Make Him an Offer He Can’t Refuse: Avoiding Conflicts through Side Payments

The equilibrium of a two-stage conflict game with side-payments predicts that with binding stage-one offers, proposers make and responders accept side-payments, generating settlements that strongly favor proposers. When side-payments are non-binding, proposers offer nothing and conflicts always arise. Laboratory experiments confirm that binding side-payments reduce conflicts. However, 30% of responders reject binding offers, and offers are more egalitarian than predicted. Surprisingly, non-binding side-payments also improve efficiency, although less than binding. With binding side-payments, 98% of efficiency gains come from avoided conflicts. However, with non-binding side-payments, only 49% of gains come from avoided conflicts and 51% from reduced conflict expenditures.contest, conflict resolution, side payments, experiments

Can Markets Save Lives? An Experimental Investigation of a Market for Organ Donations

Many people die while waiting for organ transplants even though the number of usable organs is far larger than the number needed for transplant. Governments have devised many policies aimed at increasing available transplant organs with variable success. However, with few exceptions, policy makers are reluctant to establish markets for organs despite the potential for mutually beneficial exchanges. We ask whether organ markets could save lives. Controlled laboratory methods are ideal for this inquiry because human lives would be involved when implementing field trials. Our results suggest that markets can increase the supply of organs available for transplant, but that the specific institutional design of such markets must be carefully considered. However, the increased supply of transplantable organs derives disproportionately from the poor. We also find that exogenously reducing incentives to keep one’s organs has a similar effect to creating a market, but with equitable donation rates across income levels.Organ Donations, Wealth Effects, Market Design, Experimental Economics

Testing the Boundaries of the Double Auction: The Effects of Complete Information and Market Power

We report boundary experiments testing the robustness of price convergence in double auction markets for non-durable goods in which there is extreme earnings inequality at the competitive equilibrium (CE). Following up on a conjecture by Smith (1976a), we test whether the well-known equilibrating power of the double auction institution is robust to the presence of complete information about traders’ values and costs and the presence of symmetric market power. We find that complete information is insufficient to impede convergence to CE prices; however, introducing market power consistently causes prices to deviate from the CE, whether or not subjects possess complete information. Our design highlights the value of boundary experiments in understanding how market institutions shape behavior, and our findings help delineate the limits of the double auction institution to generate competitive outcomes

Side-Payments and the Costs of Conflict.

Conflict and competition often impose costs on both winners and losers, and conflicting parties may prefer to resolve the dispute before it occurs. The equilibrium of a conflict game with side-payments predicts that with binding offers, proposers make and responders accept side-payments, generating settlements that strongly favor proposers. When side-payments are non-binding, proposers offer nothing and conflicts always arise. Laboratory experiments confirm that binding side-payments reduce conflicts. However, 30% of responders reject binding offers, and offers are more egalitarian than predicted. Surprisingly, non-binding side-payments also improve efficiency, although less than binding. With binding side-payments, 87% of efficiency gains come from avoided conflicts. However, with non-binding side-payments, only 39% of gains come from avoided conflicts and 61% from reduced conflict expenditures.contests, conflict resolution, side-payments, experiments

Testing the Boundaries of the Double Auction: The Effects of Complete Information and Market Power

We report boundary experiments testing the robustness of price convergence in double auction markets for non-durable goods in which there is extreme earnings inequality at the competitive equilibrium (CE). Following up on a conjecture by Smith (1976a), we test whether the well-known equilibrating power of the double auction institution is robust to the presence of complete information about traders’ values and costs and the presence of symmetric market power. We find that complete information is insufficient to impede convergence to CE prices; however, introducing market power consistently causes prices to deviate from the CE, whether or not subjects possess complete information. Our design highlights the value of boundary experiments in understanding how market institutions shape behavior, and our findings help delineate the limits of the double auction institution to generate competitive outcomes

Resolving Conflicts by a Random Device

We examine conflict resolution via a random device. We model conflict as a two-agent rent-seeking contest for a fixed prize. Before conflict arises, both agents may agree to allocate the prize by coin flip to avoid the costs of conflict. In equilibrium, risk-neutral agents with relatively symmetric conflict capabilities agree to resolve the conflict by randomization. However, with sufficiently asymmetric capabilities, conflicts are unavoidable because the stronger agent prefers to fight. Laboratory experiments confirm that the availability of the random device partially eliminates conflicts when agents are relatively symmetric; however, the device also reduces conflict between substantially asymmetric agents.Beauty contest, conflict resolution, experiments

Individualism, Collectivism, and Trade

While economists recognize the important role of formal institutions in the promotion of trade, there is increasing agreement that institutions are typically endogenous to culture, making it difficult to disentangle their separate contributions. Lab experiments that assign institutions exogenously and measure and control individual cultural characteristics can allow for clean identification of the effects of institutions, conditional on culture, and help us understand the relationship between behavior and culture, under a given institutional framework. We focus on cultural tendencies toward individualism/collectivism, which social psychologists highlight as an important determinant of many behavioral differences across groups and people. We design an experiment to explore the relationship between subjects’ degree of individualism/collectivism and their willingness to abandon a repeated, bilateral exchange relationship in order to seek potentially more lucrative trade with a stranger, under enforcement institutions of varying strength. Overall, we find that individualists tend to seek out trade more often than collectivists. A diagnostic treatment and additional analysis suggests that this difference may reflect both differential altruism/favoritism to in-group members and different reactions to having been cheated in the past. This difference is mitigated somewhat as the effectiveness of enforcement institutions increases. Nevertheless we see that cultural dispositions are associated with willingness to seek out trade, regardless of institutional environment

Do Market Incentives Crowd Out Charitable Giving?

Donations and volunteerism can be conceived as market transactions with a zero explicit price. However, evidence suggests people may not view zero as just another price when it comes to pro-social behavior. Thus, while markets might be expected to increase the supply of assets available to those in need, some worry such financial incentives will crowd out altruistic giving. This paper reports laboratory experiments directly investigating the degree to which market incentives crowd out large, discrete charitable donations in a setting related to deceased organ donation. The results suggest markets increase the supply of assets available to those in need. However, as some critics fear, market incentives disproportionately influence the relatively poor. (C) 2013 Elsevier Inc. All rights reserved

A Portable Method of Eliciting Respect for Social Norms

Recent models of prosociality suggest that cooperation in laboratory games may be better understood as resulting from concern for social norms than from prosocial preferences over outcomes. Underlying this interpretation is the idea that people exhibit heterogeneous respect for shared norms. We introduce a new, abstract task to elicit a proxy for individual norm-following propensity by asking subjects to choose from two actions, where one is costly. We instruct subjects that “the rule is” to take the costly action. Their willingness to incur such a cost reveals respect for norms. We show that choices in this task are similar across five countries. Rule-following is correlated with norm-consistent behavior in dictator games, providing support for our interpretation

Single- And Double-Elimination All-Pay Tournaments

Tournaments consisting of iterative matches are a common mechanism for determining how to allocate a prize. For this reason it is important to understand the behavioral as well as the theoretical properties of different tournament structures. Given that laboratory experiments have consistently found high levels of overbidding in contests, one might suspect that double-elimination tournaments would generate substantially more total investment than single-elimination tournaments despite the two types of tournaments generating theoretically equivalent expected aggregate investment. This paper reports a set of laboratory experiments designed to test this comparison. The results indicate that aggregate investment is similar between the two tournaments, despite behavioral differences in bidding strategies