Showing papers in "Journal of Economic Behavior and Organization in 1996"

Firm organization, industrial structure, and technological innovation☆

Abstract: The formal and informal structures of firms and their external linkages have an important bearing on the rate and direction of innovation. This paper explores the properties of different types of firms with respect to the generation of new technology. Various archetypes are recognized and an effort is made to match organization structure to the type of innovation. The framework is relevant to technology and competition policy as it broadens the framework economists use to identify environments that assist innovation.

The coevolution of automata in the repeated Prisoner's Dilemma

Abstract: A model of learning and adaptation is used to analyze the coevolution of strategies in the repeated Prisoner's Dilemma game under both perfect and imperfect reporting. Metaplayers submit finite automata strategies and update their choices through an explicit evolutionary process modeled by a genetic algorithm. Using this framework, adaptive strategic choice and the emergence of cooperation are studied through ‘computational experiments’. The results of the analyses indicate that information conditions lead to significant differences among the evolving strategies. Furthermore, they suggest that the general methodology may have much wider applicability to the analysis of adaptation in economic and social systems.

A positive theory of economic fairness

Abstract: This paper presents a positive theory of economic fairness which strives for generality by characterizing the fairness values which people share across differing contexts. The study attempts to isolate these underlying values from the more situation-specific perceptual effects (e.g., framing effects) which may have an impact on reported fairness. Central to the proposed theory is the Accountability Principle which, roughly speaking, requires that a person's fair allocation (e.g., of income) vary in proportion to the relevant variables which he can influence (e.g., work effort), but not according to those which he cannot reasonably influence (e.g., a physical handicap). The results of telephone interviews and written questionnaires are presented in support of the theory.

Information in ultimatum games: An experimental study

Abstract: This study reports on an experiment using variations of the ultimatum game. The experiment controls the amount and type of information known to the responder in the game. In two treatments, she knows both the absolute (money) and relative (fairness) payoffs from an offer. In the other two, she knows either only the absolute or only the relative payoffs. The predictions of four models for these treatments are tested: subgame-perfection, Bolton's comparative equilibrium, Ochs and Roth's absolute threshold, and Ochs and Roth's percentage threshold hypothesis.

The relative price of fairness: gender differences in a punishment game'

Abstract: Ideas of fairness influence economic transactions. Men and women may differ systematically in the nature and extent of this influence. We investigate gender differences in the impact of fairness on the outcome of economic transactions. In our “punishment game” subjects may choose to split a larger pie with a “bad” partner, or a smaller pie with a “good” partner. We find that a higher relative price for fairness reduces its effect on the outcome of the transaction for women, but not for men. Our interpretation of this result is that men are more likely than women to make decisions on principle.

R&D outsourcing and contractual governance: An empirical study of commercial R&D projects

Abstract: Three complementary models derived from transaction-cost economics and property rights theory are constructed to explore the boundary between internal and external R&D projects and the governance mechanisms of external R&D projects contracted out by private business firms. Whereas the boundary between external and internal projects is explained with sunk cost potentials, the uses of governance mechanisms for external projects in terms of control and property rights are explained with reference to both potential sunk costs, technical novelty in the R&D work, and expected resale value of the final R&D outputs. The models are empirically tested on 80 projects from the Norwegian information technology industry, half of which are contracted out to non-profit research institutes and half of which are made in-house by private manufacturing firms. The results support both the boundary hypotheses and three of four control-incentive hypotheses. The theoretical implications involved in choosing between internal and external R&D projects, and in designing control and property rights for external projects are discussed.

Experimental tests of the endowment effect

Abstract: The endowment effect, which predicts undertrading and a willingness-to-accept greater than willingness-to-pay, is studied using responses that remove all reference to buying or selling and focuses only on choice tasks. The results significantly lower the willingness-to-pay/willingness-to accept discrepancy, but the latter is still significant. A high efficiency open display uniform price auction is used to exchange mugs for money. Since mugs are randomly assigned to half of 2N subjects, N 2 mugs are predicted to trade. Less than N 2 mugs trade on average, but more than previously reported. The phenomenon exists but is less prominent than reported previously.

Rational behavior and economic theory

Abstract: Nowadays, it seems almost universally presumed that the fundamental characteristic of homo oeconomicus is his rationality. We analyze the role played by the concept of rationality in economic theory, and demonstrate that it is necessarily constrained to be an essentially contentless notion. We show that the main body of economic theory is firmly grounded, and that some contrasting approaches to rationality, although leading to heated debates and vivid confusion, have no fundamental significance for economics. With a refereshed view on the essence of economics, we argue that the principles of economic theory form an essential methodological guide for the emergent line of research based on the use of so-called ‘evolutive’ models.

Can the shadow of the future harm cooperation

Abstract: It is generally thought that in long-term relationships high valuations of the future are conducive to cooperation. In an intertemporal model of conflict, however, we demonstrate the possibility of the opposite effect: a longer shadow of the future may harm cooperation. In particular, we show that the degree of inefficiency is positively related to: (i) the agents' valuation of the future, (ii) potential growth rates in resources, (iii) the size of initial resource endowments, and (iv) the effectiveness of conflict.

Fairness and survival in ultimatum and dictatorship games

Abstract: Much of the debate surrounding ultimatum and dictatorship games centers around the question of fairness. Fairness, however, is not a concept that is devoid of context. What may be considered unfair when two people meet face to face or in a bilateral manner may be considered fair in a market context where economic survival is at stake. For example, it may be considered unfair in isolation to charge a high price for prescription drugs from people in need, but one's opinion of such an act might change if the economic survival of the company might be threatened if they failed to do so. Putting the survival issue aside the act seems brutal; including it allows one to make a justification. In the experiments presented in this paper we test the impact of survivability on the behavior of subjects in ultimatum and dictatorship games. While we give considerable support to the idea that market contexts affect peoples' behavior, there is still a number of unresolved issues.

Transaction cost economics and the Carnegie connection

Abstract: This paper tracks my remarks at the September 1993 conference honoring Richard M. Cyert. It begins with some recollections of my years as a graduate student at GSIA in the early 1960s. I then shift to transaction cost economics and how this project relates to what I learned from Dick Cyert and others at Carnegie.

Modes of economizing behavior: Experimental evidence

Abstract: In addition to more or less elaborate, explicity rational procedures, economic choices in reality are frequently made by trial and error, imitation, following an authority, habit, thoughtless impulse, and hunch. Presenting results from a number of experiments that explicity incorporate decision cost, this paper explores the extent to which these alternative decision making modes can lead to ‘optimal’ choices.

Fixed versus variable reference points in the risk-return relationship

Abstract: Researchers using prospect theory in explaining Bowman's risk-return paradox have typically assumed a single fixed reference point, normally the industry median, in defining two decision contexts: gain and loss. Our findings suggest this reference point is elevated above industry median performance, and varies over time and across industries independent of industry performance. Consistent with the prospect theory, firms above this reference point were risk averse and those below it were risk seeking. We found no evidence of a second survival reference point for firms in trouble.

Spatial Evolution of Automata in the Prisoner's Dilemma

Abstract: We apply the idea of evolution to a spatial model. Prisoners’ dilemmas or coordination games are played repeatedly within neighbourhoods where players do not optimise but instead copy successful strategies. Discriminative behaviour of players is introduced representing strategies as small automata, which can be in different states against different neighbours. Extensive simulations show that cooperation persists even in a stochastic environment, that players do not always coordinate on risk dominant equilibria in 2×2 coordination games, and that success among surviving strategies may differ. We present two analytical models that help understanding of these phenomena.

Incomplete contracts and the choice between vertical integration and franchising

Abstract: Previous studies have demonstrated that geographical dispersion of outlets leads to an incentive for firms to franchise. Geographical dispersion alone, however, does not provide a full explanation of the firm's decision to franchise. Certain industries with highly dispersed retail outlets, such as supermarkets, almost never franchise. This paper uses the incomplete contracting paradigm to demonstrate how the inability to contract over local outlet costs can drive the firm's decision to franchise or integrate. Since only owners have incentives to reduce cost, ownership of the local outlet should rest with the party with the greatest ability to control cost. The theory is then applied to several industries.

The inconsistent evaluation of absolute versus comparative payoffs in labor supply and bargaining

Abstract: We demonstrate an inconsistency in how people weight fairness concerns depending upon how preferences for outcomes are elicited. Specifically, we show that people are less concerned with fairness when simultaneously choosing between two outcomes than when considering each outcome separately. For example, in Study 1, subjects were recruited for participation in one of two experiments. One study would pay all participants $7. Another would pay the focal subjects $8, but others $10. When simultaneously choosing between experiments, subjects were more likely to volunteer for the one which paid $8. However, when recruited for only one experiment, those recruited for the $7 one were more likely to volunteer than those recruited to be paid $8 in the $8 $10 one. In Study 2, subjects playing the chooser role in an ultimatum game were presented with one of two alternative elicitation frames. When asked to consider each possible offer and whether to accept it or reject it and get nothing, subjects' demonstrated a greater willingness to accept unequal payoffs than when asked to state a minimum acceptable payoff. We discuss the possible causes of these inconsistencies and show that similar reversals occur in other choice domains.

A comparison of artificial and human organizations

Abstract: Formal models can facilitate the development of organizational theory. The complex, adaptive, non-linear nature of human endeavor makes computational models a particularly useful type of formal model for exploring organizational behavior. Researchers, however, rarely contrast such models with empirical data. Further, researchers tend not to contrast such models with other such models. This paper presents results from the artificial organization project and demonstrates how contrasting models with each other and with empirical data can facilitate the development of more veridical organizational models. Specifically, this paper examines whether certain organizational models, differing only with respect to the cognitive limitations of, and adaptability or general intelligence of the agents are better or worse predictors of the behavior of similar organizations composed of humans. It is shown that, not only do different agent models predict different levels of organizational performance, they also predict different relative standings for different organizational structures. Finally, the adequacy of organizations composed of simple computational agents for predicting the behavior of organizations composed of humans appears to increase as the complexity of the organizational structure increases.

When risk generates chaos

Abstract: With risk averse producers, the traditional linear cobweb model becomes nonlinear. The currently produced quantity is an homographic function of previous years quantities. This may result in the market generating chaotic price and quantity series, especially if demand is rigid. Hedging facilities are unable to reduce the magnitude of fluctuations, which are socially detrimental, especially from the consumers' point of view. This might justify public intervention on markets such as staple food commodities or health cares.

Evolutionary stability and social norms

Abstract: Self-interested behavior need not earn higher material payoffs than norm-guided behavior in strategic environments in which a recognized adherence to social norms can help solve the commitment problem. This insight can provide the basis for an evolutionary theory of social norms. If the composition of behaviors evolves under pressure of differential payoffs, a population consisting exclusively of optimizers may be unstable, and there may exist a multiplicity of attractors representing a variety of stable norms. Societies facing similar material conditions may therefore come to adopt distinct norms as a result of chance events or differences in initial conditions.

Modelling multilateral negotiations: An application to California water policy

Abstract: In this paper we advance a new framework for noncooperative, multilateral bargaining that can be used to conceptualize negotiation processes. In the proposed game theoretic setting, the outcome of the negotiation process depends crucially on the “constitutional” structure of the game: the input each group has in the decision making process, the coalitions of groups that can implement proposals, the scope of the negotiations and, the outcome if the parties fail to reach agreement. Computer simulations allow investigation of the likely outcome of negotiations under various constitutional regimes. Analysis of recent water policy negotiations in California illustrates the capacity of the model.

Nonprofit organizations and their local affiliates: A study in organizational forms

Abstract: Growth in the nonprofit sector typically occurs through a system of franchises. This paper explores the factors which encourage franchising in the sector. Data are analyzed from a survey by the author which suggest that the choice by nonprofits of the franchise versus branch office form is consistent with the predictions made by agency theory. Mechanisms used by nonprofit franchises to enhance intra-organizational coordination are also explored.

Ultimatums in two-person bargaining with one-sided uncertainty: Demand games

Abstract: The demand game is a noncooperative two-person ultimatum game with one-sided uncertainty in which the Sender knows the value of the shared surplus (pie) but the Receiver only knows its probability distribution (Mitzkewitz and Nagel, 1993). We study experimentally the effects of systematic changes in the variability of the pie distribution on the Sender's proposals and Receiver's (binary) responses. In accordance with a behavioral theory that we propose, we find that 1. (i) the Sender's proportional share of the pie increases as the Receiver's uncertainty about the pie increases, and 2. (ii) for a given pie distribution, the Sender's proportional share decreases as the actual pie size increases.

Path-Dependence without Increasing Returns to Scale and Network Externalities

Abstract: The paper presents a simple model of a locked-in situation. Recent literature on path-dependence has explained locked-in situations with increasing returns to scale or network externalities. The model of this paper is a model of a single firm (there is no network of different agents) with a given size (there are no economies of scale). Our analyses shows that complementarity of a firm's assets and sunk costs can be sufficient for path-dependence.

Evolution, interaction, and Nash equilibria

Abstract: The paper analyzes the evolution of strategy profiles in a population of finitely many players where each player interacts only with a subset of the population. Conditions are given which guarantee that the strategy profiles converge globally resp. locally to an equilibrium state. The results, derived by using methods from the theory of iterated discrete functions, are illustrated by several examples, e.g. coordination and hawk-dove games.

Bayesian equilibrium in double auctions populated by biased heuristic traders

Abstract: We use computer simulation to examine three asset markets with imperfect information. In processing imperfect information, traders in the three markets are bayesian, empirical bayesian, and heuristic (representativeness and anchor-and-adjust) respectively. All three converge to the same bayesian equilibrium — although the latter two converge more slowly — without profit maximization, natural selection, arbitrage, or mutual cancellation of random actions. The results support Becker (1962) and Simon (1973) in that the rationality of the market emerges as a consequence of the market structure, and not from the rationality of individuals.

Complexity, organization, and Stuart Kauffman's The Origins of Order

Abstract: The economics of organization asks why we observe the organizational variety we do, why that observed variety is only a subset of all possible organization types, and how organizational forms change. This review essay evaluates Stuart Kauffman's NK models from the complexity sciences for investigating these questions. Such models focus on the statistical properties of complex systems that allow us to examine the total ensemble of organization types, which types are ‘neighbors’ of which other types, and the pattern of change in organizational forms, as well as situations where the interactions among the relevant elements or the dynamic characteristics of the system are unknown.

Volunteering nonprofit entrepreneurial services

Abstract: Which member of a heterogeneous population will volunteer to provide the entrepreneurial services needed to found a nonprofit firm to privately provide a public good? We develop a model of this decision. The model predicts that nonprofit entrepreneurs will be those who incur relatively low private costs, or get a relatively high private payoff. Less obviously, they will tend to have a high discount rate and relatively long time horizons, either due to their youth, or due to their consideration of generations to come far into the future. If the public good is one which individuals tend to contribute large amounts to, such entrepreneurs will tend to be relatively wealthy. If private contributions to the firm are relatively small, the entrepreneur is more likely to come from the center of the wealth distribution.

Real and monetary cycles in models of Keynes-Wicksell type

Abstract: We formulate a descriptive dynamic macroeconomic model of the Keynes-Wicksell type which incorporates goods, labour and financial markets. The model has well specified budget constraints with respect to the economic agents (households, firms and government) within it. We introduce some standard nonlinearities into the goods and labour markets. The dynamics of the general model consist of five differential equations; we analyse two- and three-dimensional subcases to show the existence of real and monetary cycles whose interaction will determine the full dynamics. We use numerical simulation to study the dynamics of the full model and the impact of various government fiscal and monetary policies.

Rational Actors, Tit-For-Tat Types, and the Evolution of Cooperation

Abstract: Evolutionary models in economics have often been criticized for failing to allow for rational, maximizing behavior. The present paper represents a step toward correcting this deficiency, by introducing rational actors into an evolutionary model of the finitely repeated Prisoners' Dilemma. At the same time, the model endogenizes the uncertainty postulated in the classic model of Kreps et al. (1982), thus explaining cooperation by rational actors in the finitely repeated Prisoners' Dilemma. A testable implication of the model is that the level of voluntary cooperation in a society will be relatively high where geographical mobility is relatively low.

Limited intertemporal commitment and job design

Abstract: The paper shows that some of the guidelines for job design that emerge from a static analysis of the multitask agency problem can be overturned in a dynamic model with limited commitment. Static analyses have shown that it is optimal to assign workers sole responsibility for tasks, and to allocate them tasks which are as homogeneous as possible with respect to the ease of measuring performance. Our dynamic analysis demonstrates that it can, instead, be optimal to make workers jointly responsible for tasks, and to make their task portfolios as similar to one another, but as internally diverse, as possible.