We propose a model in which an entrepreneur, seeking outside fi nancing, sells a large equity share to an outside blockholder in order to signal his low propensity to extract private benefi ts. A conventional theoretical rationale for the presence of an outside block holder is mitigation of the agency problem via some type of monitoring or intervention. Our model provides a novel insight: outside blockholders may be attracted by fi rms with low, rather than high, agency problems. Our result yields a new implication for the interpretation of an often documented positive relationship between outside ownership concentration in a fi rm and its market valuation: such relationship may be driven by “sorting” rather than by a direct effect of blockholder monitoring. In fact, we show that the positive correlation may arise even if the blockholder derives private benefi ts and has no positive impact on the value of small shares. Finally, we argue that our analysis may help explain why the market reacts more favorably to private placements of equity as opposed to public issues.
I study a career concerns model in which the principal receives information about the agent’s performance from an intermediary (evaluator). I show that, in general, a biased evaluator is ex-ante optimal for the principal. The ex-ante optimal bias solves the tradeoff between ex-post optimality of the principal’s decisions about the agent and incentive provision. It is “anti-agent” (“pro-agent”) when the agent has an a priori high value (low value) for the principal. It increases with the strength of the agent’s career concerns and decreases with the degree of uncertainty about his ability. Delegating decisions to the evaluator dominates communication with her when ex-ante optimality calls for a sufficiently large bias.
Why do seemingly irrational superstitions persist?We analyze the widely held belief among Asians that children born in the Year of the dragon are superior. We use pooled cross section data from the U.S. Current Population Survey to show that Asian immigrants to the United States born in the 1976 year of the dragon are more educated than comparable immigrants from non-dragon years. In contrast, no such educational effect is noticeable for dragonyear children in the general U.S. population. We also provide evidence that Asian mothers of dragon year babies are more educated, richer, and slightly older than Asian mothers of non-dragon year children. This suggests that belief in the greater superiority of dragon-year children is self-fulfilling since the demographic characteristics associated with parents who are more willing and able to adjust their birthing strategies to have dragon children are also correlated with greater investment in their human capital.
Quality improvements in markets for medical care are key objectives in any health reform. An important question is whether disclosing physicians’ performance can contribute to achieving these goals. Due to the asymmetric information inherent in medical markets, one may argue that changes in the information structure are likely to influence the environment in which health care providers operate. In a laboratory experiment with medical students that mimics a physician decision-making environment we analyze the effect of disclosing performance information to peers. Our results suggest that the information structure doesi nfluence the individual physician’s supply of medical services. Under performance disclosure, choices that are in accordance with the medical norm or maximize the joint benefit become more frequent.
Does it pay off for companies to disclose voluntary commitments to their customers? While voluntary commitments to enhance customers’ benefits became prevalent in many markets, systematic evidence on how customers (if at all) reward companies, which disclose such discretionary kindness, is still lacking. We analyze the consequences of endogenous disclosure of discretionary kindness in a novel experiment (N = 636). We model the decision situation in a bilateral reciprocity game with asymmetric information on the vol-untariness of kindness. Experimental data show that endogenously disclosing discretionary kindness significantly triggers rewards from customers and does not backfire. Findings are robust towards variations in costs of information and the level of customers’ benefits. Survey evidence from a vignette study support our behavioral findings.
This paper reports the results of a series of competitive labour market experiments in whichsubjects have the possibility to reciprocate favours. In the high stake condition subjectsearned between two and three times their monthly income during the experiment. In thenormal stake condition the stake level was reduced by a factor of ten. We observe that bothin the high and the normal stake condition fairness concerns are strong enough to outweighcompetitive forces and give rise to non-competitive wages. There is also no evidence thateffort behaviour becomes generally more selfish at higher stake levels. Therefore, our resultssuggest that fairness concerns may play an important role even at relatively high stakelevels.
Experimental and behavioral economics provide a paradigm fo rinformative research in many areas of economics such as industrial organization, public economics, and labor economics. In health economics, however, the experimental method is a rather new approach. Recently, however, the approach became a focus of attention and a growing number of research topics in health economics are currently being addressed by experimental and behavioral research. This special issue provides a novel view of the state of the art showing that the interaction between experimental and health economics enriches our understanding of decision-making in the health care market and encourages novel methods of health care research.
This paper reports on an empirical comparison of two prominent measures of individual risk attitudes – the Holt and Laury (2002) lottery-choice task and the multi-item questionnaire advocated by Dohmen et al. (2011) – with respect to their within-subject stability over time (one year) and their correlation with actual risk-taking behavior in the lab – here the amount sent in a trust game (Berg et al., 1995). Our results suggest that the two risk attitude measures are at best only weakly correlated. Only the questionnaire measure shows high test–retest stability, while virtually no such stability is found in the lottery-choice task. In addition, only the questionnaire measure shows the expected correlations with a Big Five personality measure and is correlated with actual risk-taking behavior. With respect to behavior in the trust game, we find a high retest stability of transfers. This supports the conjecture that trusting behavior has a component which itself is a stable individual characteristic.
tDecision-makers show an increased risk appetite when they gamble with previously wonmoney, the house money effect, and when they have a chance to make up for a prior loss,the break even effect. To explore the origins of these effects, we use functional magneticresonance imaging to record the brain activities of subjects while they make sequential riskychoices. The behavioral data from our experiment confirm the path dependence of choices,despite the short trial duration and the many task repetitions required for neuroimaging.The brain data yield evidence that the increased risk appetite after gains and losses is relatedto an increased activity of affective brain processes and a decreased activity of deliberativebrain processes.
We experimentally test whether electoral competition reduces shirking behavior by office- holders and increases citizens’ trust. Using a novel multi-person investment game with voting, we indeed find that elected office-holders shirk less (i.e., they back-transfer more to citizens relative to investments) than randomly appointed office-holders. Surpris- ingly, this effect is not driven by electoral competition inflating office-holders’ promises. Instead, elected office-holders feel more committed to their promises than their randomly appointed counterparts. Elections initially also increase citizens’ trust because voters select candidates with the “right” kind of promises: neither low nor non-credibly high. However, over the course of the entire experiment, we find no evidence that electoral competition increases citizens’ trust.
Does "empowerment" come hand-in-hand with higher economic welfare? In theory, higher income is likely to raise both power and welfare, but heterogeneity in other characteristics can either strengthen or weaken the relationship. Survey data on Russian adults indicate that higher individual and household incomes raise both self-rated power and economic welfare. The individual income effect is primarily direct, rather than through higher household income. There are diminishing returns to income, though income inequality emerges as only a minor factor reducing either aggregate power or welfare. At given income, the identified covariates have strikingly similar effects on power and economic welfare.Income
This paper studies experimentally the impact of the split-award statute, where the state takes a share of the plaintiff's punitive damage award, on litigation outcomes. Our findings indicate that dispute rates are significantly lower when bargaining is performed under the split-award institution. Defendants’ litigation losses and plaintiffs’ net compensation are significantly reduced by the split-award statute.
We analyze how physicians, medical students, and non-medical students respond to financial incentives from fee-for-service and capitation. We employ a series of artefactual field and conventional lab experiments framed in a physician decision-making context. Physicians, participating in the field, and medical and non-medical students, participating in labexperiments, respond to the incentives in a consistent way: Significantly more medical services are provided under fee-for-service compared to capitation. The intensity by which subjects respond to incentives, however, differs by subject pool. Our findings are robust regarding subjects’ gender, age, and personality traits.