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ERC Advanced Grant "Economic Engineering of Cooperation in Modern Markets"

Recent advances in computer and communications technology have led to innovation in market design and strategy design. These enable radically new forms of social and economic relations, but also lead to new challenges. One question in the ERC project is how algorithmic decision-making and action can serve important social goals through smart design of market rules, and how, on the other hand, undesirable excesses of digitization can be prevented. The project also examines how ethical principles can be taken into account in the design of modern incentive systems.


Who Opts In? Composition Effects and Disappointment from Participation Payments

Ambuehl Sandro, Axel Ockenfels and Colin Stewart
Forthcoming, The Review of Economics and Statistics

Keywords: Rational inattention, incentives, composition effect, selection, screening, evaluability.

Participation payments are used in many transactions about which people know little, but can learn more: incentives for medical trial participation, signing bonuses for job applicants, or price rebates on consumer durables. Who opts into the transaction when given such incentives? We theoretically and experimentally identify a composition effect whereby incentives disproportionately increase participation among those for whom learning is harder. Moreover, these individuals use less information to decide whether to participate, which makes disappointment more likely. The learning-based composition effect is stronger in settings in which information acquisition is more difficult.

The influence of empirical and normative expectations on cooperation

Felix Kölle and Simone Quercia
2021. Journal of  Economic Behavior & Organization, 190, 691-703.

Keywords: Cooperation, social norms, expectations, public goods experiment.

Abstract: In this paper, we investigate the importance of empirical and normative expectations for cooperative behavior. We conduct two experimental studies (n=243) in which we separately elicit (i) behavior in a public goods game and (ii) normative and empirical expectations of cooperation. In a situation where others’ contributions are known, we find a strong norm of conditional cooperation whereby people find it socially appropriate to match others contribution and believe others to comply with such rule of behavior. In contrast, when there is strategic uncertainty regarding others’ behavior, empirical and normative expectations diverge substantially. While individuals believe that contributing fully to the public good is the most appropriate action, they expect others to contribute only half of their resources. This renders normative expectations unpredictive for average behavior and underlines the importance of a close alignment of empirical and normative expectations for the influence of social norms on behavior.

Pandemiebereitschaft, internationale Kooperation und Marktdesign

Axel Ockenfels
2021. Wirtschaftsdienst, 101, 594-596.

Marktdesign für eine resiliente Impfstoffproduktion

Axel Ockenfels
Pre-published online by De Gruyter on July 1, 2021.

Schlüsselwörter: Marktdesign, Marktversagen, Impfstoffproduktion, COVID-19, Pandemie-Management, Kooperation

Zusammenfassung: Manche Märkte erlauben es auf sich alleine gestellt nicht, robuste Krisenvorsorge zu treffen. Der Markt für Impfstoffe gehört dazu. Der Preismechanismus versagt besonders in der Krise, wenn beide Marktseiten große Marktmacht besitzen. Daher muss interveniert werden, um die Impfstoffproduktion zuverlässiger zu machen. Axel Ockenfels entwickelt ein hybrides Marktdesign, das auf Kapazitätspreise und Leistungspreise setzt, um den systemischen Herausforderungen einer globalen Krisensituation mit ihren politischen, ökonomischen und sozialen Verwerfungen zu begegnen. Das hybride Modell erlaubt einen gleitenden Übergang von normalen Zeiten in den Krisenmodus–und wieder zurück.

What Motivates Paternalism? An Experimental Study

Sandro Ambuehl, B. Douglas Bernheim and Axel Ockenfels
2021. American Economic Review, 111(3), 787-830.

Keywords: Paternalism, libertarianism, welfare economics, experiment, false consensus bias.

Abstract: We study experimentally when, why, and how people intervene in others’ choices. Choice Architects (CAs) construct opportunity sets containing bundles of time-indexed payments for Choosers. CAs frequently prevent impatient choices despite opportunities to provide advice, believing Choosers benefit. They violate common behavioral welfare criteria by removing impatient options even when all payoffs are delayed. CAs intervene not by removing options they wish they could resist when choosing for themselves (mistakes-projective paternalism), but rather as if they seek to align others’ choices with their own aspirations (ideals-projective paternalism). Laboratory choices predict subjects’ support for actual paternalistic policies.


Do People Intervene to Make Others Behave Prosocially?

Viola Ackfeld and Axel Ockenfels
2021. Games and Ecoomic Behavior, 128, 58-72.

Keywords: Charity experiment, prosocial behavior, autonomy, bans, incentives.

Abstract: We experimentally investigate people's willingness to intervene in others' decision-making in order to promote a charitable donation. We find that only a minority of those subjects who would donate themselves enforce the donation by banning the selfish choice from the decision-maker's choice menu. Bans are more acceptable if they are implemented only after the decision-makers could choose between the selfish and the prosocial option themselves. Also, many subjects decide against offering decision-makers a monetary incentive to switch from the selfish to the prosocial choice. We discuss potential hypotheses about underlying motivations for the (non-)usage of interventions, with a special focus on the hypothesis that interventions to promote prosocial choice are more acceptable the more they respect the autonomy of others.


Focusing climate negotations on a uniform common commitment can promote cooperation

Klaus M. Schmidt and Axel Ockenfels
2021. PNAS, 118(11).

Keywords: negotiation design, cooperation, common commitment, reciprocity, climate policy.

International cooperation on the reduction of greenhouse gas emissions, disarmament, or free trade needs to be negotiated. The success of such negotiations depends on how they are designed. In the context of international climate change policy, it has been proposed [e.g., M. L. Weitzman J. Assoc. Environ. Resour. Econ. 1, 29–49 (2014)] that shifting the negotiation focus to a uniform common commitment (such as a uniform minimum carbon price) would lead to more ambitious cooperation. Yet, a proof-of-concept for this important claim is lacking. Based on game theoretical analyses, we present experimental evidence that strongly supports this conjecture. In our study, human subjects negotiate contributions to a public good. Subjects differ in their benefits and costs of cooperation. Participation in the negotiations and all commitments are voluntary. We consider treatments in which agreements are enforceable, and treatments in which they have to be self-enforcing. In both situations, negotiating a uniform common commitment is more successful in promoting cooperation than negotiating individual commitments (as in the Paris Agreement) and complex common commitments that tailor the commitment to the specific situation of each party (as attempted with the Kyoto Protocol). Furthermore, as suggested by our model, a uniform common commitment benefits most from being enforced.

The Aversion to Monetary Incentives for Behavioral Change

Viola Ackfeld

Keywords: Aversion to incentives, information, repugnance, charity experiment.

Abstract: In this paper, I study an aversion to monetary incentives to make other people change their behavior. Particularly, I provide evidence that monetary incentives are disliked because they are powerful in changing what people do but not why they do it besides for money. In an experiment, one group of participants decides about interventions which try to change others' behavior. Between treatments, I vary whether the intervention consists of convincing information or monetary incentives. I find that participants consider monetary incentives as more effective in changing behavior than informative interventions. Nonetheless, they are less willing to intervene by monetary incentives compared to informative interventions to foster their preferred outcome. A comprehensive set of elicited beliefs supports the idea that this aversion to incentives stems from incentives' lack of changing one's reason to act.


Das Klimaschutzprogramm der Bundesregierung: Eine Wende der deutschen Klimapolitik?

Ottmar Edenhofer, Matthias Kalkuhl und Axel Ockenfels
2020. Perspektiven der Wirtschaftspolitik. 

Keywords: Klimaschutzgesetz, CO2-Preis, Emissionshandel, internationale Kooperation, Klimawandel, Klimapolitik, EU, Deutschland.

Abstract: Das Klimaschutzgesetz hat einen Paradigmenwechsel eingeleitet: den Einstieg in eine CO2-Bepreisung als künftiges Leitinstrument der Klimapolitik. Auf den ersten Blick ist der CO2-Preis unter einer Fülle von Fördermaßnahmen und ordnungsrechtlichen Regelungen verschüttet, deren Wirksamkeit und Kosten höchst unsicher sind. Der CO2-Preis ist aber so angelegt, dass er langfristig das dominante Instrument einer europäisch harmonisierten Klimapolitik werden kann. Der angedeutete Paradigmenwechsel der deutschen Klimapolitik öffnet damit die Tür, die europäische und internationale Kooperation zu stärken. Dazu ist es aber notwendig, neben der europäischen auch die globale Klimapolitik neu auszurichten. Auch dort sollten sich die Verhandlungen statt auf nationale Mengenziele auf CO2-Preise konzentrieren. Die erforderliche Kooperation wird möglich, wenn die Regierungen Transferzahlungen strategisch und reziprok nutzen. So könnte die Effektivität der Klimapolitik erhöht werden und es ließen sich die entstehenden Verteilungskonflikte entschärfen.


Bringing the efficiency of electricity market mechanisms to multimodal mobility across congested transportation systems

Arash Beheshtian, R.Richard Geddes, Omid M.Rouhani, Kara M. Kockelman, Axel Ockenfels, Peter Cramton and Wooseok Do
2020. Transportation Research Part A: Policy and Practice, 131, 58-69.

Keywords: Mobility as a service, market design, congestion pricing.

Abstract: A central challenge facing Mobility as a Service (MaaS) is mispricing of its a core input: the use of scarce road space. A transparent real-time market for road use is essential for MaaS to reach its full potential. We focus on how network-wide, real-time markets for road use support MaaS, and how such markets can be developed.
In our proposed network-management scheme, roadway tolls (for entire trips – from origin to destination) are determined in a two-stage market hosted by an independent system operator or “ISO”. Service providers purchase the product (the right to use a series of road segments at a reasonably specific time of day) in the day-ahead market. In real-time, the market becomes physical and operates under the principle of open access: road capacity cannot be withheld in real time and its use is determined by users’ decisions, guided by prices and suggested routings. Real-time road-use prices are computed using clearing prices that balance real-time supply and demand. Those with pre-paid slots can be paid to delay their travel, to create space for high bidders during periods of suddenly low capacity or unexpectedly high demand. Such policies and programs can avoid excessive congestion, provide reliable travel times, and keep traffic moving, especially as automation makes car and truck travel easier.
Such policies are critical in helping cities and regions avoid gridlock. They ensure that travelers internalize congestion externalities, while enabling MaaS and other transport providers to deliver higher-quality mobility service for all travelers. Thoughtful marriage of week-ahead, day-ahead and real-time road pricing for travelers on congested networks can deliver efficient transportation systems that save time and energy, while providing signals for optimal infrastructure investment.


Who Opts In?

Sandro Ambuehl, Axel Ockenfels and Colin Stewart
2020. Rotman School of Management Working Paper No. 3154197.

Keywords: Rational inattention, incentives, risk preferences, selection effects, cognitive ability.

Abstract: Payments and discounts incentivize participation in many transactions about which people know little, but can learn more — payments for medical trial participation, signing bonuses for job applicants, or price rebates on consumer durables. Who opts into the transaction when given such incentives? We show theoretically and experimentally that increasing participation payments disproportionately attracts individuals for whom learning about the transaction is harder. These participants decide based on worse information and are more likely to regret their decision ex post. The learning-based selection effect is stronger when information acquisition is more costly. Moreover, it outweighs selection on risk preferences in many of our treatments.


Norm Enforcement in Markets: Group Identity and the Volunteering of Feedback

Gary E. Bolton, Johannes Mans and Axel Ockenfels
2020. The Economic Jurnal, 130(629), 1248–1261.

Keywords: Laboratory, individual behavior, market structure, pricing and design.

Abstract: The provision of trader feedback is critical to the functioning of many markets. We examine the influence of group identity on the volunteering and informativeness of feedback. In a market experiment conducted simultaneously in Germany and the United States, we manipulate the interaction of traders based on natural social and induced home market identities. Traders are more likely to provide feedback information on a trader with whom they share a common group identity, and the effect is more pronounced for social identity than for home market identity. Both kinds of group identity promote rewarding good performance and punishing bad performance.


Borrow Crisis Tactics to get COVID-19 Supplies to Where they are Needed

Peter Cramton, Axel Ockenfels, Alvin E. Roth and Robert B. Wilson
2020. Nature, 582, 334-336.

z-Tree unleashed: A novel client-integrating architecture for conducting z-Tree experiments over the Internet

Matthias L. Duch, Max R. P. Grossmann and Thomas Lauer
2020. Journal of Behavioral and Experimental Finance, 28(100400).

Abstract: We present z-Tree unleashed, a novel approach and set of scripts to aid the implementation of computerized behavioral experiments outside the laboratory. z-Tree unleashed enables subjects to join the experiment using a web portal that requires no software apart from a web browser. Experimenters are likewise enabled to administer their experiments from anywhere in the world. Except for z-Tree itself, z-Tree unleashed is entirely based on free and open-source software. In this paper we give a high-level overview of z-Tree unleashed's features and benefits and its design. We also show how to set up the server and demonstrate the steps required for conducting an entire experiment. We subsequently explain how to leverage the security and routing features of a virtual private network with z-Tree unleashed, enabling servers to securely run behind routers.

Überkreuznierenspenden in Deutschland?

Dorothea Kübler und Axel Ockenfels
2020. Medizinrecht, 38, 89-94.

(Basiert auf Stellungnahme zum Antrag „Chancen von altruistischen Organlebendspenden nutzen – Spenden erleichtern“, Sachverständigengutachten für den Ausschuss für Gesundheit des Deutschen Bundestags.)

Abstract: Lebendspenden werden in Deutschland sehr viel seltener ermöglicht als in anderen Ländern. Das liegt auch daran, dass Überkreuzspenden nicht erlaubt sind. Spender und Empfänger müssen sich „in besonderer persönlicher Ver- bundenheit offenkundig nahestehen.“ Die Organe poten- zieller Nierenspender mit dem geforderten Näheverhältnis zum Empfänger sind allerdings aufgrund von Unverträg- lichkeiten in etwa 40 % der Fälle nicht kompatibel mit den jeweiligen Empfängern. Die Überkreuzspende bringt zwei Paare zusammen, bestehend aus jeweils einem Patienten und einem nahestehenden Spender, um eine Organspen- de ‚über Kreuz‘ zu ermöglichen. Aus der Praxis der Über- kreuzspende in anderen Ländern lassen sich Best Practices ableiten.

Games as frames

Axel Ockenfels and Uta Schier
2020. Journal of Economic Behavior and Organization, 172, 97-106.

Keywords: Framing, trust game, stag-hunt game, incentives, mindsets.

Abstract: We show that economic games per se can provide contextual cues and thereby impact behavior. In two laboratory experiments, we examine whether deliberating on trust games versus stag-hunt games without feedback changes cooperation behavior in a subsequent game. First, we find that subjects who play trust games without feedback hold more pessimistic beliefs about other players’ cooperation in a subsequent game than subjects who played stag-hunt games without feedback. We also observe that deliberation on trust games versus stag-hunt games accordingly affects behavior in a subsequent, unrelated game. While stag-hunt games align interests between players, trust games pose a conflict of interest between players. Such (mis-)alignments induced by the game potentially explain our findings, because they may offer cues that affect beliefs and behavior in subsequent games.

Trust in Everyday Life

Alexa Weiss, Corinna Michels, Pascal Burgmer, Thomas Mussweiler, Axel Ockenfels and Wilhelm Hofmann
2020. Journal of Personality and Social Psychology, Advance online publication.

Keywords: trust, distrust, experience sampling, cooperation, interdependence.

Abstract: Although trust plays a pivotal role in many aspects of life, very little is known about the manifestation of trust and distrust in everyday life. In this work, we integrated several prior approaches to trust and investigated the prevalence and key determinants of trust (vs. distrust) in people’s natural environments, using preregistered experience-sampling methodology. Across more than 4,500 social interactions from a heterogeneous sample of 427 participants, results showed high average levels of trust, but also considerable variability in trust across contexts. This variability was attributable to aspects of trustee perception, social distance, as well as 3 key dimensions of situational interdependence: conflict of interests, information (un)certainty, and power imbalance. At the dispositional level, average everyday trust was shaped by general trust, moral identity, and zero-sum beliefs. The social scope of most trust-related traits, however, was moderated by social distance: Whereas moral identity buffered against distrusting distant targets, high general distrust and low social value orientation amplified trust differences between close vs. distant others. Furthermore, a laboratory-based trust game predicted everyday trust only with regard to more distant but not close interaction partners. Finally, everyday trust was linked to self-disclosure and to cooperation, particularly in situations of high conflict between interaction partners’ interests. We conclude that trust can be conceptualized as a relational hub that interconnects the social perception of the trustee, the relational closeness between trustor and trustee, key structural features of situational interdependence, and behavioral response options such as self-disclosure.

An oTree-Based Flexible Architecture for Financial Market Experiments

Eric M. Aldrich, Hasan Ali Demirci and Kristian López Vargas
2019. Journal of Behavioral and Experimental Finance, 25(100205).

Keywords: Market design, experimental finance, algorithmic trading, laboratory experiments, economic software.

Abstract: This document presents an architecture for experiments in finance. The architecture builds on oTree, a modern platform for behavioral experiments, allowing for sophisticated economic environments, market institutions, and trader strategies. The system supports both continuous-and discrete-time markets, and allows for communication latencies at time resolutions of 10–20 ms. Such precise communication latencies facilitate the experimental study of high-frequency trading. The architecture also modularizes its main components, which makes the system flexible, portable, and scalable.


Die Mutter aller Kooperationsprobleme

Axel Ockenfels und Christoph M. Schmidt
2019. Zeitschrift für Wirtschaftspolitik, 68(2), 122-130.

Abstract: The discussion of climate policy received new impetus in the spring of 2019. Since then the topic has dominated the public discourse in Germany. The Fridays for Future movement continues to generate considerable pressure on policy makers. In addition, scientists emphasize in rare interdisciplinary unanimity both how urgent a radical renewal in climate policy would be, and that a uniform price for greenhouse gas emissions is the indispensable core element of the necessary reforms in Germany and Europe. One central aspect of climate policy is, however, often overlooked in all this: climate protection is essentially an international problem of cooperation. For climate change, it does not matter where greenhouse gases are emitted. The success of national climate policy must therefore be judged by whether it contributes to establishing international cooperation to reduce global greenhouse gas emissions.


Direct pricing accommodates moral behavior

Axel Ockenfels, Peter Werner and Ottmar Edenhofer
2019. Working paper.

Abstract: To measure how moral behavior interacts with pricing regimes, we conduct highly controlled experiments in which trading creates pollution. We compare indirect pricing (a cap-and-trade mechanism in our experiment) and direct pricing (a tax) in an otherwise equivalent setting in which ‘producers’ are incentivized to emit CO2. ‘Judges’ decide on central trading parameters that may restrict socially harmful activities. Profit-maximization predicts the same producer behavior, not affected by CO2 externalities. Yet, we find a significant share of producers refraining from emitting CO2 at all. Even though judges restrict behavior in similar ways across mechanisms, direct pricing is more effective to accommodate moral behavior than capping pollution.  

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Experiments in high-frequency trading: comparing two market institutions

Eric M. Aldrich and Kristian López Vargas
2019. Experimental Economics, 23, 322-352.

Keywords: Market design, auctions, high-frequency trading, continuous double auction, frequent batch auction.

Abstract: We implement a laboratory financial market where traders can access costly technology that reduces communication latency with a remote exchange. In this environment, we conduct a market design study on high-frequency trading: we contrast the performance of the newly proposed frequent batch auction (FBA) against the continuous double auction (CDA), which organizes trades in most exchanges worldwide. Our evidence suggests that, relative to the CDA, the FBA exhibits (1) less predatory trading behavior, (2) lower investments in low-latency communication technology, (3) lower transaction costs, and (4) lower volatility in market spreads and liquidity. We also find that transitory shocks in the environment have substantially greater impact on market dynamics in the CDA than in the FBA.


Market Design, Human Behavior and Management

Yan Chen, Peter Crampton, John A. List and Axel Ockenfels
2019. Working paper.

Keywords: Market design, human behavior, management.

Abstract: We review past research and forecast future directions on how the rapidly growing areas of market design and behavioral economics have influenced and will continue to impact the science and practice of management in both the private and public sectors. Using examples from various auction markets, reputation and feedback system design in online markets, matching market design in education, and the design of labor markets, we demonstrate that combining market design theory, behavioral insights, and experimental methods can lead to fruitful implementation of superior mechanisms in practice.


Using Technology to Eliminate Traffic Congestion

Peter Cramton, R. Richard Geddes and Axel Ockenfels
2019. Journal of Institutional and Theoretical Economics (JITE), 175(1), 126-139.

Keywords: Congestion pricing, dynamic road pricing, transport market design.

Abstract: Traffic congestion is a pervasive worldwide problem. We explain how to harness existing technologies together with new methods in time-and-location markets to eradicate traffic congestion along with its attendant social harms. Our marketdesign for road use builds on congestion pricing and models of efficient pricing in the electricity sector. The market maximizes the value of a transport network through efficient scheduling, routing, and pricing of road use. Privacy and equity concerns are addressed. Transparent price information provides essential infor-mation for efficient long-term investment in transport.


Personal Information Disclosure under Competition for Benefits: Is Sharing Caring?

Viola Ackfeld and Werner Güth
2019. Working paper. 

Keywords: Personal information disclosure, incentives, social pressure, experiment.

Abstract: Personal information is shared extensively every day, partly in exchange for benefits or as a reaction to other people’s information sharing. In this paper, we experimentally in- vestigate these two motives by analyzing the interaction of peer comparison and incentives to disclose potentially privacy-sensitive information. We find that information sharing is higher under incentives, and further increases under peer comparison. This effect is driven by those initially disclosing less, who additionally report to feel more compelled to reveal information. Our results provide an explanation for the current information sharing trend while pointing to a potentially neglected side effect.


Set road charges in real time to ease traffic

Peter Cramton, R. Richard Geddes and Axel Ockenfels
2018. Nature (Comment), 560, 23-25.

Abstract: Track vehicles to link tolls with demand and cut congestion, urge Peter Cramton, R. Richard Geddes and Axel Ockenfels.

Order Protection through Delayed Messaging

Eric M. Aldrich and Daniel Friedman
2018. Working Paper.

Keywords: Market design, high-frequency trading, continuous double auction, IEX, labexperiments.

Abstract: Several financial exchanges recently introduced messaging delays (e.g., the 350 microseconddelay at IEX and NYSE American) to protect ordinary investors from high-frequency traderswho exploit stale orders. To capture the impact of such delays, we propose a simple parametricmodel of the continuous double auction market format. The model features a discrete pricegrid and pegged orders, and is solved in closed form. It shows how messaging delay can in-deed lower transactions costs but typically increases queuing costs. Some of the model’s manycomparative static predictions are testable in the field and others are testable in a laboratory environment.