Social Preferences and Relational Contracting Performance: An Experimental Investigation

We examine how social preferences affect behavior and surplus in relational contracts. Experimental subjects participate in a contracting environment similar to Brown, Falk, and Fehr [Brown, M., Falk, A. & Fehr, E., “Relational Contracts and the Nature of Market Interactions, Econometrica, 72 (2004):747-780] and in social preference experiments adapted from Charness and Rabin [Charness, G. & Rabin, M. “Understanding Social Preferences with Simple Tests.” The Quarterly Journal of Economics 117(2002): 817-869]. Subjects’ behavior during the Charness and Rabin experiment is a significant predictor of behavior and outcomes observed during the subsequent multi-period, finite-horizon, relational- contracting environment, which features market power, unenforceable performance, reputation formation and endogenous matching of trading partners. Compared to subjects who respond to the Charness-Rabin games in a fashion consistent with purely self-interested, competitive or reciprocal social preferences, buyers and sellers with alternative social preference structures engage in contracts with substantially higher quality and price, which leads to greater surplus for both parties. A key difference is that self-interested, competitive and reciprocal buyers respond to early-period shirking by extending subsequent offers that are less generous to the seller, while buyers with other social preferences extend subsequent offers that are more generous. Reciprocal and competitive sellers and, to a lesser extent, self-interested sellers, deliver sub-contractual levels of quality more often, which substantially lowers buyer and total welfare. We conclude that intentional or ‘cold’ measures of social preferences have considerable predictive power in dynamic, interactive (or ‘hot’) economic settings.Contracts; relational contracts; implicit contracts; market interaction; experimental economics; repeated transaction; social preferences.

THE WELFARE EFFECTS OF BANNING TOURNAMENTS WHEN COMMITMENT IS IMPOSSIBLE: SOME RESULTS FROM THE BROILER SECTOR

We consider the implications of banning tournament contracts and replacing them with fixed performance standard contracts in a multi-period model where the principal cannot commit to future contract parameters. A ban cannot increase total surplus in a static model. In a dynamic model, however, a ban of tournaments can increase total surplus by mitigating the ratchet effect. Calibrating our model to published data from the broiler sector, we find that a ban on use of contemporaneous and lagged relative performance data does not improve total surplus under most circumstances but could increase total surplus in a few instances of low wealth and unitary relative risk aversion. A more enforceable, period-by-period ban is even less likely to be welfare enhancing and does not hinder the principal from redistributing a fixed compensation pool from low ability growers to high ability growers.Livestock Production/Industries,

TOURNAMENTS, RISK PERCEPTIONS, AND FAIRNESS

This paper reports the results of an economic experiment investigating human subjects' preferences for two types of contracts tournaments and fixed performance standard contracts. Willingness to pay data was elicited through an auction and results suggest that subjects prefer fixed performance standard contracts to tournaments. Primary drivers of this result appear to be subjects' perceptions that tournaments are more risky and less fair than fixed performance standard contracts. Surprisingly, measures of the relative profitability of the contracts did not correlate with willingness to pay. Our results can shed light on why agricultural producers express frustration over tournaments and can provide insights on contract and policy design.Research Methods/ Statistical Methods,

Social Preferences and Relational Contracting: An Experimental Investigation

The form and regulation of contracts is of increasing importance to agricultural economists as farmers and agribusinesses increasing rely on contracts rather than markets to acquire inputs and sell outputs. We focus on the differences between the joint and individual surplus achievable under complete versus incomplete or relational contracts, where the latter are contracts that are not verifiable by a third party and must rely upon threat of termination in order to entice mutually satisfactory performance. Using an experimental market similar to Brown, Falk, and Fehr [Brown, M., A. Falk, and E. Fehr. Relational Contracts and the Nature of Market Interactions, Econometrica, 72 (2004):747-780] we replicate the general results found by these authors, including the qualitative findings that complete contracts dominate incomplete contracts in terms of social surplus generated and that incomplete contracts significantly deviate from the minimal levels of social surplus predicted by equilibrium models featuring purely self-interested agents. We extend the Brown, Falk, and Fehr results in a fundamental way: we explicitly link individual outcomes in relational contracts (e.g, surplus, prices, quality) to the nature of subjects' social preferences, which were measured by a separate experimental protocol that was implemented prior to the experimental trading session. We find subjects with other-regarding preferences enter into relational contracts that generate levels of social surplus similar to the surplus generated under complete contracts. Furthermore, subjects with other-regarding preferences tend to locate others with similar preferences and enter into long-term trading relationships that generate these higher surplus levels. We discuss the ramifications of the results for current regulatory efforts aimed at agricultural contracts.Marketing,

AJAE Appendix: Tournaments, Fairness, and Risk

The material contained herein is supplementary to the article named in the title and published in the American Journal of Agricultural Economics, Volume 88, Number 3, August 2006.Research Methods/ Statistical Methods, Risk and Uncertainty,

Do the Selfish Mimic Cooperators? Experimental Evidence from Finitely-Repeated Labor Markets

Experimental studies have consistently shown that cooperative outcomes can emerge even in finitely repeated games. Such outcomes are justified by existing reputation building models, which suggest that cooperative outcomes can be sustained if some subjects have other-regarding preferences. While the existence of other-regarding preferences is typically used to justify experimental outcomes, we are unaware of empirical studies that explicitly examine the interaction between cooperators (those with other-regarding preferences) and selfish subjects in sustaining cooperation. In this paper, we classify subjects as either selfish or cooperative using simple social preference games and then test for behavioral differences between the two types in a finitely-repeated labor market with unenforceable worker effort. Theory predicts, and our data confirms, that (1) selfish players mimic the actions of cooperators when trading partners can track the individual reputation of past partners and (2) selfish and cooperative types act differently when individual reputations cannot be tracked.contracts, relational contracts, implicit contracts, market interaction, experimental economics, repeated transaction, social preferences, reputation, firm latitude, finitely-repeated games

AJAE Appendix: Contract Enforcement, Social Efficiency, and Distribution: Some Experimental Evidence

The material contained herein is supplementary to the article named in the title and published in the American Journal of Agricultural Economics, May 2007, Volume 89, Issue 2.Marketing,

Mixed Tournaments, Common Shocks, and Disincentives: An Experimental Study

Two well-known hypotheses from the literature on tournaments are that (1) tournaments can filter out common shocks thereby reducing agents risk exposure; and (2) disincentive effects can arise when a tournament scheme is administered on a group of mixed ability agents. While handicapping and/or the creation of homogeneous groups have been suggested as mechanisms for mitigating disincentive effects, it is often impractical to use handicapping schemes and nearly impossible to create a completely homogeneous labor force. Hence, contract administrators who intend to use tournaments to elicit effort must be able to assess the positive effects of tournaments (eliminate common shocks) against the negative effects (disincentive effects). Using economic experiments, we find evidence of disincentive effects under tournaments, although these effects are not as strong as predicted. Moreover, tournaments can be effective at reducing earnings variability when common shocks are important. These results suggest that the benefits of risk reduction from eliminating common shocks might outweigh the disincentive effects arising from mixed tournaments.mixed tournaments, incentives, relative performance contracts, experimental economics, Research Methods/ Statistical Methods, C91 D01, D81, D82, D86,

Macro-micro feedback links of water management in South Africa : CGE analyses of selected policy regimes

The pressure on an already stressed water situation in South Africa is predicted to increase significantly under climate change, plans for large industrial expansion, observed rapid urbanization, and government programs to provide access to water to millions of previously excluded people. The present study employed a general equilibrium approach to examine the economy-wide impacts of selected macro and water related policy reforms on water use and allocation, rural livelihoods, and the economy at large. The analyses reveal that implicit crop-level water quotas reduce the amount of irrigated land allocated to higher-value horticultural crops and create higher shadow rents for production of lower-value, water-intensive field crops, such as sugarcane and fodder. Accordingly, liberalizing local water allocation in irrigation agriculture is found to work in favor of higher-value crops, and expand agricultural production and exports and farm employment. Allowing for water trade between irrigation and non-agricultural uses fueled by higher competition for water from industrial expansion and urbanization leads to greater water shadow prices for irrigation water with reduced income and employment benefits to rural households and higher gains for non-agricultural households. The analyses show difficult tradeoffs between general economic gains and higher water prices, making irrigation subsidies difficult to justify.Water Supply and Sanitation Governance and Institutions,Town Water Supply and Sanitation,Water Supply and Systems,Water and Industry,Water Conservation

Co-crystalization and in vitro biological characterization of 5-Aryl-4-(5-substituted-2-4-dihydroxyphenyl)-1,2,3-thiadiazole Hsp90 inhibitors

A potential therapeutic strategy for targeting cancer that has gained much interest is the inhibition of the ATP binding and ATPase activity of the molecular chaperone Hsp90. We have determined the structure of the human Hsp90α N-terminal domain in complex with a series of 5-aryl-4-(5-substituted-2-4-dihydroxyphenyl)-1,2,3-thiadiazoles. The structures provide the molecular details for the activity of these inhibitors. One of these inhibitors, ICPD 34, causes a structural change that affects a mobile loop, which adopts a conformation similar to that seen in complexes with ADP, rather than the conformation generally seen with the pyrazole/isoxazole-resorcinol class of inhibitors. Competitive binding to the Hsp90 N-terminal domain was observed in a biochemical assay, and these compounds showed antiproliferative activity and induced apoptosis in the HCT116 human colon cancer cell line. These inhibitors also caused induction of the heat shock response with the upregulation of Hsp72 and Hsp27 protein expression and the depletion of Hsp90 clients, CRAF, ERBB2 and CDK4, thus confirming that antiproliferative activity was through the inhibition of Hsp90. The presence of increased levels of the cleavage product of PARP indicated apoptosis in response to Hsp90 inhibitors. This work provides a framework for the further optimization of thiadiazole inhibitors of Hsp90. Importantly, we demonstrate that the thiadiazole inhibitors display a more limited core set of interactions relative to the clinical trial candidate NVP-AUY922, and consequently may be less susceptible to resistance derived through mutations in Hsp9