Pamela Schmitt

On Perceptions of Fairness: The Role of Valuations, Outside Options, and Information in Ultimatum Bargaining Games

This study examines fairness perceptions in ultimatum bargaining games with asymmetric payoffs, outside options, and different information states. Fairness perceptions were dependent on treatment conditions. Specifically, when proposers had higher chip values, dollar offers were lower than when responders had higher chip values. When responders had an outside option, offers were higher and were rejected less often than when proposers had an outside option. However, a given offer was rejected more often when responders had an outside option. Therefore, similar to the first mover advantage, the “advantaged” or “entitled” player received a higher monetary payoff than they would otherwise. When there was complete information about payoff amounts (payoff conversion rates and outside options), rejections occurred more often, and given offer amounts were rejected more often than when there was incomplete information. When there was incomplete information, offers were higher in the initial rounds than in the final rounds. These results suggest that proposers made offers strategically, making offers that would not be rejected, rather than out of a concern for fairness.

Collective Action with Incomplete Commitment: Experimental Evidence

Face-to-face communication is investigated as an efficiency-enhancing mechanism in experimental common-pool resource environments in which the appropriation activities of outside appropriators create coordination and monitoring problems for the communicating group. We identify three distinct problems that can threaten successful collective action. Outsiders respond strategically to reductions in appropriation by cooperating group members. Members of the communicating group deviate from agreements more frequently when monitoring is imperfect and over appropriation can be blamed on outsiders. Groups that are allowed to communicate anticipate the potential problems and have difficulty reaching agreements or committing to a specific appropriation rule.

Contracts, Behavior, and the Land-Assembly Problem:An Experimental Study

We use multilateral bargaining experiments to examine how the order of bargaining (simultaneous or sequential) and the nature of contracts (contingent or non-contingent) affect the duration of bargaining, the efficiency of exchange, and the distribution of the surplus in a laboratory land-assembly game with one buyer and two sellers. While theory predicts an earnings advantage for the first seller when contracts are sequential and contingent, and for the second seller when contracts are sequential and non-contingent, we find that when a seller has an earnings advantage in the laboratory, it is the first seller to bargain in the non-contingent contract treatments. This result contradicts conventional wisdom and a common result from the land-assembly literature that it is advantageous to be the last seller to bargain, a so-called “holdout”. We also find evidence that sequential bargaining leads to more aggressive seller bargaining and greater bargaining delay than simultaneous bargaining, ceteris paribus, and that non-contingent contracts increase bargaining delay and the likelihood of failed agreements. The majority of sellers indicated a preference for being the first seller to bargain in all sequential bargaining treatments.

The Impact of a Marginal Cost Increase on Price and Quality: Theory and Evidence from Airline Market Strikes

This paper examines the impact of a marginal cost increase for one firm on price and quality in a duopoly market. The results are derived theoretically and then tested empirically. The marginal cost increase is interpreted as an increase in the wage one firm pays its workers. The predictions are tested with two United States airline strikes during the 1990s. Quality is proxied in three ways: (1) the number of flights per day, (2) the percentage of flights cancelled, and (3) the percentage of flights arriving late. The results show that the strike coefficients for the effects on quality are most consistent with theoretical predictions when quality is measured as the number of flights per day. These results are encouraging because of the three measures of quality, it seems that number of flights per day is the measure of quality that is most controllable by the firm. The strike coefficients for the direct effect on price are most consistent with theoretical predictions when quality rankings are determined by the percentage of flights cancelled. The strike coefficients for the total effect on price are most consistent with theoretical predictions when quality rankings are determined by the percentage of flights arriving late. Copyright 2002 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

Does everyone accept a free lunch? Decision-making under (almost) zero-cost borrowing

We examine decision making by a group of college students who have the opportunity to take out a sizable, very low-interest, non-credit dependent loan which, if simply invested in low-risk assets, would effectively yield a free lunch in net interest earnings. We exploit this natural experiment to study the characteristics of those willing and unwilling to take the loan. We characterize the latter as debt averse, and for those who accept the loan, we also consider whether they anticipate repaying it early. In particular, we use simple linear and non-linear binary choice models to explore how these two decisions relate to individual and family demographics as well as socio-economic characteristics, personality traits (as measured by the Myers-Briggs Type Indicator), cognitive ability (as measured by the Cognitive Reflection Test), and intellectual ability (as measured by SAT scores and grade point average). We find no consistent relationships between debt aversion and intellectual ability or gender. Individuals willing to accept the loan tend to have prior debt, longer planning horizons, come from middle-income families, and may have higher cognitive ability.

A VERTICALLY DIFFERENTIATED DUOPOLY WITH MARGINAL COST DIFFERENTIALS

A vertically differentiated duopoly model analyzes the impact of marginal cost differentials on price and quality. Firms play a two-stage game, first simultaneously choosing quality and then simultaneously choosing price. When the firm producing the high quality good faces an increase in its marginal cost, both firms increase price and upgrade quality. When the firm producing the low quality good faces an increase in its marginal cost, both firms decrease price and downgrade quality. When a first firm enters the market, quality position decisions are examined under the assumption that both the firm-specific and the quality-specific marginal costs are higher when a firm produces a higher quality good. The results show that the first entrant produces the low quality good and earns higher profits.

Institutions and information in multilateral bargaining experiments

Abstract This paper examines the behavior in multilateral bargaining experiments with alternating offers and asymmetric information. In all experiments, a single buyer has up to ten bargaining periods to purchase one unit of a good from each of two sellers. Treatments vary based on who makes the first offer (buyer or sellers), timing (consistent buyer-offer/sellers-demand or alternating), and information (buyer’s value and sellers’ costs are known or come from a uniform distribution). We find that actual bargaining outcomes are virtually identical when offers alternate, regardless of which player makes the first offer. We find that alternating offers reduce bargaining delay slightly compared to treatments in which one side or the other makes repeated take-it-or-leave-it offers. Finally, we find that incomplete information increases bargaining delay and the likelihood of failed agreements.