Reference Points and Effort Provision

By Johannes Abeler, Armin Falk, Lorenz Goette, and David Huffman

American Economic Review, April 2011

A key open question for theories of reference-dependent preferences is: what determines the reference point? One candidate is expectations: what people expect could affect how they feel about what actually occurs. In a real-effort experiment, we manipulat...

Contracts as Reference Points—Experimental Evidence

By Ernst Fehr, Oliver Hart, and Christian Zehnder

American Economic Review, April 2011

Hart and John Moore (2008) introduce new behavioral assumptions that can explain long-term contracts and the employment relation. We examine experimentally their idea that contracts serve as reference points. The evidence confirms the prediction that ther...

The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition

By Uwe Dulleck, Rudolf Kerschbamer, and Matthias Sutter

American Economic Review, April 2011

Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market breakdown. We study in a large experiment with 936 participants the determin...

Performance Pay and Multidimensional Sorting: Productivity, Preferences, and Gender

By Thomas Dohmen and Armin Falk

American Economic Review, April 2011

This paper studies the impact of incentives on worker self-selection in a controlled laboratory experiment. Subjects face the choice between a fixed and a variable payment scheme. Depending on the treatment, the variable payment is a piece rate, a tourna...

Are Risk Preferences Stable across Contexts? Evidence from Insurance Data

By Levon Barseghyan, Jeffrey Prince, and Joshua C. Teitelbaum

American Economic Review, April 2011

Using a unique dataset, we test whether households' deductible choices in auto and home insurance reflect stable risk preferences. Our test relies on a structural model that assumes households are objective expected utility maximizers and claims are gener...

Collaborating

By Alessandro Bonatti and Johannes Hörner

American Economic Review, April 2011

This paper examines moral hazard in teams over time. Agents are collectively engaged in a project whose duration and outcome are uncertain, and their individual efforts are unobserved. Free-riding leads not only to a reduction in effort, but also to procr...

Heterogeneity in Risky Choice Behavior in a Broad Population

By Hans-Martin von Gaudecker, Arthur van Soest, and Erik Wengström

American Economic Review, April 2011

We analyze risk preferences using an experiment with real incentives in a representative sample of 1,422 Dutch respondents. Our econometric model incorporates four structural parameters that vary with observed and unobserved characteristics: utility curva...

The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation

By Mohammed Abdellaoui, Aurélien Baillon, Laetitia Placido, and Peter P. Wakker

American Economic Review, April 2011

We often deal with uncertain events for which no probabilities are known. Several normative models have been proposed. Descriptive studies have usually been qualitative, or they estimated ambiguity aversion through one single number. This paper introduces...

Procedural Analysis of Choice Rules with Applications to Bounded Rationality

By Yuval Salant

American Economic Review, April 2011

I study how limited abilities to process information affect choice behavior. I model the decision-making process by an automaton, and measure the complexity of a specific choice rule by the minimal number of states an automaton implementing the rule uses...

The Bidder's Curse

By Ulrike Malmendier and Young Han Lee

American Economic Review, April 2011

We employ a novel approach to identify overbidding in auctions. We compare online auction prices to fixed prices for the same item on the same webpage. In detailed data on auctions of a board game, 42 percent of auctions exceed the simultaneous fixed pric...

Falsifiability

By Wojciech Olszewski and Alvaro Sandroni

American Economic Review, April 2011

We examine Popper's falsifiability within an economic model in which a tester hires a potential expert to produce a theory. Payments are contingent on the performance of the theory vis-à-vis data. We show that if experts are strategic, falsifiabili...

Deferred Compensation in Multiperiod Labor Contracts: An Experimental Test of Lazear's Model

By Steffen Huck, Andrew J. Seltzer, and Brian Wallace

American Economic Review, April 2011

This paper provides the first experimental test of Edward Lazear's (1979) model of deferred compensation. We examine the relationship between firms' wage offers and workers' effort supply in a multi-period environment. If firms can ex ante commit to a wa...

Sales and Monetary Policy

By Bernardo Guimaraes and Kevin D. Sheedy

American Economic Review, April 2011

A striking fact about pricing is the prevalence of "sales": large temporary price cuts followed by prices returning to exactly their former levels. This paper builds a macroeconomic model with a rationale for sales based on firms facing customers with dif...

The Cyclical Behavior of Debt and Equity Finance

By Francisco Covas and Wouter J. Den Haan

American Economic Review, April 2011

Debt and equity issuance are procyclical for most size-sorted firm categories of listed US firms and the procyclicality of equity issuance decreases monotonically with firm size. At the aggregate level, however, the results for equity issuance are not con...

Search Dynamics in Consumer Choice under Time Pressure: An Eye-Tracking Study

By Elena Reutskaja, Rosemarie Nagel, Colin F. Camerer, and Antonio Rangel

American Economic Review, April 2011

We study decisions that involve choosing between different numbers of options under time pressure using eye-tracking to monitor the search process of the subjects. We find that subjects are quite adept at optimizing within the set of items that they see, ...

Coordination in the Presence of Asset Markets

By Shimon Kogan, Anthony M. Kwasnica, and Roberto A. Weber

American Economic Review, April 2011

We explore the relationship between outcomes in a coordination game and a pre-play asset market where asset values are determined by outcomes in the subsequent coordination game. Across two experiments, we vary the payoffs from the market relative to the ...

Real-Time Search in the Laboratory and the Market

By Meta Brown, Christopher J. Flinn, and Andrew Schotter

American Economic Review, April 2011

While widely accepted labor market search models imply a constant reservation wage policy, empirical evidence strongly suggests that reservation wages decline in search duration. This paper reports the results of the first real-time-search laboratory expe...

Checkmate: Exploring Backward Induction among Chess Players

By Steven D. Levitt, John A. List, and Sally E. Sadoff

American Economic Review, April 2011

Although backward induction is a cornerstone of game theory, most laboratory experiments have found that agents are not able to successfully backward induct. We analyze the play of world-class chess players in the centipede game, which is ill-suited for t...

The Willingness to Pay—Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Comment

By Andrea Isoni, Graham Loomes, and Robert Sugden

American Economic Review, April 2011

Plott and Zeiler (2005) report that the willingness-to-pay/willingness-to-accept disparity is absent for mugs in a particular experimental setting, designed to neutralize misconceptions about the procedures used to elicit valuations. This result has recei...

The Willingness to Pay—Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Reply

By Charles R. Plott and Kathryn Zeiler

American Economic Review, April 2011

Isoni, Loomes, and Sugden (2011) assert that Plott and Zeiler (2005) reported inaccurate results. Placing ILS's selective quotes into context demonstrates otherwise. Additionally, examining the data closely yields three conclusions. First, all mug data re...