Experimental and Behavioral Economics

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Inside microeconomics is a whole experimental and methodologic area which is covered by this book

Text of Experimental and Behavioral Economics

  • EXPERIMENTAL AND

    BEHAVIORAL ECONOMICS

    i

  • ADVANCES IN APPLIED

    MICROECONOMICS

    Series Editor: Michael R. Baye

    ii

  • ADVANCES IN APPLIEDMICROECONOMICS VOLUME 13

    ADVANCES IN APPLIEDMICROECONOMICS

    EDITED BY

    JOHN MORGANUniversity of California, Berkeley, USA

    2005

    Amsterdam Boston Heidelberg London New York Oxford

    Paris San Diego San Francisco Singapore Sydney Tokyo

    iii

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    iv

  • CONTENTS

    LIST OF CONTRIBUTORS vii

    PREFACE ix

    GAIN AND LOSS ULTIMATUMSNancy Buchan, Rachel Croson, Eric Johnson andGeorge Wu 1

    BEHAVIORAL ASPECTS OF LEARNING IN SOCIALNETWORKS: AN EXPERIMENTAL STUDY

    Syngjoo Choi, Douglas Gale and Shachar Kariv 25

    COMMUNICATION AND EFFICIENCY INCOORDINATION GAME EXPERIMENTS

    Anthony Burton, Graham Loomes and Martin Sefton 63

    TRUST BUT VERIFY: MONITORING ININTERDEPENDENT RELATIONSHIPS

    Maurice E. Schweitzer and Teck H. Ho 87

    DO LIBERALS PLAY NICE? THE EFFECTS OF PARTYAND POLITICAL IDEOLOGY IN PUBLIC GOODSAND TRUST GAMES

    Lisa R. Anderson, Jennifer M. Mellor and Jeffrey Milyo 107

    AN ECONOMICS WIND TUNNEL: THE SCIENCE OFBUSINESS ENGINEERING

    Kay-Yut Chen 133

    EXPERIMENTS ON AUCTION VALUATION ANDENDOGENOUS ENTRY

    Richard Engelbrecht-Wiggans and Elena Katok 169

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  • LIST OF CONTRIBUTORS

    Lisa R. Anderson Department of Economics, College of Williamand Mary, Williamsburg, VA, USA

    Nancy Buchan School of Business, University of Wisconsin,Madison, WI, USA

    Anthony Burton Department of Health, Richmond House,London, UK

    Kay-Yut Chen Decision Technology Department, HewlettPackard Laboratories, Palo Alto, CA, USA

    Syngjoo Choi Department of Economics, New YorkUniversity, New York, NY, USA

    Rachel Croson Wharton School of Business, University ofPennsylvania, Philadelphia, PA, USA

    RichardEngelbrecht-Wiggans

    College of Business, University of Illinois,Champaign, IL, USA

    Douglas Gale Department of Economics, New YorkUniversity, New York, NY, USA

    Teck H. Ho Haas School of Business, University ofCalifornia at Berkeley, Berkeley, CA, USA

    Eric Johnson Columbia Business School, ColumbiaUniversity, New York, NY, USA

    Shachar Kariv Department of Economics, University ofCalifornia at Berkeley, Berkeley, CA, USA

    Elena Katok Smeal College of Business, Penn StateUniversity, University Park, PA, USA

    Graham Loomes School of Economics and Social Studies,University of East Anglia, Norwich, UK

    vii

  • Jennifer M. Mellor Department of Economics, College of Williamand Mary, Williamsburg, VA, USA

    Jeffrey Milyo Department of Economics and TrumanSchool of Public Affairs, University ofMissouri, Columbia, MO, USA

    Maurice E.Schweitzer

    Wharton School, University of Pennsylvania,Philadelphia, PA, USA

    Martin Sefton School of Economics, University ofNottingham, Nottingham, UK

    George Wu Graduate School of Business, University ofChicago, Chicago, IL, USA

    LIST OF CONTRIBUTORSviii

  • PREFACE

    As the demand to substantiate predictions from economic theory with

    causal empirical evidence increases, economists have begun relying on

    controlled laboratory experiments. As this field has blossomed, it has

    provided evidence confirming some of the key predictions of economic

    theory, exposing some of the weaker theoretical predictions, and high-

    lighting the importance of non-pecuniary incentives such as trust and

    reciprocity in economic decision-making. This has resulted in a symbiotic

    relationship where experimental evidence is not only used to support

    theoretical conclusions but has pointed economists into bold and exciting

    new areas of investigation. In this volume I am pleased to present some of

    the most recent stimulating work in this field.

    The first three chapters provide a fresh look at some of the classical issues

    in experimental economics. These papers provide novel insights into

    psychology in ultimatum games, the impact of social interaction on

    learning, and communication in coordination games. The next two chapters

    look at how experiments can illuminate our understanding of what

    determines trust. These papers examine how the monitoring within an

    organization influences trust as well as examining how individual political

    ideologies are related to an individuals level of trust. The final two chapters

    show how experiments can be fruitfully applied to vertical relationships and

    auction design, two of the most important areas in contemporary contract

    theory.

    I am especially proud of the diversity and excellence of all of the

    contributions to this volume. These authors come from a variety of

    disciplinary backgrounds from some of the worlds leading academic

    institutions. I feel that this volume is an exceptional example of the returns

    to cross-disciplinary interaction and I am very proud of what these authors

    have accomplished.

    I am also very grateful to Elsevier Press and especially Valerie Teng for

    providing a visible and important forum for disseminating these new and

    important findings.

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  • GAIN AND LOSS ULTIMATUMS

    Nancy Buchan, Rachel Croson, Eric Johnson and

    George Wu

    ABSTRACT

    This chapter investigates the difference between ultimatum games over

    gains and over losses. Although previous research in decision making has

    found that individuals treat losses and gains differently, losses have not

    previously been investigated in strategic situations. In the eld, however,

    the problem of negotiating over losses is as unavoidable and problematic

    as the problem of negotiating over gains. In addition, data on how we

    bargain over losses can shed some theoretical light on fairness preferenc-

    es. Two experiments use within-subject designs, the rst in the U.S. and

    the second in the U.S., China and Japan. We nd that offers and demands

    are higher in losses than in gains, and that these results hold across the

    three countries. We adapt Boltons (1991) model of fairness to explain

    the results. S