We investigate contract negotiations in the presence of externalities and asymmetric information in a controlled laboratory experiment. In our setup, it is commonly known that it is always ex post efficient for player A to implement a project that has a positive external effect on player B. However, player A has private information about whether or not it is in player A’s self-interest to implement the project even when no agreement with player B is reached. Theoretically, an ex post efficient agreement can always be reached if the externality is large, whereas this is not the case if the externality is small. We vary the size of the externality and the bargaining process. The experimental results are broadly in line with the theoretical predictions. However, even when the externality is large, the players fail to achieve ex post efficiency in a substantial fraction of the observations. This finding holds in ultimatum-game bargaining as well as in unstructured bargaining with free-form communication.

How does risk aversion change in wealth? To answer this question, we implemented a field experiment in the form of a free-to-play mobile game. Players made lottery choices at various points in the game and at different levels of in-game wealth. Since the game was designed as a closed economic system, that is, wealth could not be transferred into or out of the game, only in-game wealth was relevant for players’ choices. Analyzing the choices of over 2000 players, we find evidence for decreasing absolute risk aversion and decreasing relative risk aversion. We also find evidence of an “always safe” heuristic in a subgroup of decisions and observe a tendency of players to act according to the “hot hand fallacy”. Our research design allows us to exclude inertia and lets us analyze lottery stakes of significant size relative to in-game wealth. Our results render implications for theoretical research, empirical studies, and for the optimal design of financial products.

We study the distributional preferences of Americans during 2013–2016, a period of social and economic upheaval. We decompose preferences into two qualitatively different tradeoffs—fair-mindedness versus self-interest, and equality versus efficiency—and measure both at the individual level in a large and diverse sample. Although Americans are heterogeneous in terms of both fair-mindedness and equality-efficiency orientation, we find that the individual-level preferences in 2013 are highly predictive of those in 2016. Subjects that experienced an increase in household income became more self-interested, and those who voted for Democratic presidential candidates in both 2012 and 2016 became more equality-oriented.

Widespread evidence from psychology and neuroscience documents that previous choices unconditionally increase the later desirability of chosen objects, even if those choices were uninformative. This is problematic for economists who use choice data to estimate latent preferences, demand functions, and social welfare. The evidence on this mere choice effect, however, exhibits serious shortcomings which prevent evaluating its possible relevance for economics. In this paper, we present a novel, parsimonious experimental design to test for the economic validity of the mere choice effect addressing these shortcomings. Our design uses well-defined, monetary lotteries, all decisions are incentivized, and we effectively randomize participants’ initial choices without relying on deception. Results from a large, pre-registered online experiment find no support for the mere choice effect. Our results challenge conventional wisdom outside economics. The mere choice effect does not seem to be a concern for economics, at least in the domain of decision making under risk.

Nothing is known about the effectiveness of defaults when moving the target outcomes requires substantial effort. We conduct two field experiments to investigate how defaults fare in such situations: we change the university exam sign-up procedure in two study programs to “opt-out” (a) for a single exam, and (b) for many exams. Both interventions increase task uptake (exam sign-up). Concerning the outcomes which require effort, we find no effects for many exams. For a single exam, the opt-out increases task completion (exam participation) in the study program where the default arguably entails stronger endorsement. Within this program, the effects on successful task completion (exam passing) are heterogeneous: treated students who in the past were willing to communicate with the university (responsive individuals) invest more effort into exam preparation and are more likely to pass the exam than their control counterparts.For non-responsive individuals, we find increased sign-ups but no effects on the target outcomes. Defaults can thus be effective and may be an attractive policy option even when the target outcome requires substantial effort provision. It is, however crucial that the interventions target the appropriate individuals.

We investigate the effect of team formation and task characteristics on performance in high-stakes team tasks. In two field experiments, randomly assigned teams performed significantly better than self-selected teams in a task that allowed for an unequal work distribution. The effect was reversed if the task required the two team members to contribute more equally. Investigating mechanisms, we observe that teams become more similar in ability and report to cooperate better when team members can choose each other. We show how different levels of skill complementarity across tasks may explain our results: If team performance largely depends on the abilities of one team member, random team assignment may be preferred because it leads to a more equal distribution of skills across teams. However, if both team members’ abilities play a significant role in team production, the advantage of random assignment is reduced, and the value of team cooperation increases.

Does social learning and subsequent private information processing differ depending on whether the observer shares the same group identity as the predecessor whose action is observed? In this paper, we conduct a lab experiment to answer this question, in which subjects first observe a social signal and then receive a private signal. We find that subjects put greater weights on the social signal if they share with the predecessor the same group identity that is induced in the experimental environment. We also provide suggestive evidence that such an ingroup-outgroup difference cannot be explained by individuals’ beliefs of the predecessor’s rationality. Moreover, heterogeneous effects of group identity exist in weights given to the subsequent private signal: Compared to when the predecessor is an outgroup, those who have learned from an ingroup predecessor put a greater (smaller) weight on the private signal if it contradicts (confirms) the social signal. We conjecture that such group effects are consistent with the perspective that group identity works as a framing device and brings about certain decision heuristics in the social signal phase, which no longer exist in the private signal phase.

The common-ratio effect and the Allais Paradox (common-consequence effect) are the two best‐known violations of Expected Utility Theory. We reexamine data from 39 articles reporting experiments (143 designs/parameterizations, 14,909 observations) and find that the common-ratio effect is systematically affected by experimental design and implementation choices. The common-ratio effect is more likely to be observed in experiments with a low common-ratio factor, a high ratio of middle to highest outcome, when lotteries are presented as simple probability distributions (not in a compound/frequency form), and with high hypothetical incentives.

We experimentally investigate the effect of pre-bargaining communication on productive incentives in a multilateral bargaining game with joint production under two conditions: observable and unobservable investments. In both conditions, communication fosters fair sharing and is rarely used to pit individuals against each other. Proportional sharing arises with observable investments with or without communication, leading to high efficiency gains. Without investment observability, communication is widely used to truthfully report investments and call for equitable sharing, allowing substantial efficiency gains. Since communication occurs after production, our results highlight a novel indirect channel through which communication can enhance efficiency in social dilemmas. Our results contrast with previous findings on bargaining over an exogenous fund, where communication leads to highly unequal outcomes, competitive messages, and virtually no appeals to fairness.

We study the impact of endowments and expectations on reference point formation and measure the value of food safety certification in the context of fish trading on real markets in Nigeria. In our field experiment, consumers can trade a known food item for a novel food item that is superior in terms of food safety––or vice versa. Endowments matter for reference point formation, but we also document a reverse endowment effect for a subsample of respondents. The effect of expectations about future ownership is weak and mixed. While expectations seem to affect bidding behavior for subjects “trading up” to obtain the certified food product (a marginally significant effect), it does not affect bids for subjects “trading down” to give up this novel food item. Finally, willingness to pay for safety certified food is large for our respondents—our estimate of the premium is bounded between 37 and 53% of the price of conventional, uncertified food.

Strategic uncertainty is the uncertainty that players face with respect to the purposeful behavior of other players in an interactive decision situation. Our paper develops a new method for measuring strategic-uncertainty attitudes and distinguishing them from risk and ambiguity attitudes. We vary the source of uncertainty (whether strategic or not) across conditions in a ceteris paribus manner. We elicit certainty equivalents of participating in two strategic 2 × 2 games (a stag-hunt and a market-entry game) as well as certainty equivalents of related lotteries that yield the same possible payoffs with exogenously given probabilities (risk) and lotteries with unknown probabilities (ambiguity). We provide a structural model of uncertainty attitudes that allows us to measure a preference for or an aversion against the source of uncertainty, as well as optimism or pessimism regarding the desired outcome. We document systematic attitudes towards strategic uncertainty that vary across contexts. Under strategic complementarity [substitutability], the majority of participants tend to be pessimistic [optimistic] regarding the desired outcome. However, preferences for the source of uncertainty are distributed around zero.

We propose the use of Bayesian estimation of risk preferences of individuals for applications of behavioral welfare economics to evaluate observed choices that involve risk. Bayesian estimation provides more systematic control of the use of informative priors over inferences about risk preferences for each individual in a sample. We demonstrate that these methods make a difference to the rigorous normative evaluation of decisions in a case study of insurance purchases. We also show that hierarchical Bayesian methods can be used to infer welfare reliably and efficiently even with significantly reduced demands on the number of choices that each subject has to make. Finally, we illustrate the natural use of Bayesian methods in the adaptive evaluation of welfare.

This article surveys the use of nonparametric permutation tests for analyzing experimental data. The permutation approach, which involves randomizing or permuting features of the observed data, is a flexible way to draw statistical inferences in common experimental settings. It is particularly valuable when few independent observations are available, a frequent occurrence in controlled experiments in economics and other social sciences. The permutation method constitutes a comprehensive approach to statistical inference. In two-treatment testing, permutation concepts underlie popular rank-based tests, like the Wilcoxon and Mann–Whitney tests. But permutation reasoning is not limited to ordinal contexts. Analogous tests can be constructed from the permutation of measured observations—as opposed to rank-transformed observations—and we argue that these tests should often be preferred. Permutation tests can also be used with multiple treatments, with ordered hypothesized effects, and with complex data-structures, such as hypothesis testing in the presence of nuisance variables. Drawing examples from the experimental economics literature, we illustrate how permutation testing solves common challenges. Our aim is to help experimenters move beyond the handful of overused tests in play today and to instead see permutation testing as a flexible framework for statistical inference.

Law enforcement officials face numerous decisions regarding their enforcement choices. One important decision, that is often controversial, is the amount of knowledge that law enforcement distributes to the community regarding their policing strategies. Assuming the goal is to minimize criminal activity (alternatively, maximize citation rates), our theoretical analysis suggests that agencies should reveal (shroud) their resource allocation if criminals are uncertainty seeking, and shroud (reveal) their allocation if criminals are uncertainty averse. We run a laboratory experiment to test our theoretical framework, and find that enforcement behavior is approximately optimal given the observed non-expected utility uncertainty preferences of criminals.

We design a lab-in-the-field experiment involving naturally occurring groups operating in three South-African townships. We introduce an incentives-based mechanism named “participatory incentives” consisting of monetary incentives that are awarded conditional on the group reaching a threshold of minimum level of joint contribution to a common project or good. We show that participatory incentives significantly raise average contribution levels (from 29 to 62% of the endowment) and are even more effective in the presence of highly deprived people. We complement the reduced form estimations of the experimental data with a structural model that sheds light on the role of subjects’ beliefs and responsiveness to a social norm of high cooperation.

We study minimal conditions for competitive behavior with few agents. We adapt a price-quantity strategic market game to the indivisible commodity environment commonly used in double auction experiments, and show that all Nash equilibrium outcomes with active trading are competitive if and only if there are at least two buyers and two sellers willing to trade at every competitive price. Unlike previous formulations, this condition can be verified directly by checking the set of competitive equilibria. In laboratory experiments, the condition we provide turns out to be enough to induce competitive results, and the Nash equilibrium appears to be a good approximation for market outcomes. Subjects, although possessing limited information, are able to act as if complete information were available in the market.

Within contests, adjudication errors imply at the same time the exclusion of a meritorious candidate and the inclusion of a non-meritorious one. We study theoretically how adjudication errors affect bids in all-pay auctions, by disentangling the respective effects of exclusion and inclusion errors, and showing how they interact with the framing of incentives (prize or penalty) under different assumptions on preferences. We test our theoretical predictions with an experiment where we manipulate the presence of exclusion errors, inclusion errors, and the framing of incentives. The experimental evidence indicates that errors of either exclusion or inclusion significantly decrease bids in all-pay auctions relative to a setting without errors, interacting negatively, with no significant difference in the size of their effects. Bid levels are significantly higher in a penalty framing relative to a prize framing, both in the absence of errors and in the presence of adjudication errors.

This paper studies the effects of social status—a socially recognized ranking of individuals—on prosocial behavior. We use a laboratory experiment and propose a theory to address this issue. In a one-shot game, two players, whose social status is either earned or randomly assigned, jointly make effort contributions to a project. Player 1 first suggests an effort level for each player to player 2 who then determines the actual effort levels. Deviation from the proposal is costly. We find causal evidence that high-status players are less selfish than their low-status counterparts. In particular, high-status players 2 provide relatively more effort, ceteris paribus, than those with low status. The experimental results and theoretical framework suggest that a high social ranking yields more social behavior and that this can be attributed to the sense of responsibility that it gives.