Prediction Markets: Alternative Mechanisms for Complex Environments with Few Traders

Double auction prediction markets have proven successful in large-scale applications such as elections and sporting events. Consequently, several large corporations have adopted these markets for smaller-scale internal applications where information may be complex and the number of traders is small. Using laboratory experiments, we test the performance of the double auction in complex environments with few traders and compare it to three alternative mechanisms. When information is complex we find that an iterated poll (or Delphi method) outperforms the double auction mechanism. We present five behavioral observations that may explain why the poll performs better in these settings

Mutually Destructive Bidding: The FCC Auction Design Problem

Dissatisfaction with previous assignment mechanisms and the desire to raise revenue induced Congress to grant the FCC authority to auction radio licenses. The debate over an appropriate auction design was wide ranging with many imaginative proposals. Many of the arguments and their scientific support are unfortunately not publicly available. Here, we present our side of this debate for the record. Synergies across license valuations complicate the auction design process. Theory suggests that a “simple” (i.e., non-combinatorial) auction will have difficulty in assigning licenses efficiently in such an environment. This difficulty increases with increases in “fitting complexity.” In some environments, bidding may become “mutually destructive.” Experiments indicate that a combinatorial auction is superior to a simple auction in terms of economic efficiency and revenue generation in bidding environments with a low amount of fitting complexity. Concerns that a combinatorial auction will cause a “threshold” problem are not borne out when bidders for small packages can communicate

Rank-order competition in the voluntary provision of impure public goods

Publicly provided goods often create differential payoffs due to timely or spatial distances of group members. We design and test a provision mechanism which utilizes rank competition to mitigate free-riding in impure public goods. In our Rank-Order Voluntary Contribution Mechanism (Rank-Order-VCM) group members compete via observable contributions for a larger share of the public good; high contributors receive preferential access (a larger share), while low contributors receive restricted access (a lower share). In a laboratory experiment Rank-Order-VCM elicits median contributions equal to the full endowment throughout the finitely played games with constant groups. In the control treatment, with randomly assigned ranks, the contributions are significantly lower and decline over time. We thus provide evidence of rank competition, in situations where discriminatory access to public goods is possible, being efficiency enhancing

AUDIT STATE DEPENDENT TAXPAYER COMPLIANCE: THEORY AND EVIDENCE FROM COLOMBIA

We develop and analyze a dynamic model of individual taxpayer compliance choice that predicts “audit state dependent taxpayer compliance”, by distinguishing between naïve and myopic behavior versus sophisticated and forward-looking behavior. We then test experimentally the audit state dependent model by reporting the results from the first tax compliance experiment run in Colombia. Consistent with previous studies as well as theoretical predictions, we find that subjects’ compliance rates increase in the audit probability and in the fine rate. We also find more novel results, both theoretically and empirically: fine rates should be increased after an audit to discourage otherwise-increased underreporting, and “nudging” myopic individuals toward reporting a constant rather than a fluctuating proportion of income would benefit both the taxpayer and the tax authority

Social Preferences, Skill Segregation and Wage Dynamics

We study the earning structure and the equilibrium asignment of workers to firms in a model in which workers have social preferences, and skills are perfectly substitutable in production. Firms offer long-term contracts, and we allow for frictions in the labour market in the form of mobility costs. The model delivers specific predictions about the nature of worker flows, about the characteristic of workplace skill segregation, and about wage dispersion both within and cross firms. We shows that long-term contracts in the resence of social preferences associate within-firm wage dispersion with novel "internal labour market" features such as gradual promotions, productivity-unrelated wage increases, and downward wage flexibility. These three dynamic features lead to productivity-unrelated wage volatily within firms.Publicad

The Promise of Prediction Markets

Prediction markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election. Using these markets as forecasting tools could substantially improve decision making in the private and public sectors. We argue that U.S. regulators should lower barriers to the creation and design of prediction markets by creating a safe harbor for certain types of small stakes markets. We believe our proposed change has the potential to stimulate innovation in the design and use of prediction markets throughout the economy, and in the process to provide information that will benefit the private sector and government alike.Technology and Industry

Sequential two-player games with ambiguity

Author's pre-printIf players' beliefs are strictly nonadditive, the Dempster–Shafer updating rule can be used to define beliefs off the equilibrium path. We define an equilibrium concept in sequential two-person games where players update their beliefs with the Dempster–Shafer updating rule. We show that in the limit as uncertainty tends to zero, our equilibrium approximates Bayesian Nash equilibrium. We argue that our equilibrium can be used to define a refinement of Bayesian Nash equilibrium by imposing context-dependent constraints on beliefs under uncertainty.ESRC senior research fellowship scheme, H5242750259

Cooperation and Contagion in Web-Based, Networked Public Goods Experiments

A longstanding idea in the literature on human cooperation is that cooperation should be reinforced when conditional cooperators are more likely to interact. In the context of social networks, this idea implies that cooperation should fare better in highly clustered networks such as cliques than in networks with low clustering such as random networks. To test this hypothesis, we conducted a series of web-based experiments, in which 24 individuals played a local public goods game arranged on one of five network topologies that varied between disconnected cliques and a random regular graph. In contrast with previous theoretical work, we found that network topology had no significant effect on average contributions. This result implies either that individuals are not conditional cooperators, or else that cooperation does not benefit from positive reinforcement between connected neighbors. We then tested both of these possibilities in two subsequent series of experiments in which artificial seed players were introduced, making either full or zero contributions. First, we found that although players did generally behave like conditional cooperators, they were as likely to decrease their contributions in response to low contributing neighbors as they were to increase their contributions in response to high contributing neighbors. Second, we found that positive effects of cooperation were contagious only to direct neighbors in the network. In total we report on 113 human subjects experiments, highlighting the speed, flexibility, and cost-effectiveness of web-based experiments over those conducted in physical labs

Split or Steal? Cooperative Behavior When the Stakes Are Large

We examine cooperative behavior when large sums of money are at stake, using data from the television game show Golden Balls. At the end of each episode, contestants play a variant on the classic prisoner's dilemma for large and widely ranging stakes averaging over $20,000. Cooperation is surprisingly high for amounts that would normally be considered consequential but look tiny in their current context, what we call a “big peanuts” phenomenon. Utilizing the prior interaction among contestants, we find evidence that people have reciprocal preferences. Surprisingly, there is little support for conditional cooperation in our sample. That is, players do not seem to be more likely to cooperate if their opponent might be expected to cooperate. Further, we replicate earlier findings that males are less cooperative than females, but this gender effect reverses for older contestants because men become increasingly cooperative as their age increases