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 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.

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 an experiment to study how reversible entry decisions are affected by public and private payoff disclosure policies. In our environment, subjects choose between a risky payoff, which evolves according to an autoregressive process, and a constant payoff. The treatments vary the information disclosure rule on the risky payoff, such that in the public information treatment the risky payoff is always observable, while in the private information treatment, the risky payoff is observable only to the participants who enter the market. We find that under private information, market entry is higher, which suggests that subjects engage in exploration and place value on information.

An important issue for many economic experiments is how the experimenter can ensure sufficient power in order to reject one or more hypotheses. The paper illustrates how methods for testing multiple hypotheses simultaneously in adaptive, two-stage designs can be used to improve the power of economic experiments. We provide a concise overview of the relevant theory and illustrate the method in three different applications. These include a simulation study of a hypothetical experimental design, as well as illustrations using two data sets from previous experiments. The simulation results highlight the potential for sample size reductions, maintaining the power to reject at least one hypothesis while ensuring strong control of the overall Type I error probability.

International economic theory suggests that people should embrace economic integration because it promises large gains. But policy reversals such as Brexit indicate a desire for economic disintegration. Here we report results of an experiment of how size and cross-country distribution of gains from integration influence individuals’ inclination to cooperate to reap its intended benefits and to embrace or reject integration. The design considers an indefinitely repeated helping game with multiple equilibria and strategic uncertainty. The data reveal that inequality of potential gains neither affected behavior nor reduced support for economic integration. However, integration may lead to disappointing, unequally distributed welfare gains, undermining support for the policy. This suggests that to better assess integration policies, we should account for the spillover effects of integration on behavior. Miscalculating this behavioral aspect may undermine the intended development goals and motivate calls for dramatic policy-reversals.

The use of real decision-making incentives remains under debate after decades of economic experiments. In time preferences experiments involving future payments, real incentives are particularly problematic due to between-options differences in transaction costs, among other issues. What if hypothetical payments provide accurate data which, moreover, avoid transaction cost problems? In this paper, we test whether the use of hypothetical or one-out-of-ten-participants probabilistic—versus real—payments affects the elicitation of short-term and long-term discounting in a standard multiple price list task. We analyze data from a lab experiment in Spain and well-powered field and online experiments in Nigeria and the UK, respectively (N = 2,038). Our results indicate that the preferences elicited using the three payment methods are mostly the same: we can reject that either hypothetical or one-out-of-ten payments change any of the four preference measures considered by more than 0.18 SD with respect to real payments.

Extensive experimental research on public good games documents that many subjects are “conditional cooperators” in that they positively correlate their contribution with (their belief about) contributions of other subjects in their peer group. The goal of our study is to shed light on what preference and decision-making patterns drive this observed regularity. We consider reciprocity, conformity, inequality aversion and residual factors, such as confusion and anchoring, as potential explanations. Effects of these drivers are separated by varying how others’ contributions are determined and the informational content of the conditioning variable across treatments. Assuming additive separability of the effects of the four drivers, we find that, of the average conditionally cooperative behavior, at least 40 percent is driven by residual factors. For the remainder, most is accounted for by inequality aversion, some by conformity and very little by reciprocity. These findings carry an important message for how to interpret conditional cooperation observed in the lab. We also discuss what these findings mean for understanding conditional cooperation in fundraising applications in the field.

Previous work has shown that unobservable random shocks on output have a detrimental effect on efficiency in short-term (‘static’) employment relationships. Given the prevalence of long-term (‘dynamic’) relationships in firms, we investigate whether the impact of shocks is similarly pronounced in gift-exchange relationships where the same principal-agent pair interacts repeatedly. In dynamic relationships, shocks have a significantly less pronounced negative effect on efficiency than in static relationships. In an attempt to identify the drivers for our results we find that the combination of a repeated-game effect (current misbehavior can be punished in future periods) and a noise-canceling effect (part of the noise cancels out in the long run) is required to avoid the detrimental effects of unobservable random shocks on efficiency.