The referendum incentive compatibility hypothesis: Some new results using information messages

We report results from a laboratory experiment that allows us to test the incentive compatibility hypothesis of hypothetical referenda used in CV studies through the public or private provision of information messages. One of the main methodological issues about hypothetical markets regards whether people behave differently when bidding for a public good through casting a ballot vote than when they are privately purchasing an equivalent good. This study tried to address the core of this issue by using a good that can be traded both as private and public: information messages. This allows the elimination of confounding effects associated with the specific good employed. In our case information dispels some of the uncertainty about a potential gain from a gamble. So, the approximate value of the message can be inferred once the individual measure of risk aversion is known. Decision tasks are then framed in a systematic manner according to the hypothetical vs real nature of the decision and the public vs private nature of the message. A sample of 536 university students across three countries (I, UK and NZ) participated into this lab experiment. The chosen countries reflect diversity in exposure to the practice of advisory (NZ) and abrogative (Italy) referenda, with the UK not having any exposure to it. Under private provision the results show that the fraction of participants unwilling to buy information is slightly higher in the real treatment than in the hypothetical one. Under public provision, instead, there is no statistical difference between real and hypothetical settings, confirming in part the finding of previous researchers. A verbal protocol analysis of the thought processes during choice highlights that public provision of information systematically triggers concerns and motivations different from those arising under the private provision setting. These findings suggest that the incentive compatibility of public referenda is likely to rely more on affective and psychological factors than on the strategic behaviour assumptions theorised by economists

Buy-It-Now prices in eBay Auctions - The Field in the Lab

Electronic commerce has grown extraordinarily over the years, with online auctions being extremely successful forms of trade. Those auctions come in a variety of different formats, such as the Buy-It-Now auction format on eBay, that allows sellers to post prices at which buyers can purchase a good prior to the auction. Even though, buyer behavior is well studied in Buy-It-Now auctions, as to this point little is known about how sellers set Buy-It-Now prices. We investigate into this question by analyzing seller behavior in Buy-It-Now auctions. More precisely, we combine the use of a real online auction market (the eBay platform and eBay traders) with the techniques of lab experiments. We find a striking link between the information about agents provided by the eBay market institution and their behavior. Information about buyers is correlated with their deviation from true value bidding. Sellers respond strategically to this information when deciding on their Buy-It-Now prices. Thus, our results highlight potential economic consequences of information publicly available in (online) market institutions

A computational theory of willingness to exchange, ESRI working paper no. 477, January 2014

A new model of exchange is presented following Marr’s conception of a “computational theory”. The model combines assumptions from perceptual theory and economic theory to develop a highly generalised formal model. The approach departs from previous models by focussing not on how ownership alters preferences, but instead on difficulties inherent in the process of exchange in real markets. Agents treat their own perceptual uncertainty when valuing a potential exchange item as a signal regarding the variability of potential bids and offers. The analysis shows how optimising agents, with no aversion to risk or loss, will produce an endowment effect of variable degree, in line with empirical findings. The model implies that the endowment effect is not a laboratory finding that may not occur in real markets, but rather a market phenomenon that may not occur in the laboratory

Herding and Social Pressure in Trading Tasks: A Behavioural Analysis

We extend the experimental literature on Bayesian herding using evidence from a financial decision-making experiment. We identify significant propensities to herd increasing with the degree of herd-consensus. We test various herding models to capture the differential impacts of Bayesian-style thinking versus behavioural factors. We find statistically significant associations between herding and individual characteristics such as age and personality traits. Overall, our evidence is consistent with explanations of herding as the outcome of social and behavioural factors. Suggestions for further research are outlined and include verifying these findings and identifying the neurological correlates of propensities to herd

An Investigation Report on Auction Mechanism Design

Auctions are markets with strict regulations governing the information available to traders in the market and the possible actions they can take. Since well designed auctions achieve desirable economic outcomes, they have been widely used in solving real-world optimization problems, and in structuring stock or futures exchanges. Auctions also provide a very valuable testing-ground for economic theory, and they play an important role in computer-based control systems. Auction mechanism design aims to manipulate the rules of an auction in order to achieve specific goals. Economists traditionally use mathematical methods, mainly game theory, to analyze auctions and design new auction forms. However, due to the high complexity of auctions, the mathematical models are typically simplified to obtain results, and this makes it difficult to apply results derived from such models to market environments in the real world. As a result, researchers are turning to empirical approaches. This report aims to survey the theoretical and empirical approaches to designing auction mechanisms and trading strategies with more weights on empirical ones, and build the foundation for further research in the field

Incentives and Gender in a Multi-task Setting: an Experimental Study with Real-Effort Tasks

This paper investigates the behavioural effects of competitive, social-value and social-image incentives on men’s and women’s allocation of effort in a multi-task environment. Specifically, using two real-effort laboratory tasks, we investigate how competitive prizes, social-value generation and public awards affect effort allocation decisions between the tasks. We find that all three types of incentives significantly focus effort allocation towards the task they are applied in, but the effect varies significantly between men and women. The highest effort distortion lies with competitive incentives, which is due to the effort allocation decision of men. Women exert similar amount of effort across the three incentive conditions, with slightly lower effort levels in the social-image incentivized tasks. Our results inform how and why genders differences may persist in competitive workplaces

Repeated Rounds with Price Feedback in Experimental Auction Valuation: An Adversarial Collaboration

It is generally thought that market outcomes are improved with the provision of market information. As a result, the use of repeated rounds with price feedback has become standard practice in the applied experimental auction valuation literature. We conducted two experiments to determine how rationally subjects behave with and without price feedback in a second price auction. Results from an auction for lotteries show that subjects exposed to price feedback are significantly more likely to commit preference reversals. However, this irrationality diminishes in later rounds. Results from an induced value auction indicate that price feedback caused greater deviations from the Nash equilibrium bidding strategy. Our results suggest that while bidding on the same item repeatedly improves auction outcomes, this improvement is not the result of price feedback

Centralized vs Decentralized Markets in the Laboratory: The Role of Connectivity

This paper compares the performance of centralized and decentralized markets experimentally. We constrain trading exchanges to happen on an exogenously predetermined network, representing the trading relationships in markets with differing levels of connectivity. Our experimental results show that, despite having lower trading volumes, decentralized markets are generally not less efficient. Although information can propagate quicker through highly connected markets, we show that higher connectivity also induces informed traders to trade faster and exploit further their information advantages before the information becomes fully incorporated into prices. This not only reduces market efficiency, but it increases wealth inequality. We show that, in more connected markets, informed traders trade not only relatively quicker, but also more, in the right direction, despite not doing it at better prices