Weekly Seminar: Lise Vesterlund, “Gender Differences in Negotiation: Dialing up or Down?” (Thursday, May 9, 2019)
Evidence of gender differences in negotiation has led to a call for policies that help reduce compensation differences that result merely from differences in negotiation. One approach is to encourage women to ‘lean-in’ and negotiate more, another is to directly ban negotiation. The talk examines the effects of each of these policies and asks whether increasing or decreasing the frequency of negotiation is advisable.
Weekly Seminar: Yoram Halevy, “Hard-to-Interpret Signals” (with Larry Epstein) (Thursday, May 2, 2019)
Decisions under uncertainty are often made with information that is difficult to interpret because multiple interpretations are possible. Individuals may perceive and handle uncertainty about interpretation differently and in ways that are not directly observable to a modeler. This paper identifies and experimentally examines behavior that can be interpreted as reflecting an individual’s attitude towards such uncertainty.
Weekly Seminar: Rachel Kranton, “Deconstructing Group Bias”(Thursday, April 18, 2019)
Rachel Kranton is the James B. Duke Professor of Economics at Duke University. She studies how institutions and the social setting affect economic outcomes. She develops theories of networks and has introduced identity into economic thinking. This current project engages experimental research on identity and economic behavior and uncovers individual predilections to respond to group settings. She earned her Ph.D. in Economics at the University California, Berkeley and has held fellowships at the Russell Sage Foundation in New York and the Institute for Advanced Study in Princeton.
Weekly Seminar: Olivier Armantier, “Overcoming Discount Window Stigma: An Experimental Investigation” (With Charles Holt) (Thursday, April 11, 2019)
A core responsibility of the Federal Reserve is to ensure financial stability by acting as the “lender of last resort” through its Discount Window (DW). Historically, however, the DW has not been effective because its usage is stigmatized. In this paper, we develop a coordination game with adverse selection and we test in the lab policies that have been proposed to mitigate DW stigma. We find that whereas lowering the DW cost and making DW borrowing harder to detect are ineffective, random DW borrowing can overcome DW stigma. Implications for other forms of stigma in finance are discussed.
Weekly Seminar: Charles Noussair, “Sequential Search with a Price Freeze Option: Theory and Experimental Evidence” (Thursday, April 4, 2019)
We study the economics of price freeze options (PFOs), by introducing them into a model of sequential search. The model makes a number of predictions, which we test in a laboratory experiment. The experiment varies (1) whether freezing is possible or not, (2) the cost of freezing, and (3) the length of the time horizon. We find that the observed treatment effects are consistent with the predictions of our model, though on average there is some tendency for searches to be terminated earlier than predicted. The extent of under-searching relative to optimal risk-neutral behavior is magnified by the presence of an affordable PFO. Assuming that individuals experience regret, fail to ignore sunk search costs, or misperceive the number of periods remaining, does not improve upon the performance of the model. The data are consistent with a modest amount of risk aversion.
Weekly Seminar: Johanna Mollerstrom, “A Meritocratic Origin of Egalitarian Behavior” (Thursday, March 28, 2019)
The meritocratic fairness ideal implies that inequalities in earnings are regarded fair only when they reflect differences in performance. Consequently, implementation of the meritocratic fairness ideal requires complete information about individual performances, but in practice, such information is often not available. We study redistributive behavior in the common, but previously under-studied, situation where there is uncertainty about whether inequality is reflecting performance or luck. We show theoretically that meritocrats in such situations can become more egalitarian in their behavior, and that the degree to which this happens depends on how they trade off the probability of making mistakes and the size of mistakes that they risk making when redistributing under uncertainty. Our laboratory experiments show, in line with our model, that uncertainty about the source of inequality provides a strong egalitarian pull on the behavior of meritocrats. In addition, the external validity of our framework, and the results from the laboratory, are supported in two general population surveys conducted in the United States and in Norway.
Weekly Seminar: Charles Sprenger, “Direct Tests of Cumulative Prospect Theory” (joint with Doug Bernheim) (Thursday, March 21, 2019)
Cumulative Prospect Theory (CPT), the leading behavioral account of decision making under uncertainty, assumes that the probability weight applied to a given outcome depends on its ranking. This assumption is needed to avoid the violations of dominance implied by Prospect Theory (PT). We devise a simple and direct non-parametric method for measuring the change in relative probability weights resulting from a change in payoff ranks. We find no evidence that these weights are even modestly sensitive to ranks. The estimated changes in relative weights range from +3% to -3%, and in no case can we reject the hypothesis of rank-independence. Our estimates rule out changes in relative probability weights larger than a few percent as ranks change with 95% confidence. In contrast, conventional calibrations of CPT preferences for the same subjects imply that probability weights should change by 20% to 40%. Models with reference distributions (notably Koszegi and Rabin, 2006) have similar implications, and hence we falsify them as well. Additional tests nevertheless indicate that the dominance patterns predicted by PT do not arise. We reconcile these findings by positing a form of complexity aversion that generalizes the well-known certainty effect.