Douglas V. DeJong

Communication in the Battle of the Sexes Game: Some Experimental Results

We report experimental results on the role of preplay communication in a one-shot, symmetric battle of the sexes game. We conducted games in which there was no communication, and we studied the effects of three different communication structures: one-way communication with one round of messages and two-way communication with one round as well as three rounds of messages. With these messages, each player could indicate which action he planned to take. Communication significantly increased the frequency of equilibrium play. One-way communication was most effective in resolving the coordination problem. While there was more conflict with two-way communication, one round of communication helped to overcome some of the coordination problems, and three rounds of communication performed even better.

Evolution of Communication with Partial Common Interest

This paper uses experiments to investigate the evolution of communication. We consider simple games of information transmission in which the interests of senders and receivers are imperfectly aligned. We show that under four canonical incentive conditions the no-communication hypothesis can be rejected with and without literal meanings. Communicative outcomes are less likely to evolve and, if they do, evolve more slowly without a commonly understood language. When we see communicative outcomes, they tend to satisfy a partial common interest condition. Equilibria are useful guideposts for analyzing outcomes but are not always obtained; e.g., with literal meanings we observe stable sucker behavior and adherence to focal meanings and, without literal meanings, combinations of actions that could not coexist under

The effect of regulation on local government disclosure practices

The purpose of this study is to examine the relationship between financial disclosures of local governments and the economic incentives of the local political manager to disclose. These economic incentives include the regulatory structure of the local governments financial reporting. Unlike publicly held corporations which are all subject to the regulatory authority of the Securities and Exchange Commission, local governments face different state government regulations. Some states require GAAP compliance, same require compliance with state designated (non-GAAP) disclosure practices, and some do not regulate local government financial disclosures. The primary findings are that disclosure practices of cities in states that do not regulate local government practices, do not differ significantly from the practices of cities in GAAP regulated states. Further, when considered in conjunction with other political and socioeconomic variables, GAAP regulation appears to have a negligible effect on the financial reporting practices of local governments in GAAP regulated states. Finally, the disclosures of cities in states that require non-GAAP practices are significantly fewer than those of cities in the other categories. When considered in conjunction with other political and socioeconomic variables, non-GAAP reporting requirements appear to have a significant effect on the financial reporting practices of local governments in these states.

Alternative Institutions for Resolving Coordination Problems: Experimental Evidence on Forward Induction and Preplaycommunication

As the timely appearance of this volume suggests, the existence of coordination failures in a variety of strategic settings has begun to receive increased attention. Numerous games have been described in which players are required to coordinate their actions in order to reach a mutually advantageous equilibrium. Examples include network externalities (see e.g., Katz and Shapiro, 1985), product warranties with bilateral moral hazard (Cooper and Ross, 1985) and team production (Bryant, 1983). Recent work on macroeconomic models of imperfectly competitive economies (e.g., Heller, 1986, and Cooper and John, 1988) and search (Diamond, 1982) has also identified the possibility of aggregate coordination failures.

A Laboratory Investigation Of The Moral Hazard Problem In An Agency Relationship

Recent developments in agency theory have focused on the moral hazard problem in single-period and multiperiod models. In particular, the literature has emphasized how alternative institutions (e.g., liability rules and long-term contracts) can mitigate the adverse effects of the moral hazard problem. In this study, we use laboratory markets to examine the ability of two such institutions to remedy the adverse effects of moral hazard. We begin by presenting one set of markets with no liability rule from DeJong, Forsythe, and Lundholm [1985], hereafter DFL, where the effects of moral hazard were examined in a market for a service with a hidden characteristic; that is, the principal could not distinguish between shirking and chance as causes of an unfavorable outcome.1 The study showed that moral hazard led to shirking, and while

A laboratory investigation of alternative transfer pricing mechanisms

Abstract In this study, we conduct a laboratory experiment to evaluate three alternative mechanisms for pricing transfers between a buyer and a seller. The three mechanisms are: (1) a direct negotiation mechanism with which either party suggests terms of trade that the other can accept or reject; (2) a traditional mechanism where the transfer price and quantity are determined by the intersection of the reported demand and supply schedules of the buyer and seller, respectively; and (3) the Ronen-McKinney mechanism which computes the transfer quantity in the same way as the traditional mechanism, but is designed to give different transfer prices to the buyer and seller in order to induce them to truthfully report their respective schedules. For all periods of the experiment, the direct negotiation mechanism is the least efficient of the three due to the high frequency of bargaining impasses. The efficiency of the traditional mechanism and the efficiency of the Ronen-McKinney mechanism are indistinguishable from one another. However, in the last four periods of the experiment where the data exhibit less volatility, the efficiencies of all three mechanisms are indistinguishable from each other. When truthful reporting is considered, the Ronen-McKinney mechanism had the least amount of misreporting followed by the traditional mechanism and then the direct negotiation mechanism.

The Methodology of Laboratory Markets and Its Implications for Agency Research in Accounting and Auditing

Accounting and auditing reflect many relationships that can be characterized as principal-agent relationships. Concern over these arise within several contexts. For example, the Securities and Exchange Commission and Congress have maintained an ongoing concern about the price and quality of audit services and the effect of these services on investor welfare (see, for example, Williams [1979], Committee on Government Affairs [1977], and Staff Study of Subcommittee on Reports, Accounting and Management [1977]). Similarly, a large and growing literature has developed which considers the conflict between owners and managers (see, for example, Jensen and Meckling [1976], Fama [1980],

Class-action privileges and contingent legal fees: Investor and lawyer incentives to litigate and the effect on audit quality

Abstract The Cohen Commission recognized the importance of litigation incentives and recommended that research based upon an economic approach be conducted into the effects that litigation incentives can have on the auditing profession. By extending Simon (1981), an economic analysis of an auditing environment is presented wherein audit firms issue reports, representative investors make decisions based upon audit reports, and lawyers (as well as representative investors) play an active role in determining whether or not to initiate litigation against audit firms. The influence that alternative litigation privileges (i.e., class-action privileges with contingent legal fees and no class-action privileges with fixed legal fees) have on representative investor and lawyer incentives to litigate and on the equilibrium characteristics of this audit market are analyzed.

Blockholders and Leverage: When Debt Leads to Higher Dividends

This paper explores the use of leverage in pyramids and its relationship to dividend policy. The use of leverage in holding companies widens the disparity between control rights and cash flow rights. We postulate that it also leads to more generous dividend payouts since dividends are needed to service debt in the holding companies. We analyze a comprehensive sample of French pyramidal structures. Consistent with our hypothesis, we find that dividend payouts increase in the disproportionality between control and cash flow rights that is explained by holding company debt. By contrast, disproportionality generated by holding company equity leads to lower payouts. Servicing debt in the holding companies of a pyramidal structure is the primary motive for dividends, as opposed to alternative explanations such as investments or dividend preferences. Finally, the combination of high leverage in holding companies and high dividends negatively affects firm value, consistent with the hypothesis of tunneling by dominant owners.

Chapter 63 The Effect of Message Space Size on Learning and Outcomes in Sender–Receiver Games

Publisher Summary As documented in the dynamics and outcomes, agents learn to attach meaning to “a priori” meaningless messages. For the common interest game, Game 1, this chapter observe the efficient separating outcome, although the learning process is gradual. For the partial common interest game, Game 2, the outcomes and dynamics vary with the size of the message space. With two messages, we observe a partial pooling outcome with a minimal amount of non-equilibrium play. Again, the dynamic adjustment (learning) process is gradual. For three and four messages, the highest frequency of play is the fully separating equilibrium, although there is a significant amount of partial pooling play in both treatments and, consistent with theory, there is more partial pooling play in the four message treatment than in the three message treatment. Finally, while there is less non-equilibrium play in the four message treatment than in the three message treatment, the dynamic adjustment (learning) process in both treatments is gradual and incomplete.