Economic Science Association

I'm beginning a term as president of the Economic Science Association, which is the professional organization specifically devoted to experimental and behavioral economics.

If you can think of something useful that we ought to be doing that we're not, let me or one of the other officers or executive committee members know.

Expectations and reference points: Andreas Fuster

Andreas Fuster successfully defended his dissertation today on various aspects of behavioral economics. The part that was his job talk was his experimental paper, “Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments,” written with his fellow graduate student Keith Ericson and forthcoming in the QJE. The high level motivation for the paper is to study carefully in the lab how expectations are important for consumer decisions, and to better understand how expectations are formed. The more particular focus of the paper is reference-dependent preferences, with the idea that reference points are determined by expectations as formulated by Koszegi and Rabin. And the very particular focus of the paper is the recently controversial “endowment effect,” related to experimental observations that subjects seem reluctant to trade objects with which they are endowed.

Andreas and Keith explore whether the “reference point” that subjects form is related more to their expectations about what they may own in the future than to their current endowment. In a very carefully designed experiment, they manipulate expectations by assigning subjects a probability that they will receive an object, or have an opportunity to trade it, and then observe various measures of how subjects evaluate the object as a function of these probabilities.  Their results provide the most convincing support to date of the Koszegi-Rabin model of expectation based reference points.

When asked how he planned to spend the rest of the day, Andreas replied "PhD: pretty heavy drinking."

Welcome to the club, Andreas.

Swoopo: gone but not forgotten

Swoopo is reported to be bankrupt: Goodnight, Swoopo: The Pay-Per-Bid Auction Site Is Dead

I blogged in 2009 about A proliferation of penny auctions, and when I looked back at it just now, I saw that it attracted a bunch of spammish comments from penny auction sites...

HT: Peter Coles

Dan Ariely constructs a Forbes list of new economists

Dan gives new meaning to the word "new" as applied to economists...at least in my case. (Although I'm reminded of Frank Hahn's wish to live to a very old age but be remembered as having passed away young and full of promise...)

Here is Dan's list in Forbes (Dan Ariely picks the seven most powerful new economists) , and (easier to scan) on his web page: New Economists worth knowing.

Sidney Siegel and Psychology & Economics

That's the subject of a recent article: Innocenti, Alessandro, "How a psychologist informed economics: The case of Sidney Siegel," JOURNAL OF ECONOMIC PSYCHOLOGY,31, 3, 421-434, JUN 2010

"Abstract: In the 1950s before Kahneman and Tversky showed how behavioral economics could bring economics and psychology into a unified framework, a social psychologist, Sidney Siegel, entered the realm of economics and laid the foundation of experimental economics. This paper gives an assessment of Siegel's effort to meld psychology and economics and shows that Siegel was not only a contributor to the methodology of experimental economics but also a pioneer of behavioral economics. Although his legacy was paramount in the work of the Nobel Prize winner Vernon Smith, Siegel endorsed a very different approach to making interdisciplinary research effective. "

A proliferation of penny auctions

Last year I thought about blogging about Swoopo, the "entertainment shopping" site that is run as an "all pay" auction for consumer goods, in which all bidders must pay to bid, but only the winning bidder receives the object. But soon enough there were excellent posts on the subject by others. I particularly like Ian Ayers at Freakonomics, who explained how Swoopo is similar to the "escalation auction" proposed years ago by Martin Shubik, which has become a staple demonstration in game theory classes, and Tyler Cowen at MR, who observes that Swoopo auctions can make a lot of money for the owners of the site, while most of the bidders lose. He writes "In short, swoopo is about as close to pure, distilled evil in a business plan as I've ever seen. " (emphasis in original). And here's the Wikipedia entry.

Swoopo bidders are a bit of a puzzle of the behavioral economics kind: are they like buyers of lottery tickets, who know that they will likely lose but find entertainment value by purchasing the right to dream (see this paper by Emily Oster)? Or are they making mistakes? And if the latter, will demand for this kind of auction dry up? Or will new suckers keep appearing?

But there are other, market level questions we can ask, and I got the beginning of an answer when I did a google search on "swoopo", or another search on "penny auction" . You'll find two things if you click on those searches: there are now a lot of similar auction sites, and there are also plenty of people who are eager to sell you software to set up your own "penny auction," as these sites have come to be known.

(BidRodeo's icon is a man on a bucking bronco, over the motto "Hold on the longest and win!")

What are the questions to which those observations are the beginnings of answers? I guess one is, "is it easy to earn outsized rents by selling to the gullible?". I presume most of the new sites make very little money. Whether they also attract away swoopo's customers or otherwise reduce swoopo's rents remains to be seen.

A new (job market) paper by Edward Augenblick at Stanford suggests that the already-established penny auctions may not disappear in the blink of an eye: Pay-As-You-Go: Theoretical and Empirical Analysis of a New Auction Format

He finds Swoopo to be quite profitable, and the abstract concludes:
"Finally, I attempt to address the long-term prospects of the market for these auctions. Using high frequency auction supply and user data, I estimate the current and optimal supply of auctions for a given number of users. This analysis suggests that the structure of the auction creates barriers to quickly developing a large userbase, allowing the most-established competitor to continue making large profits in the medium-term. This analysis is supported by auction-level data from five competitors. "

HT Eduardo Azevedo and Muriel Niederle

A fast auction for gift cards

TC50: Gift Card Auction Site Rackup Aims To Shake Up Market
A "fast auction" in which the high bidders buy themselves gift cards and compete for bonus amounts on the card, so that different cards sell at different discounts.
"Rackup’s team is lead by Marc Rochman and is supported by a board that includes Stanford Prof. Paul Milgrom, one of the most prominent experts in auction theory, and Duke Prof. Dan Ariely, author of “Predictably Irrational”. The company raised early-stage funding from the founders and some private investors, amounting up to $3.5 million."

HT: Joshua Gans

Behavioral contract design; Steve Leider

Steve Leider defended his dissertation last week. He's an eclectic experimenter, but among his varied interests is how insights from psychology might change our view of contract design. In particular, if people are nicer than the standard economic model supposes (e.g. more inclined to reciprocate favors, more inclined to keep promises and uphold social norms), how might that change our views of how contracts might function, and therefore how they should be structured?

Among his papers, the following best exemplify that part of his work.

Norms and Contracting (with Judd Kessler) (Job Market Paper) Abstract: We argue that agents create norms specific to their relationships, particularly through the contracts they establish. We build a theory of how the enforceable and unenforceable aspects of a contract determine the norm, and how norms impact behavior. We then demonstrate experimentally that even totally incomplete contracts (i.e. contracts with no enforceable restriction on actions) move behavior substantially towards the first best in a variety of games. A contract with only unenforceable agreements is often more effective than a contract with only enforceable restrictions. Combining enforceable restrictions with an unenforceable agreement is frequently no more effective (and sometimes strictly less effective) than an unenforceable agreement alone. Consistent with our modeling approach that violating the norm creates disutility, many subjects often choose not to make unenforceable agreements, despite earnings substantially higher payoffs with the agreement.

Directed Altruism and Enforced Reciprocity in Social Networks (with Markus M. Mobius, Tanya Rosenblat, and Quoc-Anh Do) [Forthcoming in the Quarterly Journal of Economics] Abstract: We conduct online field experiments in large real-world social networks in order to decompose prosocial giving into three components: (1) baseline altruism towards randomly selected strangers, (2) directed altruism that favors friends over random strangers, and (3) giving motivated by the prospect of future interaction. Directed altruism increases giving to friends by 52 percent relative to random strangers, while future interaction effects increase giving by an additional 24 percent when giving is socially efficient. This finding suggests that future interaction affects giving through a repeated game mechanism where agents can be rewarded for granting efficiency-enhancing favors. We also find that subjects with higher baseline altruism have friends with higher baseline altruism.

Contractual and Organizational Structure with Reciprocal Agents (with Florian Englmaier) [Submitted] Abstract: Empirically, compensation systems generate substantial effort despite weak monetary incentives. We consider reciprocal motivations as a source of incentives. We solve for the optimal contract in the basic principal-agent problem and show that reciprocal motivations and explicit performance-based pay are substitutes. A firm endogenously determines the mix of the two sources of incentives to best induce effort from the agent. Analyzing extended versions of the model allows us to examine how organizational structure impacts the effectiveness of reciprocity and to derive specific empirical predictions. We use the UK-WERS workplace compensation data set to confirm the predictions of our extended model.

Gift Exchange in the Lab and in the Field - It is not (only) how much you give ... (with Florian Englmaier) Abstract: We build on the theoretical results from our companion paper, Englmaier and Leider (2008), that an important aspect in determining the effectiveness of gift exchange relations is the ability of the agent to “repay the gift” to the principal. To test this hypothesis, we conduct a real effort laboratory experiment and a field experiment where we vary the effect of the agent’s effort on the principal’s payoff. Furthermore we collect additional information that allows us to control for the agents’ effort costs and whether they can be classified as reciprocal or not. From our model we derive nontrivial predictions about which is the marginal agent in terms of ability affected by our experimental variation and how different types of individuals, selfish and reciprocal, will react to it. The experimental data lend support to our hypotheses.

Steve's email address will have a "umich.edu" in it starting next semester, when he starts work at the University of Michigan's Ross School of Business.

Welcome to the club, Steve.