Cathleen A. Johnson

Eliciting Risk Preferences: When is Simple Better?

We study the estimation of risk aversion preferences with experimental data. The focus is on the trade-offs that arise when choosing between two different elicitation methods that have different degrees of difficulty for subjects. We analyze how and when the simpler, but coarser, elicitation method may be preferred to the more complex, but finer, one. Results indicate that the more complex measure has an overall superior predictive accuracy, but its downside is that subjects exhibit noisier behavior; conversely, the simpler measure has the opposite costs and benefits. Our main result is that subjects’ numerical skills can help better assess this tradeoff: the simpler task may be preferred when subjects exhibit low numeracy as it generates less noisy behavior but similar predictive accuracy than the more complex task; conversely, for subjects with higher numerical skills, the greater predictive accuracy of the more complex task more than outweighs the larger noise. We explore timeconsistency and preference heterogeneity under the two methods and provide methodological suggestions for future work.

Debt Aversion and the Demand for Loans for Postsecondary Education

The authors report the results of an experiment designed to measure the impact of different forms of subsidies on the demand for postsecondary education financing among a sample of adults ages 18–55 in Canada. The experiment presents subjects with a series of choices involving trade-offs between cash payments and grants or loans earmarked for full or part-time education. In addition, the experiment includes experimental measures of time and risk preferences, and an extensive survey of experience and attitudes. This article focuses on the role of a persons attitudes toward debt (debt aversion) and experience with debt (debt use) in the decision to take up subsidized loans for postsecondary education. Using survey measures, the authors find no evidence that debt aversion is an important barrier to investment in postsecondary education. In addition, subjects with experience carrying and managing debt are more willing than others to take on additional debt to finance postsecondary education.

High Stakes Behavior with Low Payoffs: Inducing Preferences with Holt-Laury Gambles

Kahneman and Tversky (1979) argued that risky decisions in high stakes environments can be informed using questionnaires with hypothetical choices. Yet results by Holt and Laury (2002) suggest that questionnaire responses and decisions in hypothetical and low monetary payoff environments do not well predict decisions in higher monetary payoff environments. This raises the question of whether investigating decision making in high stakes environments requires using high stakes. Here we show that one can induce preferences using the binary-lottery reward technique (e.g., Berg et al., 1986) in order to study high-stakes decision making using low-stakes. In particular, we induce preferences such that decisions in a low-stakes environment reflect well the choices made in the high stakes environment of Holt and Laury (2002). This finding is of interest to anyone interested in studying high-stakes decision behavior without paying high stakes.

Does Information Transparency Decrease Coordination Failure

This study experimentally tests the effect of information transparency on the probability of coordination failure in global games with finite signals. Prior theory has shown that in global games with unique equilibrium, the effect of information transparency is ambiguous. We find that in global games where the signal space is finite, increased transparency has two effects. First, increasing the level of transparency usually destroys uniqueness and precipitates multiple equilibria, so that the effect of transparency on coordination depends crucially upon which equilibrium is actually attained. Second, the level of transparency determines which of these equilibria is risk dominant. We find that increased transparency facilitates coordination only if it switches the risk-dominant equilibrium from the secure equilibrium to the efficient equilibrium. When the converse is true, improved transparency can be dysfunctional because it increases the probability of coordination failure.

Prince: An Improved Method for Measuring Incentivized Preferences

This paper introduces the Prince incentive system for measuring preferences. Prince clarifies consequences of decisions and incentive compatibility of experimental choice questions to subjects. It combines the efficiency and precision of matching with the improved clarity and validity of choice questions. It helps distinguish between (a) genuine deviations from classical economic theories (such as the endowment effect) and (b) preference anomalies due to fallible measurements (such as preference reversals). Prince avoids the opaqueness in Becker-DeGroot Marschak and strategic behavior in adaptive experiments. It helps reducing violations of isolation in the random incentive system. Using Prince we shed new light on willingness to accept and the major components of decision making under uncertainty: utilities, subjective beliefs, and ambiguity attitudes.

Inconsistency Pays?: Time-Inconsistent Subjects and EU Violators Earn More

Experimental choice data from 881 subjects based on 40 time-tradeoff items and 32 risky choice items reveal that most subjects are time-inconsistent and most violate the axioms of expected utility theory. These inconsistencies cannot be explained by well-known theories of behavioral inconsistency, such as hyperbolic discounting and cumulative prospect theory. Aggregating expected payoffs and the risk associated with each subjects’ 72 choice items, the statistical links between inconsistency and total payoffs are reported. Time-inconsistent subjects and those who violate expected utility theory both earn substantially higher expected payoffs, and these positive associations survive largely undiminished when included together in total payoff regressions. Consistent subjects earn lower than average payoffs because most of them are consistently impatient or consistently risk averse. Positive payoffs from inconsistency cannot, however, be fully explained by greater risk taking. Controlling for the total risk of each subject’s risk choices as well as for socio-economic differences among subjects, time inconsistent subjects earn significantly more money, in statistical and economic terms. So do expected utility violators. Positive returns to inconsistency extend outside the domain in which inconsistencies occurs, with time-inconsistent subjects earning more on risky choice items, and expected utility violators earning more on time-tradeoff items. The results seem to call into question whether axioms of internal consistency—and violations of these axioms that behavioral economists frequently focus on—are economically relevant criteria for evaluating the quality of decision making in human populations.

The Effect of Perfect Monitoring of Matched Income on Sales Tax Compliance: An Experimental Investigation

Tax noncompliance is a quantitatively important phenomenon that significantly affects government revenues, and thus raises challenging questions about the determinants of tax reporting and the appropriate design of a tax system. This paper provides empirical insights regarding the nature of tax noncompliance, using an experimental approach to evaluate the effects of systematic sales tax monitoring and identify the determinants of sales tax compliance. The results suggest that if perfect monitoring of a single revenue source is introduced without other complementary policies, an increase in tax revenues is not the likely outcome as evasion increases for other revenue sources. That is, the data suggest that once taxpayers have chosen their level of tax compliance, they will try to recover their losses following any policy changes, even if it implies assuming more risks.

(Im)Patience Among Adolescents: A Methodological Note

Time preference is a fundamental component of many economic models and questions of interest. Yet, elicited preferences are frequently questioned on the grounds of potentially confounding elements of the experimental design, such as trust in the experimenter. We report on a time preference experiment using a sample of 490 high school students from Houston, TX and St. Cloud, MN. We find no relationship between confidence in receiving payment from the experimenters and the intertemporal allocation decisions. However, we find an illogical result for this population: reverse hyperbolic discounting. On aggregate the students are more likely to be impatient as choices are moved further into the future. However, this aggregate result is driven by heterogeneity in the home environment: For a subset of our population, elicited time preferences reflect increasing impatience as the decisions are farther in the future: These individuals come from home environments with factors that decrease the likelihood that they will receive the later payments. Once this heterogeneity is accounted for, the population is, on average, exponentially discounting. Results indicate that caution is warranted when trying to generalize results based on the convenience sample of university undergraduates to other populations. Further, results highlight the importance of accounting for preference heterogeneity within and across samples.

Water Externalities: Tragedy of the Common Canal

Laboratory experiments are used to investigate alternative solutions to the allocation problem of a common-pool resource with unidirectional flow. Focus is on the comparative economic efficiency of nonbinding communications, bilateral “Coasian” bargaining, allocation by auction, and allocation by exogenous usage fee. All solutions improve allocative efficiency, but communication and bilateral bargaining are not generally as effective as market allocations. An exogenously imposed optimal fee results in the greatest allocative efficiency, closely followed by an auction allocation that determines the usage fee endogenously.

Social Distance Matters in Dictator Games: Evidence from 11 Mexican Villages

We examine the impact of social distance in dictator game giving. The study is conducted in a field setting with high stakes (two days’ wages). The sample is a representative sample from eleven low-income Mexican villages. Subjects make multiple dictator decisions simultaneously, in a comparative dictator game. We show the relationship between social distance and giving using several family members, a member of the same village, and a stranger from a different village. Dictator giving shows substantial variation across recipient types and varies directly with social distance. We find higher giving towards family members than towards community members and strangers. Furthermore, our results indicate that giving to community members and to strangers is not different. In light of our results, it is important to consider the impact of social distance on inter- and intra-household transfers in policy interventions that alleviate poverty, e.g., conditional transfers.