Does Information Matter? Some Experimental Evidence from a Common-Pool Resource Game

This paper analyzes the effect of the availability of information about the payoff structure on the behavior of players in a Common-Pool Resource game. Six groups of six individuals played a complete information game, while other six groups played the same game but with no information about the payoff function. It will be shown that the patterns of investment decisions in both treatments are remarkadly similar. In fact, it cannot be rejected that there is no difference in the investment decisions at the aggregate level between the two treatments. Furthermore, after arguing that the unique Nash equilibrium of the game does not organize the individual data, two individual learning models are studied: one following a marginal analysis (the Best-reply function) and one following an average analysis (the Average-reply function). However, the predictive value of such learning models is found to be poor.Common-pool resources, Nash equilibrium, Information, Learning

Strategic The Two-Person Harvard Game: An Experimental Analysis

Two subjects have to repeatedly choose between two alternatives, A and B, where payoffs of an A or B-choice depend on the choices made by both players in a number of previous choices. Locally, alternative A gives always more payoff than alternative B. However, in terms of overall payoffs exclusive choice of B is a better strategy. The equilibrium predicted by the theory of melioration is to exclusively play A, while the Nash equilibrium is to almost exclusively play B. The predictive values of such equilibria are analyzed under three different informational conditions. Special attention is paid to the learning processes exhibited by players.Bounded rationality; Psychology; Melioration; Nash equilibrium; Information; Learning

Experimentally Observed Imitation and Cooperation in Price Competition on the Circle

This paper reports an experiment on a location game, the so-called "Price-Competition on the Circle." There are n symmetric firms equidistantly located on a circle. Consumers are uniformly distributed. Each consumer buys one and only one unit from that firm whose price, including the cost of transportation, is the lowest, provided such a price is below a maximum willingness to pay. Experiments, extended over 200 periods, were run with 3, 4, and 5 participants. Subjects did not receive any information about the relationship between prices and profits, but they received feedback on prices and profits of two neighbors after each period. The evaluation compares predictions derived from imitation equilibrium (Selten and Ostmann 2001) and Cournot equilibrium, as well as symmetric joint-profit maximization. The results qualitatively favor imitation equilibrium, as long as no cooperation is observed.Imitation, Cooperation, Location, Experiments

Welfare of naive and sophisticated players in school choice

Two main school choice mechanisms have attracted the attention in the literature: Boston and deferred acceptance (DA). The question arises on the ex-ante welfare implications when the game is played by participants that vary in terms of their strategic sophistication. Abdulkadiroglu, Che and Yasuda (2011) have shown that the chances of naive participants getting into a good school are higher under the Boston mechanism than under DA, and some naive participants are actually better off. In this note we show that these results can be extended to show that, under the veil of ignorance, i.e. students not yet knowing their utility values, all naive students may prefer to adopt the Boston mechanism.School Choice; Naive Players; Welfare; Veil of Ignorance

A measure of rationality and welfare

There is evidence showing that individual behavior often deviates from the classical principle of maximization. This evidence raises at least two important questions: (i) how severe the deviations are and (ii) which method is the best for extracting relevant information from choice behavior for the purposes of welfare analysis. In this paper we address these two questions by identifying from a foundational analysis a new measure of the rationality of individuals that enables the analysis of individual welfare in potentially inconsistent subjects, all based on standard revealed preference data. We call such measure minimal index.Rationality; Individual Welfare; Revealed Preference.

A theory of reference-dependent behavior

Extensive field and experimental evidence in a variety of environments show that behavior depends on a reference point. This paper provides an axiomatic characterization of this dependence. We proceed by imposing gradually more structure on both choice correspondences and preference relations, requiring increasingly higher levels of rationality, and freeing the decision-maker from certain types of inconsistencies. The appropriate degree of behavioral structure will depend on the phenomenon that is to be modeled. Lastly, we provide two applications of our work: one to model the status-quo bias, and another to model addictive behavior.Individual rationality, reference-dependence, rationalization, path independence, status-quo bias, addiction, habit formation, LeeX

On the complexity of rationalizing behavior

We study the complexity of rationalizing choice behavior. We do so by analyzing two polar cases, and a number of intermediate ones. In our most structured case, that is where choice behavior is defined in universal choice domains and satisfies the "weak axiom of revealed preference," finding the complete preorder rationalizing choice behavior is a simple matter. In the polar case, where no restriction whatsoever is imposed, either on choice behavior or on choice domain, finding the complete preorders that rationalize behavior turns out to be intractable. We show that the task of finding the rationalizing complete preorders is equivalent to a graph problem. This allows the search for existing algorithms in the graph theory literature, for the rationalization of choice.Rationalization, Computational complexity, NP-complete, Arbitrary Choice Domains

A characterization of sequential rationalizability

A choice function is sequentially rationalizable if there is an ordered collection of asymmetric binary relations that identifies the selected alternative in every choice problem. We propose a property, F-consistency, and show that it characterizes the notion of sequential rationalizability. F-consistency is a testable property that highlights the behavioral aspects implicit in sequentially rationalizable choice. Further, our characterization result provides a novel tool with which to study how other behavioral concepts are related to sequential rationalizability, and establish a priori unexpected implications. In particular, we show that the concept of rationalizability by game trees, which, in principle, had little to do with sequential rationalizability, is a refinement of the latter. Every choice function that is rationalizable by a game tree is also sequentially rationalizable. Finally, we show that some prominent voting mechanisms are also sequentially rationalizable.Individual rationality, Rationalizability, Consistency, Bounded rationality, Behavioral economics, Voting

Psychological pressure in competitive environments: Evidence from a randomized natural experiment

Much like cognitive abilities, emotional skills can have major effects on perfor mance and economic outcomes. This paper studies the behavior of professional subjects involved in a dynamic competition in their own natural environment. The setting is a penalty shoot-out in soccer where two teams compete in a tournament framework taking turns in a sequence of five penalty kicks each. As the kicking order is determined by the random outcome of a coin flip, the treatment and control groups are determined via explicit randomization. Therefore, absent any psychological effects, both teams should have the same probability of winning regardless of the kicking order. Yet, we find a systematic first-kicker advantage. Using data on 2,731 penalty kicks from 262 shoot-outs for a three decade period, we find that teams kicking first win the penalty shoot-out 60.5% of the time. A dynamic panel data analysis shows that the psychological mechanism underlying this result arises from the asymmetry in the partial score. As most kicks are scored, kicking first typically means having the opportunity to lead in the partial score, whereas kicking second typically means lagging in the score and having the opportunity to, at most, get even. Having a worse prospect than the opponent hinders subjects' performance. Further, we also find that professionals are self-aware of their own psychological effects. When a recent change in regulations gives winners of the coin toss the chance to choose the kicking order, they rationally react to it by systematically choosing to kick first. A survey of professional players reveals that when asked to explain why they prefer to kick first, they precisely identify the psychological mechanism for which we find empirical support in the data: they want “to lead in the score in order to put pressure on the opponent.”LeeX

Blowing the Whistle

Leniency clauses, offering cartelists legal immunity if they blow the whistle on each other, is a recent anti-trust innovation. The authorities wish to thwart cartels and promote competition. This effect is not evident, however; whistle-blowing may enforce trust and collusion by providing a tool for cartelists to punish each other. We examine the impact of leniency law, and other rules, theoretically and experimentally.Anti-trust; leniency; immunity; amnesty; blow the whistle; cartels; price competition; Bertrand model; experiment; communication