Erte Xiao

Neural responses to sanction threats in two-party economic exchange

Sanctions are used ubiquitously to enforce obedience to social norms. However, recent field studies and laboratory experiments have demonstrated that cooperation is sometimes reduced when incentives meant to promote prosocial decisions are added to the environment. Although various explanations for this effect have been suggested, the neural foundations of the effect have not been fully explored. Using a modified trust game, we found that trustees reciprocate relatively less when facing sanction threats, and that the presence of sanctions significantly reduces trustees brain activities involved in social reward valuation [in the ventromedial prefrontal cortex (VMPFC), lateral orbitofrontal cortex, and amygdala] while it simultaneously increases brain activities in the parietal cortex, which has been implicated in rational decision making. Moreover, we found that neural activity in a trustees VMPFC area predicts her future level of cooperation under both sanction and no-sanction conditions, and that this predictive activity can be dynamically modulated by the presence of a sanction threat.

Trustworthiness is a Social Norm, but Trusting is Not

Previous literature has demonstrated the important role that trust plays in developing and maintaining well-functioning societies. However, if we are to learn how to increase levels of trust in society, we must first understand why people choose to trust others. One potential answer to this is that people view trust as normative: there is a social norm for trusting that imposes punishment for noncompliance. To test this, we report data from a survey with salient rewards to elicit people’s attitudes regarding the punishment of distrusting behavior in a trust game. Our results show that people do not behave as though trust is a norm. Our participants expected that most people would not punish untrusting investors, regardless of whether the potential trustee was a stranger or a friend. In contrast, our participants behaved as though being trustworthy is a norm. Most participants believed that most people would punish someone who failed to reciprocate a stranger’s or a friend’s trust. We conclude that, while we were able to reproduce previous results establishing that there is a norm of reciprocity, we found no evidence for a corresponding norm of trust, even among friends.

Profit-Seeking Punishment Corrupts Norm Obedience

Punishment typically involves depriving violators of resources they own such as money or labor. These resources can become revenue for authorities and thus motivate profit-seeking punishment. In this paper, we design a novel experiment to provide direct evidence on the role punishment plays in communicating norms. Importantly, this allows us to provide experimental evidence indicating that if people know that enforcers can benefit monetarily by punishing, they no longer view punishment as signaling a norm violation. The result is a substantial degradation of punishmentʼs ability to influence behavior. Our findings draw attention to the detrimental effect of profit-seeking enforcement on the efficacy of punishment.

Temptation and Commitment in the Laboratory

Temptation and self-control in intertemporal choice environments are receiving increasing attention in the theoretical economics literature. Nevertheless, there remains a scarcity of empirical evidence from controlled environments informing behavior under repeated temptations. This is unfortunate in light of the fact that in many natural environments, the same temptation must be repeatedly resisted. This paper fills that gap by reporting data from a novel laboratory study of economic decisions under repeat temptations. Subjects are repeatedly offered an option with instantaneous benefit that also entails a substantial reduction to overall earnings. We show that this option is “tempting�? in the sense that a substantial fraction of our subjects incur pecuniary costs to eliminate the choice, and thus commit to not choosing the tempting alternative. We compare the timing and price-elasticity of these commitment decisions to predictions from existing theoretical models of decision under temptation. Our data are broadly consistent with theory, with the notable exception that commitment often occurs with delay rather than at the first opportunity. Moreover, the timing of commitment is significantly impacted by the cost of the commitment device. The patterns we report have direct implications for economic theory, and are a first step toward designing mechanisms that promote prudent economic decisions under temptation.

Inequality-Seeking Punishment

Inequality aversion is a key motive for punishment, with many prominent studies suggesting people use punishment to reduce or eliminate inequality. Punishment in laboratory games, however, is nearly always designed to promote equality (e.g., rejections in standard ultimatum games) and the marginal cost of punishment is typically non-trivially positive. As a consequence, individual preferences over punishment outcomes remain largely uninformed. We here report data from a laboratory experiment using dictator games. We find that when people are treated unfairly they systematically prefer to use punishment to create advantageous inequality. Our results shed new light on human preferences over punishment outcomes, and have important implications for the design of mechanisms to deter misconduct.

Money Talks: Rebate Mechanisms in Reputation System Design

Reputation systems that rely on voluntary feedback from traders are important in creating and sustaining trust in markets. Feedback nevertheless is a public good, and providing it is often costly. We combine theory with a laboratory experiment to study the effect of a seller precommitment mechanism: Sellers have an option to commit by providing a rebate to reduce the buyers feedback reporting cost before making purchasing decisions. Our theory predicts that this mechanism induces noncooperative sellers to cooperate in the listed-price market. Using a buyer--seller trust game with a unilateral feedback scheme, we find that the sellers rebate decision has a significant impact on the buyers purchasing decision via signaling the sellers cooperative type. More importantly, market efficiency under the precommitment mechanism increases with the probability that sellers will provide a rebate. Compared with the no rebate mechanism market, more efficient trades can be achieved when the sellers offer a rebate to the buyers in the market with the rebate mechanism, even when the rebate does not cover the full cost of feedback reporting. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1848 . This paper was accepted by Teck-Hua Ho, behavioral economics.

Raising the Price of Talk: An Experimental Analysis of Transparent Leadership

Does transparent leadership promote cooperative groups? We address this issue using a public goods experiment with exogenously selected leaders who are able to send non-binding contribution suggestions to the group. To investigate the effect of transparency in this setting we vary the ease with which a leader’s actions are known by the group. We find leaders’ suggestions encourage cooperation in all treatments, but that both leaders and their group members are more likely to follow leaders’ recommendations when institutions are transparent so that non-leaders can easily see what the leader does. Consequently, transparency leads to significantly more cooperation, higher group earnings and reduced variation in contributions among group members.

Sign Me Up! A Model and Field Experiment on Volunteering

We develop and model a two-stage incentivized intervention to promote pro-sociality. In the first stage, participants are incentivized to complete a compound task consisting of a targeted pro-social activity and a complement activity. In the second stage, participants are incentivized to complete repeatedly only the complement activity. The model predicts that, conditional on compliance with the first-stage compound task, intrinsic interest in the target activity is promoted regardless of compliance with the second-stage task. To test this we design and implement a field experiment on volunteering. The results are consistent with our model. Moreover, in the one year subsequent to our experiment, those who participated in our compound-task mechanism reported volunteering systematically more than those who participated in alternative mechanisms we investigated. Our approach has useful implications for promoting positive individual and social outcomes in many behavioral domains. Length: 41

Combining brain and behavioral data to improve econometric policy analysis

Abstract For an economist, ultimate goals of neuroeconomic research include improving economic policy analysis. One path toward this goal is to use neuroeconomic data to advance economic theory, and productive efforts have been made towards that end. Equally important, though less studied, is how neuroeconomics can provide quantitative evidence on policy, and in particular the way in which it might inform structural econometric inference. This paper is a first step in that direction. We suggest here that key forms of preference (or decision strategy) heterogeneity can be identified by brain imaging studies and, consequently, linked stochastically to observable individual characteristics. Then, recognizing that brain-imaging studies are substantially costly, we derive conditions under which the probabilistic link between observable characteristics and type, a quantity critical to policy analysis, can be estimated more precisely by combining data from traditional and brain-based decision studies.

When Equality Trumps Reciprocity: Evidence from a Laboratory Experiment

Inequity aversion and reciprocity have been identified as two primary motivations underlying human decision making. However, because income and wealth inequality exist to some degree in all societies, these two key motivations can point to different decisions. In particular, when a beneficiary is less wealthy than a benefactor, a reciprocal action can lead to greater inequality. In this paper we report data from a trust game variant where trustees’ responses to kind intentions generate inequality in favor of investors. In relation to a standard trust game treatment where trustees’ responses reduce inequality, the proportion of non-reciprocal decisions is twice as large when reciprocity promotes inequality. Moreover, we find investors expect that this will be the case. Overall, although both motives clearly play a role, we found strong evidence for inequality aversion. Our results call attention to the potential importance of inequality in principal-agent relationships, and have important implications for designing policies aimed at promoting cooperation.