"We provide experimental evidence that contractual incompleteness, i.e., the absence of third party enforcement of workers’ effort or the quality of the good traded, causes a fundamental change in the nature of market interactions. If contracts are complete the vast majority of trades are initiated by public offers. Most trades take place in one-shot transactions and the contracting parties are indifferent with regard to the identity of their trading partner. Moreover, the short side of the market attempts to appropriate the whole gains from trade, which causes much disagreement about contract terms.nIf contracts are incomplete the vast majority of trades are initiated by private offers. The contracting parties form long-term relations and the provision of low effort or bad quality is penalized by the termination of the relationship. The threat of terminating the relation turns out to be an extremely powerful discipline device. "
In this paper we provide experimental evidence indicating that incentive contracts may undermine voluntary cooperation. This suggests that explicit incentives may have costly side effects that have been largely neglected by economists. In our experiments the undermining effect is so strong that the incentive contracts are less efficient than contracts without any incentives. Buyers, who are in the role of principals, nonetheless, prefer the incentive contracts because they allow them tonappropriate a much larger share of the (smaller) total surplus and are, hence, more profitable for them. The undermining of voluntary cooperation through incentives is, in principle, consistent with models of inequity aversion and reciprocity. Additional experiments show, however, that the reduction of voluntary cooperation throughnincentives is partly due to a framing effect.
We consider an economy where a finite set of agents can trade on one of two asset markets. Due to endogenous participation the differ in the liquidity they provide. Traders have idiosyncratic preferencesnfor the markets, e.g. due to differential time preferences for maturity dates of futures contracts. For a broad range of parameters we find that nontrade, trade on both markets (individualization) as well as trade on one market only (standardization) is supported by a Nash equilibrium. Byncontrast, whenever the number of traders becomes large, the evolutionary process selects a unique stochastically stable state which corresponds tonthe equilibrium with two active markets and coincides with the welfare maximizing market structure.
Most professional economists believe that economist in general are more selfish than other persons and that this greater selfishness is due to economic education. In this paper we offer empirical evidence against this widely held belief. Using a unique data set about giving behaviour to two social funds at the University of Zurich, it is shown that economic training does not make people act more selfish. However, the 'natural experiment' supports the hypothesis that the different behaviour of economist can be explained by a selection effect.
Recently developed models of fairness can explain a wide variety of seemingly contradictory facts. The most controversial and yet unresolved issue in the modeling of fairness preferences concerns the behavioral relevance of fairness intentions. In this paper we provide clear and unambiguous experimental evidence for the behavioral relevance of fairness intentions. Our results indicate that the attribution of fairness intentions is important both in the domain of negatively reciprocal behavior and in the domain of positively reciprocal behavior. This means that reciprocal behavior cannot be fully captured by equity models that are exclusively based on preferences over the distribution of material payoffs. Models that take into account players' fairness intentions and distributional preferences are consistent with our data while models thatnfocus exclusively on intentions or on the distribution of material payoffs are not.
The Motivation Crowding Effect suggests that external intervention via monetary incentives or punishments may undermine, and under different identifiable conditions strengthen, intrinsic motivation. As of today, the theoretical possibility of motivation crowding has been the main subject of discussion among economists. This study demonstrates that the effect is also of empirical relevance. There exist a large number of studies, offering empirical evidence in support of the existence of crowding-out and crowding-in exists. The study is based on circumstantial evidence, laboratory studies by both psychologists and economists, as well as field research by econometric studies. The pieces of evidence presented refer to a wide variety of areas of the economy and society and have been collected for many different countries and periods of time. Crowding effects thus are an empirically relevant phenomenon, which can, in specific cases, even dominate the traditional relative price effect.
This paper explores semi-monotonicity constraints in the distribution of potential outcomes, first, conditional on an instrument, and second, in terms of the response function. The imposed assumptions are strictly weaker than traditional instrumental variables assumptions and can be gainfully employed to bound the counterfactual distributions, even though point identification is only achieved in special cases. The bounds have a simple analytical form and thus have much practical relevance in all instances when strong exogeneity assumptions cannot be credibly invoked. The bounding strategy is illustrated in a simulated data example and applied to the effect of education on smoking.
The credibility of standard instrumental variables assumptions is often under dispute. This paper imposes weak monotonicity in order to gain information on counterfactual outcomes, but avoids independence or exclusion restrictions. The outcome process is assumed to be sequentially ordered, building up and depending on the information level of agents. The potential outcome distribution is assumed to weakly increase (or decrease) with the instrument, conditional on the continuation up to a certain stage. As a general result, the counterfactual distributions can only be bounded, but the derived bounds are informative compared to the no-assumptions bounds thus justifying the instrumental variables terminology. The construction of bounds is illustrated in two data examples.
"We examine the characteristics and the relative strength of third party sanctions inna series of experiments. We hypothesize that egalitarian distribution norms and cooperationnnorms apply in our experiments, and that third parties, whose economic payoff is unaffectednby the norm violation, may be willing to enforce these norms although the enforcement isncostly for them. Almost two-thirds of the third parties indeed punish the violation of thendistribution norm and their punishment increases the more the norm is violated. Likewise, upnto roughly 60 percent of the third parties punish the violation of the cooperation norm. Thus,nour results show that the notion of strong reciprocity also extends to the sanctioning behaviornof “unaffected” third parties. In addition, these experiments suggest that third partynpunishment games are powerful tools for studying the characteristics and the content of socialnnorms. Further experiments indicate that second parties, whose economic payoff is reducednby the norm violation, punish the violation much more strongly than do third parties. We alsoncollect questionnaire evidence that is consistent with the view that fairness motives andnnegative emotions are a determinant of third party sanctions."
During the last two decades economists have made much progress in understandingnincentives, contracts and organisations. Yet, they constrained their attention to a very narrow and empirically questionable view of human motivation. The purpose of this paper is to show that this narrow view of human motivation may severely limit understanding the determinants and effects of incentives. Economists may fail to understand the levels and the changes in behaviour if they neglect motives like the desire to reciprocate or the desire to avoid social disapproval. We show that monetary incentives may backfire and reduce the performance of agents or their compliance with rules. In addition, these motives may generate very powerful incentives themselves.
