Experimental Economics

Preliminary remark. Prof Sutter started his position as co-director of the institute on 1 August 2017, and his group members started to join the institute on 1 October 2017. For this reason, the following report is not a genuine account of the group’s past aims and achievements, but rather an illustration of the main interests of Prof Sutter over the past four years and a description of his main plans for the future and how his group members contribute to these plans.

 

C.II Experimental Economics

The “Experimental Economics Group” (EEG) uses experimental methods – both in the lab and in the field – to study what the group considers to be important questions for society. Its focus is therefore on applied questions (rather than on contributions to experimental methods). The group covers a broad variety of fields with its research – including topics in finance, tournament theory, labor economics, industrial organization, group decision-making, cooperation and coordination, and economic policy issues, such as nudging, to name just a few. In fact, Professor Sutter has worked in all of the mentioned fields in the past few years, and he and his group are also open to integrating new areas of research in the future. Given the interdisciplinary nature of the MPI with its research groups in law (Professor Engel), sociology (Dr Winter) and psychology (Dr Baumert and Dr Fiedler), the EEG will also expand its research into these areas through collaboration with the other groups.

Despite its breadth in the areas of research, the EEG will focus on three main areas of research in the coming years: (1) economic decision-making of children and teenagers; (2) team decision-making; (3) credence goods markets. Professor Sutter has been working in these areas over the past few years, and the following description of the areas concentrates on his contributions over the past four years.
 

C.II.1  Economic Decision-making of Children and Teenagers

The success of experimental economics as a field has largely been driven by providing an opportunity to analyze human behavior under controlled conditions, thus examining whether human behavior matches standard game-theoretic and decision-theoretic predictions, and thereby providing insights for improving theoretical models. By now, it is firmly established that standard classical predictions are, at times, a poor predictor of actual human behavior, because factors such as social preferences, intentions, or even emotions, also affect human behavior in many situations. However, such insights from experimental economics have for a long time been based on evidence from university students in their early 20s. Fairly little has been known whether children’s behavior is better or less well accounted for by standard predictions and how children’s behavior develops with age. Learning about children’s behavior is therefore important, and for several reasons. First, studying the behavior of children and teenagers can reveal whether economic behavior develops in characteristic patterns in the course of life. Similar to psychological research on the development of moral judgments, for instance, economic research has become interested in whether fairness preferences, risk attitudes, impatience, rational choice behavior or competitive preferences develop in certain ways. Knowing more about such a potential development is a precondition for possible policy interventions that mark the second important reason why research on economic preferences of children and teenagers has become a hot topic even in core economics journals. Policy interventions – in particular interventions in school curricula – may promote particular types of behavior that are widely considered to be influential for success in life, such as patience with respect to attaining education, competitiveness to succeed on the labor market, or avoiding conflicts through a mutual understanding of fairness norms. Third, from the viewpoint of economic theory, it is interesting to study whether children and teenagers are sophisticated decision-makers who make rational decisions and are capable of applying fundamental game-theoretic concepts (such as backward induction or mixed strategy play) in their behavior.

Matthias Sutter has contributed to all three aspects of why research with children and teenagers is important. In a paper on gender differences, the willingness to compete – which has been found to be one explanatory factor for large gender differences in labor market outcomes – he has shown (in Sutter and Glätzle-Rützler, 2015) that women are less likely to choose competitive payment schemes already at the age of three years, and that this gender gap persists into early adulthood (of 18-year-old adolescents). This strong gender difference in the willingness to compete holds even for tasks where stereotypes favor women and where women objectively perform better. This finding is sometimes invoked in the public debate as the basis for affirmative-action programs that are intended to promote women. Related to the second reason, Matthias Sutter has published work on how experimental choices on intertemporal decision-making and on risk-taking are related to teenagers’ field behavior, including healthy lifestyle (with respect to smoking, drinking, and obesity), grades in school, and financial savings in real life. In Sutter et al. (2013 AER), he has found that experimental choices are closely related to field behavior, in particular that more patient teenagers in the experiment were less likely to drink alcohol or smoke and more likely to save some of their pocket money, and that they have better grades and less disciplinary referrals in school. In Sutter et al. (2015 EL), he has shown that the patience of kindergarten kids can be influenced by simply changing the default settings for saving for the future in contrast to consuming earlier.

The third reason for research with children and teenagers – testing economic theory – has been addressed in Czermak et al. (2016 JEBO), where they studied the strategic sophistication of children and teenagers in simple games, finding that 10-year-olds play the Nash equilibrium as often as 18-year-olds. Hence, there is no development in game-theoretic sophistication in the teenage years.

Besides those studies, Matthias Sutter has investigated the emergence of discrimination across different language groups in a bilingual town (see Angerer et al., 2016, 2017), or how third-party punishment already works in childhood to improve cooperation rates in a prisoner’s dilemma game (Lergetporer et al., 2014).

Overall, Matthias Sutter is motivated by the deep desire to understand the fundamental issues of preference formation, which have been neglected in economics for a long time. Currently, he is working on a project with families in Bangladesh, in which he studies the relationship of mothers’ and fathers’ economic preferences with their children’s economic preferences.

From a methodological point of view, Matthias Sutter has developed many new experimental designs to study the economic behavior of children and teenagers. These designs have been repeatedly used by subsequent authors to study related topics. One method-oriented paper on experiments with children and teenagers is Angerer et al. (2015 JESA), where the authors compare two different methods to measure the time preferences of children.
 

C.II.2  Group Decision-making

A decision-maker in an economics textbook is usually modeled as an individual whose decisions are not influenced by any other person; but of course, human decision-making in the real world is typically embedded in a social environment. Households and firms, as well as common decision-making agents in economic theory, are typically not individuals either, but groups of people—in the case of firms, often interacting and overlapping groups. Similarly, important political or military decisions, as well as resolutions on monetary and economic policy, are often made by configurations of groups and committees rather than by individuals. Economic research has developed an interest regarding group decision-making – and its possible differences with individual decision-making – only rather recently. Camerer (2003) concludes his book on Behavioral Game Theory with a section on the Top Ten open research questions for future research, listing as number eight “how do teams, groups, and firms play games?” Potential differences between individual and group decision-making have been studied over the past ten to fifteen years in a large set of games in the experimental economics literature. This literature is still relatively young (albeit older than the literature on the formation of economic preferences of children and teenagers), and it has advanced mainly through experiments in the laboratory[1] that have compared individual decision-making to group decisions, and to individual decisions in situations with salient group membership. In a nutshell, the bottom line emerging from economics research on group decision-making is that groups are more likely to make choices that follow standard game-theoretic predictions, while individuals are more likely to be influenced by biases, cognitive limitations, and in particular social considerations. In this sense, groups are generally less “behavioral” than individuals. An immediate implication of this result is that individual decisions in isolation cannot necessarily be assumed to be good predictors of the decisions made by groups. More broadly, the evidence casts doubts on traditional approaches that model economic behavior as if individuals were making decisions in complete isolation.

Matthias Sutter has contributed significantly to this literature over the past 10 years. In recent years, he has pioneered two hitherto neglected issues in the group decision-making literature. In Maciejovsky et al. (2013, Management Science), the authors have shown that the experience of group decision-making (in rationality tasks) has long-lasting effects on subsequent individual decision-making. This insight reinforces the importance of group decision-making, as it shows that it has positive externalities on individual decision-making. In Cooper and Sutter (forthcoming, 2018), they present a new experiment on group decision-making, in which group members have to take over different roles in the group, where the challenge is to assign group members optimally to the different tasks. Surprisingly, this works very well, although giving the group members too much say in task allocation can backfire. This paper is the first to have endogenous role assignment in groups where different members have different tasks, and as such it is much more relevant for organizational economics than previous papers on group decision-making, in which all group members always had the same task to do.

Overall, with his research on group decision-making, Matthias Sutter has started to open up an exciting new field, which has important implications for our understanding of how group decisions shape and are shaped by companies, politics, and, more generally, society as a whole.
 

C.II.3  Economics of Credence Goods

In many important markets – as in those for healthcare, repair and legal services, as well as in those for financial advice and fund management – consumers (patients, clients, or private investors) are unable to identify the quality of a good, service, or asset that best fits their needs. They may even be unable to verify the quality that they have actually received. In contrast, doctors, mechanics, and legal or financial experts are typically better informed regarding the appropriate quality of service provision. As this information asymmetry between trading partners often persists even after a trade has been concluded and the buyer has consumed the good or service, such goods and services are referred to as credence goods. The volume of trade on credence goods markets is huge. For instance, healthcare expenditures account for about 10% of GDP in the OECD countries alone (www.oecd-library.org). A significant portion of these expenditures is caused by the provision of medical treatments where the prescribing physicians have a large informational advantage over their patients who might not only be uninformed about the most efficient type of treatment, but who may even be unable ex post to distinguish a cheap from an expensive drug infusion. Repair services are also a multi-billion-dollar industry. In the EU, car repairs alone are worth about 100 billion Euro per annum (ec.europa.eu/eurostat), with a significant proportion of car repairs being regarded as unnecessary, probably in part because mechanics exploit their superior information about the appropriate service. Moreover, ex-post inspection by the customer may fail to distinguish a replaced part from a repaired part. Also, the finance sector is one of the biggest industries worldwide. Its share of the GDP has increased threefold over the past 50 years in major Western economies, from an average of 3% to about 9%. The complexity of its products has created severe informational asymmetries between advisors and clients. Moreover, the inherent conflict between two tasks performed by financial advisors – prospecting for customers and advising on the product’s “suitability” for the specific needs of customers – has created misaligned incentives. This implies that clients are exposed to potentially malign behavior of financial professionals in the form of unsuitable product provision.

In general, the informational asymmetries between expert sellers and their customers on any market for credence goods create strong material incentives for misbehavior on the side of the seller. If not contained by institutional remedies or moral constraints, these misaligned incentives translate into large efficiency costs for society as a whole. For this reason, it is important to investigate the provision of credence goods to get a better understanding of the determinants of misbehavior of sellers and of the factors that can promote a more efficient provision of credence goods.

Matthias Sutter has published both lab and field experiments on the provision of credence goods and the efficiency of credence goods markets. In particular, his field experiments have created attention in the scientific community because of the new designs and technical aspects of the studies. In Balafoutas et al. (2013 REStud; 2017 EJ), the authors have studied how the presumed informational disadvantage of taxi passengers is exploited by taxi drivers. Using a GPS logger, the authors were able to account for both overtreatment (taking detours) and overcharging (charging too much) in the market for taxi rides. If passengers are presumed to have little knowledge about the local conditions, they are taken on detours which account for about 5-8% of the average trip length. Passengers who seem to be unaware of the tariff conditions have to pay extra, but unjustified, charges of about 25% of the average fare. In Kerschbamer et al. (2016 PNAS), the authors have studied how insurance coverage affects the provision of credence goods. In this field experiment, the authors manipulated (with the help of their IT department) the hardware of new computers and brought them to repair shops. In one condition, the authors mentioned they had an insurance; in the other, they did not. As a consequence, repair prices differed dramatically. When insurance is mentioned, prices are about 80% higher than in a control condition without insurance. About one third of this increase is due to completely unnecessary repairs (which were assessed by the IT department), and two thirds are due to outright fraud by writing more hours for the repair. In several lab experiments, Matthias Sutter has shown that social preferences of expert sellers do play a role for the honesty in the provision of credence goods (see Kerschbamer et al., 2017 EJ, Balafoutas et al., 2015 JPubE, Beck et al., 2014 JEBO), which might be the underlying reason for the large heterogeneity of honest provision of credence goods in the field.

Overall, Matthias Sutter’s designs to study credence goods markets (both in the lab and in the field) are becoming the standard vehicle for analyzing credence goods markets, and he has been the first to provide cost estimates as a consequence of fraudulent behavior in a field setting.
 

C.II.4  Other Areas

Besides these three main research areas, Matthias Sutter has been active in several other fields, like in the experimental analysis of equilibrium selection in networks (Charness et al., 2014 ECMA), the value of property rights for efficient production in an economy (Ahn et al., 2016 JPubE), the dynamics of contests when there are multiple winners (Dutcher et al., 2015 GEB), the analysis of how markets affect moral behavior (Kirchler et al., 2016 Management Science), or the assessment of the economic consequences of a Tobin tax on financial markets (Huber et al., 2017 EJ).

C.II.5  Plans for the Future

In the fall of 2017, Matthias Sutter started with his new group at the MPI. Several of his new research group members have already worked – or are working – with children and teenagers (Zvonimir Basic, Sofia Monteiro, Angelo Romano, Anna Untrifaller, and Claudia Zoller). They are going to become engaged in new projects with children and teenagers. These projects focus on the emergence of cooperation, on the one hand, and on the importance of grit to be successful in education, on the other. In large project in Bangladesh – briefly alluded to above already – we are going to study the formation of economic preferences within families. Shambhavi Priyam will get involved in the fieldwork of this project. Related to experimental work with children and teenagers is a new research agenda on the intergenerational interaction and its economic consequences. This new agenda is intended to investigate how diversity in age can affect interactive decision-making (such as in cooperation games, network games, or games of competition). Stefania Bortolotti and Matthias Praxmarer have been involved in an ongoing pilot study and will continue to contribute to this new agenda.

One new focus of research will relate to financial literacy and how it affects economic preferences. While financial literacy has been found to help avoid costly mistakes in financial decision-making, the channel through which it works has largely remained unclear. In the summer of 2017, Matthias Sutter studied a project with 9^th- and 10^th-graders to study the effects of financial literacy on economic preferences, with the hypothesis being that financial literacy reduces risk aversion and increases patience in economic decision-making. Anna Untertrifaller and Zwetelina Iliewa are going to work on financial literacy projects. Sebastian Schneider will contribute the theoretical underpinnings of how to measure higher-order risk preferences (like prudence).

The research field on group decision-making will be further developed by studying how internal conflicts in groups affect the quality of decision-making. Matthias Praxmarer has already worked on group decision-making in his PhD thesis and will continue to contribute to this research area, while Daniel Salicath has expressed a strong interest in working in this area for his PhD.

Finally, Nathan Maddix will strengthen the group’s expertise in the area of nudging. He has been working with Cass Sunstein – one of the conceptual founding fathers of nudging – on various projects with relation to nudging, and he is going to continue in this area. Given that Matthias Sutter is member of the Austrian nudging unit (called Insights Austria), he is going to increase the time and effort devoted to projects about human nudging behavior.

 

Publications over the Past Four Years

1. Team decision making

Cooper, D. J., Sutter, M. (forthcoming), Endogenous role assignment and team performance. International Economic Review

Balafoutas, L., Kerschbamer, R., Kocher, M., Sutter, M. (2014), Revealed distributional preferences: Individuals vs. teams. Journal of Economic Behavior and Organization, 108, 319–330

Sutter, M., Czermak, S., Feri, F. (2013), Strategic sophistication of individuals and teams. Experimental evidence. European Economic Review, 64, 395–410

Maciejovsky, B., Sutter, M., Budescu, D., Bernau, P. (2013), Teams make you smarter: How exposure to teams improves individual decisions in probability and reasoning tasks. Management Science, 59(6), 1255–1270

2. Children and teenagers

Angerer, S., Dutcher, G., Glätzle-Rützler, D., Lergetporer, P., Sutter, M. (2017), Gender differences in discrimination emerge early in life: Evidence from primary school children in a bilingual city. Economics Letters, 152, 15–18

Czermak, S., Feri, F., Glätzle-Rützler, Sutter, M. (2016), How strategic are children and adolescents? Experimental evidence from normal-form games. Journal of Economic Behavior and Organization, 128, 265–285

Angerer, S., Lergetporer, P., Glätzle-Rützler, D., Sutter, M. (2016), Cooperation and discrimination within and across language borders: Evidence from children in a bilingual city. European Economic Review, 90, 254–264

Sutter, M., Glätzle-Rützler, Balafoutas, L., Czermak, S. (2016), Canceling out early age gender differences in competition – an analysis of policy interventions. Experimental Economics, 19(2), 412–432

Angerer, S., Lergetporer, P., Glätzle-Rützler, Sutter, M. (2015), How to measure time preferences in children – A comparison of two methods. Journal of the Economic Science Association, 1, 158–169

An experiment with kindergarten children. Economics Letters, 137, 21–24

Sutter, M., Glätzle-Rützler, D. (2015), Gender differences in the willingness to compete emerge early in life and persist. Management Science, 61(10), 2339–2354

Angerer, S., Glätzle-Rützler, D., Lergetporer, P., Sutter, M. (2015), Donations, risk attitudes and time preferences: A study on altruism in primary school children. Journal of Economic Behavior and Organization, 115, 67–74

Sutter, M., Yilmaz, L., Oberauer, M. (2015), Delay of gratification and the role of defaults – An Experiment with Kindergarten Children, IZA Discussion Paper, no. 9314

Glätzle-Rützler, D., Sutter, M., Zeileis, A. (2015), No myopic loss aversion in adolescents? An experimental note. Journal of Economic Behavior and Organization, 111, 169–176

Lergetporer, P., Angerer, S., Glätzle-Rützler, D., Sutter, M. (2014), Third party punishment increases cooperation in children through (misaligned) expectations and conditional cooperation. PNAS – Proceedings of the National Academy of Sciences, 111(19), 6916–6921

Fehr, E., Glätzle-Rützler, D., Sutter, M. (2013), The development of egalitarianism, altruism, spite and parochialism in childhood and adolescence. European Economic Review, 64, 369–383

Sutter, M., Kocher, M., Glätzle-Rützler, D., Trautmann, S. (2013), Impatience and uncertainty: Experimental decisions predict adolescents’ field behavior. American Economic Review, 103(1), 510–531

3. Credence goods

Kerschbamer, R., Sutter, M., Dulleck, U. (2017), How social preferences shape incentives in (experimental) markets for credence goods. Economic Journal, 127, 393–416

Balafoutas, L., Kerschbamer, R., Sutter, M. (2017), Second degree moral hazard in a credence goods market. Economic Journal, 127 (599), 1–18

Kerschbamer, R., Sutter, M. (2017), The economics of credence goods – A survey of recent lab and field experiments. CESifo Economic Studies, 63(1), 1–23

Kerschbamer, R., Neururer, D., Sutter, M. (2016), Insurance coverage of customers induces dishonesty of sellers in markets for credence goods. PNAS – Proceedings of the National Academy of Sciences, 113, 7454–7458

Balafoutas, L., Beck, A., Kerschbamer, R., Sutter, M. (2015), The hidden costs of tax evasion – Collaborative tax evasion in markets for expert services. Journal of Public Economics, 129, 14–25

Beck, A., Kerschbamer, R., Qiu, J., Sutter, M. (2014), Car mechanics in the lab – Investigating the behavior of real experts on experimental markets for credence goods. Journal of Economic Behavior and Organization, 108, 166–173

Balafoutas, L., Beck, A., Kerschbamer, R., Sutter, M. (2013), What drives taxi drivers? A field experiment on fraud in a market for credence goods. Review of Economic Studies, 80(3), 876–891

Beck, A., Kerschbamer, R., Qiu, J., Sutter, M. (2013), Shaping beliefs in experimental markets for expert services: Guilt aversion and the impact of promises and money-burning options. Games and Economic Behavior, 81, 145–164

4. Other topics

Huber, J., Kirchler, M., Kleinlercher, D., Sutter, M. (2017), Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax. Economic Journal, 127, F610–F631

Balafoutas, L., Sutter, M. (2017), On the nature of guilt aversion: Insights from a new methodology in the dictator game. Journal of Behavioral and Experimental Finance, 13(1), 9–15

Balafoutas, L., Davis, B., Sutter, M. (2016), Affirmative action or just discrimination? A study on the endogenous emergence of quotas. Journal of Economic Behavior and Organization, 127, 87–98

Ahn, T.K., Balafoutas, L., Batsaikhan, M., Campos-Ortiz, F., Putterman, L., Sutter, M. (2016), Securing Property Rights: A Dilemma Experiment in Austria, Mexico, Mongolia, South Korea and the United States. Journal of Public Economics, 143, 115–124

Kirchler, M., Huber, J., Stefan, M., Sutter, M. (2016), Market design and moral behavior. Management Science, 62(9), 2615–2625

Dutcher, G., Balafoutas, L., Lindner, F., Ryvkin, D., Sutter, M. (2015), Strive to be first or avoid being last: An experiment on relative performance incentives. Games and Economic Behavior, 94, 39–56

Volz, K., Vogeley, K., Tittgemeyer, M., von Cramon, Y., Sutter, M. (2015), The neural basis of deception in strategic interactions. Frontiers in Behavioral Neuroscience, 9, Article 27

Charness, G., Feri, F., Melendez-Jimenez, M., Sutter, M. (2014), Experimental Games on Networks: Underpinnings of Behavior and Equilibrium Selection. Econometrica, 82(5), 1615–1670

Eric van Damme, E., Binmore, K. G., Roth, A. E., Samuelson, L., Winter, E., Bolton, G. E., Ockenfels, A., Dufwenberg, M., Kirchsteiger, G., Gneezy, U., Kocher, M. G., Sutter, M., Sanfey, A. G., Kliemt, H., Selten, R., Nagel, R., Azar, O. H. (2014), How Werner Güth’s ultimatum game shaped our understanding of social behavior. Journal of Economic Behavior and Organization, 108, 292–318

Kocher, M., Sutter, M., Wakolbinger, F. (2014), Social learning in beauty-contest games. Southern Economic Journal, 80(1), 586–613

Albrecht, K., Volz, K., Sutter, M., von Cramon, Y. (2013), What do I want and when do I want it: Brain correlates of decisions made for self and other. PLoS ONE, 8(8), e73531, doi:10.1371/journal.pone.0073531

Lindner, F., Sutter, M. (2013), Level-k reasoning and time pressure in the 11–20 money request game. Economics Letters, 120(3), 542–545

Balafoutas, L., Kocher, M., Putterman, L., Sutter, M. (2013), Equality, equity and incentives: An experiment. European Economic Review, 60, 32–51

Kocher, M., Pogrebna, G., Sutter, M. (2013), Other-regarding preferences and leadership styles. Journal of Economic Behavior and Organization, 88, 109–132

Carlsson, F., Martinsson, P., Qin, P., Sutter, M. (2013), The influence of spouses on household decision making under risk: An experiment in rural China. Experimental Economics, 16(3), 383–403