Contracts, Biases and Consumption of Access Services

We consider a consumption model that takes into account the valuation and demand uncertainties that consumers face while using access services. Typical examples of such services include telecommunication services, extended warranties for consumer electronics, and club memberships. We demonstrate that consumption is affected by contract structure (pay-peruse vs. three part tariffs) even if the optimal consumption plans are identical. We find that a majority of individuals correctly use a threshold policy that is similar to a nearly optimal heuristic, however they use the free units too quickly leading to overconsumption and lost surplus. These errors are partially driven by mistaken beliefs about the value distribution. We also measure subjectsâ willingness to pay for a contract with free access units, and we find that nearly half of subjects are willing to pay at least the full per-unit price, with a substantial fraction willing to overpay. The optimal firm strategy is therefore to offer a contract that presells access units at a very small discount; this strategy increases revenue by 8 − 15% compared to only offering a pay-per-use contract.access services, pricing contracts, decision biases, experiment

Gift Exchange in the Lab - It is not (only) how much you give ...

An important aspect in determining the effectiveness of gift exchange relations in labor markets is the ability of the worker to “repay the gift” to the employer. To test this hypothesis, we conduct a real effort laboratory experiment where we vary the wage and the effect of the worker’s effort on the manager’s payoff. Furthermore we collect additional information that allows us to control for the workers’ ability and whether they can be classified as reciprocal or not. From our agency model of reciprocal motivation we derive non-trivial predictions about which is the marginal worker (in terms of ability) affected by our experimental variation and how different types of individuals, selfish and reciprocal, will react to it. Our model does substantially better than other theories in organizing the data.reciprocity, fairness, real effort experiment, personality tests

Managerial Payoff and Gift Exchange in the Field

We conduct a field experiment where we vary both the presence of a gift exchange wage and the effect of the worker’s effort on the manager’s payoff. The results indicate a strong complementarity between the initial wage gift and the agent’s ability to “repay the gift”. We collect information on ability to control for differences and on reciprocal inclination to show that gift exchange is more effective with more reciprocal agents. We present a simple principal-agent model with reciprocal subjects that motivates our empirical findings. Our results offer an avenue to reconcile the recent conflicting evidence on the efficacy of gift exchange outside the lab; we suggest that the significance of gift exchange relations depends on details of the environment.incentives, reciprocity, gift exchange, field experiments

Contractual and Organizational Structurewith Reciprocal Agents

Empirically, compensation systems generate substantial effort despite weak monetary incentives. We consider reciprocal motivations as a source of incentives. We solve for the optimal contract in the basic principal-agent problem and show that reciprocal motivations and explicit performance-based pay are substitutes. A firm endogenously determines the mix of the two sources of incentives to best induce effort from the agent. Analyzing extended versions of the model allows us to examine how organizational structure impacts the effectiveness of reciprocity and to derive specific empirical predictions. We use the UK-WERS workplace compensation data set to confirm the predictions of our extended model.optimal contracts, reciprocity, organizational structure

The role of experience in the Gambler's Fallacy

Recent papers have demonstrated that the way people acquire information about a decision problem, by experience or by abstract description, can affect their behavior. We examined the role of experience over time in the emergence of the Gambler's Fallacy in binary prediction tasks. Theories of the Gambler's Fallacy and models of binary prediction suggest that recency bias, elicited by experience over time, may play a significant role. An experiment compared a condition where participants sequentially predicted the colored outcomes of a virtual roulette wheel spin with a condition where the wheel's past outcomes were presented all at once. In a third condition outcomes were presented sequentially in an automatic fashion without intervening predictions. Subjects were yoked so that the same history of outcomes was observed in all conditions. The results revealed the Gambler's Fallacy when outcomes were experienced (with or without predictions). However, the Gambler's Fallacy was attenuated when the same outcomes were presented all at once. Observing the Gambler's Fallacy in the third condition suggests that the presentation of information over time is a significant antecedent of the bias. A second experiment demonstrated that, while the bias can emerge with an all-at-once presentation that makes recent outcomes salient (Burns & Corpus, 2004), the bias did not emerge when the presentation did not draw attention to recent outcomes. Copyright © 2009 John Wiley & Sons, Ltd.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/64569/1/676_ftp.pd

The Impact of Decision Rights on Innovation Sharing

While innovation sharing between a supplier and a buyer—a common practice in the automotive industry—can increase the efficiency of a supply chain, many suppliers are reluctant to do so. Sharing innovations leaves the supplier in a vulnerable position if the buyer exploits the information and re-shares the supplier’s innovation with competing suppliers. Anecdotal evidence from automotive suppliers tells that in some occasions the buyer’s decision is in the hands of a long-run focused employee (“engineer”), while in other occasions it is a short-run focused employee (“procurement manager”) who has more control. To examine how the allocation of decision rights to employees with different time horizons affects collaboration between the two firms, we model a buyer-supplier relationship where the buyer is a dual decision maker, consisting of long-run and short-run focused employees. We characterize the equilibrium of this model and show that the frequency of collaborative outcomes increases from a case where the decision is made by an employee with a short-term objective, to a case where the decision is made jointly, to a case where a decision is made by an employee with a long-run objective. Our experimental results verify this prediction, for the most part. An important result not predicted by the theory is that in the joint control case, both employees become significantly less trustworthy. With an additional treatment which allows for free-form communication, we identify social interaction effects in the form of a “bias to agreement” as a plausible driver of the morehttps://deepblue.lib.umich.edu/bitstream/2027.42/136770/1/1369_Beer.pdfhttps://deepblue.lib.umich.edu/bitstream/2027.42/136770/4/1369_Beer_Dec2018.pdfDescription of 1369_Beer_Dec2018.pdf : December 2018 revisio

Incentive and Competition Effects of Supplier Awards

Many firms recognize exceptional supplier performance by giving out a “Supplier of the Year” or “Outstanding Supplier” award. These awards are usually symbolic since they have no immediate monetary value for a supplier and no direct cost to a buyer. Giving these awards can be beneficial for a buyer: if suppliers care about being rewarded, symbolic awards can incentivize a supplier to exert higher effort. On the other hand, in a market with multiple buyers and suppliers, an award may have another effect, which we denote “competition effect”. When good suppliers are scarce, a public award can intensify the competition to do business with a good supplier. We develop a theoretical model that captures a supplier's value for the award in a setting with two buyers and two suppliers. We show that the average provision of quality is higher when awards are available whether these are private (only observable to the recipient) or public (observable to everyone). In addition, public awards result in buyers paying a higher price to get a good supplier. We then test these results with a laboratory experiment. Our experimental results show that private symbolic awards have incentive effects and lead to higher provision of quality and higher buyer's profits. When the awards are public this profit premium disappears. This happens for two reasons, first because buyers have to pay higher prices to get the good suppliers, and second because making the award public crowds out the intrinsic value of the award for suppliers.https://deepblue.lib.umich.edu/bitstream/2027.42/136764/1/1368_Beer.pdfhttps://deepblue.lib.umich.edu/bitstream/2027.42/136764/4/1368_Beer_March18.pdfDescription of 1368_Beer_March18.pdf : March 2018 revision (title change

Bargaining in Supply Chains (Long Version)

We study experimentally bargaining in a multiple-tier supply chain with horizontal competition and sequential bargaining between tiers. Our treatments vary the cost differences between firms in tiers 1 and 2. We measure how these underlying costs influence the efficiency, negotiated prices and profit distribution across the supply chain, and the consistency of these outcomes with existing theory. We find that the structural issue of cost differentials dominates personal characteristics in explaining outcomes, with profits in a tier generally increasing with decreased competition in the tier and increasing with decreased competition in alternate tiers. The Balanced Principal model of supply chain bargaining does a good job explaining our data, and outperforms the common assumption of leader-follower negotiations. We find a significant anchoring effect from a firm's first bid but no effect of the sequence of those bids, no evidence of failure to close via escalation of commitment, and mixed results for a deadline effect. We also find an interesting asymmetry between the buy and sells sides in employed bidding strategy. The buy side makes predominantly concessionary offers after the initial anchor, but a significant number of sell side firms engage in aggressive anti-concessionary bidding, a strategy that is effective in that it increases prices while not compromising closure rates.http://deepblue.lib.umich.edu/bitstream/2027.42/109717/1/1259_Lovejoy.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/109717/4/1259_Lovejoy_Mar2015.pdfDescription of 1259_Lovejoy_Mar2015.pdf : Long Version March 201

What Do We Expect from Our Friends?

We conduct a field experiment in a large real-world social network to examine how subjects expect to be treated by their friends and by strangers who make allocation decisions in modified dictator games. While recipients’ beliefs accurately account for the extent to which friends will choose more generous allocations than strangers (i.e. directed altruism), recipients are not able to anticipate individual differences in the baseline altruism of allocators (measured by giving to an unnamed recipient, which is predictive of generosity towards named recipients). Recipients who are direct friends with the allocator, or even recipients with many common friends, are no more accurate in recognizing intrinsically altruistic allocators. Recipient beliefs are significantly less accurate than the predictions of an econometrician who knows the allocator’s demographic characteristics and social distance, suggesting recipients do not have information on unobservable characteristics of the allocator.dictator games, beliefs, baseline altruism, directed altruism, social networks

Norms and Contracting

We argue that contracts establish the norms of a relationship and that individuals incur disutility when deviating from these norms. In a laboratory experiment, we allow agents to make simple contracts before they play one of four games, and the most effective contract always includes an unenforceable “handshake” agreement to take the first-best action. In three games, a contract with only this handshake agreement is (at least weakly) optimal. The handshake is particularly effective in games with strategic complements. Our results highlight an explanation for contractual incompleteness: establishing a norm can effectively substitute for weak enforceable restrictions