Essays in Applied Behavioral Microeconomics
Creators: Paci, Giovanni
Publisher: name: Columbia University
Year: 2014
Subjects: Microeconomics--Psychological aspects
Economics--Psychological aspects
Consumer behavior--Economic aspects
Microeconomics
Economics

description: Cognitive and emotional factors have played a larger role in economists' understanding of the world in the last decades. While earlier work has focused on experimental and theoretical results, a larger number of recent contributions have tested ideas from the field of Psychology using econometric methods for causal identification on field data. This line of research seeks to analyze market situations in which specific psychological factors can be identified to cause observed economic behavior. My dissertation, at the intersection of Behavioral and Applied Microeconomics, offers examples of behavior in which cognitive aspects are shown to play a central role and is unified across the three chapters by a common methodological approach. 
      The first chapter, based on joint work with Kareem Haggag, reports evidence from tipping behavior of New York city taxicab customers. For credit card payments, the payment screen in the car displays suggested tip amounts. In particular, for one of the main companies, the suggested amounts are $2, $3, $4 for fares below $15, and 20, 25 or 30 percent above $15. Using this variation, the chapter shows that suggestions play an important role in tipping behavior of customers: comparing rides below and above $15 using regression discontinuity methods, it is possible to show a large local causal effect of the suggestions on average tips. Moreover, a backlash effect is observed, as more customers decide not to tip on a credit card at all. These findings contribute to our understanding of default effects beyond the area of tipping, for instance in savings. An even broader lesson is that these findings isolate a case in which cognitive and emotional responses are likely to mediate the relationship between preferences and choice.
      The second chapter, based on a joint work with Kareem Haggag, presents field evidence on cheating behavior. During the two years 2008-2010, several taxi drivers cheated customers by charging a higher fare amount that is allowed only for rides outside the city even for rides in the city. The choice of whether to cheat a customer on a individual ride is shown to be affected by loss aversion. The estimates can be effectively reconciled by models of reference-dependent preferences that take drivers' expectation as reference points: drivers are more likely to cheat on those rides within a shift in which they are below expectations. The results highlight the role played by a classic decision-making bias in shaping unethical behavior in a market. These findings suggests that cognitive and emotional aspects of the valuation of benefits are relevant to our economic understanding of ethical problems.
      The third chapter presents regression-discontinuity evidence on an investment-incentive program. The methodology, which compares firms who received the award with those that marginally lost it, allows for a cleaner identification of the effect of the policy. In this last essay, the conceptual tools from Applied Microeconomics used in the first chapter are put to work in the context of firms' behavior. The tool allows one to show in a straightforward manner the main outcomes of the policy.