Peer effects in risk taking: Envy or conformity?

We examine two explanations for peer effects in risk taking: relative payoff concerns and preferences that depend on peer choices. We vary experimentally whether individuals can condition a simple lottery choice on the lottery choice or the lottery allocation of a peer. We find that peer effects increase significantly, almost double, when peers make choices, relative to when they are allocated a lottery. In both situations, imitation is the most frequent form of peer effect. Hence, peer effects in our environment are explained by a combination of relative payoff concerns and preferences that depend on peer choices. Comparative statics analyses and structural estimation results suggest that a norm to conform to the peer may explain why peer choices matter. Our results suggest that peer choices are important in generating peer effects and hence have important implications for modeling as well as for policy

Relational Contracting Under the Threat of Expropriation – Experimental Evidence

We examine how relational contracting in credit and investment relationships is affected by the potential expropriation of funds. We implement credit relationships in which repayment is not third-party enforceable, i.e. borrowers can default on their loans. In our main treatment the borrower can expropriate the lender’s funds: a defaulting borrower can reinvest the loaned funds in future periods. In a control treatment borrowers cannot expropriate borrowed funds, i.e. if they default they cannot reinvest these funds in future periods. We find that potential expropriation decreases the overall volume of credit as lenders offer smaller loans in initial periods. Borrowers are more likely to default in earlier periods of the relationship when expropriation is possible, especially when they receive large loans. Together these results suggest that relational contracts may be particularly difficult to establish in markets where the expropriation of funds is feasible. This finding is relevant to credit markets in which lenders’ rights are weak, but also to sovereign lending, as well as to foreign direct investment in countries with weak investor protection.Relational contracts;Investor protection;Banking;Sovereign debt;Foreign direct investment.

Peer Effects in Risk Taking

This paper examines the effect of peers on individual risk taking. In the absence of informational motives, we investigate why social utility concerns may drive peer effects. We test for two main channels: utility from payoff differences and from conforming to the peer. We show experimentally that social utility generates substantial peer effects in risk taking. These are mainly explained by utility from payoff differences, in line with outcomebased social preferences. Contrary to standard assumptions, we show that estimated social preference parameters change significantly when peers make active choices, compared to when lotteries are randomly assigned to them

LYING ABOUT WHAT YOU KNOW OR ABOUT WHAT YOU DO?

We compare communication about private information to communication about actions in a one-shot 2-person public good game with private information. The informed player, who knows the exact return from contributing and whose contribution is unobserved, can send a message about the return or her contribution. Theoretically, messages can elicit the uninformed player's contribution, and allow the informed player to free-ride. The exact language used is not expected to matter. Experimentally, however, we find that free-ride depends on the language: the informed player free-rides less-and thereby lies less frequently-when she talks about her contribution than when she talks about the return. Further experimental evidence indicates that it is the promise component in messages about the contribution that leads to less free-ride and less lying. © 2013 by the European Economic Association

Lying About What you Know or About What you Do? (replaces CentER DP 2010-033)

We compare communication about private information to communication about actions in a one- shot 2-person public good game with private information. The informed player, who knows the exact return from contributing and whose contribution is unobserved, can send a message about the return or her contribution. Theoretically, messages can elicit the uninformed player's contribution, and allow the informed player to free-ride. The exact language used is not expected to matter. Experimentally, however, we find that free-riding depends on the language: the informed player free-rides less, and thereby lies less frequently, when she talks about her contribution than when she talks about the return. Further experimental evidence indicates that it is the promise component in messages about the contribution that leads to less free-riding and less lying.Information transmission;lying;communication;experiment

Hiding an Inconvenient Truth: Lies and Vagueness (Revision of DP 2008-107)

When truth conflicts with efficiency, can verbal communication destroy efficiency? Or are lies or vagueness used to hide inconvenient truths? We consider a sequential 2-player public good game in which the leader has private information about the value of the public good. This value can be low, high, or intermediate, with the latter case giving rise to a prisoners dilemma. Without verbal communication, efficiency is achieved, with contributions for high or intermediate values. When verbal com- munication is added, the leader has an incentive to hide the precise truth when the value is intermediate. We show experimentally that, when communication about the value must be precise, the leader frequently lies, preserving efficiency by exaggerating. When communication can be vague, the leader turns to vague messages when the value is intermediate, but not when it is high. Thus, she implicitly reveals all values. Inter- estingly, efficiency is still preserved, since the follower ignores messages altogether and does not seem to realize that vague messages hide inconvenient truths.Communication;Efficiency;Lying;Public Goods.

Which Words Bond? An Experiment on Signaling in a Public Good Game (replaced by CentER DP 2011-139)

We compare signaling by words and actions in a one-shot 2-person public good game with private information. The informed player, who knows the exact return from contributing, can signal by contributing first (actions) or by sending a costless message (words). Words can be about the return or about her contribution decision. Theoretically, actions lead to fully e¢ cient contributions. Words can be as influential as actions, and thus elicit the uninformed player's contribution, but allow the informed player to free-ride. The exact language used is not expected to matter. Experimentally, we find that words can be as influential as actions. Free-riding, however, does depend on the language: the informed player free-rides less when she talks about her contribution than when she talks about the returns.Information transmission;costly signaling;communication;experiment