Studies in Experimental Economics
Research in Experimental Economics at ESSEC Business School
Experimental Economics: An Overview
Experimental economics is a relatively new branch of economics. By challenging the axioms of human behavior used in traditional analysis, experimental economics has opened the way for a new strain of research, featuring a more sophisticated human model, where bounded rationality, various psychological biases, social interaction and reciprocity are taken into account. By broadening the scope for research, experimental economics is helping to push the frontiers of economic knowledge.
Experimental economics is now an established field of research. According to calculations by Armin Falk and James Heckman, the proportion of experimental papers in top economics journals has risen from almost nothing before 1965 to about 4% in the period 2000-2008. The specialized journal, Experimental Economics, was established in 1998. In 2002, Professor Vernon L. Smith received the Nobel Prize in economics "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms”. In 2009, Professor Elinor Ostrom received the Nobel Prize in economics for her outstanding contribution to analyzing complex economic systems; one important dimension of her work was experimental analysis of common-pool resource dilemmas.
Laboratory tests provide insight into human behavior that goes beyond traditional field data studies (which have their own, unique strengths). As Daniel Friedman and Alessandra Cassar have observed, “in an experiment, you actively engage the world and create a learning opportunity that would not otherwise exist”. The basic principle of experimental research is controlled variation. Individuals are asked to make decisions, researchers observe them, a treatment is subsequently applied, and the observer tries to detect a change in the way the same people then make decisions.
Since many experiments can be described as simple games, there is a natural relationship between game theory and experimental economics. The main advantage of experimental research comes from the fact that the person conducting the experiment can control the game: he controls the payoffs, the rules of the game, the circulation of information, the level of interaction, whether the play is repeated or not, and so on.
In experimental economics, the subjects have all the information about the game they are playing: there is no attempt to mislead them about the true purpose of their participation. From this perspective, ethical challenges are rather incidental in this particular field. Furthermore, the subjects of economic experiments are paid, most often in cash, a factor that often guarantees that they take the task at hand seriously. Naturally, there is a difference between earning 2000 euros and 20 cents, a discrepancy that leads certain critics to argue that playing laboratory games tells us nothing about “real life” decision-making. Yet experimental economics does not aim to replicate “real life” – but to understand why, in a given setting, when introducing a controlled change, the outcome of the game play of the same people does changes.
There is arguably no economic and management problem that cannot be transposed within an experimental framework. Nevertheless, experimental economics research in a business school context raises several relevant topics, including the role of trust and trust building in the market economy, the emergence of various market equilibria in non-cooperative and cooperative settings, auction pricing, altruism and the production of public goods, corporate social responsibility and objectives for contemporary companies and organizations, the testing of behavioral axioms in finance and economics, incentive pay and employees’ compensation, and individual and group decision making, amongst many others.
Daniel Friedman and Alessandra Cassar, 2004, Economics Lab. An Intensive Course in Experimental Economics, Routledge.
Armin Falk, James J. Heckman, 2009, Lab experiments are a major source of knowledge in the social sciences, IZA Discussion Paper, Nr. 4540
Since 2010, 20 studies have been conducted in the Lab with over 2000 participants.
DECEITFUL COMMUNICATION IN A SENDER-RECEIVER EXPERIMENT: DOES EVERYONE HAVE A PRICE?
Radu Vranceanu and Delphine Dubart, Journal of Behavioral and Experimental Economics, 79, April 2019, 43-52
This paper introduces a new task to elicit individual aversion to deceiving, based on a modified version of the Deception Game as presented in Gneezy (2005). A multiple price list is used to determine the deception premium asked by an individual to switch from faithful to deceitful communication. The results show that, depending on payoffs, 71% of the subjects will switch at most once. Among them, 40% appear to be either “ethical” or “spiteful”. The other 60% respond to incentives in line with the cost of lying theory; they will forego faithful communication if the benefit from deceiving the other is large enough. Regression analysis shows that this deception premium is independent of the risk aversion and social preferences of the subject; it would thus capture an inner preference for behaving well.
Keywords: Deception, Communication strategy, Cost of lying, Inequality aversion, Multiple price list.
COMPETITIVE COMPENSATION AND SUBJECTIVE WELL-BEING: THE EFFECT OF CULTURE AND GENDER
SeEun Jung and Radu Vranceanu, Journal of Economic Psychology, Volume 70, January 2019, Pages 90-108
This paper uses a controlled experiment to investigate how subjects exposed to competition in the workplace react in terms of well-being, and how this translates into productivity. The experiment was performed in Korea, a country with an interdependent culture, and France, a country with an independent culture. Exposure to the tournament slightly improves well-being in the Korean sample and decreases it in France. This different response is driven primarily by the opposite response of female subjects, with Korean women liking and French women disliking to compete. Finally, an improvement in well-being is associated with ex-post higher productivity in France, and this positive effect is most salient in the French male population; in Korea, a similar positive effect can be observed only in the female population.
Keywords: Well-being, Experiments, Productivity, Culture
GENDER INTERACTION IN TEAMS: EXPERIMENTAL EVIDENCE ON PERFORMANCE AND PUNISHMENT BEHAVIOR
SeEun Jung and Radu Vranceanu, The Korean Economic Review, Volume 33, Number 1, Summer 2017, 95-126
This paper reports the results from an experiment where men and women are paired to form a two-member team and asked to execute a counting task. An individual’s payoff is proportional to the joint production of right answers. Participants who perform better than their partner in the task can punish him or her by imposing a fine. We manipulate the pairs’ gender compositions to analyze whether an individual’s performance and sanctioning behavior depend on his or her gender and the gender of his or her partner, which is revealed to the subjects at the beginning of the experiment. The data show that, conditional on under- performance, women are sanctioned more often and more heavily than men; however, if they are sanctioned, men tend to improve their performances, while women’s performances do not change.
Keywords: Gender, Real-effort task, Team production, Performance, Punishment, Discrimination
EXPERIMENTAL EVIDENCE ON BANK RUNS UNDER PARTIAL DEPOSIT INSURANCE
Oana Peia and Radu Vranceanu
This paper presents experimental evidence on depositor behavior under partial deposit insurance schemes. In the experiment, the size of a deposit insurance fund cannot fully cover all deposits and the level of insurance depends on the number of depositors running on the bank. We show that this form of strategic uncertainty about deposit coverage exerts a significant impact on the propensity to withdraw, and results in a large frequency of bank runs. Runs are more likely when depositors have noisy information about the size of the insurance fund and as the maximum coverage increases, in line with a risk-dominant equilibrium selection mechanism. From a policy perspective, our results emphasize the limits of underfunded deposit insurance schemes in preventing systemic banking crises.
Keywords: Bank runs, Deposit insurance, Risk dominance, Global games.
EXPERIMENTAL EVIDENCE ON GENDER DIFFERENCES IN LYING BEHAVIOUR
SeEun Jung and Radu Vranceanu, Revue Economique, vol. prépublication, no. 5, 2017, pp. 80-95.
The paper reports the results of an ultimatum game experiment with asymmetric information where proposers can send responders misleading information about their endowments. We allow all possible gender combinations in the proposer-responder pairs. In the pairs, the players’ genders are common knowledge. Proposers’ messages that underestimate the actual amount are widespread. Gender interaction has little impact on the frequency of lying. However, men tend to state bigger lies than women, and state the largest lies when paired with a woman. On average, men make higher offers than women, and also have lower acceptance rates, particularly when they are paired with women.
WILLINGNESS TO COMPETE: BETWEEN- AND WITHIN-GENDER COMPARISONS
SeEun Jung and Radu Vranceanu, Managerial and Decision Economics
This paper introduces a new instrument to elicit individual willingness to compete (WTC). Experimental data corroborate the standard result according to which the average WTC of men is higher than the average WTC of women. However, our WTC measure reveals significant within‐gender heterogeneity: 10% of women are extremely competitive, and 13% of men are extremely averse to competition. Gender differences in WTC persist after controlling for ability, self‐confidence, tolerance for risk, and the gender of the partner.
Keywords: Willingness-to-compete, Experiments, Gender effect, BDM mechanism.
LYING ABOUT DELEGATION
Angela Sutan and Radu Vranceanu, Journal of Economic Behavior and Organisation, Volume 121, Janv 2016, pp 29-40
This paper reports results from a three-player variant of the ultimatum game in which the Proposer can delegate to a third party his decision regarding how to share his endowment with a Responder with a standard veto right. However, the Responder cannot verify whether the delegation is effective or the third party merely plays a “scapegoat” role, while the decision is made by the Proposer himself. In this uncertain attribution setting, the Proposer can send an unverifiable message declaring his delegation strategy. One possible strategy is “false delegation”, in which the Proposer makes the decision but claims to have delegated it. In our sample, the recourse to false delegation is significant, and a significant number of potential Delegates accept serving in the scapegoat role. However, there are many honest Proposers, and 20% of all Delegates will refuse to be the accomplices of a dishonest Proposer. Responders tend to more readily accept poor offers in a setup that permits lying about delegation; the acceptance rate of the poor offer is the highest when Delegates can refuse the scapegoat role.
Keywords: Delegation of responsibility; Uncertain attribution; Communications strategy; Ultimatum game; Dishonesty
DO PEOPLE CONTRIBUTE MORE IN INTRA-TEMPORAL OR INTER-TEMPORAL PUBLIC GOODS?
Gilles Grolleau, Angela Sutan and Radu Vranceanu, Research in Economics, Available online 1 June 2015
We introduce a dynamic public goods game, where an individual's investment in the public good at a given round provides benefits to other individuals in the next round, and the individual himself benefits from investments in the public good made by his current group members in the previous round. Subjects turn out to be more generous in this inter-temporal context, than in a standard public goods experiment where contributions and transfers are exchanged at the same period. Furthermore, when known, benefits from the past investment are positively related to the individual's current investment in the public good.
Keywords: Dynamic public goods; Inter-temporal transfers; Voluntary contribution mechanism; Contribution vs. investment
"FACTA NON VERBA": AN EXPERIMENT ON PLEDGING AND GIVING
Gilles Grolleau, Gillermo Mateu, Angela Sutan and Radu Vranceanu
Abstract: This paper builds an experiment to investigate whether asking people to state how much they will donate to a charity (to pledge) can increase their actual donation. Individuals’ endowment is either certain or a random variable. We study different types of pledges, namely private, public and irrevocable ones, which differ in individual cost of not keeping a promise. Public pledges appear to be associated to lower donation levels. Irrevocable pledges ensure an amount of donations equal to donations in absence of pledges. Moreover, a significant number of individuals keep their promises, in presence of either private or public pledges. A higher risk attached to the endowment increases donations.
Keywords: Charity giving, Pledge, Commitment, Communication, Experiments.
GROUP GENDER COMPOSITION, TOLERANCE TO RISK AND ECONOMIC PERFORMANCE: NEW EVIDENCE FROM AN ORIGINAL BUSINESS GAME
Karine Lamiraud and Radu Vranceanu
Presented to the Annual Conference of the European Economic Association, Toulouse 24-28 August 2014
Since the “governance crisis” of the early 2000s, the relationship between the gender composition of executive boards and firms’ economic performance has become a topical research question. This paper investigates this relationship using data collected in 2012 and 2013 from an original business game developed at the ESSEC Business School. Company boards are simulated by groups of five students selected at random. We manipulate the gender composition to allow for all possible gender combinations. All-women groups are associated with poorer economic performance compared with other groups (mixed-gender and all-men). This is explained to a large extent by the differences between groups in the average tolerance to risk, which increases with the number of men in each group, all-men groups having the highest tolerance to risk. However, when controlling for average tolerance to risk, the performance advantage of all-men groups disappears and mixed-gender groups with a majority of women present the best economic performance. For these groups, a “risk shift” mechanism is at play, as they take risks beyond what their total tolerance to risk as a group would suggest.
EXPERIMENTAL EVIDENCE ON THE "INSIDIOUS" IllIQUIDITY RISK
Damien Besancenot and Radu Vranceanu, Research in Economics, Volume 68, Issue 4, December 2014, p. 315–323
In the contemporary financially globalized world, illiquidity turned out to be a major factor of instability. In this paper we report on players' behavior in a coordination game with imperfect information, designed with the aim of bringing additional insights on the illiquidity risk, and its interaction with insolvency. There is a risky individual's investment project that can be implemented only if a critical number of investors agree to participate. Results of this elementary experiment confirm the insidious nature of the illiquidity risk: as long a first illiquidity default does not occur, investors do not seem able to fully internalize it. After several defaults, agents coordinate on a default probability above which they refuse to participate to the market. This default probability is not zero, as it could be in a perfect information set-up with multiple equilibria, but is lower than without the coordination constraint.
Keywords: Coordination game, Illiquidity vs. insolvency, Threshold strategy, Experimental economics, Risk.
TEAM PRODUCTION WITH PRODUCTION WITH PUNISHMENT OPTION : INSIGHTS FROM A REAL-EFFORT EXPERIMENT
Radu Vranceanu, Fouad El Ouardighi and Delphine Dubart
Managerial and Decision Economics (2014)
This paper analyzes the consequences of allowing for punishment in a real-effort pair production experiment. The behavior of the best performer in the team differs on whether he or she can impose a sanction on the less performing partner. When sanctions are not allowed, good performers reduce their effort in response to the advantageous difference in scores; when they can impose sanctions, their change in effort is no longer related to the difference in scores. To some extent, a sanction mechanism allows good performers to focus on their own performance. In the case of costless sanctions, not sanctioning a partner who under-performs, what we refer to as forgiveness, prompts the latter to improve his or her performance, but applying the sanction has a stronger push effect.
THE VALUE OF LIES IN AN ULTIMATUM GAME WITH IMPERFECT INFORMATION
Damien Besancenot, Delphine Dubart and Radu Vranceanu
Journal of Economic Behavior and Organization, 93 (2013) 239–247
ESSEC WORKING PAPER 1207
Humans often lie strategically. We study this problem in an ultimatum game with an informed proposer and an uninformed responder, where the former can send an unverifiable statement about his endowment. A simple message game with heterogenous players with respect to lying costs shows that in equilibrium liars should understate their endowment. The second part of the paper reports on an experiment testing this game. On average, 88.5% of the proposers understate the actual endowment by 20.5%. Regression analysis shows that a one-euro gap between the actual and declared amounts prompts proposers to reduce their offer by 19 cents on average. However, responders’ decision to accept/reject the offer does not depend on the message. It results a net welfare loss specific to such a ”free-to-lie” environment.
Keywords: Ultimatum game; Asymmetric information; Lying costs; Strategic lies; Deception; Welfare loss
CAN RUMORS AND OTHER UNINFORMATIVE MESSAGES CAUSE ILLIQUIDITY?
Radu Vranceanu, Damien Besancenot and Delphine Dubart
This paper analyzes whether false information, rumors and other uninformative messages can cause illiquidity. In the model, a group of investors are invited to participate to a high-yield collective project. The project succeeds only if a minimum participation rate is reached. Before taking their decision investors receive an uninformative but emotion loaded message. If investors believe that the message has an impact on the beliefs of the others, the problem can be analyzed as a typical global game. We solve the model for the critical message separating the success / fail states of the project. It turns out that lesser investors will participate to the collective project when they receive a negative message as compared to the case when they receive a positive message. Predictions of the theoretical model are corroborated by data provided by an Online and a Lab experiment. Insights apply to contagion and market manipulation episodes.
Keywords: Illiquidity; Rumors; Market panic; Global games; Strategic uncertainty.
TRUST AND FINANCIAL TRADES: LESSONS FROM AN INVESTMENT GAME WHERE RECIPROCATORS CAN HIDE BEHIND PROBABILITIES
Radu Vranceanu, Angela Sutan, Delphine Dubart
Journal of Socio-Economics, Volume 41, Issue 1, January 2012, pp. 72-78
In this paper we show that if a very small, exogenously given probability of terminating the exchange is introduced in an elementary investment game, reciprocators play more often the defection strategy. Everything happens as if they "hide behind probabilities" in order to break the trust relationship. Investors do no not seem able to internalize the reciprocators’ change in behavior. This could explain why trades involving an exogenous risk of value destruction, such as financial transactions, provide an unfavorable environment for trust-building.
THE VALUE OF LIES IN A POWER-TO-TAKE GAME WITH IMPERFECT INFORMATION
Damien Besancenot, Delphine Dubart and Radu Vranceanu
Humans can lie strategically in order to leverage on their negotiation power. For instance, governments can claim that a "scapegoat" third party is responsible for reforms that impose higher costs on citizens, in order to make the pill sweeter. This paper analyzes such communication strategy within a variant of the ultimatum game. The first player gets an endowment, and the second player can impose a tax on it. The former can reject the allocation submitted by the tax-setter. A third party is then allowed to levy its own tax, and its intake is private information to the tax-setter. In a frameless experiment, 65% of the subjects in the tax-setter role overstate the tax levied by the third party in order to manipulate taxpayer’s expectations and submit less advantageous offers; on average, for every additional currency unit of lie, measured by the gap between the claimed and the actual tax, they would reduce their offer by 0.43 currency units.
Keywords: Ultimatum game, Taxation, Lies, Deception, Asymmetric information.
UNE ECHELLE DE MESURE DE LA CONNAISSANCE EN RAISONNEMENT ECONOMQIUE ET RESULTATS D'UNE ENQUETE MENEE EN DECEMBRE 2009
Radu Vranceanu, Maxime Laot, Delphine Dubart
We worked out a scale of economic reasoning skills with a macroeconomic and economic policy orientation. The test was administered via Internet in December 2009, and led to collection of 1542 complete questionnaires. The average rate of correct answers is relatively high, to 71%. The knowledgability of economic principles is positively related to general education, training in economics, personal interest for economics and recourse to economics in professional life.