We study whether poverty can induce affective states that decrease productivity. In a controlled laboratory setting, we find that subjects randomly assigned to a treatment, in which they view a video featuring individuals that live in extreme poverty, exhibit lower subsequent productivity compared to subjects assigned to a control treatment. Questionnaire responses, as well as facial recognition software, provide quantitative measures of the affective state evoked by the two treatments. Subjects exposed to images of poverty experience a more negative affective state than those in the control treatment. Further analyses show that individuals in a more positive emotional state exhibit less of a treatment effect. Also, those who exhibit greater attentiveness upon viewing the poverty video are less productive. The results are consistent with the notion that exposure to poverty can induce a psychological state in individuals that adversely affects productivity.
“Social Status and Motivated Beliefs” (Submitted)
This paper shows that social status determines economic achievement by means of a psychological mechanism. Specifically, social status influences the way individuals form beliefs about their abilities and these beliefs are crucial for achievement. A theoretical framework formalizes the proposed mechanism and generates a set of testable predictions. Data from a cohort study and from two controlled experiments corroborate the validity of the theoretical predictions and, thus, of the proposed mechanism. In particular, the cohort study data show that the social status of individuals at adulthood is determined by their social status at birth, but primarily through the influence that social status at birth has on the individuals’ hopes and beliefs about educational achievement at adolescence. The experiments demonstrate that subjects with similar ability on a cognitively demanding task exhibit higher beliefs about their own performance and, consequently, higher performance when assigned to a high rather than a low status treatment. This study highlights the role of social status in creating constraints that are internal to the individual and that have the potential to impair economic success.
(This paper supersedes “Believe me you are (not) that bad”. CentER Discussion Paper Series No. 2016-032.)
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To incentivize workers and boost performance, firms often offer monetary bonuses for the achievement of production goals. Such bonuses appeal to two types of motivations of the worker. On the one hand, the existence of a goal, on its own, triggers an intrinsic motivation associated with the desire to not fall short of the goal. On the other hand, the money paid to achieve the goal constitutes an extrinsic motivation. This paper studies the possibility that these two effects are substitutes when workers set their own goals. We develop a theoretical model that predicts that if the worker is sufficiently loss averse and faces uncertainty about reaching a production goal, offering a monetary payment contingent on reaching such a goal is counterproductive. This is because under the presence of monetary bonuses, the loss averse worker prefers setting lower goals, which yield lower but more likely bonus payments. Lower goals, in turn, negatively affect subsequent performance. Results from a laboratory experiment corroborate this prediction. This paper highlights the limits of monetary bonuses as an effective incentive when workers are loss averse.
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“Contracting Probability Distortions”
I introduce an incentive contract designed to take advantage of the regularity that individuals distort probabilities. The contract includes risk in the agent’s compensation and the principal can specify the degree of such risk. Specifically, the principal can choose the probability that determines the extent to which the compensation of the agent depends on his performance on the delegated task. The principal can exploit this contract feature by targeting probabilities that are distorted by the agent such that the agent’s motivation to perform the task is enhanced. A theoretical framework and an experiment demonstrate that the proposed contract generates higher performance than a traditional contract. However, the specified probability is critical to achieve this result. Small probabilities generate higher levels of performance, whereas medium-ranged or high probabilities do not generate performance differences between the contracts. I show that probability distortions caused by likelihood insensitivity-cognitive limitations restricting the accurate evaluation of probabilities-explain these findings.
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Work in progress
We shed new light on replications of laboratory experiments in economics and recall largely ignored methodological problems in the current praxis of analyzing experimental data. The basis of our investigation is a recent study by Camerer et al.(2016). We propose that most of the papers therein refer to a treatment effect that cannot be identified with the used test. We reinvestigate the original data sets and the replicated ones using tests that uncover treatment effects. We find that 6 of the papers in Camerer et al. (2016) do not have a treatment effect in the original data sets with the proposed test. Moreover, among those with an effect in the original data set, three present a treatment effect in the replication data whereas 8 do not exhibit a treatment effect. We comment on the importance of adequate testing before replication.
We investigate the emergence of echo chambers in a controlled laboratory environment. A theoretical model based on Williams (2019) shows that in settings in which types are unknown but the actions of others can be observed, rational (Bayesian) agents choose to observe the actions of those with whom they expect to share similar beliefs. This is because those with similar beliefs are more likely to be of a similar type as one’s own; hence, their actions are more informative. We test the validity of this finding with two experiments. In the first experiment, types are exogenously assigned to subjects. This is advantageous in that it guarantees heterogeneity and allows us to manipulate the degree of heterogeneity. The subjects’ task in this experiment is to i) choose another subject to observe her action and ii) accurately infer their own type after observing an informative signal and observing the action of the chosen subject. The second experiment considers preferences that are naturally formed outside of the laboratory. Specifically, we implement pairwise lotteries that investigate violations of expected utility and stochastic dominance. We analyze whether subjects who are not informed about the structure of the lotteries choose to observe the action of subjects who share similar choice patterns in the past and thus those who exhibit similar deviations from expected utility.
“Group decision-making and GARP” with Wieland Muller
We investigate the extent to which groups make rational decisions and whether and how the degree of rationality of a group relates to that of its constituting individuals. In a controlled laboratory experiment we study the choices of groups and individuals when facing linear budget sets. As standard for rationality we adopt the generalized axiom of revealed preferences (GARP) and use the indexes available in such framework to measure the degree of choice consistency of a decision maker. Our experimental design allows relating the choice consistency of a group to that of its constituting individuals when making choices in isolation. In addition, motivated by the presence of asymmetries in group choice in daily life, we investigate effect on rationality of asymmetries in contributions to the group’s budget as well as asymmetries on the allocation rule of the group’s chosen budget. Finally, we use state-of-art methods to provide the best descriptive preference characterization of group and individual decision-making.
“Alternative theories of Risk and GARP” with Wieland Muller
Status: Experimental design.