Trust, Reciprocity and Rules

In the absence of enforceable contracts, many economic and personal interactions rely on trust and reciprocity. Research shows that although this reliance often works well, sometimes it breaks down. Simple rules mandating minimum standards on reciprocation prevent the most egregious trust violations, but may also undermine behavior that would have otherwise produced higher overall economic welfare. We test the efficacy of exogenously imposed minimum return rules using experimental trust games. We find that rules fail to increase trust and trustworthiness. Thus low minimum standards significantly decrease economic welfare. Although sufficiently restrictive rules restore welfare, trust and trustworthy behavior never returns.trust games, experiments, reputation, information, reciprocity

Transparency, Efficiency and the Distribution of Economic Welfare in Pass-Through Investment Trust Games

We design an experiment to examine welfare and behavior in a multi-level trust game representing a pass through investment in an intermediated market. In a repeated game, an Investor invests via an Intermediary who lends to a Borrower. A pre-experiment one-shot version of the game serves as a baseline and to type each subject. We alter the transparency of exchanges between non-adjacent parties. We find transparency of the exchanges between the investor and intermediary does not significantly affect welfare. However, transparency regarding exchanges between the intermediary and borrower promotes trust on the part of the investor, increasing welfare. Further, this has asymmetric effects: borrowers and intermediaries achieve greater welfare benefits than investors. We discuss implications for what specific aspects of financial market transparency may facilitate more efficiency.financial intermediation, financial market transparency, pass through securities, multi-level trust games, experiments

The Play-Out Effect and Preference Reversals: Evidence For Noisy Maximization

In this paper, we document a play-out effect in preference reversal experiments. We compare data where preferences are elicited using (1) purely hypothetical gambles, (2) played-out, but unpaid gambles and (3) played-out gambles with truth-revealing monetary payments. We ask whether a model of stable preferences with random errors (e.g., expected utility with errors) can explain the data. The model is strongly rejected in data collected using purely hypothetical gambles. However, simply playing-out the gambles, even in the absence of payments, shifts the data pattern so that noisy maximization is no longer rejected. Inducing risk preferences using a lottery procedure, using monetary incentives or both shift the data pattern further so that noisy maximization achieves the best possible fit to the aggregate data. No model could fit the data better. We argue that play-out shifts the response pattern by inducing value because subjects can use outcomes to keep score. Induction or monetary payments create stronger induced values, shifting the pattern further

Continuous Time Research and Development Investment and Innovation: Effects on Price and Dividend Paths

Here, I solve a general equilibrium, stochastic, dynamic control problem. In it, an agent who owns a productive asset decides how much of a non-storable good to consume and how much to invest in research and development. Combined, two features distinguish this from previous work. First, the agent maximizes lifetime expected utility (instead of profits or income). Second, the investment level affects the probability of a research and development innovation which would make future dividends jump. Dividend evolution is represented by a continuous time Poisson process with the jump probability depending on the investment level. In equilibrium, the agent chooses the investment level to give an optimal expected innovation rate. This results in endogenously chose, stationary growth rates in asset dividends and prices. These non-stationary price and dividend paths are of a type that Marsh and Merton (1986) predict will violate variance bounds tests such as Shiller's (1981). However, they are not subject to Shiller's (1986) criticism of Marsh and Merton, because they result from a general equilibrium with all agents behaving optimally and rationally.

Arbitrage

I report the results of nine experimental asset market sessions. The traded assets were contingent claims on two "states" with known state probabilities and identical aggregate payoffs across states. Since subjects could diversify away all idiosyncratic risks, this results in prices predicted to equal expected values regardless of risk preferences. IN addition, no-arbitrage restrictions lead to precise predictions for the sum of the individual asset prices. Thus, in these single-period asset markets, price bubbles are well defined without knowing risk preferences. Bubbles regularly form. Subjects seldom exploit the resulting arbitrage opportunity. Bubbles arise even when subjects have gained experience in 15 periods, when subjects can trade directly in the "unit portfolio" of all contingent claims and when subjects can sell claims short. However, direct portfolio trading may force subjects to recognize the assets' interdependence and price them accordingly. Expected utility maximizing models cannot explain these results. Non-expected models (for example, models of decision regret) may explain them.

Implementing and Testing Risk Preference Induction Mechanisms in Experimental Sealed Bid Auctions

Risk preference inducing lottery procedures can serve as valuable tools for experimental economists. However, questioning their effectiveness, experimenters may avoid them even when predictions and conclusions depend crucially on risk preferences. Here, I review risk preference induction attempts in sealed bid auctions, discussing factors that promote or hinder success. Making the procedure very transparent and having subjects learn about it in simple environments promote success. Hysteresis resulting from switching between monetary payoffs and lottery procedures in one environment hinder success. Thus, lottery procedures appear sensitive to the implementation. However, implemented carefully, they can generate behavior consistent with the intended preferences.

Transparency, Efficiency And The Distribution Of Economic Welfare In Pass-Through Investment Trust Games

We design an experiment to examine behavior and welfare in a multi-level trust game representing a pass through investment in an intermediated market. In a repeated game, an investor invests via an intermediary who lends to a borrower. A pre-experiment one-shot version of the game serves as a baseline and to type each subject. We alter the transparency of exchanges between non-adjacent parties. We find transparency of the exchanges between the investor and intermediary does not significantly affect welfare. However, transparency regarding exchanges between the intermediary and borrower promotes trust on the part of the investor, increasing welfare. Further, this has asymmetric effects: borrowers and intermediaries achieve greater welfare benefits than investors. We discuss implications for what specific aspects of financial market transparency may facilitate more efficiency

Influence of entrance-channel magicity and isospin on quasi-fission

The role of spherical quantum shells in the competition between fusion and quasi-fission is studied for reactions forming heavy elements. Measurements of fission fragment mass distributions for different reactions leading to similar compound nuclei have been made near the fusion barrier. In general, more quasi-fission is observed for reactions with non-magic nuclei. However, the $^{40}$Ca+$^{208}$Pb reaction is an exception, showing strong evidence for quasi-fission, though both nuclei are doubly magic. Time-dependent Hartree-Fock calculations predict fast equilibration of $N/Z$ in the two fragments early in the collision. This transfer of nucleons breaks the shell effect, causing this reaction to behave more like a non-magic one in the competition between fusion and quasi-fission. Future measurements of fission in reactions with exotic beams should be able to test this idea with larger $N/Z$ asymmetries.Comment: accepted for publication in Physics Letters