Steffen Huck

More Order with Less Law: On Contract Enforcement, Trust and Crowding

Most contracts, whether between voters and politicians or between house owners and contractors, are incomplete. “More law,” it typically is assumed, increases the likelihood of contract performance by increasing the probability of enforcement and/or the cost of breach. We examine a contractual relationship in which the first mover has to decide whether she wants to enter a contract without knowing whether the second mover will perform. We analyze how contract enforceability affects individual performance for exogenous preferences. Then we apply a dynamic model of preference adaptation and find that economic incentives have a nonmonotonic effect on behavior. Individuals perform a contract when enforcement is strong or weak but not with medium enforcement probabilities: Trustworthiness is “crowded in” with weak and “crowded out” with medium enforcement. In a laboratory experiment we test our model’s implications and find support for the crowding prediction. Our finding is in line with the recent work on the role of contract enforcement and trust in formerly Communist countries.

Learning in Cournot Oligopoly: An Experiment

This experiment was designed to test various learning theories in the context of a Cournot oligopoly. We derive theoretical predictions for the learning theories and test these predictions by varying the information given to subjects. The results show that some subjects imitate successful behavior if they have the necessary information; and if they imitate, markets are more competitive. Other subjects follow a best reply process. On the aggregate level we find that more information about demand and cost conditions yields less competitive behavior, while more information about the quantities and profits of other firms yields more competitive behavior.

The relevance of equal splits in ultimatum games

Abstract In this note we present a slightly altered version of the mini ultimatum game of G. E. Bolton and R. Zwick (1995, Games Econ. Behav. 10 , 95–121). More specifically, we replaced exactly equal splits by nearly equal splits either (slightly) favoring the proposer or the responder. Such a minor change should not matter if behavior was robust. We find, however, a significant change in behavior: Fair offers occur less often when equal splits are replaced by nearly equal splits. Journal of Economic Literature Classification Numbers: C72, C78, C92.

Repetition and Reputation: Implications for Trust and Trustworthiness When Institutions Change

Institutions change—in Iraq, the formerly Communist countries, and many private and public organizations. But do people adapt to the new institutional environment, and if so, how quickly? This paper examines institutional change—how long it takes people to transition from one institutional environment to another or, put differently, whether old institutional regimes have an afterglow. More specifically, we study whether trust and trustworthiness can be fostered by first exposing people to an environment conducive to trust. We are interested in whether (intrinsic) trust and trustworthiness can be induced in the long run by providing extrinsic incentives for trust and trustworthiness in the short run. Reputation systems may provide incentives for trustworthiness and trust. Direct reputationbuilding may occur in repeated games where pairs of subjects play the same stage game repeatedly, but repeat transactions are not necessarily the rule in today’s global economy. In population games where agents are randomly re-matched in every period, indirect reputation systems are a potential substitute for personal interactions—provided information about others’ past behavior is available. On eBay, for example, buyers are willing to pay a premium of 8.1 percent of the selling price to a seller with an established good reputation (Paul Resnick et al., 2003). This paper examines experimentally to what degree indirect reputation-building substitutes for direct reputation-building in repeat interactions in the short run and analyzes the effects these environments have on behavior in the long run. In contrast, most earlier experimental studies focus on one-shot and repeat interactions in the short run. We compare the effects of direct and indirect reputation-building in a binary-choice trust game where a buyer (the trustor) can either interact with the seller (the trustee) or exit. The trustee can either honor or exploit trust. The payoffs are such that a money-maximizing trustee prefers exploiting to honoring trust in a one-shot game, while a money-maximizing trustor prefers not offering trust to being exploited. The unique Nash equilibrium of the single-shot game predicts no trade. Figure 1 presents the game we implemented with the actual payoffs in cents used. In our experiment, subjects participate in the trust game in two blocks of 10 rounds each, which is common knowledge. In phase 1, the first 10 rounds, they are confronted either with a standard, “one-shot” random matching treatment (“stranger” or “S”); a fixed-pairs, finitely repeated game treatment (“partner” or “P”); or * Bohnet: Kennedy School of Government, Harvard University, 79 JFK Street, Cambridge, MA 02139 (e-mail: Iris_Bohnet@Harvard.edu); Huck: Department of Economics and ELSE, University College London, Gower Street, London WC1E 6BT, United Kingdom (e-mail: s.huck@ucl. ac.uk). We thank Rachel Croson and the participants at the 2004 ASSA meetings for their helpful comments and Jeffrey Bielicki for his excellent research assistance. We gratefully acknowledge financial support from the Russell Sage Foundation, the Leverhulme Trust, and the Economic and Social Research Council (U.K.) via ELSE. 1 For a recent survey, see James Andreoni and Rachel Croson (2004). Studies examining the effects of different institutional environments over time include Bohnet et al. (2001) and Ernst Fehr and Simon Gachter (2003). 2 The experiments were computerized using Urs Fischbacher’s (1999) z-tree software. The instructions are available upon request.

STACKELBERG BEATS COURNOT: ON COLLUSION AND EFFICIENCY IN EXPERIMENTAL MARKETS*

We report on an experiment designed to compare Stackelberg and Cournot duopoly markets with quantity competition. We implement both a random matching and a fixed-pairs version for each market. Stackelberg markets yield, regardless of the matching scheme, higher outputs than Cournot markets and, thus, higher efficiency. For Cournot markets, we replicate a pattern known from previous experiments. There is stable equilibrium play under random matching and partial collusion under fixed pairs. We also find, for Stackelberg markets, that competition becomes less intense when firms remain in pairs but we find considerable deviations from the subgame perfect equilibrium prediction which can be attributed to an aversion to disadvantageous inequality.

To Commit or Not to Commit: Endogenous Timing in Experimental Duopoly Markets

In this paper, we experimentally investigate the extended game with action commitment of Hamilton and Slutsky (1990). In their duopoly game, firms can choose their quantities in one of two periods before the market clears. If a firm commits to a quantity in period 1 it does not know whether the other firm also commits early. By waiting until period 2, a firm can observe the other firms period 1 action. Hamilton and Slutsky predict the emergence of endogenous Stackelberg leadership. Our data, however, does not confirm the theory. While Stackelberg equilibria are extremely rare we often observe endogenous Cournot outcomes and sometimes collusive play. This is partly driven by the fact that endogenous Stackelberg followers learn to behave in a reciprocal fashion over time, i.e., they learn to reward cooperation and to punish exploitation.(This abstract was borrowed from another version of this item.)

Do players correctly estimate what others do? Evidence of conservatism in beliefs

In a simple experimental environment a group of subjects was asked to give estimates of a second group’s choice frequencies in a set of lottery-choice tasks. The results show that subjects in the first group are on average able to correctly predict the option that is chosen with higher frequency by the second group, but the predictions are systematically inaccurate in that they are distorted toward the uniform prior. Two mechanisms to elicit the expectations were used in the experiment, a quadratic scoring rule and a bidding mechanism. Aggregate results being similar under both mechanisms, the use of the former mechanism consistently yields more accurate predictions.

From Ultimatum Bargaining to Dictatorship—an Experimental Study of Four Games Varying in Veto Power

Inspired by Bolton and Zwick (1995) we study four different games, namely the ultimatum and dictator game as well as the two games in which a veto (non-acceptance) of the responder implies that only one of the two players does not receive the proposed payoff. In the experiment the participants had to play either as the proposer or as the responder in all four games. Only the proposer was privately informed about the actual cake size which could be either small or large. The main results were that the offers were more generous when the responder could only veto the proposers payoff than in ultimatum bargaining which, in turn, induced more generous offers than dictatorship. The worst proposals were observed when the responder could only reject his own payoff. A similar tendency was also observed for the minimal offers required for acceptance although many acceptance strategies were non-monotonic. Allocators with large cakes did not hide behind the small cake by offering an equal share of the small cake. A pre-experimental questionnaire designed to trigger considerations of backward induction led to more generosity.

Automatic imitation in a strategic context: players of rock–paper–scissors imitate opponents' gestures†

A compelling body of evidence indicates that observing a task-irrelevant action makes the execution of that action more likely. However, it remains unclear whether this ‘automatic imitation’ effect is indeed automatic or whether the imitative action is voluntary. The present study tested the automaticity of automatic imitation by asking whether it occurs in a strategic context where it reduces payoffs. Participants were required to play rock–paper–scissors, with the aim of achieving as many wins as possible, while either one or both players were blindfolded. While the frequency of draws in the blind–blind condition was precisely that expected at chance, the frequency of draws in the blind–sighted condition was significantly elevated. Specifically, the execution of either a rock or scissors gesture by the blind player was predictive of an imitative response by the sighted player. That automatic imitation emerges in a context where imitation reduces payoffs accords with its ‘automatic’ description, and implies that these effects are more akin to involuntary than to voluntary actions. These data represent the first evidence of automatic imitation in a strategic context, and challenge the abstraction from physical aspects of social interaction typical in economic and game theory.

Big fish eat small fish: on merger in Stackelberg markets

Abstract In this note we show that the profitability of merger in markets with quantity competition does not only depend on cost conditions but also on the market structure and on the involved firms’ ‘strategic power.’ Our main result is that bilateral merger can be profitable even if costs are linear – but only in the case of a ‘strong’ firm incorporating a ‘weak’ firm which has adverse effects on welfare.