This paper reports results from a series of laboratory experiments designed to evaluate the impact of exposure risk on market performance. Exposure risk arises when there are complementarities between trades, e.g. when the purchase of a new house requires selling the old one. The continuous double auction (CDA), which has proven to be remarkably effective in a wide variety of settings, performs poorly in a treatment with high exposure risk: overall market efficiency is only 20% and there are many instances of no trade. In a parallel treatment with lower exposure risk, efficiency under the CDA is higher (55%) but is dominated, for instance, by a top-trading-cycles procedure that uses no money. The CDA's poor performance does not depend on whether house values are private information or common knowledge, indicating that exposure risk is due to strategic uncertainty not objective uncertainty about others' preferences. We introduce a simple package market and show that it effectively resolves exposure risk: efficiency levels are 82% and 89% respectively for the low and high exposure treatments. The proposed package market is a simple extension of the CDA and could potentially be applied in a variety contexts.
Facial emotions express our internal states and are fundamental in social interactions. Here we explore whether the repetition of unattended facial emotions builds up a predictive representation of frequently encountered emotions in the visual system. Participants (n = 24) were presented peripherally with facial stimuli expressing emotions while they performed a visual detection task presented in the center of the visual field. Facial stimuli consisted of four faces of different identity, but expressed the same emotion (happy or fearful). Facial stimuli were presented in blocks of oddball sequence (standard emotion: p = 0.9, deviant emotion: p = 0.1). Event-related potentials (ERPs) to the same emotions were compared when the emotions were deviant and standard, respectively. We found visual mismatch negativity (vMMN) responses to unattended deviant emotions in the 170–360 ms post-stimulus range over bilateral occipito-temporal sites. Our results demonstrate that information about the emotional content of unattended faces presented at the periphery of the visual field is rapidly processed and stored in a predictive memory representation by the visual system. We also found evidence that differential processing of deviant fearful faces starts already at 70–120 ms after stimulus onset. This finding shows a ‘negativity bias’ under unattended conditions. Differential processing of fearful deviants were more pronounced in the right hemisphere in the 195–275 ms and 360–390 ms intervals, whereas processing of happy deviants evoked larger differential response in the left hemisphere in the 360–390 ms range, indicating differential hemispheric specialization for automatic processing of positive and negative affect.
This study compares individual preferences across incentives (i.e., hypothetical vs. real incentives) and over time (i.e. elicitation at two different points in time) in a choice experiment involving charitable donating decisions. We provide evidence of hypothetical bias but little evidence of instability of individual giving. There is significant heterogeneity in individual preferences, with real incentives either dampening or pronouncing the observed donating behaviour. Neither hypothetical bias nor instability is observed when we examine the propensity of individuals to make internally consistent decisions over identical choices.
This paper examines whether and how cheap talk communication can facilitate within-group coordination when two unequal sized groups compete for a prize that is shared equally among members of the winning group, regardless of their (costly) contributions to the group’s success. We find that allowing group members to communicate before making contribution decisions improves coordination. To measure how much miscoordination remains, we employ a control treatment where miscoordination is eliminated by asking group members to reach a unanimous contribution decision. Average group contributions are not significantly different in this control treatment. Cheap talk communication thus completely solves miscoordination within groups and makes group members act as a single agent. Furthermore, it is the larger group that benefits from communication at the expense of the smaller group. Finally, content analysis of group communication reveals that after the reduction of within-group strategic uncertainty, groups reach self-enforcing agreements on how much to contribute, designate specific contributors according to a rotation scheme, and quickly discover the logic of the mixed-strategy equilibrium.
Governments all over the world have invested tens of billions of dollars in car scrappage programs to fuel the economy in 2009. We investigate the German case using a unique micro transaction dataset covering the years 2007 to 2010. Our focus is on the incidence of the subsidy, i.e., we ask how much of the € 2,500 buyer subsidy is captured by the supply-side through an increase in selling prices.
Using regression analysis, we find that average prices in fact decreased for subsidized buyers in comparison to non-subsidized ones, suggesting that eventually subsidized customers benefitted by more than the subsidy amount. However, the incidence was heterogeneous across price segments. Subsidized buyers of cheap cars paid more than comparable buyers who did not receive the subsidy, e.g. for cars of € 12,000 car dealers reaped about 8% of the scrappage prime. The opposite was true for more expensive cars, e.g. subsidized buyers of cars of € 32,000 were granted an extra discount of about € 1,100. For cars priced about € 18,000, we find no price discrimination, i.e., in this price segment consumers fully captured the transfer. Our results can be explained by optimizing behavior on the supply-side both in the lower and upper price segments. The results are extremely robust to extensive sensitivity checks.
We use laboratory experiments to test for one of the foundations of the rational voter paradigm - that voters respond to probabilities of being pivotal.
We exploit a setup that entails stark theoretical effects of information concerning the preference distribution (as revealed through polls) on costly participation decisions. The data reveal several insights. First, voting propensity increases systematically with subjects' predictions of their preferred alternative's advantage. Consequently, pre-election polls do not exhibit the detrimental welfare effects that extant theoretical work predicts. They lead to more participation by the expected majority and generate more landslide elections. Finally, we investigate subjects' behavior in polls and identify when Bandwagon and Underdog Effects arise.
Rewards may be due to skill, effort, and luck, and the social perception of inequality in rewards among individuals may depend on what produced the inequality. Rewards due to skill produce a conflict: higher outcomes of others in this case are considered deserved, and this counters incentives to reduce inequality. However, they also signal superior skill and for this reason induce strong negative affect in those who perform less, which increases the incentive to reduce the inequality. The neurobiological mechanisms underlying evaluation of rewards due to skill, effort, and luck are still unknown. We scanned brain activity of subjects as they perceived monetary rewards caused by skill, effort, or luck. Subjects could subtract from others. Subtraction was larger, everything else being equal, in luck but increased more as the difference in outcomes grew in skill. Similarly, reward-related activation in medial orbitofrontal cortex was more sensitive to the difference in relative outcomes in skill trials. Orbitofrontal activation reflecting comparative reward advantage predicted by how much subjects reduced unfavorable reward inequality later on in the trial. Thus medial orbitofrontal cortex activity reflects the causes of reward and predicts actions that reduce inequality.
Monetary rewards are uniquely human. Because money is easy to quantify and present visually, it is the reward of choice for most fMRI studies, even though it cannot be handed over to participants inside the scanner. A typical fMRI study requires hundreds of trials and thus small amounts of monetary rewards per trial (e.g. 5p) if all trials are to be treated equally. However, small payoffs can have detrimental effects on performance due to their limited buying power. Hypothetical monetary rewards can overcome the limitations of smaller monetary rewards but it is less well known whether predictors of hypothetical rewards activate reward regions. In two experiments, visual stimuli were associated with hypothetical monetary rewards. In Experiment 1, we used stimuli predicting either visually presented or imagined hypothetical monetary rewards, together with non-rewarding control pictures. Activations to reward predictive stimuli occurred in reward regions, namely the medial orbitofrontal cortex and midbrain. In Experiment 2, we parametrically varied the amount of visually presented hypothetical monetary reward keeping constant the amount of actually received reward. Graded activation in midbrain was observed to stimuli predicting increasing hypothetical rewards. The results demonstrate the efficacy of using hypothetical monetary rewards in fMRI studies.
This study investigates how acoustic change-events are represented in a listener's brain when attention is strongly focused elsewhere. Using magneto-encephalography (MEG) we examine whether cortical responses to different kinds of changes in stimulus statistics are similarly influenced by attentional load, and whether the processing of such acoustic changes in auditory cortex depends on modality-specific or general processing resources. We investigated these issues by examining cortical responses to two basic forms of acoustic transitions: (1) Violations of a simple acoustic pattern and (2) the emergence of a regular pattern from a random one. To simulate a complex sensory environment, these patterns were presented concurrently with streams of auditory and visual decoys. Listeners were required to perform tasks of high- and low-attentional-load in these domains. Results demonstrate that while auditory attentional-load does not influence the cortical representation of simple violations of regularity, it significantly reduces the magnitude of responses to the emergence of a regular acoustic pattern, suggesting a fundamentally skewed representation of the unattended auditory scene. In contrast, visual attentional-load had no effect on either transition response, consistent with the hypothesis that processing resources necessary for change detection are modality-specific.
In this issue of Neuron, Steinbeis et al. (2012) show that DLPFC structure and functions are associated with strategic social choices during an economic task and relate to impulse control abilities in both age dependent and independent manners.
