Summary: Trust is an important condition for economic growth and other economic outcomes. Previous studies suggest that the decision to trust is driven by a combination of risk attitudes, distributional preferences, betrayal aversion, and beliefs about the probability of being reciprocated. We compare the results of a binary trust game to the results of a series of control treatments that by design remove the effect of one or more of these components of trust. This allows us to decompose variation in trust behavior into its underlying factors. Our results imply that beliefs are a key driver of trust, and that the additional components only play a role when beliefs about reciprocity are sufficiently optimistic. Our decomposition approach can be applied to other settings where multiple factors that are not mutually independent affect behavior. We discuss its advantages over the more traditional approach of controlling for measures of relevant factors derived from separate tasks in regressions, in particular with respect to measurement error and omitted variable bias.
Summary: I derive a theoretical model of choice bracketing from two behavioral axioms in an expected utility framework. The first behavioral axiom establishes a direct link between narrow bracketing and correlation neglect. The second behavioral axiom identifies the reference point as the place where broad and narrow preferences are connected. In my model, the narrow bracketer is characterized by an inability to process changes from the reference point in different dimensions simultaneously. As a result, her tradeoffs between dimensions are distorted. While she disregards interactions between actual outcomes, she appreciates these interactions mistakenly with respect to the reference point.
Summary: Why do people give when asked, but prefer not to be asked, and even take when possible? We introduce a novel analytical framework expressing context dependence and narrow bracketing axiomatically. From these behavioral regularities, we derive a utility representation of distributive preferences. Our result characterizes altruism as a concern for the well-being of others captured by prospect-theoretical value functions. The implied reference dependence and nonconvexity of preferences predict previously irreconcilable empirical evidence on giving, taking, and sorting. We test the model on data from seminal experiments and observe significantly improved fit in relation to existing models, both in- and out-of-sample.
Mathematical Social Sciences, 2013, 66(3):396-409
Summary: In the canonical network model, the connections model, only three specific network structures are generically efficient: complete, empty, and star networks. This renders many plausible network structures inefficient. We show that requiring robustness with respect to stochastic information transmission failures rehabilitates incomplete, redundant network structures. Specifically, we show that star and complete networks are not generally robust to transmission failures, that circular and quasi-circular networks are efficient at intermediate costs in four-player networks, and that if either of them is efficient, then at least one of them is pairwise stable even without reallocation. Thus, incomplete, redundant networks are efficient and stable at intermediate costs.
Work in Progress
Fake News and Information Transmission (with Steffen Huck)
Summary: We present a theoretical model to investigate how the presence of fake news affects information transmission from media outlets to economic agents. In a standard cheap talk framework we introduce uncertainty about the sender’s (media outlet’s) preferences. There are two types of media outlets. A fake news outlet wants to push the agent’s belief to the maximum irrespective of the state of the world. A legitimate outlet wants to reveal the true state to the agent. We show that any informative perfect Bayesian equilibrium of our game is characterized by a threshold value. While the agent can perfectly separate amongst states below the threshold value, there is no separation amongst states above the threshold value. We determine the unique most informative threshold value for a general class of equilibria. Our results suggest that even if fake news are rare, their presence can have a substantial negative impact on the possibilities for information transmission.
Selection and Social Learning (with Stephen Nei)
Summary: People often exchange information in the hopes of making improved decisions. However, if there is a cost to exchanging information, individual decisions to participate should trade off the expected benefit with this cost. When the expected benefit is the instrumental value of the gathered knowledge, economic theory suggests that one's presence is a signal of one's information, with more informed agents not finding the benefit likely to exceed the cost. This paper develops a simple model to demonstrate this point and then proceeds to test experimentally whether individuals (a) respond to costs in their information-gathering choices and (b) anticipate that other agents are strategic both in terms of their equilibrium decision of whether to gather information and in how they process the information provided by others.