Identity changes and the efficiency of reputation systems

Reputation systems aim to induce honest behavior in online trade by providing information about past conduct of users. Online reputation, however, is not directly connected to a person, but only to the virtual identity of that person. Users can therefore shed a negative reputation by creating a new account. We study the effects of such identity changes on the efficiency of reputation systems. We compare two markets in which we exogenously vary whether sellers can erase their rating profile and start over as new sellers. Buyer trust and seller trustworthiness decrease significantly when sellers can erase their ratings. With identity changes, trust is particularly low towards new sellers since buyers cannot discriminate between truly new sellers and opportunistic sellers who changed their identity. Nevertheless, we observe positive returns on buyer investment under the reputation system with identity changes, and our evidence suggests that trustworthiness is higher than in the complete absence of a reputation system

Essays on Social Preferences, Incentives, and Institutions

This dissertation studies social preferences and institutions, and the incentives which arise from their interaction. A particular focus lies on situations involving incomplete contracts and moral hazard. Chapter 1 studies the intrapersonal relationship between trust and reciprocity. Chapter 2 deals with the role of gift-exchange in labor contracts and analyzes how the perceived fairness of a payment scheme depends on horizontal fairness concerns. Chapter 3 asks how the efficiency of online reputation systems is affected when sellers can shed a bad reputation by changing their virtual identity. Chapter 4 studies incentives provided through promotion competitions. More precisely, we compare behavior in multi-stage elimination tournaments and simple, one-stage promotion contests. All chapters share the same underlying questions. How do non-pecuniary motivations influence behavior and the performance of institutions? What are the consequences for the design of institutions? All chapters use laboratory experiments either because their respective research question requires a high degree of control or because important variables cannot be observed in field data. The results presented in this dissertation are relevant for questions regarding the nature of social preferences, but also for problems studied in personnel economics and market design

Promotions and Incentives: The Case of Multi-Stage Elimination Tournaments

Promotion tournaments play an important role for the provision of incentives in firms. In this paper, we extend research on single-stage rank-order tournaments and analyze behavior in multi-stage elimination tournaments. The main treatment of our laboratory experiment is a two-stage tournament in which equilibrium efforts are the same in both stages. We compare this treatment to a strategically equivalent one-stage tournament and to another two-stage tournament with a more convex wage structure. Confirming previous findings average effort in our one-stage treatment is close to Nash equilibrium. In contrast, subjects in our main treatment provide excess effort in the first stage both with respect to Nash predictions and compared to the equivalent one-stage tournament. The results for the more convex two-stage tournament show that excess effort in the first stage is a robust finding and that subjects react only weakly to differences in the wage structure.personnel economics, tournament, incentives, laboratory experiment

Reciprocity and Payment Schemes: When Equality Is Unfair

A growing literature stresses the importance of reciprocity, especially for employment relations. In this paper, we study the interaction of different payment modes with reciprocity. In particular,we analyze how equal wages affect performance and effciency in an environment characterized by contractual incompleteness. In our experiment, one principal is matched with two agents. The principal pays equal wages in one treatment and can set individual wages in the other. We find that the use of equal wages elicits substantially lower efforts and effciency. This is not caused by monetary incentives per se since under both wage schemes it is profit-maximizing for agents to exert high efforts. The treatment difference is rather driven by the fact that reciprocity is violated far more frequently in the equal wage treatment. Agents suffering from a violation of reciprocity subsequently withdraw effort. Our results suggest that individual reward and punishment opportunities are crucial for making reciprocity a powerful contract enforcement device.laboratory experiment; wage setting; wage equality; gift exchange; reciprocity; social norms; incomplete contracts; multiple agents

Gift Exchange and Workers' Fairness Concerns: When Equality Is Unfair

We study how different payment modes influence the effectiveness of gift exchange as a contract enforcement device. In particular, we analyze how horizontal fairness concerns affect performance and efficiency in an environment characterized by contractual incompleteness. In our experiment, one principal is matched with two agents. The principal pays equal wages in one treatment and can set individual wages in the other. We find that the use of equal wages elicits substantially lower efforts. This is not caused by monetary incentives per se since under both wage schemes it is profit-maximizing for agents to exert high efforts. The treatment difference instead seems to be driven by the fact that the norm of equity is violated far more frequently in the equal wage treatment. After having suffered from violations of the equity principle, agents withdraw effort. These findings hold even after controlling for the role of intentions, as we show in a third treatment. Our results suggest that adherence to the norm of equity is a necessary prerequisite for successful establishment of gift-exchange relations.reciprocity, gift exchange, equity, wage equality, wage setting, incomplete contracts

Detection of single trial power coincidence for the identification of distributed cortical processes in a behavioral context

Poster presentation: The analysis of neuronal processes distributed across multiple cortical areas aims at the identification of interactions between signals recorded at different sites. Such interactions can be described by measuring the stability of phase angles in the case of oscillatory signals or other forms of signal dependencies for less regular signals. Before, however, any form of interaction can be analyzed at a given time and frequency, it is necessary to assess whether all potentially contributing signals are present. We have developed a new statistical procedure for the detection of coincident power in multiple simultaneously recorded analog signals, allowing the classification of events as 'non-accidental co-activation'. This method can effectively operate on single trials, each lasting only for a few seconds. Signals need to be transformed into time-frequency space, e.g. by applying a short-time Fourier transformation using a Gaussian window. The discrete wavelet transform (DWT) is used in order to weight the resulting power patterns according to their frequency. Subsequently, the weighted power patterns are binarized via applying a threshold. At this final stage, significant power coincidence is determined across all subgroups of channel combinations for individual frequencies by selecting the maximum ratio between observed and expected duration of co-activation as test statistic. The null hypothesis that the activity in each channel is independent from the activity in every other channel is simulated by independent, random rotation of the respective activity patterns. We applied this procedure to single trials of multiple simultaneously sampled local field potentials (LFPs) obtained from occipital, parietal, central and precentral areas of three macaque monkeys. Since their task was to use visual cues to perform a precise arm movement, co-activation of numerous cortical sites was expected. In a data set with 17 channels analyzed, up to 13 sites expressed simultaneous power in the range between 5 and 240 Hz. On average, more than 50% of active channels participated at least once in a significant power co-activation pattern (PCP). Because the significance of such PCPs can be evaluated at the level of single trials, we are confident that this procedure is useful to study single trial variability with sufficient accuracy that much of the behavioral variability can be explained by the dynamics of the underlying distributed neuronal processes

Equity and Efficiency in Multi-Worker Firms: Insights from Experimental Economics

In this paper, we discuss recent evidence from economic experiments that study the impact of social preferences on workplace behavior. We focus on situations in which a single employer interacts with multiple employees. Traditionally, equity and efficiency have been seen as opposing aims in such work environments: individual pay-for-performance schemes maximize efficiency but might lead to inequitable outcomes. We present findings from laboratory experiments that show under which circumstances partially incomplete contracts can create equitable work environments while at the same time reaching surprisingly efficient outcomes.laboratory experiments, wage setting, equity, gift exchange, reciprocity, incomplete contracts, incentives, organizational economics

Still in search of the sunk cost bias

Evidence from hypothetical scenarios strongly suggests the existence of a sunk cost bias, the tendency to ‘throw good money after bad money.’ However, the few studies using incentives are inconclusive. In addition, evidence on potential psychological channels underlying such a bias is scarce. We present a laboratory experiment designed to investigate the sunk cost bias and to test some prominent psychological mechanisms. Inspired by the hypothetical scenarios, we use a two-stage investment task in which an initial investment needs to be made to start a project. In the initial investment stage, the size of the investment and the responsibility of the investor are exogenously varied. In the second investment stage, participants can either decide to terminate the project or to make an additional investment to finish the project. We do not find evidence for the sunk cost bias. To the contrary, we observe a robust reverse sunk cost bias. That is, the larger the initial investment, the lower the likelihood to continue investing in a project. Moreover, whether or not subjects are responsible for the initial investment, does not affect their additional investment. More waste averse individuals also do not react more strongly to sunk cost whereas being in the loss domain decreases additional investment. Importantly, we replicate the sunk cost bias when using hypothetical scenarios. Surprisingly, the reverse sunk cost bias also holds for those participants who exhibit a strong sunk cost bias in the hypothetical scenarios

Neuronal avalanches recorded in the awake and sleeping monkey do not show a power law but can be reproduced by a self-organized critical model

Poster presentation: Self-organized critical (SOC) systems are complex dynamical systems that may express cascades of events, called avalanches [1]. The SOC state was proposed to govern brain function, because of its activity fluctuations over many orders of magnitude, its sensitivity to small input and its long term stability [2,3]. In addition, the critical state is optimal for information storage and processing [4]. Both hallmark features of SOC systems, a power law distribution f(s) for the avalanche size s and a branching parameter (bp) of unity, were found for neuronal avalanches recorded in vitro [5]. However, recordings in vivo yielded contradictory results [6]. Electrophysiological recordings in vivo only cover a small fraction of the brain, while criticality analysis assumes that the complete system is sampled. We hypothesized that spatial subsampling might influence the observed avalanche statistics. In addition, SOC models can have different connectivity, but always show a power law for f(s) and bp = 1 when fully sampled. This may not be the case under subsampling, however. Here, we wanted to know whether a state change from awake to asleep could be modeled by changing the connectivity of a SOC model without leaving the critical state. We simulated a SOC model [1] and calculated f(s) and bp obtained from sampling only the activity of a set of 4 × 4 sites, representing the electrode positions in the cortex. We compared these results with results obtained from multielectrode recordings of local field potentials (LFP) in the cortex of behaving monkeys. We calculated f(s) and bp for the LFP activity recorded while the monkey was either awake or asleep and compared these results to results obtained from two subsampled SOC model with different connectivity. f(s) and bp were very similar for both the experiments and the subsampled SOC model, but in contrast to the fully sampled model, f(s) did not show a power law and bp was smaller than unity. With increasing the distance between the sampling sites, f(s) changed from "apparently supercritical" to "apparently subcritical" distributions in both the model and the LFP data. f(s) and bp calculated from LFP recorded during awake and asleep differed. These changes could be explained by altering the connectivity in the SOC model. Our results show that subsampling can prevent the observation of the characteristic power law and bp in SOC systems, and misclassifications of critical systems as sub- or supercritical are possible. In addition, a change in f(s) and bp for different states (awake/asleep) does not necessarily imply a change from criticality to sub- or supercriticality, but can also be explained by a change in the effective connectivity of the network without leaving the critical state

The medial prefrontal cortex exhibits money illusion

Behavioral economists have proposed that money illusion, which is a deviation from rationality in which individuals engage in nominal evaluation, can explain a wide range of important economic and social phenomena. This proposition stands in sharp contrast to the standard economic assumption of rationality that requires individuals to judge the value of money only on the basis of the bundle of goods that it can buy—its real value—and not on the basis of the actual amount of currency—its nominal value. We used fMRI to investigate whether the brain's reward circuitry exhibits money illusion. Subjects received prizes in 2 different experimental conditions that were identical in real economic terms, but differed in nominal terms. Thus, in the absence of money illusion there should be no differences in activation in reward-related brain areas. In contrast, we found that areas of the ventromedial prefrontal cortex (vmPFC), which have been previously associated with the processing of anticipatory and experienced rewards, and the valuation of goods, exhibited money illusion. We also found that the amount of money illusion exhibited by the vmPFC was correlated with the amount of money illusion exhibited in the evaluation of economic transactions