Abstract: In the behavioral industrial organization literature, market forces may not eliminate inefficiencies associated with biased consumers. Regulations usually exist that could, but we show that self-governing citizen-consumers will not always enact these welfare-improving policies. In a market for goods with add-ons, consumers never support regulations that would reduce consumption from inefficiently high levels. Even worse, consumer overconfidence reduces demand for regulation to correct a separate classical market failure, incomplete contracting. Consumer biases have two effects: they produce deadweight losses, and they redistribute income away from biased consumers. The benefits of redistribution discourage regulation.
Informal Property Rights as Stable Conventions in Hawk-Dove Games with Many Players (Journal of Evolutionary Economics, 2015)
Abstract: This paper investigates the evolution of conventions (Young 1993) in n-player hawk- dove games where multiple players share the same payoff-irrelevant label, such as "blue'' or "green,'' during the contest. With more than two players, the stochastically stable equilibrium depends on how many players in the contest share each label. If the cost of fighting is high, then the long-run equilibrium is favorable to the label shared by fewer players develop; if the cost is low, then the opposite conventions develop. This result provides one explanation for the emergence of informal property rights. In disputes over property, a fundamental distinction exists between the possessor, who is unique, and non-possessors, who can be several. For objects whose value is low relative to the cost of conflict over them, this asymmetry favors the development of informal property rights conventions.
Abstract: We test how donors respond to new information about a charity’s effectiveness. Freedom from Hunger implemented a test of its direct marketing solicitations, varying letters by whether they include a discussion of their program’s impact as measured by scientific research. The base script, used for both treatment and control, included a standard qualitative story about an individual beneficiary. Adding scientific impact information has no effect on whether someone donates, or how much, in the full sample. However, we find that amongst recent prior donors (those we posit more likely to open the mail and thus notice the treatment), large prior donors increase the likelihood of giving in response to information on aid effectiveness, whereas small prior donors decrease their giving. We motivate the analysis and experiment with a theoretical model that highlights two predictions. First, larger gift amounts, holding education and income constant, is a proxy for altruism giving (as it is associated with giving more to fewer charities) versus warm glow giving (giving less to more charities). Second, those motivated by altruism will respond positively to appeals based on evidence, whereas those motivated by warm glow may respond negatively to appeals based on evidence as it turns off the emotional trigger for giving, or highlights uncertainty in aid effectiveness.
Abstract: Three concepts from psychology -- cognitive dissonance, motivated reasoning, and confirmation bias -- are perhaps surprisingly closely related and have been used productively in a variety of elds in economics, more so over time. These concepts are relevant to the field of industrial organization as they help explain how consumer tastes and beliefs about product qualities are determined, change, are perceived and misperceived, and related firm responses. The concepts have been applied in existing industrial organization research, but to a limited extent, and we speculate that future work could benefit from applying these concepts more extensively.
Abstract: I experimentally investigate how vague language changes the nature of communication in a biased strategic information transmission game. Counterintuitively, when both precise and imprecise messages can be sent, in aggregate senders are more accurate and receivers trust them more. I also develop and structurally estimate a model showing that vague messages increase communication between boundedly rational players, especially if some senders are moderately honest. Moderately honest senders avoid stating an outright lie by using vague messages to hedge. Precise messages are then more informative because there are fewer precise lies.
If a firm misleads consumers about the value of its product, does it matter if some consumers are more influenced by the deception than others? We show with a simple model that the answer is a resounding yes. Harm increases unambiguously due to deception, and harm is linear in the variance (not the standard deviation) of deception, for a fixed mean level of deception. Consequently, mild differences in how strongly deception in influences consumers can be important determinants of consumer harm. Furthermore, if the degree to which consumers are deceived is positively correlated with WTP, deception leads to higher prices, while if negatively correlated, deception leads to larger quantities sold to deceived consumers. Firm profits tend to be maximized by distributions of deception with correlations that cause greater consumer injury.
In resource economics, Hotelling's rule predicts that, if certain conditions hold, the net price of an intertemporally scarce, non-recyclable non-renewable resource rises over time. The interest rate, costs of extraction, and market structure determine the time path of the net price. If the resource is inter-temporally abundant, however, the net price does not rise, regardless of the interest rate, extraction costs, and market structure. We conduct laboratory experiments to test whether Hotelling's rule predicts the behavior of mathematically adept suppliers who sell a resource in a dynamic oligopolistic market. The resource is inter-temporally scarce in our treatments but inter-temporally abundant in our control. In all experimental conditions, Hotelling's rule is an accurate prediction in most instances of price and average quantities sold over time. However, the rule is less accurate in predicting individual behavior.
I model the evolution of behavior in small groups whose members play pairwise 2x2 pure coordination games. Players follow a best-response dynamic with errors but can vary in their error rates and beliefs about the behavior of other group members. Mistakes in strategy choice impair successful coordination, but they also cause the group to occasionally switch between equilibria. If which equilibrium generates higher payoffs sometimes switches, errors create a positive externality for other players, because shifting back to the better equilibrium occurs more quickly. I characterize group members' payoffs in this setting for varying error rates. Biases in belief formation produce larger externalities relative to simply higher error rates. I then analyze numerically how these biases would evolve in a setting with group structure. Group selection partially internalizes the positive externalities, stabilizing a population state in which some players have biases and others do not.