Experimental

In consumer goods markets, theory shows that it is generally profitable for sellers to use search-deterrence strategies to alter buyer search. These results rely on agents’ reacting solely to the economic content of these pressure tactics, ignoring any behaviorally based responses search deterrence may evoke. To test the validity of this assumption, this paper examines an experimental market where profit-maximizing strategy dictates that sellers should exercise one form of search deterrence, exploding offers. Sellers demonstrate a reluctance to use such offers against human buyers, but they are less reluctant to use them against computerized buyers. Human buyers are three times more likely to deviate from optimal strategy by rejecting rather than accepting these offers. Survey responses are consistent with other-regarding-preference-based reasons for sellers’ actions but not buyers’. Taken together, these results suggest the benefits of tactics that rely on pressuring decision-makers may be more nebulous than previously thought.

  • 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.