Andreas Roider

Herding With and Without Payoff Externalities - An Internet Experiment

Most real world situations that are susceptible to herding are also characterized by direct payoff externalities. Yet, the bulk of the theoretical and experimental literature on herding has focused on pure informational externalities. In this paper we experimentally investigate the effects of several different forms of payoff externalities (e.g., network effects, first-mover advantage, etc.) in a standard information-based herding model. Our results are based on an internet experiment with more than 6000 subjects, including a subsample of 267 consultants from an international consulting firm. We also replicate and review earlier cascade experiments. Finally, we study reputation effects (i.e., the influence of success models) in the context of herding.

Asset Ownership and Contractibility of Interaction

In a property-rights framework, I study how organizational form and quantity contracts interact in generating investment incentives. The model nests standard property-rights and hold-up models as special cases. I admit general message-dependent contracts but provide conditions under which noncontingent contracts are optimal. First, the article contributes to the foundation of the property-rights theory: I characterize under which circumstances its predictions are correct when trade is contractible. Second, I study how the optimal use of the incentive instruments depends on the environment. Finally, the model offers a new perspective on the classic Fisher Body case and produces implications that are empirically testable.

Asset Ownership and Contractability of Interaction

In a property-rights framework, I study how organizational form and quantity contracts interact in generating investment incentives. The model nests standard property-rights and hold-up models as special cases. I admit general message-dependent contracts, but provide conditions under which non-contingent contracts are optimal. First, I contribute to the foundation of the property-rights theory: I characterize under which circumstances its predictions are correct when trade is contractible. Second, I study how the optimal use of the incentive instruments depends on the environment. This is in the spirit of the multitasking literature. Finally, the model produces implications of the property-rights theory that are empirically testable.

Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices

The experimental literature has documented that there is overbidding in second-price auctions, regardless of bidders valuations. In contrast, in first-price auctions there tends to be overbidding for large valuations, but underbidding for small valuations. We show that the experimental evidence can be explained by a simple extension of the standard auction model, where bidders anticipate positive or negative emotions caused by the mere fact of winning or losing. Even if the emotional (dis-)utility is very small, the sellers optimal reserve price r* may be significantly different from the standard model. Moreover, r* is decreasing in the number of bidders.

Delegation of Authority as an Optimal (In)Complete Contract

The present paper aims to contribute to the literature on the foundations of incomplete contracts by providing conditions under which simple delegation of authority is the solution to the complete-contracting problem of the parties. We consider a hold-up framework where both parties profit from an investment that raises the value of an asset. Delegation turns out to be optimal if (i) the decision-dependent parts of the payoffs of the parties are linear in the asset value, and (ii) decisions have no investment-independent effect. If overinvestment might be an issue, delegation, however, with restricted competencies is optimal if some additional continuity requirements are met.

The Role of Communication of Performance Schemes: Evidence from a Field Experiment

In corporate practice, incentive schemes are often complicated even for simple tasks. Hence, the way they are communicated might matter. In a controlled field experiment, we study a minimally invasive change in the communication of a well-established incentive scheme - a reminder regarding the piece rate at the beginning of the shift. The experiment was conducted in a large firm where experienced managers work in a team production setting and here incentives for both quantity and quality of output are provided. While the treatment conveyed no additional material information and left the incentive system unchanged, it had significant positive effects on quantity and on managers compensation. These effects are economically sizable and robust to alternative empirical specifications. We consider various potential mechanisms, where our preferred explanation - improved salience of incentives - is consistent with all of the findings

On the Foundations of the Property Rights Theory of the Firm: Cooperative Investments and Message-Dependent Contracts

The property-rights theory assumes that trade is non-contractible ex-ante and focusses exclusively on the allocation of property-rights. We derive foundations for this focus on property-rights by identifying scenarios where only one of the simple ownership structures is optimal even though trade is contractible. In these scenarios it is optimal: (1) not to sign a trade contract; (2a) to sign a partially enforced trade contract; (2b) such a combination of asset ownership and a trade contract might even achieve the first-best. For the purpose of identifying the optimal simple ownership structure, trade contracts can be neclected in scenarios (2a) and (2b).

Reputational Herding in Financial Markets: A Laboratory Experiment

ABSTRACT We study reputational herding in financial markets in a laboratory experiment. In the spirit of Dasgupta and Prat [2008], career concerns are introduced in a sequential asset market where wages for investors are set by subjects in the role of employers. Employers can observe investment behavior, but not investors ability types. Thereby, reputational incentives may arise endogenously. We find that a sizable fraction of investors follows an established trend even in a setting where there are no reputational incentives. In a setting where there are reputational concerns, they do not seem to create substantial herd behavior.

Relative value perception in an insect: positive and negative incentive contrasts in ants

When choosing between two options, a sensible strategy is to choose the highest value option. To do this, both options must be evaluated and compared. The way value is judged and utility is perceived therefore has strong effects on which option is chosen. Traditionally, value was considered absolute. However, research on human decision-making suggests that, for us, utility is relative and based on past experiences or expectations. The study of successive contrast effects suggests that the same might be true for animals. Here we show that ants which had previously experienced a low quality food source showed higher acceptance of medium quality food (e.g. 0.1M then 0.5M; positive contrast) than if they had received the medium food all along (e.g. 0.5M then 0.5M; control). Ants also showed lower acceptance of medium food when previously offered high quality food (e.g. 2M then 0.5M; negative contrast). Further experiments demonstrate that these contrast effects arise from psychological, not physiological or psychophysical, causes. Pheromone deposition also correlates with perceived reward value, and ants also showed successive contrasts in their pheromone deposition. Contrast effects occurred not only when ants collected private information outside the nest, but also when information was received through trophallactic interactions in the nest. Relative value perception can therefore be expected to have strong effects not only on individual behaviour, but also on collective decision-making.

The Effect of Contract Regulation on Franchising

In many sectors, such as retailing or fast food, franchising agreements are ubiquitous. On top of its empirical relevance, franchising has developed into a testbed for contract theory, due to its very good data availability. This is highlighted by a recent book by Blair and Lafontaine (2005), which provides a nice overview of the voluminous empirical literature on the topic. For example, franchising data have been employed to investigate the risk–incentive trade-off predicted by moral-hazard models (see, e.g., Lafontaine and Bhattacharyya, 1995), or the relative merit of vertical integration as well as its coexistence with franchising (see, e.g., Lafontaine and Shaw, 2005). Klick, Kobayashi, and Ribstein (2012) add to the empirical literature on franchising by studying the effects of legal termination restrictions in franchising relationships, using U.S. data. Roughly speaking, in the absence of a termination restriction, the franchisor is allowed to terminate his relationship with the franchisee at will. First, the authors are interested in the question how the presence of termination restrictions affects the attractiveness of franchising as the organizational form of choice. From an intuitive perspective, the presence of termination restrictions seems to deter franchisor opportunism, but might lead to more franchisee opportunism: franchisees knowing that they cannot easily be terminated might provide less effort, while franchisors might be prevented from taking over successful outlets themselves. Consequently, from a theoretical perspective the effect of termination restrictions on the attractiveness of franchising relative to other organizational forms seems to be ambiguous. Second, even if termination restrictions are in place, they might not be binding, in the sense that contracting around might be possible. That is, franchisor and franchisee might be allowed to lift termination restrictions by specifying an alternative arrangement in their franchising agreement. Klick, Kobayashi, and Ribstein (2012) hypothesize that, if such contracting around is possible, the presence or absence of legal termination restrictions should not matter for the choice of organizational form (at least in a Coasian world).