social interaction co worker altruism and incentives social interaction with colleagues is an important job attribute for many workers to attract and retain workers managers therefore need to think about how to create and preserve high quality co worker relationships this paper develops a principal multi agent model where agents do not only engage in productive activities but also in social interaction with their colleagues which in turn creates co worker altruism we study how financial incentives for productive activities can improve or damage the work climate we show that both team incentives and relative incentives can help to create a good work climate

shaping beliefs in experimental markets for expert services guilt aversion and the impact of promises and money burning options in a credence goods game with an expert and a consumer we study experimentally the impact of two devices that are predicted to induce consumer friendly behavior if the expert has a propensity to feel guilty when he believes that he violates the consumer s payoff expectations i an opportunity for the expert to make a non binding promise and ii an opportunity for the consumer to burn money in belief based guilt aversion theory the first opportunity shapes an expert s behavior if an appropriate promise is made and if it is expected to be believed by the consumer by contrast the second opportunity might change behavior even though this option is never used along the predicted path experimental results confirm the behavioral relevance of i but fail to confirm ii

the effects of moral licensing and moral cleansing in contingent valuation and laboratory experiments on the demand to reduce externalities recent field experiments show that peer information can induce people to reduce their production of negative externalities related work in psychology demonstrates that inducing feelings of relative culpability in one domain can induce spillover pro social behavior in another domain we use a contingent valuation and parallel lab experiment to explore patterns of cross domain responses to norm based interventions asymmetric responses between those whose impacts are above or below the norm are found to be robust across decision settings substantial heterogeneity in responses is observed across a number of dimensions not explored in large field experiments raising questions about the universality of peer information effects and the design of such programs

regulating banks through market discipline a survey of the issues abstract the interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed new capital accord this paper reviews the potential role market discipline can play in financial regulation we start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms next a definition of market discipline as a regulatory mechanism is advanced we evaluate the disciplining power various market participants have finally we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism in this respect the basle committee has taken the right approach

gratitude conscience and reciprocity models of supplier motivation when quality is non contractible abstract standard game theoretic models that apply principal agent problems to analyse buyer supplier relations have postulated that in a single period game the agent will not choose non contractible quality however evidence exists that suppliers or service providers choose costly quality in non contractible dimensions even in absence of reputation concern if they are offered a premium such actions violate the axiom of individual rationality and are not subgame perfect in standard game theory wherein only material payoffs are considered this paper builds three models of supplier behaviour in a single period stackelberg like buyer supplier game by using the framework of psychological game theory and explains supplier motivations to choose quality on non contractible dimensions in absence of any reputation effect if the buyer offers a price higher than the market price the supplier may be motivated to choose non contractible quality due to a sense of gratitude or because of his conscience or in order to reciprocate kindness the results show that maximum possible quality is chosen by the supplier only in the presence of a sufficiently strong sense of gratitude or a sufficiently strong conscience however the buyer is better off with a fair supplier who is motivated to reciprocate than a supplier having a very poor sense of gratitude or one having a weak conscience because the buyer can choose an optimal premium above market price to ensure that a fair and reciprocal supplier chooses an optimal quality

evasive lying in strategic communication abstract information asymmetries in economic transactions are omnipresent and a regular source of fraudulent behavior in a theoretical and an experimental analysis of a sender receiver game we investigate whether sanctions for lying induce more truth telling the novel aspect in our model is that senders may not only choose between truth telling and explicit lying but may also engage in evasive lying by credibly pretending not to know while we find that sanctions promote truth telling when senders cannot engage in evasive lying this is no longer true when evasive lying is possible then explicit lying is largely substituted by evasive lying which completely eliminates the otherwise positive effect of sanctions on the rate of truth telling as outlined in our model the necessary prerequisite for such an erosion effect is that evasive lying is perceived as sufficiently less psychologically costly than direct lying evidence from our experimental data and a survey conducted with additional participants indicate that the shift towards evasion can indeed be attributed to lower psychological costs overall our results clearly demonstrate the limitations of sanctioning lying to counteract the exploitation of informational asymmetries and may explain the empirical evidence from the finance industry that sanctions for financial misconduct eventually appear to be not very effective

promises and expectations abstract we investigate why people keep their promises in the absence of external enforcement mechanisms and reputational effects in a controlled laboratory experiment we show that exogenous variation of second order expectations promisors expectations about promisees expectations leads to a significant change in promisor behavior we provide evidence that a promisor s aversion to disappointing a promisee s expectation leads her to behave more generously we propose and estimate a simple model of conditional guilt aversion that is supported by our results and nests the findings of previous contributions as special cases

social norms and moral hazard the probability of income loss depends on talent and effort effort has positive externalities and therefore individuals are awarded status in proportion to their perceived diligence the social no

broken promises and hidden partnerships an experiment abstract previous research indicates that cheap talk promises promote cooperation we extend the empirical study of promises to a three person environment doing this enabled us to study two features of promises in the naturally occurring world that have not been studied in the previous literature for one we are able to determine the impact of contingent promises which refers to promises that need to be kept or broken only in the event that another event first occurs second we were able to study promise chains by which we mean a set of sequentially made promises in both cases we are able to apply existing theories to these novel environments to predict promise keeping behavior consistent with theory predictions we find that promises are not necessary and do not change behavior when incentives are aligned when there is conflict of interest and when a promise is definite that is not contingent we find that people are indeed willing to forgo monetary payoff to keep their promises however when the promise is contingent promises no longer promote cooperation people are equally like to choose a selfish action regardless whether they made a promise finally we find that promise chains do not promote trustworthiness with people at the end of the chain no more likely to honor their promises than people at earlier positions despite the additional indirect harm that people later in the chain cause by defecting our findings offer insights relevant for the behavioral economic theory of guilt aversion

fairness and the optimal allocation of ownership rights we report on several experiments on the optimal allocation of ownership rights the experiments confirm the property rights approach by showing that the ownership structure affects relationship specific investments and that subjects attain the most efficient ownership allocation despite starting from different initial conditions however in contrast to the property rights approach the most efficient ownership structure is joint ownership these results are neither consistent with the self interest model nor with models that assume that all people behave fairly but they can be explained by the theory of inequity aversion that focuses on the interaction between selfish and fair players

assessing the impact of renewable energy deployment on local sustainability towards a theoretical framework renewable energy sources res have a large potential to contribute to the sustainable development sd of specific territories by providing them with a wide variety of socioeconomic and environmental benefits however the existing literature has put much emphasis on the environmental benefits including the reduction of global and local pollutants while socioeconomic impacts have not received a comparable attention these include diversification of energy supply enhanced regional and rural development opportunities creation of a domestic industry and employment opportunities with the exception of the diversification and security of energy supply these benefits have usually been mentioned but their analysis has been too general i e mostly at the national level and a focus on the regional and even more so the local level has been lacking at most studies provide scattered evidence of some of those regional and local benefits but without an integrated conceptual framework to analyse them this paper tries to make a contribution in this regard by developing an integrated theoretical framework which allows a comprehensive analysis of the impact of renewable energy on local sustainability and which can be empirically applied to identify these benefits in different territories

understanding carbon lock in abstract this paper narrative argues that industrial economies have been locked into fossil fuel based energy systems through a process of technological and institutional co evolution driven by path dependent increasing returns to scale it is asserted that this condition termed carbon lock in creates persistent market and policy failures that can inhibit the diffusion of carbon saving technologies despite their apparent environmental and economic advantages the notion of a techno institutional complex is introduced to capture the idea that lock in occurs through combined interactions among technological systems and governing institutions while carbon lock in provides a conceptual basis for understanding macro level barriers to the diffusion of carbon saving technologies it also generates questions for standard economic modeling approaches that abstract away technological and institutional evolution in their elaboration the question of escaping carbon lock in is left for a future paper

integrating sustainable chain management with triple bottom line accounting abstract triple bottom line accounting is widely advanced as a way in which firms can realise broader societal objectives in addition to increasing shareholder value in our analysis of the australian economy we integrate financial input output tables that describe the interdependencies between economic sectors with national social and environmental accounts to construct numerate triple bottom line accounts for 135 discrete sectors the accounts are portrayed against the numeraire of one dollar of gdp thus for a sector of the economy financial aspects of performance can be expressed for example as dollars of export earnings per dollar of gdp social aspects such as employment can be portrayed as minutes of employment generated per dollar greenhouse issues can be portrayed as kilograms of carbon dioxide emitted per dollar since these indicators of triple bottom line performance are referenced against financial units and are consistent with the system of national accounts they can be applied to financial accounts of a firm a service or a product and allow a robust triple bottom line account to be developed across a range of scales the critical advantage of this approach is that it includes both the direct or immediate effects as well as the indirect or diffuse effects associated with a large and distant chain of supply paths the incorporation of most indirect or upstream effects therefore expands the range of issues and effects within the analytical boundary and also includes imports and exports both products and firms can then be assessed properly in sustainable chain management scm terms thus a firm that uses a key intermediate input that requires a large amount of water for example cannot hide the environmental implications since they are revealed in the analysis of the full production chain this revelation can also underpin progress when firms acknowledge both the direct and indirect effects and improve their selection of key inputs on a wider range of criteria rather than on price alone our analysis is well developed at the economic sector level for australia and is also being applied to number of government institutions firms and individual products before the full benefits of numerate triple bottom line accounting can be applied to the equity issues of globalisation trade interdependencies between groups of typical countries will have to be analysed using these whole economy approaches this will allow country specific intensities to be applied to important items in the international production chain

discretionary rewards as a feedback mechanism abstract this paper studies the use of discretionary rewards in a finitely repeated principal agent relationship with moral hazard the key aspect is that rewards have informational content when the principal obtains a private subjective signal about the agent s performance she may pay discretionary bonuses to provide credible feedback to the agent in accordance with the often observed compression of ratings we show that in equilibrium the principal communicates the agent s interim performance imperfectly i e she does not fully differentiate good and bad performance furthermore we show that small rewards can have a large impact on the agent s effort provided that the principal s stake in the project is small

judicial errors and crime deterrence theory and experimental evidence abstractthe economic theory of crime deterrence predicts that the conviction of an innocent individual type i error is as detrimental to deterrence as the acquittal of a guilty individual type ii error in this paper we qualify this result theoretically showing that in the presence of risk aversion loss aversion or type i error aversion type i errors have a stronger effect on deterrence than type ii errors we test these predictions with two experimental studies in which participants choose whether to steal from other individuals under alternative combinations of probabilities of judicial errors the results indicate that both types of errors have a significant impact on deterrence as predicted type i errors have a stronger impact on deterrence than type ii errors this asymmetry is entirely explained by differences in the expected utility gains from crime whereas nonexpected utility factors do not play a significant role

bare promises an experiment abstract is truth value of a statement what lying aversion is all about we propose an experimental test and find only limited support in this context with bare promises we also test for guilt aversion and again find only limited support

a meeting of the minds informal agreements and social norms using coordination games we elicit social norms directly for two different games where either an agreement to take the first best action has been reached or where no such agreement exists we combine the norms data with separately measured choice data to predict changes in behavior we demonstrate that including social norms as a utility component significantly improves predictive performance then we compare social norms to guilt aversion and lying aversion we estimate that honoring an agreement in the double dictator game is worth giving up approximately 10 of total earnings and more than 120 in the bertrand game we show that informal agreements affect behavior through their direct effect on social norms as well as through an indirect effect on beliefs this paper was accepted by uri gneezy behavioral economics

conditional cooperation with negative externalities an experiment abstract empirically the commons are not as tragic as standard theory predicts the predominant explanation for this finding is conditional cooperation yet many real life situations involve insiders who are directly affected by a dilemma and outsiders who may be harmed if the insiders overcome the dilemma the quintessential illustration is oligopoly if insiders overcome their dilemma and collude this inflicts harm on the opposite market side in our experiment harm on outsiders significantly reduces conditional cooperation of insiders we can exclude that this result is driven by inequity aversion reciprocity or efficiency seeking only guilt aversion can rationalize our findings with guilt being most pronounced if the active insiders not only inflict harm on the outsider but increase their own payoff at the expense of the outsider

bargaining under incomplete information fairness and the hold up problem in the hold up problem incomplete contracts cause the proceeds of relation speciflc investments to be allocated by ex post bargaining the present paper investigates the e ciency of incomplete contracts if individuals have heterogeneous preferences implying heterogeneous bargaining behavior and equally important preferences are private information as the sunk investment costs can thus potentially signal preferences they can in uence beliefs and consequently bargaining outcomes the necessities of signalling are shown to generate very strong investment incentives these incentives are based on the desire not to reveal information that is unfavorable in the ensuing bargaining after flnding all perfect bayesian equilibria in pure strategies the paper derives the necessary and su cient conditions under which it is optimal to invest and trade e ciently

marital investments time consistency and emotions abstract a benchmark model of a married couple s educational investment yields an inefficient outcome due to the possibility of opportunistic divorce motivated by findings in social psychology i use psychological game theory to incorporate belief dependent guilt feelings multiple equilibria become possible some marriages have inefficient under investment some have efficient outcomes and preclude divorce if guilt is sufficiently important a life long efficient marriage is implied because a spouse may signal a trust so strong as to force the partner to hold beliefs that make divorce unattractive

selective intervention and internal hybrids interpreting and learning from the rise and decline of the oticon spaghetti organization infusing hierarchies with elements of market control has become a much used way of simultaneously increasing entrepreneurialism and motivation in firms however this paper argues that such internal hybrids particularly in their radical forms are inherently hard to successfully design and implement because of a fundamental incentive problem of establishing credible managerial commitments to not intervene in delegated decision making this theme is developed and illustrated using the case of the world leading hearing aids producer oticon in the beginning of the 1990s oticon became famous for its radical internal hybrid the spaghetti organization recent work has interpreted the spaghetti organization as a radical attempt to foster dynamic capabilities by organizational means neglecting however that about a decade later the spaghetti organization has given way to a more traditional matrix organization in contrast an organizational economics interpretation of oticon organizational changes is developed this lens suggests that a strong liability of the spaghetti organization was the above incentive problem frequent managerial meddling with delegated rights led to a severe loss of motivation and arguably caused the change to a more structured organization refutable implications are developed and the discussion is broadened to more general issues of economic organization

the hidden cost of raising voters expectations reference dependence and politicians credibility abstract two politicians compete to get elected each politician is characterized by a valence which is unobservable to the electorate and can take one of two values high or low the representative voter prefers politicians with high valence but random shocks may lead him to appoint a low valence politician politicians make statements concerning their valence if the voter is a standard expected utility maximizer politicians statements lack any credibility and no information transmission takes place by introducing reference dependence and loss aversion we show that truthful communication is possible in equilibrium and we characterize the conditions under which it can arise intuitively these behavioral biases introduce a cost of overstating one s valence as overstatements may shift the electorate s preferences toward better skilled opponents

gift exchange incentives and heterogeneous workers by incorporating reciprocity in an otherwise standard principal agent model i investigate the relation between monetary gift exchange and incentive pay while allowing for worker heterogeneity i assume that some but not all workers care more for their principal when they are convinced that the principal cares for them the principal can be egoistic or altruistic absent worker heterogeneity an altruistic principal signals his altruism by offering relatively weak incentives and a relatively high expected total compensation however the latter is not always required to credibly signal altruism furthermore since some workers do not reciprocate the principal s altruism the principal may find it optimal to write a contract that simultaneously signals his altruism and screens reciprocal worker types such a contract is characterised by excessively strong incentives and a relatively high expected total compensation

optimal regulation of deposit taking financial intermediaries a correction abstract this paper corrects a paper of david miles published in the european economic review in 1995 reversing some of the conclusions he draws solving his model correctly it turns out that because depositors are unable to monitor the default risk of individual banks moral hazard gives banks an incentive to increase risky lending prudential capital requirements reduce incentives to hold risky loans

promises and conventions an approach to pre play agreements abstract i analyze how informal agreements can be sustained by moral emotions with regard to a large class of two player games specifically i assume that people feel guilty if they breach an agreement and that the guilt increases according to the degree of the harm inflicted on the other a central insight is that it is easier to sustain efficient informal agreements if actions are strategic complements than if they are strategic substitutes i complement this general insight by studying two specific cases where negotiators face uncertainty about the breach of the agreement i show that while the optimal agreement in a game with strategic substitutes must compromise on surplus maximization and efficiency the optimal agreement in a game with sufficiently strong strategic complements tends to maximize both the surplus and the probability of compliance especially if the game is symmetric

every drop counts a water conservation experiment with hotel guests we implement a field experiment with hotel guests to measure the effects of nonprice interventions on water conservation and customer satisfaction in hotels guests have no direct pecuniary incentive to conserve water as consumers do at home where they pay their own water bills because hotels earn greater profits when they manage to convince guests to conserve guests may be suspicious of a hotel s stated social goal of water conservation by implementing behavioral interventions that address these challenges we find that our nudges can induce guests to reduce their water consumption even when no direct monetary incentive is provided using post stay customer surveys we detected no adverse effects on customer satisfaction due to these nudges jel d12 i31 q41 q50

the supply of information by a concerned expert how much information should a policy maker pass on to a currently ill informed citizen in this paper we address this classic question of crawford and sobel 1983 in a setting in which beliefs impact utility as in kreps and porteus 1978 we show that this simple amendment has far reaching implications in particular our question cannot be answered using a utility function with standard revealed preference foundations revealed preference cannot tell us whether in a particular state s a decision maker prefers to believe incorrectly that the state is t or to know the truth to solve the model we go beyond the classical model in two respects relying on the psychological expected utility model of caplin and leahy 2001 to capture preferences and the psychological game model of geanakoplos pearce and stacchetti 1989 to capture strategic interactions

the magic of the personal touch field experimental evidence on money appreciation as gifts this paper makes use of two field experiments to explore individual effort responses to gifts we extend the literature by looking at nonfinancial gifts and gifts that combine financial and nonfinancial elements with or without adding a personal touch we find that non pecuniary gifts that signal worker appreciation induce reciprocity most importantly we find that there are interaction effects between money and appreciation while money and appreciation are individually effective they only work well together when they are combined with a personal touch this points to the importance of interpersonal elements in gift giving and has important implications for how to effectively elicit worker effort

explaining gift exchange the limits of good intentions this paper explores the limitations of intention based social preferences as an explanation of gift exchange between a firm and a worker in a framework with one self interested and one reciprocal player gift giving never arises in equilibrium instead any equilibrium in a large class of multistage games must involve mutually unkind behavior of both players besides gift exchange this class of games also includes moral hazard models and the rotten kid framework even though equilibrium behavior may appear positively reciprocal in some of these games the self interested player never benefits from reciprocity we discuss the relation of these results to the theoretical and empirical literature on gift exchange in employment relations

desert and inequity aversion in teams teams are becoming increasingly important in work settings we develop a framework to study the strategic implications of a meritocratic notion of desert under which team members care about receiving what they feel they deserve team members nd it painful to receive less than their perceived entitlement while receiving more may induce pleasure or pain depending on whether preferences exhibit desert elation or desert guilt our notion of desert generalizes distributional concern models to situations in

why do people keep their promises an experimental test of two explanations numerous psychological and economic experiments have shown that the exchange of promises greatly enhances cooperative behavior in experimental games this paper seeks to test two theories to explain this effect the first posits that individuals have a preference for keeping their word the second assumes that people dislike letting down others payoff expectations according to the latter account promises affect behavior only indirectly because they lead to changes in the payoff expectations attributed to others i conduct an experiment designed to distinguish between and test these alternative explanations the results demonstrate that the effects of promises cannot be accounted for by changes in payoff expectations this suggests that people have a preference for promise keeping per se

psychological expected utility theory and anticipatory feelings we extend expected utility theory to situations in which agents experience feelings of anticipation prior to the resolution of uncertainty we show how these anticipatory feelings may result in time inconsistency we provide an example from portfolio theory to illustrate the potential impact of anticipation on asset prices

can contracts signal social norms experimental evidence we investigate whether incentive schemes signal social norms and thus affect behavior beyond their direct economic consequences a one shot principal agent experiment is studied where prior to contract choice principals are informed about the past actions of other agents and thus have more information about norms of behavior compared with a setting in which principals are uninformed agents exert substantially higher effort under a fixed wage contract when they are aware that an informed principal chose this contract the informed principal s choice apparently signals a norm not to exploit trust which leads to more trustworthy behavior this mechanism s robustness is explored in further experiments data as supplemental material are available at http dx doi org 10 1287 mnsc 2015 2336 this paper was accepted by uri gneezy behavioral economics

incentives for dishonesty an experimental study with internal auditors we conduct an experiment with professional internal auditors and evaluate their performance and objectivity measured as the extent to which they truthfully report the performance of other participants in a real effort task in line with our hypotheses we find that incentive based compensation increases dishonest behavior competitive incentives lead to under reporting of other participants performance while collective incentives lead to over reporting of performance we replicate these results with a student sample in addition we find that moving from an environment with objective performance evaluation toward a peer evaluation scheme reduces performance among internal auditors but not among students jel c93 m42 m52

expectations network centrality and public good contributions experimental evidence from india do individuals in a position of social influence contribute more to public goods than their less connected partners can we motivate these influential individuals by disclosing how others expect them to act to answer these questions we play a public good game on a star network the experimental design is such that efficiency and equality considerations should motivate central players to contribute more than others using a subject population familiar with contributions to public goods on social networks we find that central players contribute just as much as the average of other players leading to a large loss of efficiency when we disclose the expectations of other players we find that central players often adjust their contributions to meet the expectations of the group expectations disclosure leads to higher contributions in groups that have weak social ties outside of the experiment in groups where ties are strong it has no significant effect this evidence casts doubt on the idea that individuals who by their social position can contribute more effectively to the public good rise to the challenge by contributing more than others in some but not all social groups these individuals can be motivated to increase contributions by disclosing the expectations of others

intention based reciprocity and the hidden costs of control abstract empirical research suggests that despite strengthening conventional incentives to put in effort exerting control might reduce worker performance the present paper shows that intention based reciprocity can explain such hidden costs of control if individuals differ in their propensity for reciprocity and preferences are private information not being controlled might then be considered to be kind because not everybody reciprocates not being controlled with high effort this argument contrasts existing theoretical wisdom on the hidden costs of control that is almost exclusively based on signaling

learning to be fair abstract we study the process of equilibrium selection in games when players have social preferences of the type discussed among others by rabin 1993 and segal and sobel 2007 to this end we employ a standard noisy version of the best response dynamics we obtain several results concerning some popular games such as the prisoner s dilemma and the battle of the sexes we show that reciprocity may have a negative effect on the equilibrium selection process when players are sufficiently concerned with reciprocity the stochastically stable equilibrium in the battle of the sexes is inefficient at the same time the cooperative equilibrium in the prisoner s dilemma is never stochastically stable

intertemporal incentives under loss aversion this paper studies the intertemporal allocation of incentives in a repeated moral hazard model with reference dependent preferences as in k oszegi and rabin 2009 besides consumption utility the agent experiences utility from the change in his beliefs about present and future eort and income when eort plans are rational the prospect of being disappointed by the outcome realization equals that of being pleasantly surprised and hence the loss averse agent is on net hurt by news in contrast to the prediction with classical preferences but consistent with real world contracts if consumption utility is not too concave and news about present income carries suciently larger weight in utility than news about future income a contract setting a current

how predictable is technological progress abstract recently it has become clear that many technologies follow a generalized version of moore s law i e costs tend to drop exponentially at different rates that depend on the technology here we formulate moore s law as a correlated geometric random walk with drift and apply it to historical data on 53 technologies we derive a closed form expression approximating the distribution of forecast errors as a function of time based on hind casting experiments we show that this works well making it possible to collapse the forecast errors for many different technologies at different time horizons onto the same universal distribution this is valuable because it allows us to make forecasts for any given technology with a clear understanding of the quality of the forecasts as a practical demonstration we make distributional forecasts at different time horizons for solar photovoltaic modules and show how our method can be used to estimate the probability that a given technology will outperform another technology at a given point in the future

the social contract in the laboratory an experimental analysis of self enforcing impartial agreements social contract theories are based on the idea of the consent of the governed according to which norms rules and institutions constitutions in particular must be based on the general consensus or unanimous consent of the individuals who are subject to the regulation the article reports the results of an experiment aimed at identifying the conditions for the emergence of a self enforcing social contract in the laboratory our main result is that spontaneous compliance with a non self interested norm of distribution is likely to occur if individuals have been part of the same process of ex ante agreement on the distributive norm under a veil of ignorance to which the emergence of reciprocal expectations of conformity is also related this is in line with rawls s idea of an endogenous sense of justice stabilizing ex post institutions that would have been ex ante chosen in the original position

preferences for power abstract power the ability to determine the outcomes of others usually comes with various benefits higher compensation public recognition etc we develop a new game the power game to demonstrate that a substantial fraction of individuals enjoy the intrinsic value of power they accept lower payoffs in exchange for power over others without any benefits to themselves these preferences exist independently of other components of decision rights cannot be explained by social preferences and are not driven by mistakes confusion or signaling intentions we further show that valuation of power i is higher when individuals directly determine outcomes of others ii depends on how much discretion one has over those outcomes and iii is tied to relationships between individuals we establish that ignoring preferences for power may have large welfare implications and consequently should be included in the study of political systems and labor contracts

friends or foes optimal incentives for reciprocal agents abstract widely used performance based contracts put positive or negative externalities on co workers these externalities have been proven to shape an organization s working climate especially when workers exhibit social preferences however it is a priori unclear whether a more friendly or a more competitive working environment should be encouraged in this paper we develop a theoretical model in which a self interested principal has to motivate a set of agents to work hard agents are symmetric potentially risk averse and exhibit reciprocity concerns towards each other we show that the principal reduces the cost of achieving high effort provision by designing a psychological gift exchange game thereby replacing monetary with psychological incentives we find that the optimal incentive scheme depends on the interplay between the agents attitudes towards risks and their preferences for reciprocity in particular the optimal scheme implements i a relative performance compensation scheme which induces an exchange of unkindness if agents are relatively little risk averse and ii a joint performance compensation scheme which induces an exchange of kindness if agents are sufficiently risk averse our findings can explain some puzzling empirical results

do voluntary payments to advisors improve the quality of financial advice an experimental deception game abstract the market for retail financial products e g investment funds or insurances is marred by information asymmetries clients are not well informed about the quality of these products they have to rely on the recommendations of advisors incentives of advisors and clients may not be aligned when fees are used by financial institutions to steer advice we experimentally investigate whether voluntary contract components can reduce the conflict of interest and increase truth telling of advisors we compare a voluntary payment upfront an obligatory payment upfront a voluntary bonus afterwards and a three stage design with a voluntary payment upfront and a bonus after advisors are most truthful when mutual opportunities to reciprocate exist and when the voluntary payment is largest our analysis identifies the third stage bonus payment as the key feature for success as it allows for an interplay of reciprocal behavior between clients and advisors

incomplete information models of guilt aversion in the trust game in the theory of psychological games it is assumed that players preferences on material consequences depend on endogenous beliefs most of the applications of this theoretical framework assume that the psychological utility functions representing such preferences are common knowledge however this is often unrealistic in particular it cannot be true in experimental games where players are subjects drawn at random from a population therefore an incomplete information methodology is needed we take a first step in this direction focusing on guilt aversion in the trust game in our models agents have heterogeneous belief hierarchies we characterize equilibria where trust occurs with positive probability our analysis illustrates the incomplete information approach to psychological games and can help to organize experimental results in the trust game this paper was accepted by uri gneezy behavioral economics

solar energy strategies in the u s utility market abstract given the exponential cost decline trend of solar energy generation technologies and the targeted tax incentives and loan guarantees for renewable energy in the american recovery and reinvestment act of 2009 and other policy measures solar energy generation has been enjoying rapid growth in the united states this paper examines the incorporation of solar renewable energy into generation portfolios and the effects of natural capital specifically the geospatially calculated potential solar energy generation as measured by potential average annual kilowatt hours per square meter per day and respective state mandated renewable portfolio standard targets on utility scale solar energy generation findings suggest that a state s natural solar energy potential is a predictor of solar energy generation development and further this relationship is significantly moderated by state specific renewable energy portfolio standard targets

man s search for meaning the case of legos we investigate how perceived meaning influences labor supply in a laboratory setting we manipulate the perceived meaning of simple repetitive tasks and find a strong influence on subjects labor supply despite the fact that the wage and the task are identical across the conditions in each experiment subjects in the less meaningful conditions exhibit reservation wages that are consistently much higher than the subjects in the more meaningful conditions the result replicates across different types of tasks moreover in the more meaningful conditions subjects productivity influences labor supply more strongly

incomplete contracts and signaling this article presents a principal agent model in which asymmetric information leads to contractual incompleteness i show that in the presence of transactions costs incompleteness may act as a signal of the principal s type two types of transactions costs are considered those incurred ex ante drafting costs and those incurred ex post enforcement or verification costs i prove that in the presence of either of these costs asymmetric information leads to more contractual incompleteness than full information does

the hidden advantage of delegation pareto improvements in a gift exchange game this paper analyzes the effect on performance and earnings of delegating the wage choice to employees our results how that such delegation significantly increases effort levels moreover we observe a pareto improvement as the earnings of both employers and employees increase when employers delegate than when they do not interestingly we also find that the employees performance under delegation is higher than under non delegation even for similar wages while there is strong evidence that behavior reflects strategic considerations this result also holds for one shot interactions a possible non strategic motivation explaining the positive reaction to delegation is a sense of enhanced responsibility

public beliefs and corruption in a repeated psychological game abstract this paper investigates the role of guilt aversion for corruption in public administration corruption is modeled as the outcome of a game played between a bureaucrat a lobby and the public there is a moral cost of corruption for the bureaucrat who is averse to letting the public down we study how the behavior of the lobby and the bureaucrat depend on perceived public beliefs when these are constant and when they are allowed to vary over time with time varying beliefs corruption is more likely when the horizon of the game is relatively long and when public beliefs are initially low and are updated fast

the timing of discretionary bonuses effort signals and reciprocity abstract in a real effort experiment we investigate the relationship between reciprocity and the timing of discretionary bonuses in a two period principal agent manager worker setting we vary the timing of the manager s bonus decision in order to examine two main channels reward and trust through which discretionary bonuses may operate average worker performance improves when bonus decisions are made between the two periods since both channels are simultaneously active first period output significantly increases as workers attempt to signal their trustworthiness to managers when the bonus decision is made upfront or at the end average output is no different than in a baseline setting without the bonus mechanism furthermore output after a bonus is not paid decreases substantially consistent with negative reciprocity our main findings are reinforced by using time spent on the available real leisure activity as an alternative measure of subjects effort

guilt in games a clear conscience is a good pillow why does this old proverb contain an insight the emotion of guilt holds a key psychologists report that the prototypical cause of guilt would be the infliction of harm loss or distress on a relationship partner roy baumeister arlene m stillwell and todd f heatherton 1994 245 june price tangney 1995 moreover guilt is unpleasant and may affect behavior to render the associated pangs counterfactual baumeister stillwell and heatherton state if people feel guilt for hurting their partners and for failing to live up to their expectations they will alter their behavior to avoid guilt in ways that seem likely to maintain and strengthen the relationship avoided guilt is the down of the sound sleeper s bolster how can guilt be modeled how are human interaction and economic outcomes influenced we offer a formal approach for providing answers start with an extensive game form which associates a monetary outcome with each end node say that player i lets player j down if as a result of i s choice of strategy j gets a lower monetary payoff than j expected to get before play started player i s guilt may depend on how much he lets j down player i s guilt may also depend on how much j believes i believes he lets j down we develop techniques to analyze equilibria when players are motivated in part by a desire to avoid guilt the intellectual home for our exercise is what has been called psychological game theory this framework originally developed by john geanakoplos david pearce and ennio stacchetti 1989 and recently extended by battigalli and dufwenberg 2005 henceforth b d allows players utilities to depend on beliefs about choices states of nature

do people avoid opportunities to donate a natural field experiment on recycling and charitable giving abstract we use a natural field experiment to investigate the hypothesis that generosity is partly involuntary by examining whether individuals tend to avoid opportunities to act generously in sweden new recycling machines for bottles and cans with an option of donating the returned deposit to charity were gradually introduced in one of the largest store chains we find a substantial decline in recycling the month these new machines were introduced and a further decline in the following months these results indicate that individuals avoid opportunities to act generously and corroborate findings from both lab and field studies supporting the claim that generous behavior is partly involuntary

optimal regulation of deposit taking financial intermediaries abstract this paper analyses the case for special restrictions on the commercial decisions of deposit taking financial intermediaries the existence of asymmetric information between managers of intermediaries and depositors is shown to generate unregulated outcomes where equity capital is underutilised and lending is suboptimally low a form of regulation to correct this market failure is designed the form of regulation is a capital adequacy scheme of the same kind as those used by bank regulators this is an important result because such schemes have lacked a theoretical underpinning even those who have viewed capital requirements as justifiable have assumed that they will reduce the level of intermediation this paper shows that this is not generally the case the ways in which optimal capital adequacy rules differ from the regulations currently used by banking supervisors is also analysed