DOES MUTUAL KNOWLEDGE OF PREFERENCES LEAD TO MORE
NASH EQUILIBRIUM PLAY? EXPERIMENTAL EVIDENCE

EUROPEAN ECONOMIC REVIEW, 2021. VOL. 135, ARTICLE 103735.

 

 (JOINT WITH CHRISTOPH BRUNNER AND FLORIAN KAUFFELDT)

Nash equilibrium often does not seem to accurately predict behavior. In experimental game theory, it is usually assumed that the monetary payoffs in the game represent subjects' utilities. However, subjects may actually play a very different game. In this case, mutual knowledge of preferences may not be satisfied. In our experiment, we first elicit subjects' preferences over the monetary payos for all players. This allows us to identify equilibria in the games that subjects actually are playing. We then examine whether revealing other subjects' preferences leads to more equilibrium play and find that this information indeed has a significant effect. Furthermore, it turns out that subjects are more likely to play maxmin and maxmax strategies than Nash equilibrium strategies. This indicates that subjects strongly rely on heuristics when selecting a strategy.

 

INEQUALITY, FAIRNESS AND SOCIAL CAPITAL 

EUROPEAN ECONOMIC REVIEW, 2020. VOL. 129, ARTICLE 103566

(JOINT WITH DIETMAR FEHR, STEFAN TRAUTMANN AND YILONG XU)

We study the impact of unjust inequality on social trust and trustworthiness, and how it interacts with economic status in a large-scale controlled experiment. We document that unfair economic inequality is detrimental for social interactions, resulting in a significant decline in trust and trustworthiness. Probing the boundaries of this effect, we demonstrate that this erosion of social capital critically depends on the context: if an economically successful person is not directly responsible for the outcome of the unsuccessful person, we observe no negative effects on trust and trustworthiness in the aggregate. Finally, our data do not support the view that higher status or wealth leads to an erosion of pro-social attitudes: the successful are always more generous, whereas unsuccessful persons display the least efficient and generous behavior.

 

HEDGING, AMBIGUITY AND THE REVERSAL OF ORDER AXIOM

GAMES AND ECONOMIC BEHAVIOR, 2019. VOL. 117, PP. 380-387 

      

 (JOINT WITH JÖRG OECHSSLER AND ALEX ROOMETS)

We ran experiments that gave subjects a straight-forward and simple opportunity to hedge away ambiguity in an Ellsberg-style experiment. Subjects had to make bets on the combined outcomes of a fair coin and a draw from an ambiguous urn. By modifying the timing of the draw, coin flip, and decision, we are able to test the reversal-of-order axiom. Our main result is that the reversal-of-order axiom seems to hold. We also confirm low levels of ambiguity hedging despite the relative obviousness of the opportunity.

 

GENDER DIFFERENCES IN BARGAINING EXPERIMENTAL EVIDENCE  (UNDER REVIEW)

 (JOINT WITH GRACIELA KUECHLE)

Laboratory experiments on bargaining show that women perform worse than men in the presence of asymmetric power and gender information. However, it is not clear whether the results are driven by the asymmetry, the gender information or the combination of both. We close this gap by adopting a comprehensive design, which varies both factors in the context of a Rubinstein bargaining setup. When power asymmetry is high and gender is revealed, men obtain more favorable deals than women, particularly when they are in the strong position. We also find gender pairing effects whereby, women in the weak position earn less when facing a man. This suggests that when there is room for bargaining, the information is more profitable for men. All differences disappear when gender is not disclosed or the asymmetry is small.

 

DO PEOPLE EXHIBIT MORE ANTISOCIAL BEHAVIOR IF THE INCOME ALLOCATING PROCESS HAS BEEN UNFAIR?

(REVISE AND RESUBMIT AT JOURNAL OF ECONOMIC PSYCHOLOGY)

We examine whether an unfair process of income allocation leads to a higher degree of antisocial behavior. First, an initially unequal distribution is determined by either a fair, a random or an unfair process. In this context the fair payment rule induces an approx. equal effort-to-pay ratio, while in the unfair case this ratio is strongly imbalanced. Participants can then anonymously reduce the income of another player at a cost. Our main finding is that money burning rates are relatively low and similar across treatments. In contrast to the literature, even in the unfair treatment disadvantaged participants do not destroy more from those who are better off. Only in the reversed direction there is an effect: participants who suffer from the unfair mechanism are very rarely the target of destruction, irrespectively of the income class of the decision maker.


According to reported fairness evaluations, the unfair mechanism is perceived as clearly less fair then the other mechanisms. However, there is no correlation between fairness evaluations and the propensity to reduce money. This suggests that subjects' decisions are not affected by the (un-)fairness of the allocating process. Putting together evidence from a debriefing questionnaire and related studies suggests that the decision to burn money depends a lot on whether there is individual responsibility for the (unequal) distribution.

 

FAIRNESS PROPERTIES OF COMPENSATION SCHEMES

 

(JOINT WITH DIETMAR FEHR, STEFAN TRAUTMANN AND YILONG XU)

How do different characteristics of pay-for-performance schemes affect fairness perceptions? We systematically consider three main categories of incentives: continuous piece rate incentives, discrete bonus schemes, and tournament incentives. We find that inequality has a strong negative effect on perceived fairness. Controlling for inequality, people consider piece rate schemes fairer than those with a discrete bonus or tournament design. Adding time advantages or handicaps for a task to influence (competitive) advantages negatively influences perceived fairness. Advantages for the successful are especially aversive under tournament schemes, while handicaps are perceived as unfair in general, even though they reduce inequality.

 

PREFERENCED-BASED GAMES AND NASH EQUILIBRIUM PLAY  

RESEARCH PROPOSAL, 2021   

The Nash equilibrium is a widely used concept in applied game theory and experimental economics. However, in several situations it fails to accurately predict behavior. Sometimes players even violate the criterion of strict dominance. As this happens in very simple games as well, it seems unlikely that a lack of rationality is the driving force behind behavior. In many applications, the Nash prediction is based solely on players’ own (material) payoffs. These are assumed to represent the utility of the decision makers. However, it is a well-established fact that for many players their utility does not only depend on their own payoff. Instead, they frequently take additional factors into account, such as the payoffs of others or the type of interaction (“social preferences”). As a result, the actual strategic situation may be different from the one implied by the material payoffs of the game. People even might play a completely different kind of game compared to what the analysts think they do.


In this project, we intend to explore the latter aspect by conducting a comprehensive analysis how the nature of a strategic situation changes when incorporating players’ (social) preferences into the decision problem. We plan to first examine simple one-shot 2x2 games and subsequently extend the analysis to more complex categories of games. We plan to use experimental methods to elicit people’s evaluations of the outcomes of games, which in our context usually correspond to payoff tuples. We first start with an ordinal preference ranking and later on extend it to a cardinal measure. These evaluations can then be used to infer the strategic properties of the game the agents are playing according to their preferences (the “preference-based game”). Empirical frequencies of different types of preferences yield information how often specific pairings of types occur. From that may determine the likelihood by which games transform into other classes of games when accounting for the social preferences of the involved players. Because the Nash-prediction that is based solely on players’ own payoffs is biased towards selfish behavior, through this approach more cooperative outcomes can be justified as an equilibrium.


Furthermore, we are able to test if the equilibrium prediction can substantially be improved when taking players’ preferences into account. This can be done by comparing empirical frequencies of Nash equilibrium play, once based on the predictions from the original payoff structure with those from the corresponding preference-based games. If the latter frequencies are significantly higher, then it is not the concept of the Nash equilibrium itself to be blamed for the imprecise prediction of behavior. Rather the material payoff structure of the game (the “game-protocol”) does not represent the strategic situation adequately.