Experimental

  • Search Deterrence in Experimental Consumer Goods Markets (with Alexander L. Brown and Ajalavat Viriyavipart)  (recent version)

Recent theoretical research indicates that search deterrence strategies are generally optimal for sellers in consumer goods markets. Yet search deterrence is not always employed in such markets. To understand this incongruity, we develop an experimental market where profit-maximizing strategy dictates sellers should exercise one form of search deterrence, exploding offers. Sellers demonstrate a reluctance to use such offers against human buyers that is lessened when facing computerized buyers. Human buyers are three times more likely to deviate from optimal strategy by rejecting rather than accepting these offers. The differential rate of buyer suboptimal play shifts the equilibrium of the game to a point where seller gains from the use of exploding offers are greatly reduced. In sum, the results suggest the benefits of search deterrence may be substantially less than what theory predicts.

  • Does Trustworthiness Matter in an Optimal Contract? (With Debing Ni and Kaiming Zheng) (recent version)

This paper considers a modified principal-agent environment, where the agent makes costly work effort in exchange for wage, and the principal chooses a combination of fixed rate and piece rate transfer to the agent in hope for higher effort. Because the principal in our environment is liability constrained and because the production is subjected to great uncertainty, she suffers from significant efficiency loss with self-regarding agents. However, the agent may be potentially reciprocal. In our specific theoretic setting, by triggering some agents’ reciprocity preference, the principal may achieve a better outcome. Is it possible that principals reward agents’ trustworthiness and “trustworthy” agents improve labor market efficiency? We test the modified principal-agent model using a lab experiment. We find that, compared with a market with self-regarding agents, the market witnesses significant higher offers of fixed rate wage. Estimations on agents’ effort choice confirms the effects of both positive and negative reciprocity. It reveals that negative reciprocity has a greater impact on efforts and thus on principals’ wage offers. The estimated reciprocity reference point decreases over the experiment in the social information sessions, but not in the individual information sessions. Only at later rounds, principals’ offer are correlated with the trustworthiness level of the agents.