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

Economists have traditionally treated preferences as exogenously given. Preferences are assumed to be influenced by neither beliefs nor the constraints people face. As a consequence, changes in behaviour are explained exclusively in terms of changes in the set of feasible alternatives. Here, we argue that the opposition to explaining behavioural changes in terms of preference changes is ill-founded, that the psychological properties of preferences render them susceptible to direct social influences and that the impact of ‘society’ on preferences is likely to have important economic and social consequences.

Well-functioning groups enforce social norms that restrain opportunism. We study how the assignment to the top or bottom of the caste system affects the altruistic punishment of norm violations. Individuals at the bottom of the hierarchy exhibit a much lower willingness to punish norm violations that hurt members of their own caste. We can rule out self-selection into castes and control for wealth, education and political experience. We thus plausibly identify the impact of caste status on altruistic punishment. The lower willingness to punish may impair the low castes’ ability to enforce contracts, to ensure property rights and sustain cooperation.

Humans are noted for their capacity to over-ride self-interest in favor of normatively valued goals. We examined the neural circuitry that is causally involved in normative, fairness-related decisions by generating a temporarily diminished capacity for costly normative behavior, a 'deviant' case, through non-invasive brain stimulation (repetitive transcranial magnetic stimulation) and compared normal subjects' functional magnetic resonance imaging signals with those of the deviant subjects. When fairness and economic self-interest were in conflict, normal subjects (who make costly normative decisions at a much higher frequency) displayed significantly higher activity in, and connectivity between, the right dorsolateral prefrontal cortex (DLPFC) and the posterior ventromedial prefrontal cortex (pVMPFC). In contrast, when there was no conflict between fairness and economic self-interest, both types of subjects displayed identical neural patterns and behaved identically. These findings suggest that a parsimonious prefrontal network, the activation of right DLPFC and pVMPFC, and the connectivity between them, facilitates subjects' willingness to incur the cost of normative decisions.

Previous experimental work provides encouraging support for some of the central assumptions underlying Hart and Moore (2008)’s theory of contractual reference points. However, existing studies ignore realistic aspects of trading relationships such as informal agreements and ex post renegotiation. We investigate the relevance of these features experimentally. Our evidence indicates that the central behavioral mechanism underlying the concept of contractual reference points is robust to the presence of informal agreements and ex post renegotiation. However, our data also reveal new behavioral features that suggest refinements of the theory. In particular, we find that the availability of informal agreements and ex post renegotiation changes how trading parties evaluate ex post outcomes. Interestingly, the availability of these additional options affects ex post evaluations even in situations in which the parties do not use them.

This paper examines the role of cooperativeness and impatience in the exploitation of common pool resources (CPRs) by combining laboratory experiments with field data. We study fishermen whose main, and often only, source of income stems from the use of fishing grounds with open access. The exploitation of a CPR involves a negative interpersonal and inter-temporal externality because individuals who exploit the CPR reduce the current and the future yield both for others and for themselves. Economic theory – which assumes the existence of general across-situational traits – thus predicts that fishermen who exhibit more cooperative and less impatient behavior in the laboratory should be less likely to exploit the CPR, which our findings confirm. We thus corroborate the economic theory and extend the scope of other-regarding preference theories to crucial economic decisions with lasting consequences for the people involved. In addition, we establish cooperativeness and impatience as two distinct traits related to resource conservation in the field and validate laboratory preference measures.

null

Economists have traditionally treated preferences as exogenously given. Preferences are assumed to be influenced by neither beliefs nor the constraints people face. As a consequence, changes in behaviour are explained exclusively in terms of changes in the set of feasible alternatives. Here we argue that the opposition to explaining behavioural changes in terms of preference changes is illfounded, that the psychological properties of preferences render them susceptible to direct social influences, and that the impact of “society” on preferences is likely to have important economic and social consequences.

Social preference research has received considerable attention in recent years. Researchers have demonstrated that the presence of people with other-regarding preferences can have important implications in many economic dimensions. However, it is important to be aware of the fact that the empirical basis of this literature relies to a large extent on experiments that do not provide anonymity between experimenter and subject. It has been argued that this lack of experimenter-subject anonymity may create selfish incentives to engage in seemingly other-regarding behavior. If this were the case these experiments would overestimate the importance of social preferences. Previous studies provide mixed results and methodological differences within and across studies make it dificult to isolate the impact of experimenter-subject anonymity on prosocial behavior. In this paper we use a novel procedure that allows us to examine the impact of the exact same ceteris-paribus variation in anonymity on behavior in three of the most commonly used games in the social preference literature. Our data reveals that introducing experimenter-subject anonymity has only minor, insignificant, effects on prosocial behavior.

null

Although animal researchers established the role of testosterone as a social hormone decades ago, the investigation of its causal influence on human social behaviors has only recently begun. Here, we review and discuss recent studies showing the causal effects of testosterone on social interactions in animals and humans, and outline the basic neurobiological mechanisms that might underlie these effects. Based on these recent findings, we argue that the role of testosterone in human social behavior might be best understood in terms of the search for, and maintenance of, social status.

null

Empirical research has shown that people tend to overweight small probabilities and underweight large probabilities when valuing risky prospects, but little is known about factors influencing the shape of the probability weighting curve. Based on a laboratory experiment with monetary incentives, we demonstrate that pre-existing good mood is significantly associated with women’s probability weights: Women in a better than normal mood tend to weight probabilities relatively more optimistically. Many men, however, seem to be immunized against effects of incidental mood by applying a mechanical decision criterion such as maximization of expected value.

Hart and John Moore (2008) introduce new behavioral assumptions that can explain long-term contracts and the employment relation. We examine experimentally their idea that contracts serve as reference points. The evidence confirms the prediction that there is a trade-off between rigidity and flexibility. Flexible contracts—which would dominate rigid contracts under standard assumptions—cause significant shading in ex post performance, while under rigid contracts much less shading occurs. 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 the contract. (JEL D44, D86, J41)

Hart and John Moore (2008) introduce new behavioral assumptions that can explain long-term contracts and the employment relation. We examine experimentally their idea that contracts serve as reference points. The evidence confirms the prediction that there is a trade-off between rigidity and flexibility. Flexible contracts--which would dominate rigid contracts under standard assumptions--cause significant shading in ex post performance, while under rigid contracts much less shading occurs. 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 the contract

We conducted a randomized field experiment to examine how workers respond to wage cuts, and whether their response depends on the wages paid to coworkers. Workers were assigned to teams of two, performed identical individual tasks, and received the same performance?independent hourly wage. Cutting both team members’ wages caused a substantial decrease in performance. When only one team member’s wage was cut, the performance decrease for the workers who received the cut was more than twice as large as the individual performance decrease when both workers’ wages were cut. This finding indicates that social comparison processes among workers affect effort provision because the only difference between the two wage cut conditions is the other team member’s wage level. In contrast, workers whose wage was not cut but who witnessed their team member’s pay being cut displayed no change in performance relative to the baseline treatment in which both workers’ wages remained unchanged, indicating that social comparison exerts asymmetric effects on effort.

A large body of experimental research has demonstrated that, on average, people violate the axioms of expected utility theory as well as of discounted utility theory. In particular, aggregate behavior is best characterized by probability distortions and hyperbolic discounting. But is it the same people who are prone to these behaviors? Based on an experiment with salient monetary incentives we demonstrate that there is a strong and significant relationship between greater departures from linear probability weighting and the degree of decreasing discount rates at the level of individual behavior.We argue that this relationship can be rationalized by the uncertainty inherent in any future event, linking discounting behavior directly to risk preferences. Consequently, decreasing discount rates may be generated by people’s proneness to probability distortions.

Markets for energy-using durables seem to be characterized by an “energy efficiency gap”, the phenomenon that consumers could save on total costs if they bought high-efficiency products but often decide not to do so. This fact has been attributed to consumers undervaluing future cost savings relative to the upfront purchase price, possibly due to their high discount rates. Factors influencing discounting behavior include the following: 1. Individuals’ rates of pure time preference, i.e. the rate at which future utility is ex- changeable for present utility 2. Uncertainty concerning product life, service reliability and future energy costs 3. Individuals’ limited access to capital markets resulting in liquidity constraints 4. Difficulties obtaining and processing information regarding future running costs The objective of the current research was to develop a descriptive model of discounting be- havior which disentangles the effects of pure time preferences from other potentially decisive factors in the context of financial decision making and to test the model with novel experi- mental data. The data was collected from a representative sample of the German speaking Swiss population. We elicited discount rates, measures of risk aversion and other individual data relevant for decisions on energy-using durables. There were two different treatment groups: One group of the participants responded to hypothetical questions and received a flat participation fee, the other group was paid depending on their decisions in an incentive compatible manner. The following results emerged: 1. We found a substantial incentive effect: People who responded to hypothetical ques- tions exhibited an average discount rate of 47.5% p.a., compared to 36.4% p.a. of the incentivized group. Model estimates show that there is no significant difference between groups’ preference parameters other than their levels of pure time preference. The incentive effect can be traced back to the behaviors of comparatively small subgroups of people in the hypothetical treatment who reacted strongly to two factors: skepticism about the certainty of future payments and liquidity constraints, both of which drove up discount rates considerably. We did not find any evidence whatsoever that participants in the hypothetical treatment did not do their best to respond conscientiously and honestly. We conjecture that the incentive effect is due to people’s inherent difficulty of foreseeing how they will behave when they actually face real consequences of their choices. For this reason we recommend that the design of policy measures should be principally based on the analysis of real decisions. 2. Liquidity constraints are an important factor affecting people’s behavior in the incentivized treatment group. We estimate that discount rates are 40% higher for liquidity-constrained individuals than for unconstrained ones who exhibit an average rate of time preference of more than 30% p.a. The magnitudes of these rates suggest that there are considerable obstacles to investment in energy-efficient durables even for people with unlimited access to capital markets. 3. Participants reported to be concerned about uncertain future energy costs and to have difficulties with assessing monthly energy costs. Both factors may play a crucial role in people’s undervaluation of future energy cost savings. Product- and consumer-specific information on present values of expected running costs may help consumers in their decision making. 4. If our estimates of time preference rates are indeed manifestations of people’s innate preferences, information and education will most likely not alter people’s behavior. In this case, policy could influence relative prices of high-efficiency and low-efficiency durables directly via feebates, a combination of fees and rebates. This idea can be transferred to other aspects of the purchase decision, such as service, warranty and leasing contracts. In order to be able to quantify the relative magnitudes of fees and rebates, the extent of undervaluation of future costs will have to be assessed on a market-by-market basis.

null

Adaptive behavior often exploits generalizations from past experience by applying them judiciously in new situations. This requires a means of quantifying the relative importance of prior experience and current information, so they can be balanced optimally. In this study, we ask whether the brain generalizes in an optimal way. Specifically, we used Bayesian learning theory and fMRI to test whether neuronal responses reflect context-sensitive changes in ambiguity or uncertainty about experience-dependent beliefs. We found that the hippocampus expresses clear ambiguity-dependent responses that are associated with an augmented rate of learning. These findings suggest candidate neuronal systems that may be involved in aberrations of generalization, such as over-confidence.

Neuroeconomics combines methods and theories from neuroscience psychology, economics, and computer science in an effort to produce detailed computational and neurobiological accounts of the decision-making process that can serve as a common foundation for understanding human behavior across the natural and social sciences. Because neuroeconomics is a young discipline, a sufficiently sound structural model of how the brain makes choices is not yet available. However, the contours of such a computational model are beginning to arise; and, given the rapid progress, there is reason to be hopeful that the field will eventually put together a satisfactory structural model. This paper has two goals: First, we provide an overview of what has been learned about how the brain makes choices in two types of situations: simple choices among small numbers of familiar stimuli (like choosing between an apple or an orange), and more complex choices involving tradeoffs between immediate and future consequences (like eating a healthy apple or a less-healthy chocolate cake). Second, we show that, even at this early stage, insights with important implications for economics have already been gained.