Normative Conflict & Feuds: The Limits of Self-Enforcement

A normative conflict arises when there exist multiple plausible norms of behavior. In such cases, norm enforcement can lead to a sequence of mutual retaliatory sanctions, which we refer to as a feud. We investigate the hypothesis that normative conflict enhances the likelihood of a feud in a public-good experiment. We find that punishment is much more likely to trigger counter-punishment and start a feud when there is a normative conflict, than in a setting in which no conflict exists. While the possibility of a feud sustains cooperation,the cost of feuding fully offsets the efficiency gains from increased cooperation.normative conflict; peer punishment; feuds; counter-punishment; social norms

The Lure of Authority: Motivation and Incentive Effects of Power

Authority and power permeate political, social, and economic life, but empirical knowledge about the motivational origins and consequences of authority is limited. We study the motivation and incentive effects of authority experimentally in an authority delegation game. Individuals often retain authority even when its delegation is in their material interest—suggesting that authority has nonpecuniary consequences for utility. Authority also leads to over provision of effort by the controlling parties, while a large percentage of subordinates underprovide effort despite pecuniary incentives to the contrary. Authority thus has important motivational consequences that exacerbate the inefficiencies arising from suboptimal delegation choices. {JEL C92, D23, D82

Behavioral constraints on the design of subgame-perfect implementation mechanisms

We study subgame-perfect implementation (SPI) mechanisms that have been proposed as a solution to incomplete contracting problems. We show that these mechanisms, which are based on off-equilibrium arbitration clauses that impose large fines for lying and the inappropriate use of arbitration, have severe behavioral constraints because the fines induce retaliation against legitimate uses of arbitration. Incorporating reciprocity preferences into the theory explains the observed behavioral patterns and helps us develop a new mechanism that is more robust and achieves high rates of truth-telling and efficiency. Our results highlight the importance of tailoring implementation mechanisms to the underlying behavioral environment. (JEL C92, D44, D82, D86, D91

Essays on institutional persistence, contract structure, and authority

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2008.Includes bibliographical references (p. 154-158).This thesis is a collection of essays that uses theoretical and experimental methods to explore institutional persistence, contract structure, and authority. Chapter One studies the informational and efficiency properties of institutions that form to reduce moral hazard. While in the short run such mechanisms may be optimal, in the long run inefficient institutions may persist because information about changes in the underlying environment is lost. Using experimental and theoretical methods, it analyzes a market with high quality and low quality products that are indistinguishable without a costly certification process. Sellers in the market make endogenous production decisions and are heterogeneous in their levels of moral hazard leading to two possible equilibria-non-certifying and certifying-that vary in both efficiency and information about the underlying environment. The certifying equilibrium, which does not carry information about changes in the distribution of sellers, does not adjust when the underlying environment changes, perpetuating a market structure that makes all market participants weakly worse off. Chapter Two studies how changes in contract structure may help preserve antiquities. Most countries prohibit the export of certain antiquities. This practice often leads to illegal excavation and looting for the black market, which damages objects and destroys important aspects of the archaeological record. Chapter Two argues that many of the goals for export bans could be better accomplished through the use of long-term leases which would raise revenue for the country of origin while preserving national long-term ownership rights. Chapter Three uses experiments to study how control rights are distributed in a setting with incentive conflicts.(cont.) It shows that while effort levels are consistent with theoretical predictions, principals retain control rights even when it is strongly in their interest to delegate. Chapter Three also documents a differential response to authority by gender. As agents, women have strong fairness preferences resulting in diminished effort in asymmetric treatments but higher effort in symmetric ones. As principals, women are more likely to transfer authority when it is efficient to do so.Tom S. Wilkening.Ph.D

Behavioral constraints on the design of subgame-perfect implementation mechanisms

We study subgame-perfect implementation (SPI) mechanisms that have been proposed as a solution to incomplete contracting problems. We show that these mechanisms — which are based on off-equilibrium arbitration clauses that impose large fines for lying and the inappropriate use of arbitration — have severe behavioral constraints because the fines induce retaliation against legitimate uses of arbitration. Incorporating reciprocity preferences into the theory explains the observed behavioral patterns and helps us develop a new mechanism that is more robust and achieves high rates of truth-telling and efficiency. Our results highlight the importance of tailoring implementation mechanisms to the underlying behavioral environment

The role of bounded rationality and imperfect information in subgame perfect implementation - an empirical investigation

In this paper we conduct a laboratory experiment to test the extent to which Moore and Repullo’s subgame perfect implementation mechanism induces truth-telling, both in a setting with perfect information and in a setting where buyers and sellers face a small amount of uncertainty regarding the good’s value. We find that Moore–Repullo mechanisms fail to implement truth-telling in a substantial number of cases even under perfect information about the valuation of the good. Our data further suggests that a substantial proportion of these lies are made by subjects who hold pessimistic beliefs about the rationality of their trading partners. Although the mechanism should—in theory—provide incentives for truth-telling, many buyers in fact believe that they can increase their expected monetary payoff by lying. The deviations from truth-telling become significantly more frequent and more persistent when agents face small amounts of uncertainty regarding the good’s value. Our results thus suggest that both beliefs about irrational play and small amounts of uncertainty about valuations may constitute important reasons for the absence of Moore–Repullo mechanisms in practice

Information and the persistence of private-order contract enforcement institutions: An experimental analysis

AbstractWe study an experimental market in which some sellers are prone to moral hazard, and in which a private-order contract enforcement institution exists that can mediate trade and prevent sellers from reneging on their contractual obligations. Using the institution to resolve the moral-hazard problem is costly. We demonstrate that in this market, the utilization of the private-order contract enforcement institution may make public and private market signals uninformative and inhibit learning. We study whether this potential information externality can limit adaptation away from the private-order institution when it is efficient to do so. Consistent with theory, we find inefficient persistence when the institution is used, but by contrast, efficient adaptation in other situations. Providing information to individuals who are using the private-order institution allows them to partially adapt

The Informational Properties of Institutions: An Experimental Study of Persistence in Markets with Certification

Institutions that form to reduce moral hazard often eliminate discretion and pool the actions of heterogeneous agents. An unintended consequence of this pooling is that agents' types cannot be determined by their actions. While in the short run such mechanisms may be optimal, in the long run ineffcient institutions may persist because information about changes in the environment is lost. This paper studies a market with a moral hazard reducing certification technology. When certification is adopted, information embedded in market primitives is eliminated. This leads to the persistence of certification, an ineffcient institution that makes all participants weakly worse off.Persistence of Institutions, Information, Externalities, Inecient MarketStructures, Experimental Economics