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A sceptic comment on 'A sceptic's comment on the study of economics'

Jeannette Brosig, Timo Heinrich, Thomas Riechmann, Ronnie Schöb and Joachim Weimann
2007. FEMM Working Paper Series 15, University of Magdeburg.
This paper provides a critical re-examination of Rubinstein’s survey in which he questions the way of teaching economics. The observations obtained in our new survey cast some doubts on the original findings, and in particular, question Rubinstein’s conjecture that our students’ views on economic issues are influenced by the way we teach economics.

A sceptic comment on 'A sceptic's comment on the studies of economics'

Strategic Capacity Choice under Uncertainty: The Impact of Market Structure on Investment and Welfare

Veronika Grimm and Gregor Zoettl
2007. University of Cologne Working Paper.
We analyze a market game where firms choose capacities under uncertainty about future market conditions and make output choices after uncertainty has unraveled. We show existence and uniqueness of equilibrium under imperfect competition and establish that capacity choices by strategic firms are generally too low from a welfare point of view. We also demonstrate that strategic firms choose even lower capacities if they anticipate competitive spot market pricing (e.g. due to regulatory intervention). We finally illustrate how the model can be used to assess the impact of electricity market liberalization on total capacity and welfare by fitting it to the data of the German electricity market. 

Strategic Capacity Choice under Uncertainty

Regret and Feedback Information in First-Price Sealed-Bid Auctions

Richard Engelbrecht-Wiggans and Elena Katok 
2007. Working Paper.
We investigate the effect of regret-related feedback information on bidding behavior in sealed-bid first-price auctions. Two types of regret are possible in this auction format. A winner of the auction may regret paying too much relative to the second highest bid, and a loser may regret missing an opportunity to win at a favorable price. In theory, under very general conditions, being sensitive to winning and paying too much should result in lower average bids, and being sensitive to missing opportunities to win at a favorable price should result in higher bids. For example, the US Government’s policy of revealing losing bids may cause regret-sensitive bidders to anticipate regret and bid conservatively, decreasing the government’s revenue.. We test these predictions in the laboratory and find strong support for both.

Regret and Feedback Information in First-Price Sealed-Bid Auctions

Sequential versus Bundle Auctions for Recurring Procurement

Veronika Grimm
2007. Journal of Economics, 90(1), 1-27.
We compare sequential and bundle procurement auctions in a framework of successive procurement situations, where current success positively or negatively affects future market opportunities. We find that in bundle auctions procurement cost is lower and less risky than in sequential standard auctions, but still higher than in the optimal sequential auction. Only a sequential second price auction leads to the efficient outcome.

A Comparison of Buyer-determined and Price-based multi-attribute Mechanisms

Richard Engelbrecht-Wiggans, Ernan Haruvy and Elena Katok
2007. Marketing Science, 26(5), 629-641.
Reverse auctions are fast becoming the standard for many procurement activities. In the past, the majority of such auctions have been solely price based, but increasingly attributes other than price affect the auction outcome. Specifically, the buyer uses a scoring function to compare bids and the bid with the highest score wins. We investigate two mechanisms commonly used for procurement in business-to-business markets, in a setting in which buyers’ welfare is affected by exogenous nonprice attributes such as the quality, service, and past relationships. Under both mechanisms, bidders bid based on price, but in the “buyer-determined” mechanism, the buyer is free to select the bid that maximizes her surplus while in the “price-based” mechanism, the buyer commits to awarding the contract to the low price bidder. We find, both in theory and in the laboratory, that the “buyer-determined” mechanism increases the buyer’s welfare only as long as enough suppliers compete. If the number of suppliers is small and the correlation between cost and quality is low, the buyer is better off with the “price-based” mechanism. These findings are intended to help procurement managers make better decisions in designing procurement mechanisms for a variety of settings.

Leading by Example in a Public Goods Experiment with Heterogeneity and Incomplete Information

Werner Güth, Maria Vittoria Levati, Matthias Sutter and Eline van der Heijden
2007. Journal of Conflict Resolution, 51(5), 793-818.
We study the effects of leadership on the private provision of a public good when group members are heterogeneously endowed. Leadership is implemented as a sequential public goods game where one group member contributes first and all the others follow. Our results show that the presence of a leader increases average contribution levels but less so than in case of homogeneous endowments. Leadership is almost ineffective, though, if participants do not know the distribution of endowments. Granting the leaders exclusion power does not lead to significantly higher contributions.

The Effect of Timing on Bid Increments in Ascending Auctions

Anthony M. Kwasnica and Elena Katok
2007. Production and Operations Management, 16(4), 483-494.
We investigate the role of timing in ascending auctions under the premise that time is a valuable resource. Traditional models of the English auction ignore timing issues by assuming that the auction occurs instantaneously. However, when auctions are slow, as internet auctions used for procurement often are, there are significant opportunity or monitoring costs to bidders, and the choice of the size of the jump bid becomes a strategic decision. We study this choice in the experimental laboratory by systematically varying the opportunity costs associated with fast bidding. We find that when time is more valuable bidders respond by choosing larger jump bids. Surprisingly, the economic performance of the auction is not significantly affected. We develop a simple model of ascending auctions with impatient bidders that provides insights into the effect jump bids have on auction performance.

Marktmachtmessung im deutschen Strommarkt in Theorie und Praxis. Kritische Anmerkungen zur London Economics-Studie

Axel Ockenfels
2007. Energiewirtschaftliche Tagesfragen, 57(9), 12-29.
Im Februar 2007 hat das Beratungsunternehmen London Economics im Auftrag der GeneraldirektionWettbewerb der Europäischen Kommission eine Studie mit dem Titel Structure and Performance of Six European Wholesale Electricity Markets in 2003, 2004 and 2005 vorgelegt, in der die Funktionsfähigkeit und Struktur ausgewählter europäischer Großhandelsmärkte analysiert wird. Die von London Economics vorgelegte Evidenz ist jedoch methodisch und empirisch fehlerbehaftet. Die Interpretationen und Schlussfolgerungen leiden zudem an einer mangelnden ökonomischen Fundierung sowie an einer unzureichenden Berücksichtigung der Strommarktdynamik. Insgesamt betrachtet kann die Studie dem Anspruch nicht gerecht werden, eine robuste Entscheidungsgrundlage für wettbewerbspolitische oder regulatorische Maßnahmen zu liefern.

An Evolutionary Analysis of Buyer Insurance and Seller Reputation in Online Markets

Werner Güth, Friederike Mengel and Axel Ockenfels
2007. Theory and Decision, 63(3), 265-282.
Applying an evolutionary framework, we investigate how a reputation mechanism and a buyer insurance (as used on Internet market platforms such as eBay) interact to promote trustworthiness and trust in markets with moral hazard problems. Our analysis suggests that the costs involved in giving reliable feedback determine the gains from trade that can be obtained in equilibrium. Buyer insurance, on the other hand, can affect the trading dynamics and equilibrium selection. We find that, under reasonable conditions, buyer insurance crowds out trust and trustworthiness. 

Measuring Market Power on the German Electricity Market in Theory and Practice – Critical Notes on the LE Study

Axel Ockenfels
2007. Energiewirtschaftliche Tagesfragen, 57(9), 12-29.
In February 2007, under an engagement from the DG Competition of the European Commission, the consultancy firm “London Economics” issued a study entitled “Structure and Performance of Six European Wholesale Electricity Markets in 2003, 2004 and 2005”, in which the performance and structure of selected European wholesale markets were analyzed. However, the evidence produced by London Economics suffers from methodological and empirical failings. Moreover, the interpretations and conclusions are based on inadequate economic modeling, and insufficient consideration is given to the dynamics of the electricity market. Overall, the study cannot provide a robust basis for decision-making in relation to competition policy or regulatory measures.

The impact of competition and reputation feedback systems on Internet trading

Gary Bolton, Claudia Loebbecke and Axel Ockenfels
2007. Paper presented on the International Conference on Information Systems (ICIS), Montreal, Canada.

The Bullwhip Effect and Order Smoothing in a Laboratory Beergame

David E. Cantor and Elena Katok
2007. Working Paper.
Production and order smoothing is often a rational cost-minimizing behavior and it has been documented in practice. Changing orders may be costly, but these costs can be difficult to measure using secondary data. Using the controlled setting of the laboratory, we systematically investigate supply chain features that lead to the bullwhip effect and to order smoothing. We find that shorter lead-times not only reduce the bullwhip effect, but also induce order smoothing by retailers. When customer demand has a predictable seasonal component, our participants understand how to smooth orders, and order smoothing is even more pronounced. This behavior is even more prevalent when changing order levels is costly.

The Bullwhip Effect and Order Smoothing in a Laboratory Beergame

The interplay between competition and feedback in online trading networks

Bolton, Gary E., Claudia Loebbecke and Axel Ockenfels
2007. Paper presented on the Academy of Management Annual Meeting AoM, Organization, Communication and Information Systems (OCIS), Philadelphia PA, USA.

Production under Uncertainty: The Effect of Price Caps

Veronika Grimm and Gregor Zoettl
2007. University of Cologne Working Paper.
We analyze the effect of price caps on equilibrium production in oligopoly under demand uncertainty. We find that high price caps always increase production and welfare as compared to the situation without price cap. Price caps close to marginal cost may lead to zero production, depending on the nature of uncertainty. We characterize the optimal price cap and show that typically, the optimal price cap is bounded away from marginal cost, while for certain demand distributions a price cap at marginal cost may even be optimal.

'Buying a pig in a poke': An experimental study of unconditional veto power

Thomas Gehrig, Werner Güth, Vittoria Levati, Rene Levinsky, Axel Ockenfels, Tobias Uske and Torsten Weiland
2007. Journal of Economic Psychology, 28(6), 692-703.
We study an ultimatum experiment in which the responder does not know the offer when accepting or rejecting. Unconditional veto power leads to acceptances, although proposers are significantly greedier than in standard ultimatum games, and this is anticipated by responders. We also elicit responders willingness to pay for (un)conditional veto power. The bids reveal a large endowment effect. 

Book Review: An Introduction to the Structural Econometrics of Auction Data (H. Paarsch and H. Hong)

Veronika Grimm
2007. Journal of Economics 92(2).

Daten statt Dogmen

Axel Ockenfels
2007. In Ökonomie 2.0, Norbert Häring and Olaf Storbeck (eds.), 1-6. Stuttgart: Schaeffer, Poeschel.

Deception through telling the truth?!

Matthias Sutter
2007. Working Papers in Economics and Statistics, University of Innsbruck, No. 26.
The notion of deception is typically associated with telling a lie or with the misrepresentation of information. In this paper I use a cheap-talk sender-receiver experiment to show that telling the truth should be classified as deception if the sender chooses the true message with the expectation that the receiver will not follow the sender's (true) message. The experimental data reveal a large degree of sophisticated deception through telling the truth. The robustness of my broader classification of deception including truth telling when linked to particular expectations is confirmed in an experimental treatment where teams make decisions.

Deception through telling the truth?!

Herding, Social Preferences and (Non-)Conformity

Luca Corazzini and Ben Greiner
2007. Economics Letters, 97(1), 74-80.
We study the role of social preferences and conformity in explaining herding behavior in anonymous risky environments. In an experiment similar to information cascade settings, but with no private information, we find no evidence for conformity. On the contrary, we observe a significant amount of non-conforming behavior, which cannot be attributed to errors.

Herding, Social Preferences and (Non-)Conformity

Entry decisions and bidding behavior in sequential first-price procurement auctions: an experimental study

Jeannette Brosig and J. Philipp Reiß
2007. Games and Economic Behavior, 58, 50-74.
Though many real life auctions are run independently of each other, from the bidders’ point of view they often form sequences of auctions.We investigate how behavior responds to the additional incentives that are present in such auction sequences. Comparing subjects’ decisions in single first-price procurement auctions with their decisions in a game consisting of two subsequent first-price procurement auctions, we find that, in line with the theoretical prediction, entry and bidding behavior is crucially affected by the opportunity cost of early bid submission. Though, entry decisions and average bids in the auction sequence systematically deviate from the perfect Bayesian equilibrium prediction. While the nature of the opponent (human being or computer) has no significant effect on these findings, giving subjects additional feedback on winners and prices seems to reduce the deviations from the equilibrium prediction. 

Selfish in the end? An investigation of consistency and stability of individual behavior

Jeannette Brosig, Thomas Riechmann and Joachim Weimann
2007. FEMM Working Paper Series, University of Magdeburg, 05.
This paper puts three of the most prominent specifications of ‘other-regarding’ preferences to the experimental test, namely the theories developed by Charness and Rabin, by Fehr and Schmidt, and by Andreoni and Miller. In a series of experiments based on various dictator and prisoner’s dilemma games, we try to uncover which of these concepts, or the classical selfish approach, is able to explain most of our experimental findings. The experiments are special with regard to two aspects: First, we investigate the consistency of individual behavior within and across different classes of games. Second, we analyze the stability of individual behavior over time by running the same experiments on the same subjects at several points in time.Our results demonstrate that in the first wave of experiments, all theories of other-regarding preferences explain a high share of individual decisions. Other-regarding preferences seem to wash out over time, however. In the final wave, it is the classical theory of selfish behavior that delivers the best explanation. Stable behavior over time is observed only for subjects, who behave strictly selfish. Most subjects behave consistently with regard to at least one of the theories within the same class of games, but are much less consistent across games.

Selfish in the end?

Strombörse und Marktmacht

Axel Ockenfels
2007. Energiewirtschaftliche Tagesfragen, 57(5), 44-58.
Auch in Deutschland scheinen Politik und Öffentlichkeit in den letzten Monaten Vertrauen in den Strommarkt zu verlieren. Die Rufe nach Markteingriffen und Reformen werden zunehmend lauter. Warum ist es scheinbar so schwierig, Strompreise und -märkte zu bändigen?

Contracting in Supply Chains: A Laboratory Investigation

Elena Katok and Diana Wu
2007. Working Paper .
We investigate the performance of three commonly-studied supply chain contracting mechanisms: the wholesale price, the buyback, and the revenue-sharing contracts. The simple setting we consider is one with a two-member supply chain in which the retailer faces the newsvendor problem, the supplier has no capacity constraints, and the delivery occurs instantaneously. This is the setting for which clear theoretical benchmarks are known: there exists a family of coordinating buyback and revenue-sharing contracts that differ only in how the profit is distributed between the retailer and the supplier. We compare the three mechanisms in a laboratory setting that controls for strategic interactions between the retailer and the supplier, and find that although the buyback and the revenue-sharing contracts improve supply chain efficiency relative to the wholesale price contract, the improvement is smaller than the theory predicts. We also find that although the buyback and the revenue-sharing contracts are mathematically equivalent, they do not generally produce equivalent outcomes for retailers but they do for suppliers.

Contracting in Supply Chains: A Laboratory Investigation

How do coalitions get built: evidence from an extensive form coalition game with renegotiation and externalities

Gary E. Bolton and Jeannette Brosig
2007. Working Paper Series in Economics, University of Cologne, No. 30.
We investigate a three-person coalition game in which one bargainer, the builder, can propose and build a coalition over two stages. In equilibrium, coalition building ends with an efficient grand coalition, while the equilibrium path is contingent on the values of the two-person coalitions and associated externality payoffs. Considering relative payoffs need not change the equilibrium path. Nevertheless, outcomes in the experiment are often inefficient. One explanation is that bargainers have difficulties anticipating the future actions of other bargainers. This problem might be mitigated by allowing bargainers to communicate prior to each stage. A test finds that communication does in fact increase efficiency, although unevenly, and at the cost of the builder. The study implies that the nature and pattern of communication among bargainers is a critical factor in efficient coalition building.

How do coalitions get built

Bargaining outside the Lab. A Newspaper Experiment of a Three-person Ultimatum Game

Werner Güth, Carsten Schmidt and Matthias Sutter
2007. Economic Journal, 117(518), 449-469.
In a large scale newspaper experiment 5,132 readers of the German weekly, Die Zeit, participated in a three-person bargaining game. In our data analysis we focus on (1) the influence of age, gender, profession and the medium chosen for participation on bargaining behavior and on (2) the external validity of student behavior (inside and outside the lab). We find that older participants and women care more about equal distributions and that Internet users are more self-regarding than those using mail or fax. Decisions made by students in the lab are rather similar to those made by students in the newspaper experiment. Furthermore, student behavior is not different from non-student behavior when the same age group is considered, indicating a high degree of external validity of student data.

Self Centered and Other Regarding Behavior in the Solidarity Game

Susanne Büchner, Giorgio Coricelli and Ben Greiner
2007. Journal of Economic Behavior and Organization, 62(2), 293-303.

This paper revisits 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 'fixed total sacrifice' behavior is replaced by 'fixed relative gift' behavior. Additionally, we introduce a measure of personality characteristics and compare its specific components with pro-social gift behavior in our experiments. We do not find correlations between actual gift behavior and measures of empathy-driven pro-social behavior used in social science.

Regret in Auctions: Theory and Evidence

Richard Engelbrecht-Wiggans and Elena Katok
2007. Economic Theory, 33(1), 81-101.
The sealed-bid first-price auction of a single object in the case of independent privately-known values is the simplest auction setting and understanding it is important for understanding more complex mechanisms. But bidders bid above the risk-neutral Nash equilibrium theory prediction. The reasons for this “over bidding” remain an unsolved puzzle. Several explanations have been offered, including risk aversion, social comparisons, and learning.We present a new explanation based on regret and a model that explains not only the observed over bidding in sealed-bid first-price auctions, but also behavior in several other settings that is inconsistent with risk aversion. 

Welfare Reducing Polls

Jacob K. Goeree and Jens Großer
2007. Economic Theory, 31, 51-68.

Welfare Reducing Polls

Leading by Example with and without Exclusion Power in Voluntary Contribution Experiments

Vittoria Levati, Matthias Sutter, and Eline van der Heijden
2007. Journal of Public Economics, 91, 1023-1042.
We examine the effects of leading by example in voluntary contribution experiments. Leadership is implemented by letting one group member contribute to the public good before followers do. Such leadership increases contributions in comparison to the standard voluntary contribution mechanism, especially so when it goes along with authority in the form of granting the leader exclusion power. Whether leadership is fixed or rotating among group members has no significant influence on contributions. Only a minority of groups succeeds in endogenously installing a leader, even though groups with leaders are much more efficient than groups without a leader.

Outcomes versus Intentions. On the Nature of Fair Behavior and its Development with Age

Matthias Sutter
2007. Journal of Economic Psychology, 28(1), 69-78.
Economic decisions depend both on actual outcomes as well as perceived intentions. In this paper, we examine whether and how the relative importance of outcomes or intentions for economic decisions develops with age. We report the results of ultimatum games with children, teens and students. We find that children and teens react systematically to perceived intentions, like students do. However, children and teens reject unequal offers much more often than students, indicating that outcomes are relatively more important than intentions for younger subjects. Hence, the relative importance of intentions increases with age.

Individual versus group behavior and the role of the decision making procedure in gift-exchange experiments

Martin Kocher and Matthias Sutter
2007. Empirica, 34, 63-88.
We test for behavioral differences between groups and individuals in gift-exchange experiments. Related studies in economics establish group behavior as often closer to the standard game-theoretic equilibrium under the assumptions of rationality and selfishness. We show that this result may depend crucially on the decision making procedure within groups and the nature of the task. A novel experimental decision making protocol opens the black box of group decision making and allows tracking important features of the group interaction process. We are also able to show that acting in a group may shift initial individual choices.

Group Selection with Imperfect Separation - An Experiment

Veronika Grimm and Friederike Mengel
2007. Working Paper.

We experimentally investigate the effect of imperfect separation of groups on group selection and cooperation in a standard prisoner's dilemma environment. Subjects can repeatedly choose between two groups, where in one of them an institutionalized norm fosters cooperation. The degree of separation of the two groups is varied between treatments. We find that both, the share of participants that choose into the group where the norm is implemented and the share of participants that cooperate, rise monotonously with the degree of group separation. Furthermore with higher group separation significantly more subjects support the enforcement of the norm.

Group Selection with Imperfect Separation - An Experiment