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The Dynamics of Cooperation in Group Lending - A Microfinance Experiment

Peter Werner
University of Cologne, Working Paper Series in Economics No. 49, 2010

JEL codes: O16, G21, C92, H41

Keywords: microfinance; group lending; individual lending; social preferences

We investigate the dynamics of borrower behavior in a microfinance experiment in which subjects are jointly responsible for credit repayment. Although cooperation levels are generally high, moral hazard problems persist among borrowers. Moreover, the path dependency of decisions mitigates the insurance effect of joint liability. We compare two conversion mechanisms from joint to individual liability. First, an active choice of the joint liability contract does not systematically increase cooperation. Second, conversion based on repayment success tends to have a detrimental impact on cooperation among the remaining joint liability borrowers.

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Wage Transparency and Performance: A Real-Effort Experiment

Ben Greiner, Axel Ockenfels, Peter Werner
University of Cologne, Working Paper Series in Economics No. 48, 2010

JEL codes: C91, J33, M52

Keywords: labor market experiments; real effort; social comparison; wage schemes

Without transparency about peer wages in a real effort experiment, a change of wages does not affect performance. With transparency, however, higher paid workers tend to work more accurately, and lower paid workers shirk more under piece rates.

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Wars of Attrition with Stochastic Competition

Olivier Bos
University of Cologne, Working Paper Series in Economics No. 47, 2010

JEL codes: D44, D82

Keywords: Wars of attrition; number of bidders

We extend the all-pay auctions analysis of Krishna and Morgan (1997) to a stochastic competition setting. In the war of attrition it does not directly follow from the first order condition that the bidding equilibrium strategy is a weighted average of the bidding equilibrium strategies that would be chosen for each number of bidders. This result contrasts with the characterization of the bidding equilibrium strategies in the first-price all-pay auction as well as the winner-pay auctions. Our findings are applicable to future works on contests and charity auctions.

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All-Pay Auctions with Endogenous Rewards

Olivier Bos, Martin Ranger
University of Cologne, Working Paper Series in Economics No. 46, 2010

JEL codes: D44, D72

Keywords: All-pay auctions; contests

This paper examines a perfectly discriminating contest (all-pay auction) with two asymmetric players. Valuations are endogenous and depend on the effort each player invests in the contest. The shape of the valuation function is common knowledge and differs between the contestants. Some key properties of R&D races, lobbying activity and sport contests are captured by this framework. Once the unique equilibrium in mixed strategies analyzed, we derive a closed form of the expected expenditure of both players. We characterize the expected expenditure by means of incomplete Beta functions. We focus on unordered valuations.

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Charity Auctions for the Happy Few

Olivier Bos
University of Cologne, Working Paper Series in Economics No. 45, 2010

JEL codes: D44, D62, D64

Keywords:  All-pay auctions; charity; complete information; externalities

Recent literature has shown that all-pay auctions raise more money for charity than winner-pay auctions. We demonstrate that the first-price and second-price winner-pay auctions outperform the first-price and second-price all-pay auction when bidders are sufficiently asymmetric. To prove it, we consider a framework with complete information. Complete information is realistic and corresponds to events that occur, for instance, in a local service club (such as a voluntary organization) or in a show business dinner.

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Redistributive Politics and Market Efficiency: An Experimental Study

Jens Großer, Ernesto Reuben
University of Cologne, Working Paper Series in Economics No. 44, 2009

JEL codes: H23, D41, D72, D73

We study the interaction between competitive markets that produce large but unequally distributed welfare gains and elections through which the poor majority can redistribute income away from the rich minority. In our simple laboratory democracy, subjects first earn their income by trading in a double auction market and thereafter vote on redistributive policies in two-candidate elections. In addition, in one of the treatments subjects can attempt to influence the candidates’ policy choices by transferring money to them. We observe very high levels of redistribution - even when transfers to candidates are possible - with little effect on market efficiency. Overall, the experimental results are explained by our equilibrium predictions.

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History-Dependent Individual Behavior, Polarization, and Pareto-Improving Activating Welfare

Peter Funk
University of Cologne, Working Paper Series in Economics No. 43, 2009

This paper assumes that human capital not only generates market incomes but is a direct source of utility as well. In an otherwise standard framework it is shown that the interaction between human capital and effort in raising human capital and in generating utility naturally leads to history-dependent optimal individual behavior. Depending on the initial distribution of skills, this history-dependence divides each group of otherwise identical households into two perpetually separated groups: one rich and educated, the other poor and uneducated. If the rich have a common interest in the education of the poor (for instance financing public goods), such polarized equilibria are typically Pareto-inefficient. While unconditional transfers only reduce the incentives of the uneducated to accumulate skills, it is shown that there exist activating tax-transfer systems that Pareto-dominate any non-redistributing tax-system and involve a negative marginal income tax on household income below a certain threshold.

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Engineering Trust - Reciprocity in the Production of Reputation Information

Gary Bolton, Ben Greiner, Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 42, 2009

JEL codes: C73, C9, D02, L14

Keywords:  market design; reputation; trust; reciprocity; eBay

Reciprocity in feedback giving distorts the production and content of reputation information in a market, hampering trust and trade efficiency. Guided by feedback patterns observed on eBay and other platforms we run laboratory experiments to investigate how reciprocity can be managed by changes in the way feedback information flows through the system, leading to more accurate reputation information, more trust and more efficient trade. We discuss the implications for theory building and for managing the redesign of market trust systems.

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Marktdesign und Experimentelle Wirtschaftsforschung

Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 41, 2008

Economic engineering is the science of designing real-world institutions and mechanisms that align individual incentives and behavior with the underlying goals. Institutions matter because they affect incentives, and decision makers respond to incentives. Yet, they do not always do so rationally. Experimental economics complements economic theory by observing the performance of mechanisms in the context of actual decision processes faced by real people. It also answers questions that cannot be answered by theory and field data, tests hypotheses and identifies causalities suggested by theory and field observations, collects facts and phenomena that may stimulate behavioral theories of market design, eases cross-disciplinary cooperation, and communicates economic research to market participants, managers and other real-world decision makers. This article presents selected examples to illustrate how experimental economics may interplay with the more traditional economic toolbox to promote economic engineering both in research and in practice. Copyright 2009 die Autor Journal compilation 2009, Verein für Socialpolitik und Blackwell Publishing Ltd. (This abstract was borrowed from another version of this item.)

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Risk Taking and Social Comparison - A Comment on “Betrayal Aversion: Evidence from Brazil, China, Oman, Switzerland, Turkey, and the United States”

Gary Bolton, Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 40, 2008

No abstract is available for this item.

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