The role of financial information, social capital and reputation in lender decisions

Abstract

This Thesis contains three essays on the economic behavior of individuals. The first essay, co-authored with Andreas Blume and Douglas DeJong is an experimental investigation into the contribution of cognition in a strategic setting where the goal is to coordinate by choosing different courses of action. Specifically, we study whether cognitive limits affect the ability of agents to achieve dispersion outcomes and; further, how these limits affect the means by which dispersion outcomes are attained. We find that in the self-play treatment when agents are allowed to play against themselves, dispersion outcomes are relatively easy to obtain; however, when paired with others, cognitive differences increase the difficulty in achieving a dispersion outcome. When we relax the cognitive constraints, the ability of participants to achieve dispersion outcomes increases to approximately the same level as those in the self-play treatment; further, the means by which dispersion outcomes are achieved does not differ from those in the self-play treatment. In the second essay I investigate how noise impacts incentives provided by contracts that are structured with option-style payoffs. Existing theory suggest that one cannot commit to not renegotiate based on the receipt of a non-contractible signal; however, others suggest that in the presence of a noise in the non-contractible signal may not result in partners wanting to renegotiate since the initial contract may still provide incentives for subsequent periods. Using an experimental economics approach I find that players who receive a perfect non-contractible signal do not put forth high effort in a subsequent period; however, the presence of noise in the signal may result in players continuing to put forth high effort in a subsequent period. A behavioral explanation is provided for these observations.