Contributions published at Microeconomics and Experimental Economic Research (Ernst Fehr)

The goal of the three essays in this thesis is to improve our knowledge about the relevance of cooperativeness, impatience, and punishment for economic outcomes. The first essay examines the role of cooperativeness and impatience in the exploitation of common pool resources. In this study, we combine laboratory measures of other-regarding and time preferences from the same fishermen with data about their fishing instruments. The findings show that fishermen who exhibit a higher propensity for cooperation in the laboratory, and those who show more patience in the laboratory, use fishing instruments which are less exploitative for the fishing grounds. We thus provide clear evidence that other-regarding preferences play an important role in persisting and crucial economic decisions in naturally occurring situations and establish other-regarding and time preferences as two distinct motivations for cooperation in the field. The second essay studies the direct link between individual preferences and performance on naturally occurring markets where asymmetric information and reputation play an important role. This essay shows that other-regarding preferences are important for economic outcomes in markets because they can restrain impatient sellers from yielding to their temptation to engage in uncooperative behavior and losing their reputation. The third essay identifies the motives behind punishment from unaffected third parties and affected second parties using a within-subject design in ten simple games and a classification procedure. We find that the most parsimonious model explaining the pattern of punishment includes inequity-averse and selfish subjects, and that this holds for both third and second parties. The findings cast doubt on the idea that second and third parties punish in an impartial or normative manner. Die drei Aufsätze in dieser Dissertation haben zum Ziel das Wissen über die Bedeutung von Kooperationsbereitschaft, Ungeduld und Bestrafungen für ökonomische Sachverhalte zu erweitern. Der erste Aufsatz untersucht die Bedeutung von freiwilliger Kooperationsbereitschaft und Ungeduld bei der Ausbeutung von Fischbeständen. In dieser Studie beobachten wir das Verhalten von Fischern in Laborsituationen und beim Fischen. Wir finden, dass Fischer, die sich kooperativer und geduldiger in den Laborsituationen verhalten, Fischinstrumente verwenden, die die Fischbestände weniger ausbeuten. Dieses Ergebnis lässt den Schluss zu, dass sowohl die individuelle Neigung zur Kooperativität als auch der individuelle Grad der Geduld, wichtige Determinanten für die Ausbeutung von wichtigen Naturressourcen sind. Der zweite Aufsatz beschäftigt sich mit dem Erfolg von Verkäufern auf Märkten wo asymmetrische Information und der individuelle Ruf eine wichtige Rolle spielen. Es kristallisiert sich heraus, dass die individuelle Neigung zu freiwilliger Kooperationsbereitschaft wichtig für den individuellen Erfolg ist, da sie ungeduldige Verkäufer von der Versuchung abhält, Käufer auszunutzen, und sie dadurch vor einem Verlust eines guten Rufs bewahrt. Der dritte Aufsatz untersucht das Bestrafungsverhalten von Parteien, die durch ein vorangegangenes Verhalten beeinflusst wurden und von jenen, die durch ein vorangegangenes Verhalten nicht beeinflusst wurden (Dritte). Es zeigt sich, dass ein Modell, dass annimmt das Bestrafende entweder eigennützig oder neidisch sind, das beobachte Bestrafungsverhalten am hinreichend erklären kann. Darüber hinaus wird erkenntlich, dass das Bestrafungsverhalten von Dritten nicht unparteiischer ist als das von Parteien, die durch ein vorangegangenes Verhalten beeinflusst wurden.

In this paper we study the role of incomplete ex ante contracts for ex post trade. Previous experimental evidence indicates that a contract provides a reference point for entitlements when the terms are negotiated in a competitive market. We show that this finding no longer holds when the terms are determined in a non-competitive way. Our results imply that the presence of a “fundamental transformation” (i.e., the transition from a competitive market to a bilateral relationship) is important for a contract to become a reference point. To the best of our knowledge this behavioral aspect of the fundamental transformation has not been shown before.

Our legal system requires assigning responsibility for crimes and deciding on appropriate punishments. A new fMRI study by Buckholtz et al. in this issue of Neuron reveals that the right dorsolateral prefrontal cortex (rDLPFC) plays a key role in these cognitive processes. This finding sheds light on the neural mechanisms underlying moral judgment from a third-party perspective.

In a recent paper, Hart and Moore (2008) introduce new behavioral assumptions that can explain long term contracts and important aspects of the employment relation. However, sonfar there exists no direct evidence that supports these assumptions and, in particular, Hart and Moore’s notion that contracts provide reference points. In this paper, we examine experimentally the behavioral forces stipulated in their theory. The evidence confirms the model’s prediction that there is a tradeoff between rigidity and flexibility in a tradingnenvironment with incomplete contracts and ex ante uncertainty about the state of nature. Flexible contracts – which would dominate rigid contracts under standard assumptions – cause a significant amount of shading on ex post performance while under rigid contracts much less shading occurs. Thus, although rigid contracts rule out trading in some states of thenworld, parties frequently implement them. While our results are broadly consistent with established behavioral concepts, they cannot easily be explained by existing theories. The experiment appears to reveal a new behavioral force: ex ante competition legitimizes the terms of a contract, and aggrievement and shading occur mainly about outcomes within thencontract.

Cultural boundaries have often been the basis for discrimination, nationalism, religious wars, and genocide. Little is known, however, about how cultural groups form or the evolutionary forces behind group affiliation and in-group favoritism. Hence, we examine these forces and show that arbitrary symbolic markers, though initially meaningless, evolve to play a key role in cultural group formation and in-group favoritism because they enable a population of heterogeneous individuals to solve important coordination problems. This process requires that individuals differ in some critical but unobservable way and that their markers are freely and flexibly chosen. If these conditions are met, markers become accurate predictors of behavior. The resulting social environment includes strong incentives to bias interactions toward others with the same marker, and subjects accordingly show strong in-group favoritism. When markers do not acquire meaning as accurate predictors of behavior, players show a dramatically reduced taste for in-group favoritism. Our results support the prominent evolutionary hypothesis that cultural processes can reshape the selective pressures facing individuals and so favor the evolution of behavioral traits not previously advantaged.

Human social interaction is strongly shaped by other-regarding preferences. These preferences are key for a unique aspect of human sociality – large scale cooperation with genetic strangers – but little is known about their developmental roots. We show here that young children’s other-regarding preferences assume a particular form – inequality aversion – that develops strongly between the ages of 3 and 8. At age 3-4, the overwhelming majority of children behave selfishly, while the vast majority at age 7-8 prefers resource allocations that remove advantageous or disadvantageous inequality. Moreover, inequality aversion is strongly shaped by parochialism, a preference for favouring the members of one’s own social group. These results indicate that human egalitarianism and parochialism have deep developmental roots, and the simultaneous emergence of altruistic sharing and parochialism during childhood is intriguing in view of recent evolutionary theories which predict that the same evolutionary process jointly drives both human altruism and parochialism.

We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks.

We report on several experiments on the optimal allocation of ownership rights. The experiments confirm the property rights approach by showing that the ownership structure affects relationship-specific investments and that subjects attain the most efficient ownership allocation despite starting from different initial conditions. However, in contrast to the property rights approach, the most efficient ownership structure is joint ownership. These results cannot be explained by the self-interest model nor by models that assume that all people behave fairly, but they are largely consistent with approaches that focus on the interaction between selfish and fair players.

Low frequency “off-line” repetitive transcranial magnetic stimulation (rTMS) over the course of several minutes has attained considerable attention as a research tool in cognitive neuroscience due to its ability to induce functional disruptions of brain areas. This disruptive rTMS effect is highly valuable for revealing a causal relationship between brain and behavior. However, its influence on remote interconnected areas and, more importantly, the duration of the induced neurophysiological effects, remain unknown. These aspects are critical for a study design in the context of cognitive neuroscience. In order to investigate these issues, 12 healthy male subjects underwent 8 H215O positron emission tomography (PET) scans after application of long-train low frequency rTMS to the right dorsolateral prefrontal cortex (DLPFC). Immediately after the stimulation train, regional cerebral blood flow (rCBF) increases were present under the stimulation site as well as in other prefrontal cortical areas, including the ventrolateral prefrontal cortex (VLPFC) ipsilateral to the stimulation site. The mean increases in rCBF returned to baseline within nine minutes. The duration of this unilateral prefrontal rTMS effect on rCBF is of particular interest to those who aim to influence behavior in cognitive paradigms that use an “off-line” approach.

This paper examines the role of other-regarding and time preferences for ncooperation in the field. We study the preferences of fishermen whose main, and often only, nsource of income stems from using a common pool resource (CPR). The exploitation of a nCPR involves a negative interpersonal and inter-temporal externality because individuals who nexploit the CPR reduce the current and the future yield for both others and themselves. nAccordingly, economic theory predicts that more cooperative and more patient individuals nshould be less likely to exploit the CPR. Our data supports this prediction because fishermen nwho exhibit a higher propensity for cooperation in a laboratory public goods experiment, and nthose who show more patience in a laboratory time preference experiment, exploit the fishing ngrounds less in their daily lives. Moreover, because the laboratory public goods game exhibits nno inter-temporal spillovers, measured time preferences should not predict cooperative nbehavior in the laboratory. This prediction is also borne out by our data. Thus, laboratory npreference measures are useful to capture important dimensions of field behavior.

Trust and betrayal of trust are ubiquitous in human societies. Recent behavioral evidence shows that the neuropeptide oxytocin increases trust among humans, thus offering a unique chance of gaining a deeper understanding of the neural mechanisms underlying trust and the adaptation to breach of trust. We examined the neural circuitry of trusting behavior by combining the intranasal, double-blind, administration of oxytocin with fMRI. We find that subjects in the oxytocin group show no change in their trusting behavior after they learned that their trust had been breached several times while subjects receiving placebo decrease their trust. This difference in trust adaptation is associated with a specific reduction in activation in the amygdala, the midbrain regions, and the dorsal striatum in subjects receiving oxytocin, suggesting that neural systems mediating fear processing (amygdala and midbrain regions) and behavioral adaptations to feedback information (dorsal striatum) modulate oxytocin’s effect on trust. These findings may help to develop deeper insights into mental disorders such as social phobia and autism, which are characterized by persistent fear or avoidance of social interactions.

Much evidence suggests that people are heterogeneous with regard to their abilities to make rational, forward-looking decisions. This raises the question as to when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results. We examine this question in the context of a long-standing and important economic problem: the adjustment of nominal prices after an anticipated monetary shock. Our experiments suggest that two types of bounded rationality – money illusion and anchoring – are important behavioral forces behind nominal inertia. However, depending on the strategic environment, bounded rationality has vastly different effects on aggregate price adjustment. If agents’ actions are strategic substitutes, adjustment to the new equilibrium is extremely quick, whereas under strategic complementarity, adjustment is both very slow and associated with relatively large real effects. This adjustment difference is driven by price expectations, which are very flexible and forward-looking under substitutability but adaptive and sticky under complementarity. Moreover, subjects’ expectations are also considerably more rational under substitutability. KEYWORDS: Bounded rationality, strategic substitutes, strategic complements, money illusion, anchoring, nominal rigidity, sticky prices.

How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that, contrary to gains, no coherent change in relative risk aversion is observed for losses. The increase in relative risk aversion over gains cannot be captured by the curvature of the utility function. It is driven predominantly by a change in probability weighting of a majority group of individuals who exhibit more rational probability weighting at high stakes. These results not only challenge expected utility theory, but also prospect theory.

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Studying social behavior often requires the simultaneous interaction of many subjects. As yet, however, no painless, noninvasive brain stimulation tool existed that allowed the simultaneous affection of brain processes in many interacting subjects. Here we show that transcranial direct current stimulation (tDCS) can overcome these limits. We apply right prefrontal cathodal tDCS and show that subjects’ propensity to punish unfair behavior is reduced significantly.

Human morality is a key evolutionary adaptation on which human social behavior has been based since the Pleistocene era. Ethical behavior is constitutive of human nature, we argue, and human morality is as important an adaptation as human cognition and speech. Ethical behavior, we assert, need not be a means toward personal gain. Because of our nature as moral beings, humans take pleasure in acting ethically and are pained when acting unethically. From an evolutionary viewpoint, we argue that ethical behavior was fitness-enhancing in the years marking the emergence of Homo sapiens because human groups with many altruists fared better than groups of selfish individuals, and the fitness losses sustained by altruists were more than compensated by the superior performance of the groups in which they congregated.