Economic Laboratory Experiments Research Articles

Cognitive-Based Design Principles in Experimental Economics: How to Devise More Effective Instructions, Software, and Comprehension Tests

Economic laboratory experiments are often used for testing real-world economic mechanisms, such as multi-item auctions and multi-contract cost sharing. Ensuring that participants understand these increasingly complex tasks is crucial in order to maintain control, the reproducibility, and the internal validity of the experiments. Traditionally, experimental economists communicate tasks through written instructions. Learning from instructions by reading, understanding, and memorizing involves advanced cognitive processes. However, economists have as yet not fully integrated the findings of cognitive research into their instruction and experiment design. A large body of previous work has shown that cognitive-based designs substantially increase the effectiveness of learning. This paper seeks to leverage the findings of cognitive research for the design of economic laboratory experiments. In an interdisciplinary approach, it reviews and transfers results between the two fields. It discusses the practical limitations of traditional methods of experimental economics; provides an overview of the related cognitive research; and presents concrete guidelines for devising cognitive-based instructions, software, and comprehension tests for reproducible economic laboratory experiments.

Heart rate variability indicates emotional value during pro-social economic laboratory decisions with large external validity

The present study investigates the external validity of emotional value measured in economic laboratory experiments by using a physiological indicator of stress, heart rate variability (HRV). While there is ample evidence supporting the external validity of economic experiments, there is little evidence comparing the magnitude of internal levels of emotional stress during decision making with external stress. The current study addresses this gap by comparing the magnitudes of decision stress experienced in the laboratory with the stress from outside the laboratory. To quantify a large change in HRV, measures observed in the laboratory during decision-making are compared to the difference between HRV during a university exam and other mental activity for the same individuals in and outside of the laboratory. The results outside the laboratory inform about the relevance of laboratory findings in terms of their relative magnitude. Results show that psychologically induced HRV changes observed in the laboratory, particularly in connection with social preferences, correspond to large effects outside. This underscores the external validity of laboratory findings and shows the magnitude of emotional value connected to pro-social economic decisions in the laboratory.

Nudgitize Me! A Behavioral Finance Approach to Minimize Losses and Maximize Profits from Heuristics and Biases

Behavioral Finance is one of the most novel developments in Behavioral Economics. Since the end of the 1970ies a wide range of psychological, economic and sociological laboratory and field experiments proved human beings deviating from rational choices and standard neo-classical profit maximization axioms that fail to explain how human actually behave. Human beings were rather found to use heuristics in the day-to-day decision making. These mental short cuts enable to cope with information overload in a complex world. Behavioral economists proposed to nudge and wink citizens to make better choices for them with many different applications in very many different domains. This paper reviews and proposes how to use mental heuristics, biases and nudges in the finance domain to profit from markets.

Mechanism Designers in Alliance: A Portrayal of a Scholarly Network in Support of Experimental Economics

This article takes one of the necessary, albeit rudimentary, steps toward coming to grips with the legitimation of laboratory experimentation in economics. To be specific, it aims to identify a subset of the nonexperimentalists in the economics profession who explicitly endorsed, between the early 1980s and the early 1990s, the legitimacy and the social usefulness of Vernon Smith's and Charles Plott's laboratory studies. By exploring several dimensions of the network established among Smith, Plott, and some well-known mechanism design theorists, this article demonstrates the following. First, close professional ties had been established among the protagonists discussed herein by the early 1980s. Second, in the 1970s and the 1980s, some mechanism design theorists felt the need to take Smith's and Plott's laboratory experiments seriously, and they indeed heeded the implications of Smith's and Plott's laboratory studies upon mechanism design. Third, the protagonists not only had keen interests in mechanism design, but shared the same conceptual scheme. Fourth, in the late 1970s and the 1980s, Smith and Plott believed that their laboratory studies were a useful complement to mechanism design theorists' mathematical endeavors, on the one hand; on the other, in the mid-1980s, the mechanism design theorists explicitly endorsed the complementarity of the two distinct scholarly activities and the legitimacy of Smith's and Plott's laboratory experimentation.

Log, Stock and Two Simple Lotteries

This work studies the problem of decision-making under risk by agents whose information processing abilities may be limited. The constructed theoretical framework grounds on findings from economic laboratory experiments, incorporates existing neuroscience knowledge, and is implemented using information-theoretic formalism. Activation of the above information-processing constraints distorts the subjective perception of the objective stochastic environment the agent operates in, and the constrained-optimal decision-making requires appropriate adjustments. In the selected application, a general equilibrium macro-finance model, such biases of subjective perspective as overconfidence, pessimism and categorization thus emerge endogenously. The theoretical implications receive empirical support in a mutually consistent way: according to (cross-checked) calibrations, they allow us to reverse-engineer and rationalize the phenomena known as the equity premium/risk-free rate puzzles; as well as contribute to the understanding of such regularities as the portfolio underdiversification puzzle, style investing and the non-monotone pricing kernel puzzle. On the other hand, these results also help rationalize, by formulating certain optimizing foundations behind, the experimental evidence that underlies the Allais paradox and that is systematized in, e.g., the (cumulative) prospect theory.

Wholesale Competition, Open Access Regulation and Tacit Collusion

Although the regulation of access to an essential upstream resource is a perennial issue for policymakers and industry stakeholders, a set of new issues arises when there is more than one vertically integrated access provider such that competition at the wholesale level may emerge in addition to retail competition. Especially in the likely case of a highly concentrated (duopoly) wholesale market the question arises whether regulatory intervention is (still) warranted. Evidently, the answer to this question will have direct ramifications on how regulators and competition authorities should deal with this kind of market structure, but also on whether authorities should promote the entry of a second integrated access provider in markets in which the essential input is currently supplied monopolistically.Albeit not confined to this context, the analysis of this market scenario of competing access providers is particularly relevant for the telecommunications industry. Due to technological progress and consolidation both the fixed and the mobile industries are characterized by few vertically integrated firms, as well as several non-integrated resellers that rely on access to an upstream resource. On the one hand, with respect to fixed networks, technological progress led to the roll out of new fiber-optic networks as well as the evolution of broadband cable networks, which both created new vertically integrated firms that compete most notably in densely populated urban areas with the traditional telecommunications incumbent. On the other hand, mobile telecommunications markets recently experienced a wave of mergers and acquisitions that reduced the number of independent operators maintaining a distinct cellular infrastructure, thus increasing market concentration at the wholesale level. We consider the market scenario where wholesale access for a non-integrated reseller is provided competitively by two vertically integrated firms. In a continuous-time economic laboratory experiment with both student and expert participants we compare market outcomes under different modes of wholesale competition as well as under an open access regulation preventing a margin squeeze. In this vein and in the spirit of a more behaviorally oriented regulation, this experimental analysis serves as a regulatory testbed, which points at possible behavioral issues that may arise in practice. We find that wholesale competition can facilitate tacit collusion, which yields wholesale and retail prices even above the monopoly level. We draw on the literature on upstream collusion and show in a theoretical analysis that incentives for tacit collusion are actually higher under wholesale competition if an infinitely repeated game context is considered. We demonstrate that wholesale competition may be intensified by a simple price commitment rule, which in turn restores the theoretical prediction to the extent that access prices are lower than under a wholesale monopoly. Moreover, the experimental results give a clear indication regarding the theoretically ambiguous effect of margin squeeze regulation on retail market prices, showing that consumers are never better off compared to no regulation in both the monopoly and the duopoly wholesale scenario.

Prudence and prevention: an economic laboratory experiment

ABSTRACTIn an economic laboratory experiment, we study the relationship between prudence and prevention in general decision situations. Previous theoretical research on this relationship posits a negative impact of prudence on the optimal level of prevention. Overall, we find both risk-averse and prudent behaviour among our subjects. Moreover, prudent subjects chose significantly less prevention than nonprudent subjects, confirming the theoretical results of one-period models in the literature. Our findings might have implications for health policy if prudence – rather than irrational decision behaviour, as previously assumed – is responsible for low levels of preventive effort.

Evaluating replicability of laboratory experiments in economics

The replicability of some scientific findings has recently been called into question. To contribute data about replicability in economics, we replicated 18 studies published in the American Economic Review and the Quarterly Journal of Economics between 2011 and 2014. All of these replications followed predefined analysis plans that were made publicly available beforehand, and they all have a statistical power of at least 90% to detect the original effect size at the 5% significance level. We found a significant effect in the same direction as in the original study for 11 replications (61%); on average, the replicated effect size is 66% of the original. The replicability rate varies between 67% and 78% for four additional replicability indicators, including a prediction market measure of peer beliefs.

Wholesale Competition and Open Access Regimes: Experimental Evidence

We consider the market scenario where wholesale access for a non-integrated reseller is provided competitively by two vertically integrated firms. In a continuous-time economic laboratory experiment with both student and expert participants we compare market outcomes under different modes of wholesale competition as well as under an open access regulation preventing a margin squeeze. We find that wholesale competition can facilitate tacit collusion, which yields wholesale and retail prices even above the monopoly level. However, we show that a simple price commitment rule can substantially reduce tacit collusion. Moreover, we do not find evidence that margin squeeze regulation benefits consumers.

Subject pool recruitment procedures: organizing experiments with ORSEE

This paper discusses aspects of recruiting subjects for economic laboratory experiments, and shows how the Online Recruitment System for Economic Experiments can help. The software package provides experimenters with a free, convenient, and very powerful tool to organize their experiments and sessions.

Incentivizing cost-effective reductions in hospital readmission rates

The recent regulatory changes enacted by the Centers for Medicare and Medicaid Services (CMS) have identified hospital readmission rates as a critical healthcare quality metric. This research focuses on the utilization of pay-for-performance (P4P) mechanisms to cost effectively reduce hospital readmission rates and meet the regulatory standards set by CMS. Using the experimental economics laboratory we find that both of the P4P mechanisms researched, bonus and bundled payments, cost-effectively meet the performance criteria set forth by CMS. The bundled payment mechanism generates the largest reduction in patient length of stay (LOS) without altering the probability of readmission. Combined these results indicate that utilizing P4P mechanisms incentivizes cost effective reductions in hospital readmission rates.

Is equilibrium in transport pure Nash, mixed or Stochastic?

The classical theory of transport equilibrium is based on the Wardrop’s first principle that describes a Nash User Equilibrium (UE), where in no driver can unilaterally change routes to improve his/her travel times. A growing number of economic laboratory experiments aiming at testing Nash-Wardrop equilibrium have shown that the Pure Strategy Nash Equilibrium (PSNE) is not able to explain the observed strategic choices well. In addition even though Mixed Strategy Nash Equilibrium (MSNE) has been found to fit better the observed aggregate choices, it does not explain the variance in choices well. This study analyses choices made by users in three different experiments involving strategic interactions in endogenous congestion to evaluate equilibrium prediction. We compare the predictions of the PSNE, MSNE and Stochastic User Equilibrium (SUE). In SUE, the observed variations in choices are assumed to be due to perception errors. The study proposes a method to iteratively estimate SUE models on choice data with strategic interactions. Among the three sets of experimental data the SUE approach was found to accurately predict the average choices, as well as the variances in choices. The fact that the SUE model was found to accurately predict variances in choices, suggests its applicability for transport equilibrium models that attempt to evaluate reliability in transportation systems. This finding is fundamental in the effort to determining a behaviourally consistent paradigm to model equilibrium in transport networks. The study also finds that Fechner error which is the inverse of the scale parameter in the SUE model is affected by the group sizes and the complexity of the cost function. In fact, the larger group sizes and complexity of cost functions increased the variability in choices. Finally, from an experimental design standpoint we show that it is not possible to estimate a noise parameter associate to Fechner error in the case when the choices are equally probable.

Heartbeat and economic decisions: observing mental stress among proposers and responders in the ultimatum bargaining game.

The ultimatum bargaining game (UBG), a widely used method in experimental economics, clearly demonstrates that motives other than pure monetary reward play a role in human economic decision making. In this study, we explore the behaviour and physiological reactions of both responders and proposers in an ultimatum bargaining game using heart rate variability (HRV), a small and nonintrusive technology that allows observation of both sides of an interaction in a normal experimental economics laboratory environment. We find that low offers by a proposer cause signs of mental stress in both the proposer and the responder; that is, both exhibit high ratios of low to high frequency activity in the HRV spectrum.

Price Signaling and Tacit Collusion Under Multimarket Contact

We suggest a price signaling strategy that offers a microfoundation for the process leading to tacit collusion under multimarket contact, even in cases where previous theoretical explanations fail. It rests on the assumptions that firms can communicate collusive intentions solely through their price setting behavior and that such price signaling can be conducted more efficiently under multimarket contact. We are able to verify these assumptions by means of an economic laboratory experiment. Our results bear important insights for competition policy by highlighting that limiting firms' possibilities to engage in price signaling can effectively mitigate the emergence of tacit collusion.

Blinding and the Non-interference Assumption in Medical and Social Trials

This paper discusses the so-called non-interference assumption (NIA) grounding causal inference in trials in both medicine and the social sciences. It states that for each participant in the experiment, the value of the potential outcome depends only upon whether she or he gets the treatment. Drawing on methodological discussion in clinical trials and laboratory experiments in economics, I defend the necessity of partial forms of blinding as a warrant of the NIA, to control the participants’ expectations and their strategic interactions with the experimenter.

REGULATORY DEALING: TECHNOLOGY ADOPTION VERSUS ENFORCEMENT STRINGENCY OF EMISSION TAXES

We analyze the role of targeted enforcement of emissions taxes when the regulator wants to minimize aggregate emissions via the adoption of new more environmentally friendly technology. The regulator wants to speed up the path of technology adoption generated by a policy of uniform enforcement (that monitors adopters and nonadopters with the same probability) by engaging in a regulatory deal where a reduced monitoring probability is granted in “exchange” for adoption of the new technology. We set up a theoretical model, characterize the circumstances in which such dealing minimizes aggregate emissions, and test our hypothesis using economic laboratory experiments. Our analytical and experimental results suggest that even though such a deal might imply an increased level of violation by adopters, such tolerance is rather an integral part of an overall enforcement strategy that minimizes aggregate emissions when the rate of adoption is endogenous. (JEL L51, Q53, Q55, Q58)

The Impact of Tax Knowledge and Budget Spending Influence on Tax Compliance

We conduct a computerized economic laboratory experiment to infer the causal effect of two non-economic determinants on tax compliance. We find strong evidence that higher compliance in tax systems with low power of authorities can be achieved by increasing trust in authorities in form of knowledge about tax expenditures and the possibility for taxpayers to actively influence budget spending. However, in tax systems with high power of authorities we do not find any effect due to the threatening impact of high audit rates already enforcing a high level of compliance. To clearly identify the importance of these effects on tax compliance we take account of how the power of authorities is perceived by taxpayers when making decisions under risk and uncertainty in reporting tax liability. The perceived power of authorities is measured by taxpayer’s individual risk attitudes. Further, we control for taxpayer’s general attitude towards paying taxes and the overall orientation towards tax authorities via the motivational posture “tax commitment” (Braithwaite 2003). Individual risk aversion as elicited by lottery choices in a multiple price list format is correlated with tax compliance, reflecting the acknowledgement of the power of tax authorities. Opposed to this we do not find any evidence that a positive orientation towards tax authorities is positively related to compliance.

Questions of Scale in Economic Laboratory Experiments

<titre>R&#233;sum&#233;</titre>Les questions d&#8217;&#233;chelle ont donn&#233; lieu &#224; une large r&#233;flexion s&#8217;agissant de la mod&#233;lisation et de l&#8217;exp&#233;rimentation des syst&#232;mes physiques, mais elles n&#8217;ont pas &#233;t&#233; discut&#233;es dans le cadre des exp&#233;riences &#233;conomiques. Dans cet article, on distingue deux sortes d&#8217;exp&#233;riences, les exp&#233;riences &#171;&#160;g&#233;n&#233;riques&#160;&#187; et &#171;&#160;sp&#233;cifiques&#160;&#187;. D&#233;veloppant une comparaison entre deux &#233;tudes exp&#233;rimentales en laboratoire portant sur l&#8217;&#171;&#160;effet des prix post&#233;s&#160;&#187;, on montre que les questions d&#8217;&#233;chelle deviennent importantes dans les exp&#233;riences sp&#233;cifiques en raison de la r&#233;duction aux dimensions du laboratoire de l&#8217;&#233;chelle de temps propre au march&#233; cible. Cela impose des choix dans la configuration mat&#233;rielle de l&#8217;exp&#233;rience comme des changements de r&#244;le pour les sujets exp&#233;rimentaux.&#160;Notre discussion, donc, s&#8217;inscrit au sein de la litt&#233;rature r&#233;cente sur la validit&#233; externe et la mat&#233;rialit&#233; des exp&#233;riences.JEL Classification&#160;: B41, C90, L92, L98

Norms, cognitive dissonance, and cooperative behaviour in laboratory experiments

PurposeThe paper emphasises the general relevance of social norms and social associations for cooperative behaviour in less or non‐social economic contexts, focusing in particular on economic laboratory experiments, and to illustrate the underlying psychological driving forces.Design/methodology/approachThe argument focuses on the interplay between social norms, their psychological enforcement mechanism (cognitive dissonance) and context effects. Drawing on findings from both (social) psychology and experimental economics, it emphasises the relevance of social norms for cooperative behaviour also in less or non‐social environments as often created in economic laboratory experiments. Moreover, the conditions for cognitive dissonance effects to occur are summarised and the corresponding behavioural effects are both highlighted and exemplified by means of various examples including the analysis of a specific data set.FindingsThe discussion strongly suggests that the influence of common cooperative social norms is difficult to “anonymise away” in laboratory experiments or other less socially focused decision environments. Moreover, it provides a possible explanation for the occurrence of a variety of behavioural patterns often found in such settings, such as initially high but decreasing willingness to cooperate in social dilemmas.Practical implicationsEmphasising the far reach of social aspects in economic decision making, the discussion may help in the design of institutions as it illustrates a widespread source of non‐economic individual incentives.Originality/valueThe argument addresses the idiosyncrasies of individual cooperative behaviour in situations where economic incentives should hinder such behaviour. Adding to earlier arguments which explain such cooperation, for example, by reference to fairness concerns or inequity aversion, the present discussion emphasises in particular the specific psychological driving forces behind such behaviour. In doing so, it establishes a clear link to the research on cognitive dissonance in psychology.

Demand shocks, capacity coordination, and industry performance: lessons from an economic laboratory

Antitrust exemptions granted to businesses under extenuating circumstances are often justified by the argument that they benefit the public by helping producers adjust to otherwise difficult economic circumstances. Such exemptions may allow firms to coordinate their capacities, as was the case of the post-September 11, 2001, antitrust immunity granted to Aloha and Hawaiian Airlines. We conduct economic laboratory experiments to determine the effects of explicit capacity coordination on oligopoly firms' abilities to adjust to negative demand shocks and on industry prices. The results suggest that capacity coordination speeds the adjustment process, but also has a clear procollusive effect on firm behavior.