Markets are increasingly used as information aggregation mechanisms to predict future events. If ... more Markets are increasingly used as information aggregation mechanisms to predict future events. If policymakers and managers use markets to guide policy and managerial decisions, interested parties may attempt to manipulate the market in order to influence decisions. We study experimentally the willingness of managers to base decisions on market information under the shadow of manipulation. We find that when there are manipulators in the market, managers under-utilize the information revealed in prices. Furthermore, mere suspicion of manipulation erodes trust in the market, leading to the implementation of suboptimal policies—even without actual manipulation. This paper was accepted by Yan Chen, behavioral economics and decision analysis.
We use an experiment to study whether market competition can reduce anomalous behaviour in games.... more We use an experiment to study whether market competition can reduce anomalous behaviour in games. In different treatments, we employ two alternative mechanisms, the random mechanism and the auction mechanism, to allocate the participation rights to the red hat puzzle game, a well-known logical reasoning problem. Compared to the random mechanism, the auction mechanism significantly reduces deviations from the equilibrium play in the red hat puzzle game. Our findings show that under careful conditions, market competition can indeed reduce anomalous behaviour in games.
We study, using laboratory experiments, the extent to which disclosure policies about the financi... more We study, using laboratory experiments, the extent to which disclosure policies about the financial health of a bank affect the likelihood of a bank run. We consider two disclosure regimes, full disclosure and no disclosure, under two scenarios: one in which the bank is on average financially solvent and another in which the bank is on average insolvent. When the bank is on average insolvent, the full disclosure regime reduces the expected likelihood of runs. In contrast, when the bank is on average solvent, the full disclosure regime increases the expected likelihood of runs. Our evidence illustrates the importance of contemporary financial disclosure regulations.
We use an experiment to study whether market competition can reduce anomalous behaviour in games.... more We use an experiment to study whether market competition can reduce anomalous behaviour in games. In different treatments, we employ two alternative mechanisms, the random mechanism and the auction mechanism, to allocate the participation rights to the red hat puzzle game, a well-known logical reasoning problem. Compared to the random mechanism, the auction mechanism significantly reduces deviations from the equilibrium play in the red hat puzzle game. Our findings show that under careful conditions, market competition can indeed reduce anomalous behaviour in games.
This paper investigates the conventional wisdom that market competition for the rights to perform... more This paper investigates the conventional wisdom that market competition for the rights to perform decision-making tasks improves aggregate performances in all relevant tasks by diverting decision rights to individuals who are better able to utilise them. To do so, I use an experiment that embeds asset markets into the Hat Puzzle Problem game. I show that players’ performances in the game will depend on their ability to employ sophisticated counterfactual reasoning and provide a behavioural framework that illustrates how market competition can improve aggregate performances in the game. Contradictory to the conventional wisdom, I find that market competition exacerbates aggregate performances and diverts decision rights to players who are less able to utilise them. I provide some evidence that the failure of markets can be linked to the formation of price “bubbles”, which distort the markets’ allocation of decision rights.
We use an experiment to study whether market selection can reduce anomalous behaviour in games. I... more We use an experiment to study whether market selection can reduce anomalous behaviour in games. In different treatments, we employ two alternative mechanisms, the random mechanism and the auction mechanism, to allocate the participation rights to the red hat puzzle game, a well-known logical reasoning problem. Compared to the random mechanism, the auction mechanism significantly reduces deviations from the equilibrium play in the red hat puzzle game. Our findings show that under carefully designed incentives, market competition can indeed reduce anomalous behaviour in games.
In this paper, we seek to determine if auctions can be used to select players according to their ... more In this paper, we seek to determine if auctions can be used to select players according to their level-k types. To do so, we embed auctions into the pbeauty contest game. We find that by using different designs, we can get the auction winners to be either the lower level-k types or the higher level-k types. In particular, when the value of winning the auction is increasing in the level-k types of all the players, higher level-k players bid higher. When the value of winning the auction is decreasing in the level-k types of all the players, the lower level-k players bid higher. Taken together, our experiment confirms that we can use auctions to select players by their level-k types. This shows that auctions can allow an economic designer to affect the outcome of a game through the selection of level-k types entering to play the game.
Studies of experimental and betting markets have shown that markets are able to efficiently aggre... more Studies of experimental and betting markets have shown that markets are able to efficiently aggregate information dispersed over many traders. We study information aggregation in Arrow-Debreu markets using a novel information structure. Compared to previous studies, the information structure is more complex, allows for heterogeneity in information among traders-which provides insights into the way in which information is gradually disseminated in the market-and generates situations in which all traders hold identical beliefs over the traded assets' values, thus providing a harsh stress test for belief updating. We find little evidence for information aggregation and dissemination in early rounds. Nonetheless, after traders gain experience with the market mechanism and structure, prices converge to reveal the true state of the world. Elicited post-market beliefs reveal that markets are able to efficiently aggregate dispersed information even if individual traders remain uninformed, consistent with the marginal trader hypothesis.
Journal of Economic Behavior & Organization, 2016
We report on data from a real-effort tax compliance experiment using three subject pools: student... more We report on data from a real-effort tax compliance experiment using three subject pools: students, who do not pay income tax; company employees, whose income is reported by a third party; and self-employed taxpayers, who are responsible for filing and payment. While compliance behaviour is unaffected by changes in the level of, or information about the audit probability, higher fines increase compliance. We find subject pool differences: self-assessed taxpayers are the most compliant, while students are the least compliant. Through a simple framing manipulation, we show that such differences are driven by norms of compliance from outside the lab.
This paper investigates the conventional wisdom that markets would naturally allocate the rights ... more This paper investigates the conventional wisdom that markets would naturally allocate the rights for performing decisional task to those players who might be best suited to perform the task. We embedded the decisional tasks in a stylised setting of a game, motivated by Littlewood (1953) Red Hat Puzzle, when the optimal choices in the game require players to employ logical and epistemological reasoning. We present a treatment where players are permitted to trade their participation rights to the game. The payoffs are furthermore calibrated such that the players who know the optimal choice in the game should value the rights strictly more than those who do not. However, aggregated performances in this treatment were found to be significantly lower than the control treatments where players were not permitted to trade their participation rights, providing little support for the conventional wisdom. We show that this finding could be attributed to price "bubbles" in the markets for participations rights.
We investigate whether subjects' behavior in the Arad and Rubinstein (2012) "11-20" game could be... more We investigate whether subjects' behavior in the Arad and Rubinstein (2012) "11-20" game could be well explained by the k-level process described by the authors. We replicated their game in our baseline experiment and provided two other variations that retained the same mixed-strategy equilibrium but resulted in different predicted behavior by the k-level process. Our experiments results suggest that k-level process leads to inconsistent predictions. In contrast to the standard k-level process as in Arad and Rubinstein, we allow players to best respond stochastically in our "SK" model and compared the model's statistical fit against the Quantal Response Equilibrium and Cognitive Hierarchy Model. The SK model and Cognitive Model were able to outperform the QRE in a statistical sense and performed as well as each other. In addition, the Cognitive Hierarchy and to lesser extend the SK model, demonstrate consistent estimates. Our findings suggest that the behavioral assumptions of Arad and Rubinstein k-level process does not fully explain behavior in the "11-20" and better explanations could be obtained when one allows for stochastic best responds as in the SK and Cognitive Hierarchy Models.
We investigate whether behaviours in Arad and Rubinstein (2012) "11-20" game are well explained b... more We investigate whether behaviours in Arad and Rubinstein (2012) "11-20" game are well explained by the level-k model. We replicate their game in our Baseline experiment and provided two other variations that retain the same mixed-strategy equilibrium but result in different predicted level-k behaviours. Our hypothesis test is motivated by the logic that if the Baseline and variation games capture level-k reasoning behaviours, we should find consistent proportion of level-k types in all games. We considered two types of level-k models where players were assumed to best respond stochastically and found that the level-k models were able to explain the data significantly better than the equilibrium driven alternatives. In addition, the levelk models were also able to demonstrate consistent proportions of level-k types between the differentiated games. Our findings provide support for Arad and Rubinstein (2012) assertion that behaviours in the "11-20" game can be attributed to the level-k models.
In this paper we examine diffusion of responsibility in a whistleblowing experiment. We use a mul... more In this paper we examine diffusion of responsibility in a whistleblowing experiment. We use a multi-player asymmetric information ultimatum game where only the proposer and a subset of the responders (the information insiders) know the size of a pot that the proposer distributes among information insiders and outsiders. Insiders have a clear monetary incentive to whistleblow in case of a small pot in order to avoid rejection of seemingly unfair offers by outsiders; in case of a large pot only altruistic motives could explain that insiders whistleblow. We vary the number of information insiders, one or two, who can whistleblow. We find that in all treatments close to 60% of the insiders whistleblow when they are pivotal for both small and large pots. In a treatment where other insider can also blow the whistle, we observe a significant drop in case only altruistic motives can explain whistleblowing. We show that the effect is due to the extensive margin, i.e. the share of whistleblowers drops to 20%, while patterns of active whistleblowers do not change. In case of low pot sizes, where whistleblowing is in line with selfish motives, we do not observe diffusion of responsibility, in spite of a possible free riding incentive due to a positive cost of whistleblowing.
Markets are increasingly used as information aggregation mechanisms to predict future events. If ... more Markets are increasingly used as information aggregation mechanisms to predict future events. If policymakers and managers use markets to guide policy and managerial decisions, interested parties may attempt to manipulate the market in order to influence decisions. We study experimentally the willingness of managers to base decisions on market information under the shadow of manipulation. We find that when there are manipulators in the market, managers under-utilize the information revealed in prices. Furthermore, mere suspicion of manipulation erodes trust in the market, leading to the implementation of suboptimal policies—even without actual manipulation. This paper was accepted by Yan Chen, behavioral economics and decision analysis.
We use an experiment to study whether market competition can reduce anomalous behaviour in games.... more We use an experiment to study whether market competition can reduce anomalous behaviour in games. In different treatments, we employ two alternative mechanisms, the random mechanism and the auction mechanism, to allocate the participation rights to the red hat puzzle game, a well-known logical reasoning problem. Compared to the random mechanism, the auction mechanism significantly reduces deviations from the equilibrium play in the red hat puzzle game. Our findings show that under careful conditions, market competition can indeed reduce anomalous behaviour in games.
We study, using laboratory experiments, the extent to which disclosure policies about the financi... more We study, using laboratory experiments, the extent to which disclosure policies about the financial health of a bank affect the likelihood of a bank run. We consider two disclosure regimes, full disclosure and no disclosure, under two scenarios: one in which the bank is on average financially solvent and another in which the bank is on average insolvent. When the bank is on average insolvent, the full disclosure regime reduces the expected likelihood of runs. In contrast, when the bank is on average solvent, the full disclosure regime increases the expected likelihood of runs. Our evidence illustrates the importance of contemporary financial disclosure regulations.
We use an experiment to study whether market competition can reduce anomalous behaviour in games.... more We use an experiment to study whether market competition can reduce anomalous behaviour in games. In different treatments, we employ two alternative mechanisms, the random mechanism and the auction mechanism, to allocate the participation rights to the red hat puzzle game, a well-known logical reasoning problem. Compared to the random mechanism, the auction mechanism significantly reduces deviations from the equilibrium play in the red hat puzzle game. Our findings show that under careful conditions, market competition can indeed reduce anomalous behaviour in games.
This paper investigates the conventional wisdom that market competition for the rights to perform... more This paper investigates the conventional wisdom that market competition for the rights to perform decision-making tasks improves aggregate performances in all relevant tasks by diverting decision rights to individuals who are better able to utilise them. To do so, I use an experiment that embeds asset markets into the Hat Puzzle Problem game. I show that players’ performances in the game will depend on their ability to employ sophisticated counterfactual reasoning and provide a behavioural framework that illustrates how market competition can improve aggregate performances in the game. Contradictory to the conventional wisdom, I find that market competition exacerbates aggregate performances and diverts decision rights to players who are less able to utilise them. I provide some evidence that the failure of markets can be linked to the formation of price “bubbles”, which distort the markets’ allocation of decision rights.
We use an experiment to study whether market selection can reduce anomalous behaviour in games. I... more We use an experiment to study whether market selection can reduce anomalous behaviour in games. In different treatments, we employ two alternative mechanisms, the random mechanism and the auction mechanism, to allocate the participation rights to the red hat puzzle game, a well-known logical reasoning problem. Compared to the random mechanism, the auction mechanism significantly reduces deviations from the equilibrium play in the red hat puzzle game. Our findings show that under carefully designed incentives, market competition can indeed reduce anomalous behaviour in games.
In this paper, we seek to determine if auctions can be used to select players according to their ... more In this paper, we seek to determine if auctions can be used to select players according to their level-k types. To do so, we embed auctions into the pbeauty contest game. We find that by using different designs, we can get the auction winners to be either the lower level-k types or the higher level-k types. In particular, when the value of winning the auction is increasing in the level-k types of all the players, higher level-k players bid higher. When the value of winning the auction is decreasing in the level-k types of all the players, the lower level-k players bid higher. Taken together, our experiment confirms that we can use auctions to select players by their level-k types. This shows that auctions can allow an economic designer to affect the outcome of a game through the selection of level-k types entering to play the game.
Studies of experimental and betting markets have shown that markets are able to efficiently aggre... more Studies of experimental and betting markets have shown that markets are able to efficiently aggregate information dispersed over many traders. We study information aggregation in Arrow-Debreu markets using a novel information structure. Compared to previous studies, the information structure is more complex, allows for heterogeneity in information among traders-which provides insights into the way in which information is gradually disseminated in the market-and generates situations in which all traders hold identical beliefs over the traded assets' values, thus providing a harsh stress test for belief updating. We find little evidence for information aggregation and dissemination in early rounds. Nonetheless, after traders gain experience with the market mechanism and structure, prices converge to reveal the true state of the world. Elicited post-market beliefs reveal that markets are able to efficiently aggregate dispersed information even if individual traders remain uninformed, consistent with the marginal trader hypothesis.
Journal of Economic Behavior & Organization, 2016
We report on data from a real-effort tax compliance experiment using three subject pools: student... more We report on data from a real-effort tax compliance experiment using three subject pools: students, who do not pay income tax; company employees, whose income is reported by a third party; and self-employed taxpayers, who are responsible for filing and payment. While compliance behaviour is unaffected by changes in the level of, or information about the audit probability, higher fines increase compliance. We find subject pool differences: self-assessed taxpayers are the most compliant, while students are the least compliant. Through a simple framing manipulation, we show that such differences are driven by norms of compliance from outside the lab.
This paper investigates the conventional wisdom that markets would naturally allocate the rights ... more This paper investigates the conventional wisdom that markets would naturally allocate the rights for performing decisional task to those players who might be best suited to perform the task. We embedded the decisional tasks in a stylised setting of a game, motivated by Littlewood (1953) Red Hat Puzzle, when the optimal choices in the game require players to employ logical and epistemological reasoning. We present a treatment where players are permitted to trade their participation rights to the game. The payoffs are furthermore calibrated such that the players who know the optimal choice in the game should value the rights strictly more than those who do not. However, aggregated performances in this treatment were found to be significantly lower than the control treatments where players were not permitted to trade their participation rights, providing little support for the conventional wisdom. We show that this finding could be attributed to price "bubbles" in the markets for participations rights.
We investigate whether subjects' behavior in the Arad and Rubinstein (2012) "11-20" game could be... more We investigate whether subjects' behavior in the Arad and Rubinstein (2012) "11-20" game could be well explained by the k-level process described by the authors. We replicated their game in our baseline experiment and provided two other variations that retained the same mixed-strategy equilibrium but resulted in different predicted behavior by the k-level process. Our experiments results suggest that k-level process leads to inconsistent predictions. In contrast to the standard k-level process as in Arad and Rubinstein, we allow players to best respond stochastically in our "SK" model and compared the model's statistical fit against the Quantal Response Equilibrium and Cognitive Hierarchy Model. The SK model and Cognitive Model were able to outperform the QRE in a statistical sense and performed as well as each other. In addition, the Cognitive Hierarchy and to lesser extend the SK model, demonstrate consistent estimates. Our findings suggest that the behavioral assumptions of Arad and Rubinstein k-level process does not fully explain behavior in the "11-20" and better explanations could be obtained when one allows for stochastic best responds as in the SK and Cognitive Hierarchy Models.
We investigate whether behaviours in Arad and Rubinstein (2012) "11-20" game are well explained b... more We investigate whether behaviours in Arad and Rubinstein (2012) "11-20" game are well explained by the level-k model. We replicate their game in our Baseline experiment and provided two other variations that retain the same mixed-strategy equilibrium but result in different predicted level-k behaviours. Our hypothesis test is motivated by the logic that if the Baseline and variation games capture level-k reasoning behaviours, we should find consistent proportion of level-k types in all games. We considered two types of level-k models where players were assumed to best respond stochastically and found that the level-k models were able to explain the data significantly better than the equilibrium driven alternatives. In addition, the levelk models were also able to demonstrate consistent proportions of level-k types between the differentiated games. Our findings provide support for Arad and Rubinstein (2012) assertion that behaviours in the "11-20" game can be attributed to the level-k models.
In this paper we examine diffusion of responsibility in a whistleblowing experiment. We use a mul... more In this paper we examine diffusion of responsibility in a whistleblowing experiment. We use a multi-player asymmetric information ultimatum game where only the proposer and a subset of the responders (the information insiders) know the size of a pot that the proposer distributes among information insiders and outsiders. Insiders have a clear monetary incentive to whistleblow in case of a small pot in order to avoid rejection of seemingly unfair offers by outsiders; in case of a large pot only altruistic motives could explain that insiders whistleblow. We vary the number of information insiders, one or two, who can whistleblow. We find that in all treatments close to 60% of the insiders whistleblow when they are pivotal for both small and large pots. In a treatment where other insider can also blow the whistle, we observe a significant drop in case only altruistic motives can explain whistleblowing. We show that the effect is due to the extensive margin, i.e. the share of whistleblowers drops to 20%, while patterns of active whistleblowers do not change. In case of low pot sizes, where whistleblowing is in line with selfish motives, we do not observe diffusion of responsibility, in spite of a possible free riding incentive due to a positive cost of whistleblowing.
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