This study reports experiments that examine outcomes when agents choose between a payment scheme that rewards based on absolute performance (i.e., piece rate) and a scheme that rewards based on relative performance (i.e., a tournament). Holding total payments in the tournament constant, performance is higher when the tournament option is winner-take-all compared to a graduated tournament (i.e., second and third-place performers also receive a payment). Performance is higher in the winner-take all tournaments even among participants that choose the piece-rate option. While there is a modest amount of overcrowding, there are no significant differences in overcrowding across conditions. Entry rates into the tournament and the relative ability of tournament entrants (compared to non-entrants in the same condition) are higher in the graduated tournament condition than the winner-take-all conditions. Consequently, the winner-take-all tournament is more efficient than the graduated tournament (incentive effects are stronger and the overcrowding is about the same), but the graduated tournament provides a more effective mechanism to identify the most capable performer in a talent pool.

Experimental methods are currently being extensively used to elicit subjective values for commodities and projects. Three methodological problems are not systematically addressed in this emerging literature. The first is the potential for laboratory responses to be censored by field opportunities, so that lab responses can be confounded by uncontrolled knowledge of the field; the second is the potential for subjective perceptions about field opportunities, and hence valuation responses, to be affected by the institution used to elicit values; and the third is the potential for some elicitation institutions to influence subjective perceptions of characteristics of the commodity or project being valued, and hence change the very commodity being valued. All three problems result in potential loss of control over the value elicitation process. For example, we show that censoring affects conclusions drawn in a major study of beef packaging valuation. We derive implications for experimental designs that minimize the potential effect of these methodological problems.

Public reputation mechanisms are an effective means to limit opportunistic behavior in markets suffering from moral hazard problems. While previous research was mostly concerned with the influence of exogenous feedback mechanisms, this study considers the endogenous emergence of reputation through deliberate information sharing among actors and the role of barriers in hindering information exchange. Using a repeated investment game, we analyze the effects of competition and transfer costs on players’ willingness to share information with each other. While transfer costs are a direct cost of the information exchange, competition costs represent an indirect cost that arises when the transfer of valuable information to competitors comes at the loss of a competitive advantage. We show that barriers to information exchange not only affect the behavior of the senders of information, but also affect the ones about whom the information is shared. While the possibility of sharing information about others significantly improves trust and market efficiency, both competition and direct transfer costs diminish the positive effect by substantially reducing the level of information exchange. Players about whom the information is shared anticipate and react to the changes in the costs by behaving more or less cooperatively. For reputation building, an environment is needed that fosters the sharing of information. Reciprocity is key to understanding information exchange. Even when it is costly, information sharing is used as a way to sanction others.

The lack of a behavioral isomorphism between theoretically equivalent auction institutions is a robust finding in experimental economics. Using a near-continuous time environment and graphically adjustable bid functions, we are able to provide subjects with extensive feedback in multiple auction formats. We find that (1) First Price and Dutch Clock auctions are behaviorally isomorphic and (2) Second Price and English Clock auctions are behaviorally isomorphic. We further replicate the established result (1) that prices in Dutch Clock auctions exceed those of English Clock auctions and (2) that prices in First Price auctions exceed those of Second Price auctions. The latter pattern is often attributed to risk aversion which changes the equilibrium bidding strategy for First Price and Dutch Clock auctions. Because we observe each participant’s bid function directly, we find evidence suggesting a different explanation, namely that bidders are best responding to the distribution of observed prices.

We use data from experiments on finitely repeated dilemma games with fixed matching to investigate the effect of different types of information on cooperation. The data come from 71 studies using the voluntary contributions paradigm, covering 122 data points, and from 18 studies on decision-making in oligopoly, covering another 50 data points. We find similar effects in the two sets of experimental games. We find that transparency about what everyone in a group earns reduces contributions to the public good, as well as the degree of collusion in oligopoly markets. In contrast, transparency about choices tends to lead to an increase in contributions and collusion, although the size of this effect varies somewhat between the two settings. Our results are potentially useful for policy making, because they provide guidance on the type of information to target in order to stimulate or limit cooperation.

Three experiments are designed to test if the level of irrelevant prizes in the menu has a positive (assimilation) or negative (contrast) effect on the perceived valuation of target objects. Familiar field prizes and binary lotteries over such prizes are placed within “more-expensive” and “less-expensive” menus. Subjects fill-in a sequence of binary choice problems to reveal their preference between given cash and a designated prize from the menu. Between-subject comparisons reveal that the prize-level in the menu positively affects perceived valuations in spite of procedural attempts to rule out menu-dependent preferences and prohibit experimenter bias. The effect also shows within-subject in auction experiments: the price that subjects are willing to pay for given monetary lotteries significantly increases with the average payoff in the irrelevant-menu. The bias finally manifests even when subjects are led to choose the target lottery, independently, from the underlying menu.

We analyze a bargaining protocol recently proposed in the literature vis-à-vis unconstrained negotiation. This new mechanism extracts “gains from trade” inherent in the differing valuation of two parties towards various issues where conflict exists. We assess the role of incomplete vs. complete information in the efficiency achieved by this new mechanism and by unconstrained negotiation. We find that unconstrained negotiation does best under a situation of complete information where the valuations of both bargaining parties are common knowledge. Instead, the newly proposed mechanism does best in a situation with incomplete information. The sources of inefficiencies in each of the two cases arise from the different strategic use of the available information.

Coordination problems are ubiquitous in social and economic life. Political mass demonstrations, the decision whether to join a speculative currency attack, investment in a risky venture, and capital flight from a particular country are all characterized by coordination problems. Furthermore, all these events have a dynamic nature which has been largely omitted from previous experimental studies. Here I use a two-stage variant of a dynamic global game to study experimentally how the arrival of information in a dynamic setting affects the relative aggressiveness of speculators. In the first stage, subjects exhibit excess aggressiveness, which appears to be driven by beliefs about others’ actions rather than an intrinsic taste for attacking. However, following a failed first-stage attack, subjects learn to be less aggressive in the second stage. On the other hand, the arrival of new, more precise information after a failed attack leads to an increase in subjects’ aggressiveness. Beliefs, again, play a crucial role in explaining how the arrival of information affects attacking behavior.

We investigate the Baron-Ferejohn (The American Political Science Review 83(4): 1181–1206, 1989) model of legislative bargaining with cheap talk between the designated proposer and potential coalition partners. Communication results in substantially increased proposer power close to the stationary subgame perfect equilibrium prediction. This is achieved primarily through voters competing with each other to get the proposer to include them in the winning coalition, while arguing for a zero allocation for redundant voters. Voters typically follow through on their stated reservation shares, but proposers often fail to partner with voters making excessively low offers, as these are more likely to be reneged on.

Decision making can be a complex process requiring the integration of several attributes of choice options. Understanding the neural processes underlying (uncertain) investment decisions is an important topic in neuroeconomics. We analyzed functional magnetic resonance imaging (fMRI) data from an investment decision study for stimulus-related effects. We propose a new technique for identifying activated brain regions: cluster, estimation, activation, and decision method. Our analysis is focused on clusters of voxels rather than voxel units. Thus, we achieve a higher signal-to-noise ratio within the unit tested and a smaller number of hypothesis tests compared with the often used General Linear Model (GLM). We propose to first conduct the brain parcellation by applying spatially constrained spectral clustering. The information within each cluster can then be extracted by the flexible dynamic semiparametric factor model (DSFM) dimension reduction technique and finally be tested for differences in activation between conditions. This sequence of Cluster, Estimation, Activation, and Decision admits a model-free analysis of the local fMRI signal. Applying a GLM on the DSFM-based time series resulted in a significant correlation between the risk of choice options and changes in fMRI signal in the anterior insula and dorsomedial prefrontal cortex. Additionally, individual differences in decision-related reactions within the DSFM time series predicted individual differences in risk attitudes as modeled with the framework of the mean-variance model.

As internet penetration rapidly expanded throughout the world, press freedom and government accountability improved in some countries but backslid in others. We propose a formal model that provides a mechanism that explains the observed divergent paths of countries. We argue that increased access to social media makes partial capture, where governments allow limited freedom of the press, an untenable strategy. By amplifying the influence of small traditional media outlets, higher internet access increases both the costs of capture and the risk that a critical mass of citizens will become informed and overturn the incumbent. Depending on the incentives to retain office, greater internet access thus either forces an incumbent to extend capture to small outlets, further undermining press freedom; or relieve pressure from others. We relate our findings to the cases of Turkey and Tunisia.

This paper revisits and fine-tunes a spin-off from Knight's (1921, Risk, Uncertainty and Profit) influential distinction between risk (‘probability of unknown events’) and uncertainty (‘unquantifiable randomness’): the contrast between actuarial institutions and entrepreneurship. It contends that this opposition is not exclusive and argues that the act of insurance does not automatically reduce entrepreneurial profits. To maintain this claim, the paper emphasizes hedging and, more specifically, draws on an innovative actuarial scheme – parametric (or index-based) insurance – which, unlike indemnity-based insurance, does not rely on a damage assessment but indemnifies the policyholder according to the variation of an index. This argument sheds new light on the function habitually assigned to actuarial institutions, amends the theory of entrepreneurial profits, and integrates hedging within entrepreneurial judgment.

The class of distortion riskmetrics is defined through signed Choquet integrals, and it includes many classic risk measures, deviation measures, and other functionals in the literature of finance and actuarial science. We obtain characterization, finiteness, convexity, and continuity results on general model spaces, extending various results in the existing literature on distortion risk measures and signed Choquet integrals. This paper offers a comprehensive toolkit of theoretical results on distortion riskmetrics which are ready for use in applications.

In 2014, the National Highway Traffic Safety Administration finalized its rear visibility regulation, which requires cameras in all new vehicles, with the goal of allowing drivers to see what is behind them and thus reducing backover accidents. In 2018, the Trump administration embraced the regulation. The rear visibility rule raises numerous puzzles. First, Congress’ grant of authority was essentially standardless – perhaps the most open-ended in all of federal regulatory law. Second, it is not easy to identify a market failure to justify the regulation. Third, the monetized costs of the regulation greatly exceeded the monetized benefits, and yet on welfare grounds, the regulation can plausibly be counted as a significant success. Rearview cameras produce a set of benefits that are hard to quantify, including increased ease of driving, and those benefits might have been made a part of “breakeven analysis,” accompanying standard cost-benefit analysis. In addition, rearview cameras significantly improve the experience of driving, and it is plausible to think that in deciding whether to demand them, many vehicle purchasers did not sufficiently anticipate that improvement. This is a problem of limited foresight; rearview cameras are “experience goods.” A survey conducted in 2019 strongly supports this proposition, finding that about 56 % of consumers would demand at least $300 to buy a car without a rearview camera, and that fewer than 6 % would demand $50 or less. Almost all of that 6 % consists of people who do not own a car with a rearview camera. (The per-person cost is usually under $50.) These conclusions have general implications for other domains in which regulation has the potential to improve social welfare, even if it fails standard cost-benefit analysis; the defining category involves situations in which people lack experience with a good whose provision might have highly beneficial welfare effects.

Whereas many others have scrutinized the Allais paradox from a theoretical angle, we study the paradox from an historical perspective and link our findings to a suggestion as to how decision theory could make use of it today. We emphasize that Allais proposed the paradox as a normative argument, concerned with ‘the rational man’ and not the ‘real man’, to use his words. Moreover, and more subtly, we argue that Allais had an unusual sense of the normative, being concerned not so much with the rationality of choices as with the rationality of the agent as a person. These two claims are buttressed by a detailed investigation – the first of its kind – of the 1952 Paris conference on risk, which set the context for the invention of the paradox, and a detailed reconstruction – also the first of its kind – of Allais’s specific normative argument from his numerous but allusive writings. The paper contrasts these interpretations of what the paradox historically represented, with how it generally came to function within decision theory from the late 1970s onwards: that is, as an empirical refutation of the expected utility hypothesis, and more specifically of the condition of von Neumann–Morgenstern independence that underlies that hypothesis. While not denying that this use of the paradox was fruitful in many ways, we propose another use that turns out also to be compatible with an experimental perspective. Following Allais’s hints on ‘the experimental definition of rationality’, this new use consists in letting the experiment itself speak of the rationality or otherwise of the subjects. In the 1970s, a short sequence of papers inspired by Allais implemented original ways of eliciting the reasons guiding the subjects’ choices, and claimed to be able to draw relevant normative consequences from this information. We end by reviewing this forgotten experimental avenue not simply historically, but with a view to recommending it for possible use by decision theorists today.

Recently a number of multi-country insurance schemes have been introduced to deal with short-term fiscal liquidity gaps after natural disasters. However, little is known about the actual underlying risk to the fiscal sector just after such events. In this paper, we estimate the risk of fiscal shortages due to tropical storms in the Caribbean. To this end, first we use a panel VAR and estimate that while government expenditure does not respond to damages due to tropical storms, there is a significant contemporaneous effect on fiscal revenue. The results also reveal that different components of expenditure and revenue respond differently to hurricane shocks. Then, employing a parametric bulk extreme value model on estimated losses due to historical events, we show that the fiscal shortage due to storms can potentially be sizeable depending on the rarity of the event, but varies considerably across islands. However, any risk assessment is fraught with considerable uncertainty, particularly for rare but potentially very damaging tropical storm strikes.

We conduct two randomized control trials designed to understand the role of information and priming on the willingness to retrench the pension system. The first entails a survey to a sample of Portuguese voters, who are randomly presented with a text providing factual information about the public pension system. The second surveys a sample of Portuguese University students, randomly presented with an alternative order of questions. We show that more literacy on the pension system has a positive impact on the individual willingness to support reforms. Given that public opinion is usually seen as an important deterrent of effective action by politicians and that the level of voters’ literacy can be influenced by policy action, this analysis may provide useful insights to policy makers faced with the challenge of reforming existent pension systems. Our analysis also suggests that priming effects should not be ignored, given their impact in individuals in the extremes of the political spectrum.

We propose a model in which financial sophistication improves portfolio returns and therefore the incentive to substitute consumption intertemporally. The model delivers an Euler equation in which consumption growth is positively correlated with financial sophistication. We test the model's prediction using panel data on consumption and financial sophistication drawn from the Italian Survey of Household Income and Wealth. We find that consumption growth is positively correlated with financial sophistication, as predicted by the model. We also provide estimates of the intertemporal elasticity of substitution in the range between 0.4 and 0.6.

We attempt to value health risks by combining traditional demand impact analysis with direct elicitation of individuals' risk perceptions of food safety. We examine the impact of multiple risks of related goods on consumption of a risky good. We argue that the consumption of a risky good depends on both its absolute risk level and its relative risks to other risky goods. Seafood consumption in eastern North Carolina was studied. We elicited, in a survey, individual perceived risks as reference points to derive the economic value of reducing health risk in seafood consumption. Revealed and stated data were combined to trace out demand changes in response to absolute and relative risk reductions. Our results show that seafood consumption is affected by the perceived absolute risk and by the relative risk to poultry and that individuals react to the multiple risks in a nonlinear way, as was suggested by our analytical model.

This paper explores the effect farmer perceptions concerning how best management practice (BMP) adoption changes the profit distribution have on BMP adoption incentives and the potential for insurance to increase these incentives. Adoption indifference curves illustrate the effect of farmer perceptions on BMP adoption incentives and the potential for insurance to expand the set of perceptions consistent with adoption. Empirical analysis quantifies these conceptual results for nutrient BMP insurance, a new policy available to corn farmers as part of a USDA-Risk Management Agency pilot program in four states. Results indicate that nutrient BMP insurance can have economically relevant effects on farmer adoption incentives.