FLWNO

When choice is stochastic, revealed preference analysis often relies on random utility models. However, it is impossible to infer preferences without assumptions on the distribution of utility noise. We show that this difficulty can be overcome by using response time data. A simple condition on response time distributions ensures that choices reveal preferences without distributional assumptions. Standard models from economics and psychology generate data fulfilling this condition. Sharper results are obtained under symmetric or Fechnerian noise, where response times allow uncovering preferences or predicting choice probabilities out of sample. Application of our tools is simple and generates remarkable prediction accuracy.

Do employers and workers underbid prevailing wages if there si unemployment? Do employers take advantage of workers' underbidding by lowering wages? Do employers take advantage of workers underbidding by lowering wages? We hypothesize that under conditions of incomplete labor contracts, wage levels may positively affect workers' propensity to cooperate. This, in turn, may prevent firms from underbidding or accepting the underbidding of workers. Experimental double auctions conducted for the purpose of examinating these hypotheses yield the following results: (i) Workers' underbidding is very frequent, but employers refuse to accept workers' low wage offers in markets with complete labor contracts, employes accept and actively enforce wages close to the competitive level. (ii) Workers' effort is positively related to the wage level. Therefore over their effort level. This holds true even in the presence of explicit performance incentives.

The widespread use of markets leads to unprecedented material well-being in many societies. We study whether market interaction, as a side effect, erodes moral values. In an influential paper, Falk and Szech (2013) provide experimental data that seem to suggest that “market interaction erodes moral values.” Although we replicate their main treatment effect, we show that additional treatments are necessary to corroborate their conclusion. These treatments reveal that playing repeatedly, and not market interaction, causes the erosion of moral values. Our paper thus shows that neither Falk and Szech's data nor our data support the claim that markets erode morals.

The data in Fehr and Tyran (2001) and Petersen and Winn (2014) show that money illusion plays an important role in nominal price adjustment after a fully anticipated negative monetary shock. Money illusion affects subjects' expectations, and causes pronounced nominal inertia after a negative shock but much less inertia after a positive shock. Thus Petersen and Winn (2014) provide a misleading interpretation of both our and their own data.

This paper shows that a small amount of individual-level money illusion may cause considerable aggregate nominal inertia after a negative nominal shock. In addition, our results indicate that negative and positive nominal shocks have asymmetric effects because of money illusion. While nominal inertia is quite substantial and long lasting after a negative shock, it is rather small after a positive shock.

Neuroeconomics strives to use knowledge from neuroscience to improve models of decisionmaking. Here we introduce a biologically plausible, drift-diffusion model that is able to jointly predict choice behavior and response times across different choice environments. The model has both normative and positive implications for economics. First, we consistently observe that decisionmakers inefficiently allocate their time to choices for which they are close to indifference. We demonstrate that we can improve subjects' welfare using a simple intervention that puts a time limit on their choices. Second, response times can be used to predict indifference points and the strength of preferences.

We study the link between social preferences and a behaviorally validated measure of support for redistribution. We uncover three fundamentally distinct social preference types: predominantly selfish, inequality averse and altruistic individuals. Inequality averse and altruistic individuals display a much stronger support for redistribution, particularly if they are more affluent. Beliefs about the role of effort and luck for success play no role for selfish individuals but are highly relevant for other-regarding individuals. Finally, while inequality averse individuals display strong support for policies aimed at reducing the incomes of the rich, altruistic individuals are considerably less supportive of these policies.

We study subgame-perfect implementation (SPI) mechanisms that have been proposed as a solution to incomplete contracting problems. We show that these mechanisms, which are based on off-equilibrium arbitration clauses that impose large fines for lying and the inappropriate use of arbitration, have severe behavioral constraints because the fines induce retaliation against legitimate uses of arbitration. Incorporating reciprocity preferences into the theory explains the observed behavioral patterns and helps us develop a new mechanism that is more robust and achieves high rates of truth-telling and efficiency. Our results highlight the importance of tailoring implementation mechanisms to the underlying behavioral environment.

Hart and John Moore (2008) introduce new behavioral assumptions that can explain long-term contracts and the employment relation. We examine experimentally their idea that contracts serve as reference points. The evidence confirms the prediction that there is a trade-off between rigidity and flexibility. Flexible contracts—which would dominate rigid contracts under standard assumptions—cause significant shading in ex post performance, while under rigid contracts much less shading occurs. The experiment appears to reveal a new behavioral force: ex ante competition legitimizes the terms of a contract, and aggrievement and shading occur mainly about outcomes within the contract.