Kyle Hyndman

Social Learning Through Endogenous Information Acquisition: An Experiment

This paper provides a test of a theory of social learning through endogenous information acquisition. A group of subjects face a decision problem under uncertainty. Subjects are endowed with private information about the fundamentals of the problem and make decisions sequentially. The key feature of the experiment is that subjects can observe the decisions of predecessors by forming links at a cost. The model predicts that the average welfare is enhanced in the presence of a small cost. Our experimental results support this prediction. When the informativeness of signals changes across treatments, behavior changes in accordance with the theory. However, within treatments, there are important deviations from rationality such as a tendency to conform and excessive link formation. Given these biases, our results indicate that subjects would, except when faced with a small cost, have been better off not forming any links. This paper was accepted by Teck Ho, behavioral economics.

Bargaining with a residual claimant: An experimental study

We experimentally investigate a bargaining environment in which players negotiate over a fixed payment to one player, while the other player receives the residual from a random pie realization after subtracting the fixed payment. Contrary to the intuition that risk exposure is detrimental, we show that residual claimants are able to extract a risk premium, which is increasing in risk exposure. In some cases the premium is so high that it is advantageous to bargain over a risky pie rather than a risk-less pie. Contrary to theory, the comparatively less risk adverse residual claimants benefit the most. Moreover, bargaining frictions increase as risk increases, and we document more frequent disagreements as risk increases. When given the chance to choose a less or more risky distribution over which to bargain, residual claimants tend to choose the more risky distribution only when there is the possibility of an equal-split ex-post. Our results suggest that theoretical bargaining models require some separation between the determinants of bargaining power and fair compensation for risk exposure.

Repeated bargaining with reference-dependent preferences

We consider a two-player bargaining model in which one or both players have reference-dependent preferences, but are otherwise perfectly rational. Our behavioural assumption is that players with reference-dependent preferences prefer impasse to consuming strictly less than their current reference points. Reference points adjust each period according to some exogenously specified law of motion. When reference points do not adjust following disagreement, we show that disagreement does not arise in equilibrium, but they do influence the division of the pie. In contrast, when reference points adjust downwards following disagreement, disagreements arise and players may try to manipulate the reference point of their opponent. When reference points adjust downwards following a rejection, for a particular Markov equilibrium, we show that the set of feasible allocations can be divided into agreement and disagreement regions. In particular, there are thresholds such that if one (or more) player’s reference point is above the threshold, disagreement necessarily arises.

An Experimental Investigation of Managing Quality Through Monetary and Relational Incentives

We investigate the efficacy of monetary and relational incentives for managing the quality of a product in a two-tier supply chain. In our setting, a retailer offers a supplier contract terms for a product, where the product can be low or high quality. The supplier can choose to exert high effort, which is costly but guarantees high quality, or low effort, which does not assure high quality with certainty. We compare how monetary incentives, such as a bonus that is paid to the supplier when high quality is received by the retailer, and relational incentives, such as the two parties engaging in a long-term relationship where there is the threat of punishment, affect overall quality and supply chain efficiency. Two of our primary results suggest that (1) relational incentives improve both quality and supply chain efficiency, regardless of whether a monetary incentive is present, and (2) when relational incentives are present, the impact of adding monetary incentives is nonmonotonic: less efficient monetary ...

Flexibility and Reputation in Repeated Prisoners' Dilemma Games

We study the role that the option to terminate a relationship has on cooperation in a repeated prisoners dilemma. While cooperation is, in theory, sustainable with or without this option, we show experimentally that cooperation rates are significantly lower with the option to terminate. Rather than punishing a defection, most subjects choose to terminate the relationship, which increases the temptation to behave opportunistically. However, we show that introducing a reputation mechanism, through which signals of past cooperative behavior are given to future matches, can substantially increase cooperation rates, in some cases to a level higher than when the option to terminate the relationship is absent. Our results show that an objective, long-lasting measure of reputation is the most effective in promoting cooperation, but short-lasting or subjective but long-lasting reputation mechanisms also increase cooperative behavior. Moreover, reputation mechanisms generally lead to stable cooperation rates over time, in contrast to the declining cooperation rates observed in their absence when subjects are free to terminate relationships. Finally we show that the option to terminate a relationship acts as a sorting mechanism between subjects who cooperate frequently and those who do not, and that reputation mechanisms further enhance this sorting effect.

Multidimensional Bargaining and Inventory Risk in Supply Chains: An Experimental Study

We study the impact of multidimensional bargaining and the location of inventory risk on the performance of a two-stage supply chain. We conduct a controlled human subjects experiment where a retailer and supplier either interact through ultimatum offers or dynamically bargain over contract terms, including a wholesale price and, potentially, an order quantity. We also manipulate whether the risk associated with unsold inventory lies with the retailer or the supplier or is endogenously determined in the bargaining process. One key insight is that supply chain efficiency is significantly higher when the order quantity is included in the negotiation and that, contrary to the normative theory, this leads to a Pareto improvement whereby both the supplier and retailer earn higher profits. A second important result, also counter to the normative theory, is that the party incurring the cost of unsold inventory always earns a lower profit than its counterpart, regardless of the bargaining environment or inventory...

Understanding the Behavioral Drivers of Execution Failures in Retail Supply Chains: An Experimental Study Using Virtual Reality

We conduct a real-effort experiment in an immersive virtual environment and quantify the impact of product similarity on operational execution in a retail setting. In our experiments, subjects must identify and sort two types of products based on their observable characteristics. We find measures of operational execution to be substantially lower when the observable characteristics of the two products types are very similar compared to when they are dissimilar. Specifically, we observe more sorting errors and more products left unsorted when subjects handle products with more similar observable characteristics. Introducing a visual cue to distinguish products improves execution when the products are dissimilar (by lowering the frequency of sorting mistakes) and, even more so, when they are similar (by reducing both the number of sorting mistakes and the number of products left unsorted). Overall performance (measured by the faction of products correctly sorted) increases by approximately 22 percent, on average, when subjects handle products with observable characteristics that are easier to distinguish. Using three-dimensional real-time movement measurements of our subjects, we discuss differences among high- and low-performing subjects as well as the managerial implications of our findings for product design, packaging, and labeling on execution performance in the retail context.