Frederic G. Schneider
Senior Research Associate @ Judge Business School, University of Cambridge
Abstract: We study the stability of voluntary cooperation in response to varying rates at which a group grows. Using a laboratory public-good game with voluntary contributions and economies of scale, we construct a situation in which expanding a group’s size yields potential efficiency gains, but only if the group overcomes the challenge that growth poses for sustained cooperation. We then study the effect on cooperation of exogenously varying rates of entry. Slow growth yields higher cooperation rates and welfare than fast growth, both for incumbents and entrants. This is consistent with slow growth allowing the persistence of optimistic self-reinforcing beliefs. We also study growth rates determined by incumbent group members. While such endogenous growth generally also produces high cooperation levels, growth stalls at intermediate group sizes, leaving potential efficiency gains from growth unrealized.
Abstract: We study whether employment history can provide information about a worker’s non-cognitive skills – in particular, about “work attitude,” or the ability to work well and cooperatively with others. We conjecture that, holding all else equal, a worker’s frequent job changes can indicate poorer work attitude, and that this information is transmitted in labor markets through employment histories. We provide support for this hypothesis across three studies that employ complementary lab, field, and survey experiments. First, a laboratory labor market, in which the only valuable characteristic of workers is their reliability in cooperating with an employer’s effort requests, demonstrates that prior employment information allows employers to screen for such reliability and allows high-reliability workers to obtain better employment outcomes. Second, we conduct a field experiment that varies the frequency of job changes in fictitious job applicants’ resumes. Those applicants with fewer job changes receive substantially more callbacks from prospective employers. Finally, a survey experiment with human resource professionals confirms that the resume manipulations in the field study create different perceptions of work attitude and that these account for the callback differences. Our work highlights the potential importance of job history as a signal of worker characteristics, and points to a cost for workers of frequent job changes.
Abstract:We propose that heterogeneous asset trading behavior is the result of two distinct, non-convertible mental dimensions: analytical (“quantitative”) capability and mentalizing (“perspective-taking”) capability. We develop a framework of mental capabilities that yields testable predictions about individual trading behavior, revenue distribution and aggregate outcomes. The two-dimensional structure of mental capabilities predicts the existence of four mental types with distinguishable trading patterns and revenues. Individuals will trade most successfully if and only if they have both capabilities. On the other hand, subjects who can mentalize well but have poor analytical capability will suffer the largest losses. As a consequence, being able in just one dimension does not assure trading success. We test these implications in a laboratory environment, where we first independently elicit subjects’ capabilities in both dimensions and then conduct a standard asset market experiment. We find that individual trading gains and patterns are consistent with our theoretical predictions. Our results suggest that two mental dimensions are necessary to encompass the complex heterogeneous behaviors in asset markets; a one-dimensional measure of mental capability will lead to biased conclusions. The findings have potential implications for financial institutions, which can use the measures to select successful traders, or for policy-makers, helping them to prevent the formation of asset bubbles. Finally, our conceptual framework and the empirical screening method could be applied to explain heterogeneous behavior in other games.
Abstract:We study how the willingness to enter into long-term bilateral relationships affects cooperation, where it is otherwise unenforceable and where parties have very little information about each other, ex ante. We conduct a laboratory experiment using a finitely-repeated Prisoner’s Dilemma game, in which we vary the duration of interaction between partners and also allow players to endogenously select interaction durations. We also independently elicit subjects’ social types. Consistent with prior research, we find that longer bilateral interactions facilitate cooperation. However, we find that many individuals are reluctant to opt for long-term commitment, and that some subjects persistently avoid long-term relationships. Uncooperative types are less likely to commit than conditional cooperators. Importantly, endogenously-chosen long-term commitment yields higher cooperation rates (98% in one condition) than when commitment is exogenously imposed. Thus, we show that the willingness to voluntarily enter into long-term relationships provides a means for fostering – and screening for – cooperative behavior.
Abstract: Strong reciprocity is characterized by the willingness to altruistically reward cooperative acts and to altruistically punish norm-violating, defecting behaviours. Recent evidence suggests that subtle reputation cues, such as eyes staring at subjects during their choices, may enhance prosocial behaviour. Thus, in principle, strong reciprocity could also be affected by eye cues. We investigate the impact of eye cues on trustees’ altruistic behaviour in a trust game and find zero effect. Neither the subjects who are classified as prosocial nor the subjects who are classified as selfish respond to these cues. In sharp contrast to the irrelevance of subtle reputation cues for strong reciprocity, we find a large effect of explicit, pecuniary reputation incentives on the trustees’ prosociality. Trustees who can acquire a good reputation that benefits them in future interactions honour trust much more than trustees who cannot build a good reputation. These results cast doubt on hypotheses suggesting that strong reciprocity is easily malleable by implicit reputation cues not backed by explicit reputation incentives.
Abstract:Reputation formation pervades human social life. In fact, many people go to great lengths to acquire a good reputation, even though building a good reputation is costly in many cases. Little is known about the neural underpinnings of this important social mechanism, however. In the present study, we show that disruption of the right, but not the left, lateral prefrontal cortex (PFC) with low-frequency repetitive transcranial magnetic stimulation (rTMS) diminishes subjects’ ability to build a favorable reputation. This effect occurs even though subjects’ ability to behave altruistically in the absence of reputation incentives remains intact, and even though they are still able to recognize both the fairness standards necessary for acquiring and the future benefits of a good reputation. Thus, subjects with a disrupted right lateral PFC no longer seem to be able to resist the temptation to defect, even though they know that this has detrimental effects on their future reputation. This suggests an important dissociation between the knowledge about one’s own best interests and the ability to act accordingly in social contexts. These results link findings on the neural underpinnings of self-control and temptation with the study of human social behavior, and they may help explain why reputation formation remains less prominent in most other species with less developed prefrontal cortices.
Abstract:Social comparison has potentially far-reaching consequences in many economic domains. We conducted a field experiment to examine how social comparison affects workers’ effort provision if their own wage or that of a co-worker is cut. Workers were assigned to groups of two, performed identical individual tasks, and received the same performance-independent hourly wage. Cutting both group members’ wages caused a decrease in performance. But when only one group member’s wage was cut, the affected workers decreased their performance more than twice as much as when both workers’ wages were cut. This finding indicates that social comparison among workers affects effort provision because the only difference between the two wage-cut treatments is the other group member’s wage level. In contrast, workers whose wage was not cut but who witnessed their group member’s pay being cut displayed no change in performance relative to the baseline treatment in which both workers’ wages remained unchanged. This indicates that social comparison exerts asymmetric effects on effort.
Abstract:The development of conventions and routines between organizational members often aids interaction and efficient coordination. In many contexts, the development of homogeneous efficient conventions can be aided by centralization and hierarchy. We use a laboratory experiment to study a context in which individuals voluntarily decide whether to interact, where profitable interaction requires developing conventions, and where efficiency obtains when all organizational members have access to a common convention. We show that centralized strategies, in which one member serves an implicit leadership function in shaping conventions, greatly facilitates the acquisition of homogeneous conventions in this setting. However, subjects rarely rely on centralization and hierarchy, even when we make it very easy to do so. Moreover, subjects regularly forgo potentially profitable interactions. In a further experiment, we show that even experienced managers find it difficult to efficiently centralize coordination. We conclude that many people may be unaware of the benefits of centralization for aiding coordination and efficiency in organizations.
Abstract: Do collusive purposes motivate merger activity and if so, what role do mavericks play? In this paper, we study whether firms’ collusive ability influences their incentives to merge because, when tacit coordination is unsuccessful, firms switch to mergers in order to reduce competitive pressure. Our experimental approach suggests that firms send more merger offers when prices are closer to marginal costs. Maverick firms that undercut prices and thereby foster market competition are the predominant receivers of these offers.
Concern about coordinated effects long has been central to U.S. merger policy. A merger has coordinated effects if it enhances the scope for collusion, tacit or explicit, in the post-merger market. One way a merger may achieve this is by reducing the number of independent decision makers. The structural presumption that high market concentration facilitates collusion enjoys vast theoretical and experimental support in economics.
In recent years, antitrust scholars have devoted increasing attention to the role of mavericks in destabilizing collusive agreements and thus to the importance of mavericks for coordinated effects in post-merger markets. A maverick is a firm that declines to follow the industry consensus and plays an unusually disruptive and competitive role in the market and thereby constrains effective coordination. U.S. antitrust authorities have repeatedly opposed mergers on the argument that these would remove a particularly aggressive competitor from the market.
In this paper, we report experimental evidence on the coordinated effects of mergers in Bertrand oligopoly markets with repeated interaction. We study how individual market players affect the competitive dynamic and how their elimination through a merger may impact the likelihood of coordination. To do this, we focus on firms’ decisions whether or not to merge in a setting where we allow the market structure to evolve dynamically and endogenously. The previous experimental literature takes either a static (between subjects) approach which compares oligopoly markets with different firm numbers or a dynamic (within subjects) approach in which the experimenters exogenously impose whether, when, and between whom the consolidations take place. Our experimental design allows firms to decide freely whether, when, and to whom they send merger bids. We can therefore examine firms’ motives behind merger decisions.
We have three main results. First, we find some evidence that mergers allow firms to tacitly collude and thereby to raise prices. In particular, we find support for the common wisdom that prices increase with market concentration which is in line with previous experimental studies. Second, we find that the lower the prices on the pre-merger markets, the more likely a merger occurs. This finding is novel for oligopoly experiments, and it suggests that mergers may serve a collusive purpose. Third, our data confirm that industry mavericks are the predominant receivers of the merger offers. The last two findings give support to the current U.S. merger policy with its emphasis on the elimination of a maverick as a collusion-facilitating device.