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

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Authority and power permeate political, social, and economic life, but empirical knowledge about the motivational origins and consequences of authority is limited. We study the motivation and incentive effects of authority experimentally in an authority- delegation game. Individuals often retain authority even when its delegation is in their material interest - suggesting that authority has non-pecuniary consequences for utility. Authority also leads to over-provision of effort by the controlling parties, while a large percentage of subordinates under-provide effort despite pecuniary incentives to the contrary. Authority thus has important motivational consequences that exacerbate the inefficiencies arising from suboptimal delegation choices.

Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing them to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972) critique of the Coasian approach.

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When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.

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Researchers have demonstrated that the presence of people with social preferences has importanteconomic implications. However, the empirical basis of this research relies to a large extent onexperiments that do not provide anonymity between experimenter and subject. It has been arguedthat this lack of experimenter–subject anonymity may create selfish incentives to engage inseemingly other-regarding behavior. If this were the case, these experiments would overestimatethe importance of social preferences. Previous studies provide mixed results and methodologicaldifferences within and across studies make it difficult to isolate the impact of experimenter–subjectanonymity. In this paper we use a novel procedure that allows us to examine the impact of theexact same ceterisparibus variation in anonymity on behavior in three of the most commonly usedgames in the social preference literature. We find that the introduction of experimenter–subjectanonymity has no significant effect in any of the three games.

Probability weighting has been largely ignored by economics despite abundant evidence that riskattitudes are in fact probability dependent. Probability weighting, however, provides a unifyingaccount of many real-world phenomena that are diffcult to reconcile with expected utility theory,such as the equity premium puzzle, the long-shot bias in betting markets, households'underdiversification and their willingness to buy small-scale insurance at exorbitant prices. Recentfindings suggest that probability dependence is not just a feature of laboratory data but is indeedpresent in financial, insurance and betting markets. Thus, the neglect of probability weightingprevents economists from comprehending important phenomena. In this paper, we discuss thefoundations and economic consequences of probability weighting and offer a practitioner's guideto understanding and modeling probability-dependent risk preferences.

We investigated behavioral and neurobiological mechanisms by which risk-averse advice,provided by an expert, affected risky decisions across three developmental groups [earlyadolescents (12-14 years), late adolescents (15-17 years), adults (18+ years)]. Using cumulativeprospect theory, we modeled choice behavior during a risky-choice task. Results indicate thatadvice had a significantly greater impact on risky choice in both adolescent groups than in adults.Using functional magnetic resonance imaging, we investigated the neural correlates of thisbehavioral effect. Developmental effects on correlations between brain activity and valuationparameters were obtained in regions that can be classified into (i) cognitive control regions, such asdorsolateral prefrontal cortex (DLPFC) and ventrolateral PFC; (ii) social cognition regions, such asposterior temporoparietal junction; and (iii) reward-related regions, such as ventromedial PFC(vmPFC) and ventral striatum. Within these regions, differential effects of advice on neuralcorrelates of valuation were observed across development. Specifically, advice increased thecorrelation strength between brain activity and parameters reflective of safe choice options inadolescent DLPFC and decreased correlation strength between activity and parameters reflective ofrisky choice options in adult vmPFC. Taken together, results indicate that, across development,distinct brain systems involved in cognitive control and valuation mediate the risk-reducing effectof advice during decision making under risk via specific enhancements and reductions of thecorrelation strength between brain activity and valuation parameters.

Human altruism shaped our evolutionary history and pervades social and political life. There are,however, enormous individual differences in altruism. Some people are almost completely selfish,while others display strong altruism, and the factors behind this heterogeneity are only poorlyunderstood. We examine the neuroanatomical basis of these differences with voxel-basedmorphometry and show that gray matter (GM) volume in the right temporoparietal junction (TPJ)is strongly associated with both individuals' altruism and the individual-specific conditions underwhich this brain region is recruited during altruistic decision making. Thus, individual differencesin GM volume in TPJ not only translate into individual differences in the general propensity tobehave altruistically, but they also create a link between brain structure and brain function byindicating the conditions under which indi

van Honk and colleagues have taken our findings on the role of testosterone in ultimatum gamebargaining1 a step forward by showing that the hormone has important prosocial effects beyondthe ultimatum game by increasing cooperation in the public goods game (PGG)2. In contrast to theultimatum game, participants in the PGG decide simultaneously about their cooperation levels andare not confronted with a rejection threat from other participants, suggesting a much moreuniversal effect of testosterone on prosociality than revealed by our study1. As the PGG captures alarge class of evolutionarily and contemporaneously important situations, their findings are ofgreat interest, and considerably extend our knowledge about the causal effect of testosterone onsocial behaviour. In addition, their results raise intriguing questions regarding the motivationaland biological mechanisms through which testosterone increased cooperation levels, suggestingthat the study will trigger further important experiments.

Psychosocial stress precipitates a wide spectrum of diseases with major public-health significance.The fight-or-flight response is generally regarded as the prototypic human stress response, bothphysiologically and behaviorally. Given that having positive social interactions before beingexposed to acute stress plays a preeminent role in helping individuals control their stressresponse, engaging in prosocial behavior in response to stress (tend-and-befriend) might also be aprotective pattern. Little is known, however, about the immediate social responses followingstress in humans. Here we show that participants who experienced acute social stress, induced bya standardized laboratory stressor, engaged in substantially more prosocial behavior (trust,trustworthiness, and sharing) compared with participants in a control condition, who did notexperience socioevaluative threat. These effects were highly specific: Stress did not affect thereadiness to exhibit antisocial behavior or to bear nonsocial risks. These results show that stresstriggers social approach behavior, which operates as a potent stress-buffering strategy in humans,thereby providing evidence for the tend-and-befriend hypothesis.

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High-performance work systems give workers more discretion, thereby increasing effort productivity but also shirking opportunities. We show experimentally that screening for work attitude and labor market competition are causal determinants of the viability of high-performance work systems, and we identify the complementarities between discretion, rent-sharing, and screening that render them profitable. Two fundamentally distinct job designs emerge endogenously in our experiments: “bad” jobs with low discretion, low wages, and little rent-sharing and “good” jobs with high discretion, high wages, and substantial rent-sharing. Good jobs are profitable only if employees can be screened, and labor market competition fosters their dissemination.

The formation of human capital is important for a society's welfare and economic success. Recent literature shows that child health can provide an important explanation for disparities in children’s human capital development across different socio-economic groups. While this literature focuses on cognitive skills as determinants of human capital, it neglects non-cognitive skills. We analyze data from economic experiments with preschoolers and their mothers to investigate whether child health can explain developmental gaps in children’s non-cognitive skills. Our measure for children’s noncognitive skills is their willingness to compete with others. Our findings suggest that health problems are negatively related to children’s willingness to compete and that the effect of health on competitiveness differs with socio-economic background. Health has a strongly negative effect in our sub-sample with low socioeconomic background, whereas there is no effect in our sub-sample with high socio-economic background.

Retinal detachment results in visual loss and requires surgical treatment. The risk of retinal detachment depends, among other factors, on the vitreous rheology, which varies with age. To date, the viscoelasticity of the vitreous body has only been measured in cadaver eyes. However, the ex vivo and in vivo viscoelasticity may differ as a result of the effect of intravitreal membranes. Therefore, an MRI method and appropriate postprocessing tools were developed to determine the vitreous deformation and viscoelastic properties in the eyes of living humans. Nineteen subjects (eight women and 11 men; mean age, 33 years; age range, 14-62 years) gazed at a horizontal sinusoidal moving target during the segmented acquisition of complementary spatial modulation of magnetization images. The center of the lens and the scleral insertion of the optic nerve defined the imaging plane. The vitreous deformation was tracked with a dedicated algorithm and fitted with the commonly used viscoelastic model to determine the model parameters: the modified Womersley number a and the phase angle b. The vitreous deformation was successfully quantified in all 17 volunteers having a monophasic vitreous. The mean and standard deviation of the model parameters were determined to be 5.5 ± 1.3 for a and -2.3 ± 0.2 for b. The correlation coefficient (-0.76) between a and b was significant. At the eye movement frequency used, the mean storage and loss moduli of the vitreous were around 3 ± 1 hPa. For two subjects, the vitreous deformation was clearly polyphasic: some compartments of the vitreous were gel-like and others were liquefied. The borders of these compartments corresponded to reported intravitreal membrane patterns. Thus, the deformation of the vitreous can now be determined in situ, leaving the structure of the intravitreal membranes intact. Their effect on vitreous dynamics challenges actual vitreous viscoelastic models. The determination of the vitreous deformation will aid in the quantification of local vitreous stresses and their correlation with retinal detachment.

Parochial altruism – a preference for altruistic behavior towards ingroup members and mistrust or hostility towards outgroup members – is a pervasive feature in human society and strongly shapes the enforcement of social norms. Since the uniqueness of human society critically depends on the enforcement of norms, the understanding of the neural circuitry of the impact of parochial altruism on social norm enforcement is key, but unexplored. To fill this gap, we measured brain activity with functional magnetic resonance imaging (fMRI) while subjects had the opportunity to punish ingroup members and outgroup members for violating social norms. Findings revealed that subjects’ strong punishment of defecting outgroup members is associated with increased activity in a functionally connected network involved in sanction-related decisions (right orbitofrontal gyrus, right lateral prefrontal cortex, right dorsal caudatus). Moreover, the stronger the connectivity in this network, the more outgroup members are punished. In contrast, the much weaker punishment of ingroup members who committed the very same norm violation is associated with increased activity and connectivity in the mentalizing-network (dorsomedial prefrontal cortex, bilateral temporo-parietal junction), as if subjects tried to understand or justify ingroup members’ behavior. Finally, connectivity analyses between the two networks suggest that the mentalizing-network modulates punishment by affecting the activity in the right orbitofrontal gyrus and right lateral prefrontal cortex, notably in the same areas showing enhanced activity and connectivity whenever third-parties strongly punished defecting outgroup members.