high cost regions and sellers in low cost regions benefit the greatest from linking.
[show abstract][hide abstract] ABSTRACT: This experiment compares the performance of two contest designs: a standard winner-take-all tournament with a single fixed prize, and a novel proportional-payment design in which that same prize is divided among contestants by their share of total achievement. We find that proportional prizes elicit more entry and more total achievement than the winner-take-all tournament. The proportional-prize contest performs better by limiting the degree to which heterogeneity among contestants discourages weaker entrants, without altering the performance of stronger entrants. These findings could inform the design of contests for technological and other improvements, which are widely used by governments and philanthropic donors to elicit more effort on targeted economic and technological development activities.
[show abstract][hide abstract] ABSTRACT: This article investigates the extent to which exam performance at the end of compulsory education has been affected by three major education reforms: the introduction of a quasi-market following the Education Reform Act (1988); the specialist schools initiative introduced in 1994; and the Excellence in Cities programme introduced in 1999. Using a panel of schools for all state-funded secondary schools in England (1992-2006), we find that only about one-third of the improvement in school exam scores is directly attributable to the combined effect of these three major education reforms. The distributional consequences of the policy, however, are estimated to have been favourable, with the greatest gains being achieved by schools with the highest proportion of pupils from poor families. Copyright (c) Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2009.
Purdue University, Department of Economics, Purdue University Economics Working Papers. 01/2010;
[show abstract][hide abstract] ABSTRACT: The laboratory provides a test bed to inform many design choices for emissions permit markets. Experiments are sometimes strongly motivated and structured by specific theoretical models and predictions, but in other cases the experiment itself can be the model of the market and regulatory environment. We review specific experimental applications that address design issues for permit auction rules, permit expiration dates and banking, liability rules, and regulatory enforcement.
Agricultural and Resource Economics Review 01/2010; 39(2).
[show abstract][hide abstract] ABSTRACT: Organizational and political leaders often engage in "divide-and-conquer" transgression, in which a leader extracts surplus from a victim and shares it with a beneficiary to gain the latter's support for his transgression. This paper conducts the first experimental study to evaluate how repeated interactions with and without communication between "responders" can coordinate their resistance towards divide-and-conquer transgressions. It also investigates theoretically and empirically how social preferences can affect successful resistance against divide-and-conquer transgressions with repetition. In our experiment, repetition without communication reduces the transgression rate. Joint resistance is more common in early rounds of a supergame when players have more uncertainty about social preference types, and leaders target beneficiaries who resist transgression. We also find that repetition alone is only as effective as cheap talk communication in the one-shot game in reducing transgression. Our findings suggest that the risk associated with cooperation can impose a limit on the effectiveness of repeated interaction in facilitating cooperation in this repeated Coordinated Resistance game.
The Economic Journal 01/2010; 124(574). · 1.95 Impact Factor
[show abstract][hide abstract] ABSTRACT: Theoretical models of information asymmetry have identi ed a tradeo between the desire to learn and the desire to prevent an opponent from learning private information. This paper reports a laboratory experiment that investigates if actual bidders account for this tradeo, using a sequential procurement auction with private cost information and varying information revelation policies. Speci cally, the Complete Information Policy, where all submitted bids are revealed between auctions, is compared against the Incomplete Information Policy, where only the winning bid is revealed. The experimental results are largely consistent with the theoretical predictions. For example, bidders pool with other types to prevent an opponent from learning signi cantly more often under a Complete Information Policy. Also as predicted, the procurer pays less when employing an Incomplete Information Policy only when the market is highly competitive. Bids are usually more aggressive than the risk neutral quantitative prediction, which is usually consistent with risk aversion.
Purdue University, Department of Economics, Purdue University Economics Working Papers. 01/2010;
[show abstract][hide abstract] ABSTRACT: We report experiments studying mixed strategy Nash equilibria that are theoretically stable or unstable under learning. The Time Average Shapley Polygon (TASP) predicts behavior in the unstable case. We study two versions of Rock–Paper–Scissors that include a fourth strategy, Dumb. The unique Nash equilibrium is identical in the two games, but the predicted frequency of Dumb is much higher in the game where the NE is stable. Consistent with TASP, the observed frequency of Dumb is lower and play is further from Nash in the high payoff unstable treatment. However, Dumb is played too frequently in all treatments.
[show abstract][hide abstract] ABSTRACT: Evidence shows that real-effort investments can affect bilateral bargaining outcomes. This paper investigates whether similar investments can inhibit equilibrium convergence of experimental markets. In one treatment, sellers' relative effort affects the allocation of production costs, but a random productivity shock ensures that the allocation is not necessarily equitable. In another treatment, sellers' effort increases the buyers' valuation of a good. We find that effort investments have a short-lived impact on trading behavior when sellers' effort benefits buyers, but no effect when effort determines cost allocation. Efficiency rates are high and do not differ across treatments.
International Journal of Industrial Organization 01/2010; 29(1):97-103. · 0.84 Impact Factor
[show abstract][hide abstract] ABSTRACT: Many people incur costs to reward strangers who have been kind to others. Theoretical and experimental evidence suggests that such "indirect rewarding" sustains cooperation between unrelated humans. Its emergence is surprising, because rewarders incur costs but receive no immediate benefits. It can prevail in the long run only if rewarders earn higher payoffs than "defectors" who ignore strangers' kindness. We provide experimental evidence regarding the payoffs received by individuals who employ these and other strategies, such as "indirect punishment," by imposing costs on unkind strangers. We find that if unkind strangers cannot be punished, defection earns most. If they can be punished, however, then indirect rewarding earns most. Indirect punishment plays this important role, even if it gives a low payoff and is rarely implemented.
[show abstract][hide abstract] ABSTRACT: Theoretical models on information sharing in the information systems literature have shown the existence of a trade-off between the desire to learn and the desire to prevent an opponent from learning. The models have often imposed steep informational requirements on rational bidders. In this paper, we investigate through a laboratory experiment if actual bidders account for this trade-off. Our experimental framework is a sequential procurement auction setting with private cost information and varying information policies. Specifically, the Complete Informa-tion Policy, where all submitted bids are revealed between auctions, is compared against the Incomplete Information Policy, where only the winning bid is revealed. Our experimental re-sults are largely consistent with the theoretical predictions. For example, bidders prevent an opponent from learning significantly more often under a Complete Information Policy. We also find that the desire to learn dominates the desire to prevent the opponent from learning and leads to higher bid prices when the probability of competing against a low-cost opponent is low (and vice-versa). We also observe some deviations from the theoretical results, which we explain using recent insights from behavioral economics. JEL: C91, D44, D82.