## Science Slam picture and video

A really good picture of the Science Slam victory celebration with GSBC and MPI colleagues. The photographer managed to do a really good group picture. I will remember his technique to encourage people to do a wide smile: not the usual “Cheese!”, but stretching his own mouth wide with his fingers. It seems to have worked!

The videos of the 4th Jena Science Slam are also now online:

http://www.db-thueringen.de/servlets/DerivateServlet/Derivate-29821.xml

I am slammer number 4. I am not sure I like my presentation so much but at least it got people laughing. I was told I already won with the first picture in the presentation, which features THREE cats. Cats are for the win apparently!

In other remarks, it is surprising how things that appear to last only a second on the video seemed to go so much slower when I was on stage!

Categories: article

## Jena Science Slam Winner!

My (winning!) Jena Science Slam presentation, with notes in small character added. The title of my slam was “Why is shopping such a baffling ordeal, and what can you do about it?”. I am very thankful to the audience, they had amazing energy in their cheering and applause!

There should soon be videos of this year’s Slam on the Graduate Academy’s website. It will be funny to see how it looked like :)

## Competition when firms can confuse consumers: A primer on some ongoing research

I felt like giving a little primer on the results of an experiment that Paolo and I did in December, about the incentives for firms to confuse consumers. I was motivated by seeing the following recent article in JEBO:

“Consumer Myopia, Competition and the Incentives to Unshroud Add-on Information” by Tobias Wenzel
http://dx.doi.org/10.1016/j.jebo.2013.12.002

As in most (all?) articles on shrouding, this paper considers only the one stage game and finds as usual that firms will want to make their prices transparent… while ignoring the impact of collusion.

Yes, I did the same thing in my paper in Economica with Bob Sugden on spurious complexity and common standards (http://dx.doi.org/10.1111/j.1468-0335.2011.00895.x). But now, from a recent experiment with Paolo Crosetto where we test a similar model in the lab, we found that firms were quite able to collude not to unshroud after experiencing the horrors of an unshrouded equilibrium!

I am excited about writing up the results, as in fact, being able to choose to make prices transparent or not can help collusion compared to a standard setting with no possible shrouding, and this in two ways: by serving as a signal that one wishes to make peace with others, and also by making the punishment phase harder on those who deviate and unshroud. Once said, this looks obvious now, but I guess this has been missed by others than us, so I don’t feel so bad about missing it.

I will be working in the next month or so on writing up the results, but I am now busy finishing writing a paper on the relation between exit costs and incentives to exit in a repeated version of the public good game with imperfect public monitoring and stochastic outcomes. Very interesting, but it has been hell to find the correct perspective in writing about the experimental findings.

Categories: article

## Social preferences under uncertainty. An experiment

In his short story “The Lottery in Babylon”, Borges imagines a city where a lottery, managed by a secret society, mandates the fate of its citizens. Every sixty nights, drawings are made and determine each citizen’s fate until the next drawing, and this with “incalculable consequences”. Like the narrator, one might end up a proconsul, or one might end up a slave… until the next drawing, unless of course the draw mandates death!

This is one extreme example of enforced social mobility of course, but the author, intriguingly, ends the story by saying that the lottery has become so much part of life in Babylon that one is not any more sure it even ever existed. Could our lives also be determined by a secret society of Fates?

In our more prosaic lives as well, chance, or misfortune, can befall any of us without warning. While one may think one’s in control of one’s destiny, a lot of our decisions have unpredictable consequences. Yet, one must decide one way or the other. In most of the literature on decisions in a risky setting, chance only affects oneself. However, more recently, some authors have started to investigate the social dimension of risk, that is, whether perceptions of a risk may be affected not only by how that risk affects oneself, but also by how it affects others (Bolton and Ockenfels, 2010Brennan, González, Güth and Levati, 2008Charness and Jackson, 2009Güth, Levati and Ploner, 2008Bradler, 2009Harrison, Lau, Rutström and Tarazona-Gómez, 2013Linde and Sonnemans, 2012Rohde and Rohde, 2011)

This matters because people are sensitive to how their wealth compares with that of others, so that a catastrophe that affects all in the same way, such as a tsunami in a coastal city in Japan, will have a different impact than a risk that affects only oneself, such as when one’s house burns down.

In a new working paper, Social preferences under uncertainty, I decided to investigate how individuals consider different types of social lotteries by using the simplest experimental design I could think of. I got a number of experimental subjects (humans of the student variety) to choose between different allocations of wealth between themselves and an anonymous other, some of those allocations being subject to chance.

The main variables I was interested in were as follows:

• If the allocation is subject to chance, does a bad outcome for me (low payoff) also mean a bad outcome for the others?
• If there is an alternative to risk, such that I can get a payoff for sure and the other as well, does that safe alternative guarantee me as much as the other, less, or more?

I was expecting, based on earlier literature, that correlation in payoffs (the first aspect) would not influence choice that much. That actually did not fit with my intuition, as I thought people would dislike negatively correlated social payoffs most. I also expected that people would be more ready to take risk if that meant avoiding a safe but subordinate alternative. Because many people do not like inequality even if it favours themselves, I also expected people would be more ready to take risk to avoid dominant safe alternative, maybe out of a sense of fairness.

In the event, I did find that people did not like their payoffs to be correlated with that of others, though the effect was small, and that they indeed did not like inequality in terms of the safe alternative. This means they were more likely to choose a risky but fair lottery giving expected payoff of 45 ECU for both when the alternative was a safe but unequal payoff than when it was a safe and equal payoff.

The issue is that while dislike for correlated lotteries can be explained through altruism (people do not like others to bear risk even if themselves do bear risk), dislike for unequal safe payoffs can be explained through inequality aversion, which goes against altruism in some cases. Indeed, altruism mandates preferring higher payoffs for the other no matter what, while inequality aversion means that one prefers the other to have less if the other has more than oneself!

This generates some issues when generalizing the social preferences as modeled in Fehr and Schmidt (1999) or Bolton and Ockenfels (2000) and in a lot of the literature on choice in social settings, as one cannot be at the same time altruistic and inequality averse. Why were people not happy for the other to get a higher payoff than themselves in the safe lottery? Among others, Brock, Lange and Ozbay (2013)Cappelen, Konow, Sørensen and Tungodden (2010) and Krawczyk and Le Lec, (2010) in particular suggested fairness considerations had to play a role. I used a suggestion in Fudenberg and Levine (2012) whereby utility would be a mix of utility for ex-ante, expected payoffs and ex-post social outcomes from the lottery. I later found out this idea was used in recent theoretical papers by Krawczyck (2011) and Saito (2012).

The formula for utility of lottery $L=(a,\frac{1}{2};b,\frac{1}{2})$ takes the form $U_{L}=\lambda(\frac{1}{2}u(a)+\frac{1}{2}u(b))+(1-\lambda)u(\frac{1}{2}a+\frac{1}{2}b)$

that is, utility is $\lambda$ times the expected utility of the lottery, with the utility of different outcomes possibly influenced by the utility of the other in that situation, so $u(me,you)=u(me)-\alpha|u(you)-u(me)|$ for example, plus $1- \lambda$ times the utility of the expected value of the lottery, maybe influenced by the expected value of the lottery for the other.

An individual would thus judge a lottery along two dimensions: Is it fair? Are the outcomes correlated or not with those of the other? I did find that people’s choices were consistent with them putting a high weight on ex-ante fairness ($1-\lambda$ high), but also taking account of the type of risk borne in the lottery. However, I was still not able to reconcile subjects’ preferences among lotteries with my modelling, suggesting that maybe individuals do indeed have different social preferences under risk than under certainty.

In terms of experimental methods, one of my issue with standard ways to elicit preferences is that, when offered the choice between two lotteries, subjects can generally only say: “I prefer this one”, or “I prefer this other”, but not by how much. Some experiments allow people to express indifference, and some, such as Connolly and Butler (2006) ask people to express the strength of their preferences or emotions associated with a lottery, though not in an incentive compatible way. Peter Moffatt in his excellent book Experimetrics (forthcoming at Palgrave Macmillan ) explains how far expressed strength of preferences can indeed be used to refine estimates, but as he mentions along Grether and Plott (1979), “task related incentives are the bedrock of theories under test”, so that tests of theories “cannot be taken seriously in the absence of non negligible task-related incentives”. I had the idea to make people pay to increase the probability to obtain their preferred lottery. In principle, they would pay only up to the point where their preferred lottery minus the price would be indifferent vs. the less preferred lottery. I think I am the first to implement such a system, which ended up working nicely, and allowed me to have more precise and robust estimates of subjects’ preferences (see the econometric section). However, this made the experiment more difficult to understand for subjects.

Another issue I had with other experiments on the topic was how the choices offered to the subjects looked too much like each other so that subjects could quite easily apply decisions made in one setting to another setting. For example, if they keep being offered a lottery that gives either 20 or 80 with probability ½ and ½, while the payoff of the other varies between choice instances, then they might just economize on the thinking cost and always make the same decisions without considering the payoff of the other. I therefore randomized payoffs in my lotteries, at the cost however of not being able to compare decisions directly across different situations, and therefore having to adopt a parametric approach to identifying subjects’ preferences (i.e. postulating a model of choice, estimating its parameters and looking at its consequences in terms of choice among different types of lotteries).

For more details, the paper is available at SSRN and at RePEC.

## Presentation of a new paper at the ESA in Cologne

Paolo Crosetto was kind enough to make the above presentation on my behalf at the ESA European conference in Köln this year. I was not able to make it but was kept on the program so, learning this the day before, we jumped on the opportunity and I wrote the presentation in an afternoon.

The presentation is of a paper we just released on SSRN and RePeC as a Jena Economic Research Paper. The title is “Partnerships, Imperfect Monitoring and Outside Options: Theory and Experimental Evidence”.  We designed an original game inspired by literature on public good production, moral hazard and team work. Instead of joint effort translating into some amount of production, joint effort only determines how likely you are to get a reward.

This little change means that issues of imperfect monitoring of the action of others are prevalent in our model. For example, working on a paper, you cannot be sure that failure to get the paper accepted at a top journal was due to lack of effort of your partner or to bad luck (of course, it cannot be your fault!). We think such issues are very important to the sustainability of group work, especially when, as is now so often the case, participants are not in the same place and meet only irregularly.

We got a number of subjects to play the game and found that they displayed a distaste for team work in so far as they choose to exit joint production more frequently than would be efficient. More precisely, they chose to work on their own even when they did believe it would be more efficient to work jointly with their partner. We also found that, unlike in the experimental literature on public good production, they did not seem to vary their effort in joint production as a function of what they expected others to do. Their behavior was of the form: exit joint production if unhappy, stay and keep doing the same if satisfied. Overall, we found that better outside options were detrimental to social welfare, meaning that agents, once committing to team work, were better off being restricted in the range of outside options available to them. This prevented them succumbing to the temptation of leaving the team.

Categories: article

## Presentation at the 13th Annual Conference of the APET in Taiwan, 2012

I was at the 13th Annual Conference of the Association for Public Economic Theory last week. It was organized this year by the Institute of Economics at the Academia Sinica, which is in Taipei, Taiwan. I presented my paper with Caterina Giannetti on the role of reciprocation in the formation of social networks, which uses data from blogging networks. We will soon release a new version of the paper that expands on the work we did since last version. Indeed, we worked on explaining better the contribution of the paper, how dynamic analysis differs from static analysis, the robustness of our empirical results, and their practical implications, notably in terms of the long-term effects of changes in activity over time.

Our paper was part of the very well attended session on public goods and networks, which took place on June 14 and was organized by Nizar Allouch. It seems the topic is interesting to many! I found the conference very interesting overall as I always found a good session to attend. The contribution by Steven Durlauf was particularly interesting for me, essentially about issues with the econometric identification of linear social network model. I also liked the session on behavior in health systems, useful in guiding the design of health policies and programs, the session on political economy, notably an interesting paper presented by Maria E Gallego, and a final session on public good provision, especially a paper by Nobue Suzuki dealing with how free exit affects public good provision (not available online though).

The conference itself was well organized. We had buses picking us up directly at the hotel to bring us at the venue, the food was quite good, and every sessions took place in the same building. It was the first time I went to an APET conference, and there were papers of a good level on a wide diversity of topics. A particularity is how Europeans, Asians and Americans all participate there in about equal number. I found that very refreshing as other conferences tend to have much less varied of a mix. I enjoyed the gala dinner on the second day. I was seated at the “French table”, which gave me some insights on the situation “back home”. We were treated to a huge variety of dishes, all more interesting than the other :-P. This was preceded by a visit of the National Palace Museum and its collection of perfect objects from Imperial China. I recommend going to the tea room at the top, with very nice views on the surroundings!

Categories: presentations

## Leaving GSBC :-( Joining MPI :-)

This week is my last week working at the GSBC (University of Jena) and from next week onward I will be working at the Max Planck Institute of Economics, also in Jena.

I am very happy of course to join Professor Werner Güth‘s Strategic Interaction research group, but I will really miss working at GSBC as well. I was very happy to work there and I am particularly thankful to Professor Uwe Cantner, director of the GSBC, and to Dr. Kristina von Rhein, who was the research coordinator at GSBC for most of my stay there. They both took very good care of me and I have been very happy working with them!

During my stay at GSBC, I got 3 papers and one book chapter published (here, here, here and here). I also worked with Caterina Giannetti, Paolo Crosetto and Gerhard Riener on a total of three research papers, two of which are now under submission (here and here).

I went to a number of international conferences (EEA 2009, EARIE 2011 and Econometric Society 2011), workshops (ACLE 2012, Crem-Economix 2010), participated in two excellent summer schools (at the MPI of Economics here in 2009 and at the MPI for Human Development in Berlin in 2011), organized a workshop on the economics of open source software in 2010 (with Kristina von Rhein and Sebastian von Engelhardt), and had great fun organizing a hand-on introduction to experimental economics with Paolo Crosetto at last year’s Night of Science in Jena (people played our experiment, introduced with a poster here).

The PhD programme at GSBC is certainly a program I would rank highly in terms of the quality of the research environment being provided there. There is a summer schools every year (in a castle, no less!), where PhD students present their work and train their techniques (link for two years ago). There are seminars every week with presentations by external presenters, and a school day every year on a specific topic (this year about migration). There are also research assistants available (I was in charge of that along with Kristina), money for going to conferences, and last but not least, advanced courses in a variety of specialized fields (see here for current list). I was particularly impressed by the very good courses in econometrics and experimental methods being led by Professor Oliver Kirchkamp, but there were also courses in a variety of other topics. Econometrics is certainly something I started to more or less understand only since I came here.

The crowd of PhD students in floors 1 and 3 of the building at Bachstrasse 18k, where the GSBC resides, is also quite impressive. There are not only PhD students from the GSBC, but also from the EIC, which specializes on the economics of innovation, and from the IMPRS, which focuses on decisions under uncertainty. Students come from the Czech Republic, Poland, Italy, Chile, Brazil, Nigeria, China, India, Pakistan, Iran, United States, Russia, Netherland, Ghana, Belarus, etc… There are even some Germans there! Each of those schools has its own research presentations, seminars, summer schools, courses… which means that there is always something new going on, always interesting seminars to attend, and many opportunities to socialize as well!

So anyway, I am remaining in Jena and will keep on benefiting from its very good research environment, especially given the excellent interplay between the Max Planck Institute and the University. For my work at the MPI, I plan to collect a new, more detailed panel dataset on the activity of bloggers to keep on refining my work with Caterina Giannetti. I also am working on two ideas for experiments, one following on my paper with Paolo Crosetto, the other dealing with the perception of fairness (details still secret!). This should keep me busy for a while!

Categories: Uncategorized