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False Consensus Voting and Welfare Reducing Polls

Jacob Goeree, Jens Großer
University of Cologne, Working Paper Series in Economics No. 9, 2004

Keywords: Majority Voting; Correlated Preferences; False Consensus; Pre-election Polls

We consider a process of costly majority voting where people anticipate that others have similar preferences. This perceived consensus of opinion is the outcome of a fully rational Bayesian updating process where individuals consider their own tastes as draws from a population. We show that the correlation in preferences lowers expected turnout. The intuition is that votes have a positive externality on those who don’t participate, which reduces incentives to participate. We study the effects of the public release of information (“polls”) on participation levels. We find that polls raise expected turnout but reduce expected welfare because they stimulate the “wrong” group to participate. As a result, polls frequently predict the wrong outcome. While this lack of prediction power is usually attributed to an imperfect polling technology, we show it may result from the reaction of rational voters to the poll’s accurate information.

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Neighborhood Information Exchange and Voter Participation: An Experimental Study

Jens Großer, Arthur Schram
University of Cologne, Working Paper Series in Economics No. 8, 2004

We study the effect of social embeddedness on voter turnout by investigating the role of information about other voters' decisions. We do so in a participation game, where some voters ('receivers') are told about some other voters' ('senders') turnout decision at a first stage of the game. Cases are distinguished where the voters support the same or different candidates or where they are uncertain about each other's preferences. Our experimental results show that such information matters. Participation is much higher when information is exchanged than when it is not. Senders strategically try to use their first mover position and some receivers respond to this.

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Impulse Balance Equilibrium and Feedback in First Price Auctions

Axel Ockenfels, Reinhard Selten
University of Cologne, Working Paper Series in Economics No. 7, 2004

JEL codes: C7, C9

Keywords: Auctions; Overbidding; Feedback; Experiments; Ex-post rationality; Bounded rationality; Social comparison

Experimental sealed-bid first-price auctions with private values in which feedback on the losing bids is provided yield lower revenues than auctions where this feedback is not given. The concept of weighted impulse balance equilibrium, which is based on a principle of ex post rationality and incorporates a concern for social comparison, captures the data.

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Can Money Matter for Interest Rate Policy?

Matthias Brückner, Andreas Schabert
University of Cologne, Working Paper Series in Economics No. 6, 2004

JEL codes: E52, E51, E41, E32

Keywords: Transactions frictions; predetermined money; real balance effects; saddle path stability; discretionary optimization

In this paper it is shown that money can matter for macroeconomic stability under interest rate policy, if transactions frictions are specified in a consistent way. We develop a sticky price model with a shopping time specification, which induces the marginal utility of consumption to depend on the (predetermined) stock of money held at the beginning of the period. Saddle path stability is then ensured by a passive interest rate policy, whereas activeness is associated with an explosive equilibrium path unless the central bank reacts to changes in beginning-of-period real balances. When the central bank aims at minimizing macroeconomic distortions, real balances enter the interest rate feedback rule under discretionary optimization. If it is alternatively assumed that end-of-period money provides transaction services, money can be neglected for interest rate policy in order to implement the optimal plan. However, the equilibrium under the targeting rule is likely to be indetermined, allowing for endogenous fluctuations, which can be avoided by the central bank implementing the optimal plan with an interest rate feedback rule featuring beginning-of-period real balances.

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Trust among Internet Traders: A Behavioral Economics Approach

Gary E. Bolton, Elena Katok, Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 5, 2004

Standard economic theory does not capture trust among anonymous Internet traders. But when traders are allowed to have social preferences, uncertainty about a seller's morals opens the door for trust, reward, exploitation and reputation building. We report experiments suggesting that sellers' intrinsic motivations to be trustworthy are not sufficient to sustain trade when not complemented by a feedback system. We demonstrate that it is the interaction of social preferences and cleverly designed reputation mechanisms that solves to a large extent the trust problem on Internet market platforms. However, economic theory and social preference models tend to underestimate the difficulties of promoting trust in anonymous online trading communities.

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On the Relevance of Open Market Operations

Andreas Schabert
University of Cologne, Working Paper Series in Economics No. 4, 2003

JEL codes: E52, E32

Keywords: Legal Restriction on Eligible Securities; Liquidity and Risk-free Rate Puzzle; Price Level and Equilibrium Determinacy; Policy Equivalence; Ricardian Fiscal Policy

This paper reexamines the role of open market operations for short-run effects of monetary policy in a New Keynesian framework. The central bank supplies money in exchange for securities that are discounted with the short-run nominal interest rate, while money demand is induced by a liquidity constraint. We allow for a legal restriction by which only government bonds are eligible. Their supply is bounded by fiscal policy that is assumed to be Ricardian. If public debt is dominated in rate of return by private debt, open market operations matter, and an endogenous liquidity premium and a liquidity effect arise. Nominal interest rate setting (including a peg) is then associated with price level and equilibrium uniqueness, regardless whether prices are flexible or set in a staggered way. Thus, the legal restriction overcomes indeterminacies due to an unbounded money supply, as implied by the real bills doctrine. Moreover, it facilitates constant money growth and interest rate policy to be equivalent.

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How Effective are Electronic Reputation Mechanisms? An Experimental Investigation

Gary E. Bolton, Elena Katok, Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 3, 2003

Electronic reputation or "feedback" mechanisms aim to mitigate the moral hazard problems associated with exchange among strangers by providing the type of information available in more traditional close-knit groups, where members are frequently involved in one another's dealings. In this paper, we compare trading in a market with online feedback (as implemented by many Internet markets) to a market without feedback, as well as to a market in which the same people interact with one another repeatedly (partners market). We find that, while the feedback mechanism induces quite a substantial improvement in transaction efficiency, it also exhibits a kind of public goods problem in that, unlike in the partners market, the benefits of trust and trustworthy behavior go to the whole community and are not completely internalized. We discuss the implications of this perspective for improving feedback systems.

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Preference Uncertainty, Voter Participation and Electoral Efficiency: An Experimental Study

Jens Großer, Tamar Kugler, Arthur Schram
University of Cologne, Working Paper Series in Economics No. 2, 2003

We experimentally study the impact of preference uncertainty on voter turnout and electoral efficiency in a participation game. We find higher participation rates when the electorate is informed about the level of support for various candidates than when group sizes remain uncertain. Moreover, despite higher free riding incentives majorities win more often than minorities. In aggregate, whether or not group sizes are known hardly affects welfare. We also distinguish between allied and floating voters and our data show that the lower turnout under uncertainty can be attributed to floating voters participating less. Finally, our results match better the predictions by quantal response (logit) equilibria than by (Bayesian-) Nash equilibria.

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Self Centered and Other Regarding Fairness in the Solidarity Game

Susanne Büchner, Giorgio Coricelli, Ben Greiner
University of Cologne, Working Paper Series in Economics No. 1, 2003

JEL codes: C91, D3

Keywords: Experimental Economics; Game theory; Fixed Total Sacrifice; Solidarity

This paper revisits and extends the experiment on the solidarity game by Selten and Ockenfels (1998). We replicate the basic design of the solidarity game and extend it in order to test the robustness of the 'fixed total sacrifice' effect and the applied strategy method. Our results only partially confirm the validity of the fixed total sacrifice effect. In a treatment with constant group-endowment rather than constant winner-endowment the predominance of the 'fixed total sacrifice' behavior is replaced by 'fixed relative gift' behavior. We additionally introduce a measure of personality characteristics and compare its specific components with pro-social gift behavior in our experiments. We don't find correlations between actual gift behavior and measures of empathy-driven pro-social behavior used in social science.

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