Randomization, revelation, and redistribution in a Lerner world
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If total social income is fixed and a social planner is uninformed of the utility representations of different individuals, then Lerner showed that the social optimum is to equally distribute income across individuals. We show that the planner by the use of randomization can in some circumstances induce individuals to reveal information about the curvature of their utility functions and then use the information to move away from equality on average. However, whether this is optimal depends in part on unobservable beliefs of the planner. These may be viewed as an aspect of the planner's ethical judgements or as something entirely arbitrary.Keywords:
Unobservable
Planner
Social planner
Redistribution
Revelation
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There are many ways to be competitive (as there are many ways to be cooperative, too). The most studied one, both theoretically and empirically, is called (maximization of self-interest). The term rationality traditionally refers to individuals acting towards the maximization of their own selfish interests, measured by the concept originally introduced in game theory (Neumann, & Morgenstern, 2004; Tversky, Kahneman, 1986). In a sense, one compares his/her fate in all possible scenarios and chooses the best possible outcome. However, in most real situations of experimental interest, people compete against each other. Taking as an example an experimental game, where each of two individuals has two strategic possibilities and pay-off functions associated with all possible combinations, a simple maximization of one's pay-off says nothing about the effect of this decision to the direct competitor's pay-off. If a strategic decision maximizes one's pay-off but results in an even higher pay-off for the opponent, then this may be a wrong decision in an environment of direct competition. In fact, mathematical models along these lines are considered the starting point of the studies of cooperation, as the benefit of one is also a benefit for the other (Chalub, Santos, Pacheco, 2006; Falk, Fehr, & Fischbacher, 2005; Hamilton, 1970; Leimar, & Hammerstein, 2001; Santos, & Pacheco, 2005; Santos, Pacheco, & Lenaerts, 2006; Trivers, 1971). Evolutionary psychology has further explored this by studying the impact that neurological and emotional processes related to altruism and cooperation have on the survival and spread of individuals (Van Lange, 1999; Van Lange, Agnew, Harinck, & Steemers, 1997; de Wall, 1996). Defined as an act that causes loss of payoff (or any other type of cost) to the opponent, spite may be advantageous in a competitive scenario given certain precise conditions. We will not specify here the full set of conditions that make spite advantageous; we stress however, that rationality (maximization of own's payoff) and spite (minimization of other's payoff) are not mutually exclusive. Humans display many behaviors that could be classified as spiteful and spite is often linked with negative emotional responses to inequity such as envy and jealousy (Berke, 1988; Dufwenberg, & Guth 2000; Salovey, & Rothman 1991; Smith, 1991). Although apparently maladaptive, these behaviors are suited to certain competitive contexts. By comparing payoffs directly with another individual, one could be empowered with the means of assessing the best strategy for obtaining a payoff. Some authors have suggested that this would elicit an outcompete your neighbor decision process that would allow exerting just the right amount of effort to succeed in outcompeting rivals (Hill & Buss, 2008). In economics, the process of dumping (where a firm decreases the price of its product, possibly below cost price, intending to drive competitors out of the market) is such an example (Winters, 1991). Humans also commonly display what is known as last-place aversion. In this case individuals prefer to minimize the probability of being last (for example, in a ranking of income distribution), rather than maximizing their own pay-off (Kuziemko, Buell, Reich, & Norton, 2011). Spiteful behavior has also been identified in a study where higher-ranking individuals are more likely to spite lower ranking individuals than their similars (Fehr, Hoff & Kshetramade 2008). For this study, the starting point was to understand if the propensity for spiteful behavior was present in children along with the propensity for rationality, or if children displayed these propensities at different stages of their development, ultimately comparing the motivations and the ability of children and teenagers to react to stimuli that induced behavior in one or the other direction. Namely, we wanted to quantify, according to age, the propensity for acting rationally or spitefully. …
Bounded rationality
Maximization
Reciprocal altruism
Altruism
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Individuals often repeatedly face a choice of whether to obey a particular legal rule. Conventional legal scholarship assumes that whether such a choice is made repeatedly or is a one-time event has no effect on individuals' decisions. In either case, individuals are expected to maximize their payoffs. Experimental studies, however, suggest that individuals facing a recurring choice, in contrast to individuals making the choice only once, do not behave as maximizers. Instead, individuals facing the choice repeatedly apply the strategy of "probability matching." For example, individuals failed to maximize when presented with a die with 4 red faces and 2 white faces, and asked to predict the colors of a series of rolls. Although maximization demands consistently betting on the red, individuals preferred a "mixed" approach; red was chosen in 2/3 of the rolls and white in 1/3 of the rolls.
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We perform an experiment on social insurance to provide a laboratory replica of some important features of the welfare state. In the experiment, all individuals in a group decide whether to make a costly effort, which produces a random (independent) outcome for each one of them. The group members then vote on whether to redistribute the resulting and commonly known total sum of earnings equally amongst themselves. This game has two equilibria, if played once. In one of them, all players make effort and there is little redistribution. In the other one, there is no effort and nothing to redistribute. A solution to the repeated game allows for redistribution and high effort, by the threat to revert to the worst of these equilibria. Our results show that redistribution with high effort is not sustainable. The main reason for the absence of redistribution is that rich agents do not act differently depending on whether the poor have worked hard or not. There is no social contract by which redistribution may be sustained by the threat of punishing the poor if they do not exert effort. Thus, the explanation of the behavior of the subjects lies in Hobbes, not in Rousseau.
Redistribution
Social insurance
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We study the minimal contributing set (MCS) game, a three‐person sequential step‐level public goods game. The behavior of critical third players changes with experience in this game even though they face no strategic or payoff uncertainty. We explore why these changes occur by manipulating subjects' experience in the first half of the experiment. The treatments give subjects very different initial experiences, but all treatments move subjects' choices toward experienced subjects' play in the control sessions. Long‐run play is indistinguishable across treatments. Our results are more consistent with the “discovered preferences” hypothesis ( Plott 1996 ) than either the “constructed preference” or “reference point” hypotheses. ( JEL H41, C72, C92)
Public goods game
Social Preferences
Stochastic game
Social comparison theory
Experimental economics
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Author(s): Gagnon-Bartsch, Tristan Michael | Advisor(s): Rabin, Matthew | Abstract: This dissertation explores economic implications of misinferring from others' behavior. The first two chapters study misinference in models of social learning. They explore in turn two distinct inferential errors: (1) projection---the tendency for people to overestimate how similar others' tastes are to their own, and (2) redundancy neglect---people fail to realize that those acting before them also infer from the behavior of predecessors. The final chapter draws out the implications of projection in auctions. More specifically, within social-learning environments, Chapter 1 explores the implications of taste projection: agents overestimate how common is their own taste. For instance, investors with varied risk preferences learn which prospect minimizes risk and which maximizes expected return. Inference requires agents to assess if surprising action frequencies are likely provoked by uncommon tastes or contrary private information. Taste projectors miscalculate these odds. In settings where rational agents correctly learn their optimal choice, projection stops some or all from ever learning the right choice. Long-run beliefs and behavior are determined by a player's taste, the degree of all players' biases, and the nature of uncertainty. First, when each thinks her is most common, society comes to believe a single action is best for all, irrespective of whether this is true. Second, when the bias is weaker, social beliefs and behavior perpetually cycle---history never provides a clear message about the optimal choice. Third, when quality is highly uncertain, popularity due to is systematically over-attributed to quality. Finally, this form of biased learning can exacerbate and perpetuate a false-consensus effect: if people neglect differences in perceptions when learning about the distribution of tastes from others' choices, then a small initial bias eventually leads all types to think their own is most common. For contrast, I also characterize rational learning among Bayesian agents with taste-dependent beliefs over the distribution of preferences.Across a range of social-learning settings, Chapter 2 follows Eyster and Rabin (2010) in studying the implications of agents who neglect the redundancy in information when learning from others. Players naively think each predecessor's action reflects solely that person's private information. We explore new implications that arise in environments richer than ER's canonical binary-state setting. Whereas in both classical learning models and ER society will with positive probability come to believe the true state, we characterize a set of states that agents will always come to disbelieve even when true. Typically when the truth lies in this set, society will unlearn: an early generation learns the truth, but society's beliefs move away and converge to wrong beliefs. Society only remains confident in those hypotheses such that the behavior observed when people are fully confident in the hypothesis most closely resembles the behavior we'd see by privately informed agents if that hypothesis were true. We provide specific implications of these principles. First, in cases where options such as restaurants or stocks have independent quality, people form polarized beliefs---they come to believe that the best option is the best it could be and that all lesser options are the worst they could be. Second, in an investment setting, polarized perceptions lead investors to allocate all their wealth to a single prospect, generating a welfare loss through under-diversification. Third, agents generally overestimate the extent of private information in the economy. Chapter 3 explores how projection affects bidding in auctions. We consider auctions for a good with both private- and common-value elements. We model projection by assuming bidders with higher private values perceive a distribution of valuations that first-order stochastically dominates the perception of those with lesser private values. Those with low private values perceive a distribution shifted to the left whereas those with high private values perceive one shifted to the right. We draw out the implications of this assumption in first- and second-price sealed-bid auctions and English auctions. When the good has only private value, projection leads players to misperceive the extent of competition. This induces overbidding, on average, in first-price auctions, but has no effect in second-price or English auctions. If the good also has some common-value component, players draw inference about others' signals from their equilibrium bids. No matter the auction format, projection leads to distorted inference that reduces efficiency. The probability the player with the highest value receives the good is decreasing in the extent of projection.
Popularity
Social Learning
Odds
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We analyze an agency model where one individual decides how much evidence he collects. We assume that he has free access to information, but all the news acquired become automatically public. Conditional on the information disclosed, a second individual with conflicting preferences undertakes an action that affects the payoff of both agents. In this game of incomplete but symmetric information, we show that the first individual obtains rents due to his superior ability to decide whether to collect or forego evidence, i.e., due to his control in the generation of (public) information. We provide an analytical characterization of these rents, that we label "rents of public ignorance". They can be interpreted as, for example, the degree of influence that a chairman can exert on a committee due exclusively to his capacity to decide whether to keep discussions alive or terminate them and call a vote. Last, we show that similar insights are obtained if the agent decides first how much private information he collects and then how much of this information he transmits to the other agent.
Ignorance
Value (mathematics)
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We show that status quo bias combined with downward‐sloping demand implies addictive behavior. This result does not depend on transitivity, a complete ordering, or even the existence of a preference relation that rationalizes choices. ( JEL D11, D81)
Status quo bias
Revealed preference
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This paper analyzes collective decision making when individual preferences evolve through learning. Votes are affected by their anticipated effect on future preferences. The analysis is conducted in a two-arm bandit model with a safe alternative and a risky alternative whose payoff distribution, or type, varies across individuals and may be learned through experimentation. Society is shown to experiment less than any of its members would if he could dictate future decisions, and to be systematically biased against experimentation compared to the utilitarian optimum. Control sharing can even result in negative value of experimentation: society may shun a risky alternative even its expected payoff is higher than the safe one's. Commitment to a fixed alternative can only increase efficiency if aggregate uncertainty is small enough. Even when types are independent, a positive news shock for anyone raises everyone's incentive to experiment. Ex ante preference correlation or heterogeneity reduces these inefficiencies.
Ex-ante
Stochastic game
Value (mathematics)
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This manuscript consists of three essays divided into three chapters. The second chapter is an essay co-authored with Tiago Caruso, and the third chapter is a version of a collaborative project with Jernej Copic, Robert Sherman, and Omer Tamuz.The first chapter studies repeated contests with private information. In these contests, weak contestants prefer to appear strong while strong contestants prefer to appear weak. In contrast to a single contest, this leads to an equilibrium where effort is not strictly monotonic in ability and allows for a less able contestant to win against a contestant of higher ability. While the aggregate payoffs of contestants are higher per contest than in the single contest benchmark, aggregate output per contest is lower. Depending on the economic setting, the presence of private information can lead to productive or allocational inefficiencies.In the second chapter we study a binary choice model where an agent makes a decision that is informed by his beliefs after observing a public signal. This model generalizes to a wide range of economic environments which require econometricians to estimate the beliefs of agents. With minimal structure imposed on the agent's utility function, we characterize the structure of information needed to identify the beliefs of the agent after observing both signals and decisions. We find that the information must be sufficiently convincing and dense for the agent's beliefs to be point identified. When the full range of information is relaxed, we show how the agents beliefs can be partially identified. Additionally, we explicitly show how the econometrician can construct the sharpest boundaries around the agents beliefs, as she observes signals and decisions.In the third chapter we propose a simple model of agglomeration of some particles (or agents) when there is no growth in the number of agents. In many periods, countably many agents move freely (randomly) along a line until they encounter other agents, in which case they form a community and stop moving. We show that as time goes to infinity, the distribution of sizes of communities is exponential. When agents can also detach (leave) a community, we show that when the probability of leaving a community decreases sufficiently fast with the community size, there is no steady-state distribution of community sizes: as time goes to infinity, community sizes tend to infinity.
CONTEST
Benchmark (surveying)
Identification
Private information retrieval
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We consider an environment where individuals sequentially choose among several actions. The payoff to an individual depends on her action choice, the state of the world, and an idiosyncratic, privately observed preference shock. Under weak conditions, as the number of individuals increases, the sequence of choices always reveals the state of the world. This contrasts with the familiar result for pure common-value environments where the state is 'never' learned, resulting in herds or informational cascades. The medium run dynamics to convergence can be very complex and non-monotone: posterior beliefs may be concentrated on a wrong state for a long time, shifting suddenly to the correct state.
Stochastic game
Sequence (biology)
Value (mathematics)
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