CHAPTER I: Introduction Most economic models assume that economic agents are purely rational and self-interest. In this view, people are motivated exclusively by own material self-interests. The view can be traced back to Adam Smith. In his “An Inquiry into the Nature and Cause of the Wealth of Nations”, Adam Smith argues that by rationally pursuing own economic interests in a free market environment, people can exhaust every mutually beneficial opportunities to produce goods and exchange with one another. Such exhaustion of mutually beneficial exchanges thus results in full employment. In many economic domains, the pure rational self-interest hypothesis has been quite successful in providing satisfactory explanations and accurate predictions to economic phenomena. Recently, countless evidence from many economic experiments has shown that the rational self-interest hypothesis could be too narrow to capture behaviors in many economic settings. The results from these experiments have systematically refuted their corresponding theoretical predictions which are derived from the rational self-interest assumption. This evidence has led many people to conclude that, in addition to maximizing their material payoffs, people also care about fairness and other people’s wellbeing, and exhibit reciprocity towards others. This view is now reasonably well accepted in the discourse of economics. Recent research has no longer focused on establishing whether people exhibit other-regarding behavior, but instead on explaining the nature of this behavior. Rabin (1993), Fehr and Schmidt (1999), and Bolton and Ockenfels (2000) are examples of such studies. Problems that have puzzled economists for a long time, such as the persistence of noncompetitive wage premium, have been explained by some of these theories. In this thesis, I investigate some issues of other-regarding preference using experimental methods. Among many advantages that experimental method offers, it allows researchers to exert tight control over the environment under which decisions are made. Recently, the use of experimental methods has substantially enhanced our understanding of human behavior. Many new insights that were not predicted by the theories have been uncovered. Many new theories have been written to explain the observed results which in turn have shed lights on many observed economic and social phenomena. This thesis consists of four essays. The first essay investigates the impact of other-regarding preference on behaviors inside organization based on the principal-agent relationship. Its impact on behaviors in the society at large is examined in the second essay. Specifically, the second essay investigates the characteristics and the nature of social norms in a social encounter where the unaffected third party observers are present. The third and the fourth essays investigate the impact of institutional arrangement on the stability of other-regarding preference. In what follows, I will briefly elaborate the contents of all those essays. In the first essay, the experimental quest is on the impact of other-regarding preference on behaviors inside organization. More specifically, I study the role of delegation in the principal-agent relationship based on the theoretical construction of Aghion and Tirole (1997). The literature in the principal-agent theory mainly focuses on the use of monetary incentive in alleviating the agency problems. Aghion and Tirole (1997), instead, emphasize the importance of using non-monetary incentives to curb managerial opportunism. They argue that delegation of authority to an agent can be a powerful mechanism to elicit high effort from the agent. That is, when the agent is given the power to decide which project to implement, he will work hard to ensure his preferred project is chosen. For the principal1, the cost resulting from the delegation is that she loses some degree of control over the firm. Despite this consequence, the benefits of allowing the agent to implement his preferred project can potentially outweigh the costs to the principal should a poor project be implemented without her being informed. I designed a simple experiment that closely follows the theoretical constructions of Aghion and Tirole (1997). I first parameterized their model and derived its theoretical predictions. Using these parameterized values, I conducted several treatments of experiments. The experimental results From now on, referred to as she. showed that without delegating formal authority to the agent, the principal exerted higher than the Nash predicted effort levels while the mean effort exerted by the agent was not significantly different from the Nash prediction. When formal authority was delegated to the agent, it resulted in a significant increase in the agent’s effort and a significant decrease in the principal’s effort. However, delegation of formal authority resulted in higher payoff to the principal only when the principal’s interests were closely aligned with those of the agent’s. Some interesting findings that are not predicted by Aghion and Tirole (1997) were also found in our experiment. First, an uninformed principal did not always delegate the real authority to an agent. Delegation of real authority resulted in higher payoff to the principal. Further, an informed agent did not always propose the project that maximizes his own private benefit. As also shown by many experimental works, both the principal and the agent seemed to exhibit a noticeable degree of fairness even at the expense of private costs in acquiring information on project payoffs. With payoff from recommending a project randomly is dominated by the payoff from recommending inaction, the uninformed agent did not always refrain from choosing such an inferior strategy. Lastly, I conducted a simple comparative statics analysis on the impact of the interests congruence on behaviors. The simple comparative statics analysis showed that increasing the principal’s interests congruence resulted in the principal behaving less aggressively in overruling her agent’s non-profit-maximizing project recommendations. It also resulted in the agent behaving more selfishly. The experimental results suggest several possible implications to the design of organization. First, the agent will be motivated to work hard when formal authority is delegated to him. However, delegation of formal authority to the agent does not directly translate to higher profits to owners of the organization. In spite of the inherent fairness that the agent holds, the agent is mostly self-interested and will take actions that benefit him first rather than the organization. Delegation of formal authority to the agent pays only when the principal’s interests are closely aligned with those of the agent’s. Second, given that the agent might take excessively risky decisions, the benefit from delegating real authority to the agent could be severely discounted. To the uninformed principal, however, delegation of real authority to the agent still pays than retaining the authority. In the second essay, I investigate the characteristics and the nature of social norms using a modified third party punishment game (Fehr and Fischbacher, 2004). Recently, the study of social norms has kindled many economists. Plethora of recent experimental evidence has shown that the affected second parties often punish someone who violates social norms. Such punishment occurs at the affected second parties’ own expenses, most importantly, with the consequence that does not bring material benefit to them. While the reasons why the unaffected third parties will punish the violations of social norms are still not clear, it is undisputable that the punishment by the affected second party alone is not sufficient for the social norms to be enforced. To this end, it is crucial that the unaffected third parties must have motivation to punish when social norms are violated (Bendor and Swistak, 2001, Carpenter and Matthews, 2002, Fehr and Fischbacher, 2004). In their third party punishment game experiment2, Fehr and Fischbacher (2004) showed that the third party observers, whose material payoffs were unaffected by the violation of egalitarian distribution norm, were willing to enforce the social norm at their own expenses. However, their design incorporated only a single third party observer. In reality, social norms enforcement typically requires collective efforts from a population of third-party observers who are not directly harmed by the norm violations. While the behavior of the single third-party has exhibited strong motive to enforcing the social norms, the same motive might not sustain when there are multiple observers. To explore these issues, I extend Fehr and Fischbacher (2004) by first introducing three (3) third party observers into the TPP game. Including more than one (1) third party observer in the TPP game introduces temptation to free-ride on other third-party observers’ incentives to punish. To the best of our knowledge, no research has analyzed the impact of increasing the number of third party observers on the incentives to punish the unfair dictator in the TPP game context. The results of including three third party observers in the game show that incentive to punish, measured by the amount spent by the sanctioning third party observers, shrank significantly when the number of observers increased to three; interestingly, decision to punish measured by the proportion of third party observers chose to punish was not affected. From now on, referred to as TPP game I also investigate the impact of punishment on behaviors. In another treatment with multiple third party observers, I weakened the impact of punishment with the aim to analyze the impact of punishment on players’ behaviors. I found that weakening the impact of punishment affected both the amount spent to punish as well as the decision to punish. To complete the experiment, I also conducted a simple repeated dictator game treatment with random interactions among participants. By comparing behaviors among different treatments of which the number of observers increased gradually from no observers, to one observer, and to three observers, I found a strong negative relationship between the number of third party observer and the amount given by the dictators. The third essay further evaluates the property of other-regarding behavior using a modified dictator game. The central issue in the experimental quest is the impact of peer comparison of ability among allocators on their other-regarding behavior towards their respective recipient. The baseline treatment is a setting in which information on the relative ranking of ability is not disclosed to the allocators. If other-regarding behavior is inherently stable, it cannot be manipulated by changing the social environment. Consequently, the presence of a social comparison of ability should not influence people’s other-regarding behavior. If we observe any significant difference in the allocation decisions between these two underlying environments, we may attribute this difference to the presence of the social comparison of ability. More importantly, it would also suggest that people’s other-regarding behavior is endogenously shaped by the social (institutional) environment. Interestingly, the experimental results show that disclosing information on the relative ranking of the allocators’ ability and the distribution of their scores results in their giving a lower amount. One possible conjecture is that being aware of the competitive environment and knowing that people tend to compare themselves against others may reinforce their sense of entitlement towards their own “hard-earned” money endowment and thus result in giving less. The experimental results also suggest that a meritocratic environment that is characterized by an explicit social comparison will result in a society that exhibits less generosity towards others. Similar to List (2007), the results also provide evidence on the manipulability of other-regarding behavior. But there is one significant difference between this essay and List (2007). In the latter, the manipulation is done by changing the allocators’ action set, while in this essay the manipulation is done by changing their social environment (institution). On a more general level, the experimental results suggest that a society that is excessively competitive and accustomed to social comparison will exhibit less generosity towards others. To check the robustness of the experimental results I also conducted an additional experiment with a distinct set of participants using a charity game, wherein the allocators must decide how much of their hard-earned money to donate to a global charitable organization, Médecins sans Frontières (Doctors without Borders). Thus, instead of giving to an unknown recipient, allocators donate money to a widely known charitable organization whose activities span the globe. The results are similar to those obtained from our modified dictator game experiment, whereby the amount of giving is significantly reduced when the allocators are socially aware of their relative ranking of ability among their peers. Finally, in both experiments, I also found evidence that, when subjected to a social comparison of ability, female allocators reduced their contribution rate significantly more than male allocators. The existing theories of other regarding preference share one common thread. That is, they focus solely on factors that are directly related to the allocation decisions such as the motives and consequences behind those allocation decisions, but not on other factors that are seemingly unrelated to, but could possibly influence those allocation decisions such as the procedure with which people earn their initial money endowment. Rabin (1993) points out to the importance of the direct reciprocity motive. A person’s behavior towards another person is driven by the (expected) intention of the other person towards the latter. Fehr and Schmidt (1999) and also Bolton and Ockenfels (2000) argue that other regarding behavior is primarily driven by the final distribution of payoffs among people in the reference group. These theories disregard the possible link between the procedure with which the money endowment is generated and distributed among individuals and the allocation decisions of these individuals. The fourth essay further investigates the possibility of this link using a two-stage dictator game. In the first stage, participants who were randomly selected as allocators had to perform a task of answering GRE-GMAT like questions to earn money. Better performance on the task resulted in higher earnings. From the first stage, I obtain the distribution of the allocators’ scores (performance) on the task. I then provide the allocators with the information on their individual ranking of scores among all allocators and the general distribution of scores. Prior to playing the second stage, the allocators’ initial money endowment was determined. In the baseline meritocratic treatment, the allocators’ initial money endowment was set equal to their individual earnings from the task. In another treatment, which is call the egalitarian treatment, the allocators’ initial endowment was set equal to the average earnings of all allocators from the task. This implies that in the egalitarian treatment the high performers were taxed, while the low performers were given subsidy by the high performers. In the second stage, the allocators had to decide how much of their money endowment to give to other participants who were randomly designated as the recipients. The experimental results show that the allocators were more generous under the egalitarian treatment than under the meritocratic treatment. Thus, in essence, the egalitarian treatment gave rise to a stronger other regarding behavior of the allocators. Surprisingly, being taxed and “forced” to subsidize the low performers did not diminish the high performers’ generosity. The contribution rate and the absolute contribution of the high performers in the egalitarian treatment were not statistically different from the contribution rate and the absolute contribution of the high performers in the meritocratic treatment. However, the low performers who were at the receiving end of a “kind act” of the high performers significantly increase their contribution rate and absolute contribution given to the third party recipients in the egalitarian treatment. Essentially, the generously egalitarian environment inculcates pay it forward attitude. The low performers may have “felt obliged” to reciprocate for what they have received from the high performers by being more generous towards the third party recipients. Boulding (1973) and Moody (2008) coin this form of reciprocity as serial reciprocity. CHAPTER II Delegation of Formal and Real Authority in the Lab Abstract We experimentally study delegation of formal and real authority in the principalagent relationship based on the theoretical constructions of Aghion and Tirole (1997). Our results show that the principal exerted higher than the Nash predicted effort when she held formal authority while agent did not. Delegation of formal authority to the agent significantly increased the agent’s effort. Unlike the theory predicts, an uninformed principal did not always delegate real authority to an agent; an informed agent did not always propose the project that maximizes his own private benefit. Furthermore, both the principal and the agent seemed to exhibit a noticeable degree of fairness even at the expense of private costs. Lastly, even with the risk of suffering large wealth loss from randomly recommending a project, the uninformed agent did not always refrain from engaging in such risky behavior. This research benefited from the research grant support R-122-000-107-112 awarded by the Faculty of Arts and Social Sciences-National University of Singapore. 2.1 Introduction Modern organizations are characterized by separation of ownership and control (Berle and Means, 1932). Despite having strong interests to be in control of a firm’s detailed operations, the owner (principal) of the firm tends to refrain from doing so. The complexities of the organization and the spans of its operation imply that hiring professional managers (agent) to run the firm is almost inevitable. However, given that the agent’s effort is not contractible and directly monitoring the agent is difficult, empowering the agent to run the firm will only cause the agent to shirk from his responsibilities since working gives rise to disutilities. The shirking problem becomes even worse when the interests of the agent and the principal are incongruent. Instead of promoting the principal’s interests, employing the agent to run the firm gives the agent chances to advance his own private benefits. This essentially is the well-known agency problem. With the root of the agency problem lying in the incongruent preferences, co-aligning the interests of the agent with those of the principal is fundamental to alleviating the problem. Through a proper design of a compensation scheme, the agent can be incentivized to work in line with the principal’s interest. However, an incentive scheme based on effort fails to work well since effort is mostly unobservable and hence not contractible. Instead, vast literature in the principal-agent theory advocates the use of an incentive design based on measurable variables, such as the firm’s output. A compensation scheme based on measurable contributions co-aligns the two parties’ interests. It deters the agent from shirking since such behavior is nonprofit-maximizing to the agent. An alternative solution to reducing the agency problem is to strengthen the information system. Although it does not directly change the agent’s preferences, strengthening the information system keeps the principal informed about whether the agent is behaving in the interests of the principal. Consequently, deceiving the principal becomes more difficult. An elegant and innovative way to alleviate the agency problem is proposed by Aghion and Tirole (1997). In contrast to most principal-agent frameworks, their paper emphasizes the importance of using non-monetary incentives to curb managerial opportunism. They argue that delegation of authority to the agent can be a powerful mechanism to elicit high effort from the agent. Specifically, when the agent is given the authority to decide on the project to be implemented, he will work hard to ensure his preferred project is chosen. For the principal, however, the cost resulting from the delegation is that she loses some degree of control over the firm. Despite this, the benefits of allowing the agent to implement his preferred project can potentially outweigh the costs to the principal if the principal is uninformed and she chooses to implement a poor project. Aghion and Tirole (1997) also distinguish formal authority from real authority. Formal authority is the authority which is legally conferred and stated in the contract. It gives its holder the right to make decisions that affect the organization without being overruled by anyone inside the organization. Real authority, on the other hand, is the effective control over decisions. However, formal authority need not necessarily confer real authority. The two types of authority coincide only when the holder of formal authority is informed about the prospects of available projects to be developed by the organization. In this case, formal authority will be exercised by the informed authority holder. When the holder of formal authority is uniformed, however, he or she will delegate real authority to the informed subordinates. In this case, there is a separation of formal and real authority. Such separation is necessary to avoid the uninformed formal authority holder from making worse decisions. Formal authority can also be delegated in an informal way. Baker, Gibbons and Murphy (1999) show that, in most organizations, delegation of formal authority often represents an informal promise given by the principal to the agent. As an informal promise, it can be withdrawn by the principal. Similar to Aghion and Tirole (1997), they argue that delegation of formal authority can incentivize the agent to exert effort. Unlike Aghion and Tirole (1997), however, an informed principal might be tempted to renege on the delegation decision by rejecting a project that is not in her best interest. This, however, might not happen if the interaction between the principal and the agent is repeated. In such a setting, the benefit deriving from the reputation of delegation can outweigh the gain from reneging on the promise of delegation. Nor will the agent relentlessly implement his preferred project when the principal is uninformed. The fact that the delegation of formal authority represents an informal promise implies that withdrawing the formal authority from the agent is Dollars. In addition, you will be able to earn a substantial amount of money by answering some multiple choice questions. However, it is also possible that some of your answers lead to losses. It is therefore very important that you read the instruction thoroughly and make your decisions carefully. In this experiment, your total earnings will be calculated in point scores. They will be converted into Singapore Dollar at the rate of point = Singapore Dollar Your individual earnings will be paid to you in cash immediately in sealed envelopes which will be put in a designated place for you to pick up at the end of the experiment. Please note that your earnings will be rounded up or down to the nearest dollar. To preserve your anonymity, each of you is given a unique user ID. You will be identified only by your user ID throughout the whole experiment. Thus, neither the experimenters not other participants will know your personal identities. Please note that during the decision making process no communication is allowed. If you have questions, please raise your hand and we will attend to you in private. Specific Instructions In this experiment, participants will be randomly split up into groups. Each group consists of one participant “A”, one participant “B”. Throughout the whole experiment, one participant A is matched with one participant B. You are participants A. All participants A are in this room but all participants B are in another room. You will not be told who your matched participant B is either during or after the experiment, and your matched participant B will not be told who you are either during or after the experiment. There are two steps involved in this experiment. The following describes the two steps. Step One Each participant A is required to answer 20 multiple choice questions in 15 minutes. They are English questions, logic questions and mathematical questions. Please answer each question by choosing one correct answer from several choices of answers provided. If you not know the answer for the question, please choose “I don’t know” which is provided as one of the choices. Each correct answer adds one point to your individual scores. However, each incorrect answer deducts one point from your individual scores. If you not know the answer and choose ‘I don’t know’ option, your individual scores will not be affected. When the time allowed to answer the questions (15 minutes) is up, computer will submit your answer for marking automatically. Once your answers are submitted, the computer will mark your answers immediately. You will be informed the number of correct answers, number of incorrect answers and number of question unanswered based on the answers you have provided. Upon knowing your individual scores, we will distribute the Step Two of experimental instruction to you. The Step Two of experimental instruction will specify the following: a. How your individual scores are translated into individual earnings. b. Further decisions you need to make. Step Two You have known your individual scores from answering the questions in Step One. With the conversion rate of ‘1 point = Singapore Dollar’, your individual earnings will be the dollar amount of your individual scores obtained from Step One plus Singapore Dollars show-up fee. After knowing your individual earnings, you will be asked to make a transfer from your individual earnings to your matched participant B in the other room. The amount you can transfer ranges from Singapore Dollar up to your individual earnings. Please note, the smallest unit of your transfer will be in dollar, i.e., no decimal point is allowed. Your final earning will be your total earning net of your transfer to your matched participant B. This is how we calculate participants A’s and B’s final earnings. Participant A’s final earning amounts to + Singapore Dollars + The amount of money participant A earned from Step One − The amount of money participant A decided to transfer to his/her matched participant B Participant B’s final earning amounts to + Singapore Dollars + The amount of money participant A decided to transfer to the matched participant B Experimental instruction for the WPC treatment in the charity game General Information You are taking part in an experiment on decision making. By participating, you will be paid a showup fee of Singapore Dollars. In addition, you will be able to earn a substantial amount of money by answering some multiple choice questions. However, it is also possible that some of your answers lead to losses. It is therefore very important that you read the instruction thoroughly and make your decisions carefully. In this experiment, your total earnings will be calculated in point scores. They will be converted into Singapore Dollar at the rate of point = Singapore Dollar Your individual earnings will be paid to you in cash immediately in sealed envelopes which will be put in a designated place for you to pick up at the end of the experiment. Please note that your earnings will be rounded up or down to the nearest dollar. To preserve your anonymity, each of you is given a unique user ID. You will be identified only by your user ID throughout the whole experiment. Thus, neither the experimenters not other participants will know your personal identities. Please note that during the decision making process no communication is allowed. If you have questions, please raise your hand and we will attend to you in private. Specific Instructions There are two steps involved in this experiment. The following describes the two steps. Step One You are required to answer 20 multiple choice questions in 15 minutes. They are English questions, logic questions and mathematical questions. Please answer each question by choosing one correct answer from several choices of answers provided. If you not know the answer for the question, please choose “I don’t know” which is provided as one of the choices. Each correct answer adds one point to your individual scores. However, each incorrect answer deducts one point from your individual scores. If you not know the answer and choose ‘I don’t know’ option, your individual scores will not be affected. When the time allowed to answer the questions (15 minutes) is up, computer will submit your answer for marking automatically. Once your answers are submitted, the computer will mark your answers immediately. You will be informed the number of correct answers, number of incorrect answers and number of question unanswered based on the answers you have provided. Once all participants have submitting their answers, the computer will also inform you about your individual ranking of scores among all the participants A. You will thus know your performance relative to other participants A in the computer lab. Upon knowing your individual rankings of scores, we will distribute the Step Two of experimental instruction to you. The Step Two of experimental instruction will specify the following: c. How your individual scores are translated into individual earnings. d. Further decisions you need to make. Step Two You have known your individual scores from answering the questions in Step One. With the conversion rate of ‘1 point = Singapore Dollar’, your individual earnings will be the dollar amount of your individual scores obtained from Step One plus Singapore Dollar show-up fee. After knowing your individual earnings, you will be asked to make a donation to a charitable organization that has been chosen as our beneficiary. This charitable organization is Médecins sans Frontières (Doctors without Borders, http://www.doctorswithoutborders.org). The amount you can donate ranges from Singapore Dollar up to your total earnings. Please note, the smallest unit of your donation will be in dollar, i.e., no decimal point is allowed. At the end of Step Two, we will tally the total amount of donations that all of you have made. We will donate this total amount online immediately in front of all participants. You can follow the whole process from the screen projected in this lab. After we finish reading this instruction, we will show you a video clip showing one example of activities of this organization. Your final earning will be your individual earning net of your donation. This is how we calculate your final earnings. + Singapore Dollars + The amount of money you earned from answering the multiple choice questions in Step One − The amount of money you decided to donate to ‘Médecins sans Frontières’ Now let’s watch the video. Experimental instruction for the WOPC treatment in the charity game General Information You are taking part in an experiment on decision making. By participating, you will be paid a showup fee of Singapore Dollars. In addition, you will be able to earn a substantial amount of money by answering some multiple choice questions. However, it is also possible that some of your answers lead to losses. It is therefore very important that you read the instruction thoroughly and make your decisions carefully. In this experiment, your total earnings will be calculated in point scores. They will be converted into Singapore Dollar at the rate of point = Singapore Dollar Your individual earnings will be paid to you in cash immediately in sealed envelopes which will be put in a designated place for you to pick up at the end of the experiment. Please note that your earnings will be rounded up or down to the nearest dollar. To preserve your anonymity, each of you is given a unique user ID. You will be identified only by your user ID throughout the whole experiment. Thus, neither the experimenters not other participants will know your personal identities. Please note that during the decision making process no communication is allowed. If you have questions, please raise your hand and we will attend to you in private. Specific Instructions There are two steps involved in this experiment. The following describes the two steps. Step One You are required to answer 20 multiple choice questions in 15 minutes. They are English questions, logic questions and mathematical questions. Please answer each question by choosing one correct answer from several choices of answers provided. If you not know the answer for the question, please choose “I don’t know” which is provided as one of the choices. Each correct answer adds one point to your individual scores. However, each incorrect answer deducts one point from your individual scores. If you not know the answer and choose ‘I don’t know’ option, your individual scores will not be affected. When the time allowed to answer the questions (15 minutes) is up, computer will submit your answer for marking automatically. Once your answers are submitted, the computer will mark your answers immediately. You will be informed the number of correct answers, number of incorrect answers and number of question unanswered based on the answers you have provided. Upon knowing your individual scores, we will distribute the Step Two of experimental instruction to you. The Step Two of experimental instruction will specify the following: a. How your individual scores are translated into individual earnings. b. Further decisions you need to make. Step Two You have known your individual scores from answering the questions in Step One. With the conversion rate of ‘1 point = Singapore Dollar’, your individual earnings will be the dollar amount of your individual scores obtained from Step One plus Singapore Dollar show-up fee. After knowing your individual earnings, you will be asked to make a donation to a charitable organization that has been chosen as our beneficiary. This charitable organization is Médecins sans Frontières (Doctors without Borders, http://www.doctorswithoutborders.org). The amount you can donate ranges from Singapore Dollar up to your total earnings. Please note, the smallest unit of your donation will be in dollar, i.e., no decimal point is allowed. At the end of Step Two, we will tally the total amount of donations that all of you have made. We will donate this total amount online immediately in front of all participants. You can follow the whole process from the screen projected in this lab. After we finish reading this instruction, we will show you a video clip showing one example of activities of this organization. Your final earning will be your individual earning net of your donation. This is how we calculate your final earnings. + Singapore Dollars + The amount of money you earned from answering the multiple choice questions in Step One − The amount of money you decided to donate to ‘Médecins sans Frontières’ Now let’s watch the video. APPENDIX D: EXPERIMENTAL INSTRUCTIONS FOR CHAPTER V Experimental instruction for the meritocratic treatment General Information You are taking part in an experiment on decision making. By participating, you will be paid a showup fee of Singapore Dollars. In addition, you will be able to earn a substantial amount of money by answering some multiple choice questions. However, it is also possible that some of your answers lead to losses. It is therefore very important that you read the instruction thoroughly and make your decisions carefully. In this experiment, your total earnings will be calculated in point scores. They will be converted into Singapore Dollar at the rate of point = Singapore Dollar Your individual earnings will be paid to you in cash immediately in sealed envelopes which will be put in a designated place for you to pick up at the end of the experiment. Please note that your earnings will be rounded up or down to the nearest dollar. To preserve your anonymity, each of you is given a unique user ID. You will be identified only by your user ID throughout the whole experiment. Thus, neither the experimenters not other participants will know your personal identities. Please note that during the decision making process no communication is allowed. If you have questions, please raise your hand and we will attend to you in private. Specific Instructions In this experiment, participants will be randomly split up into groups. Each group consists of one participant “A”, one participant “B”. Throughout the whole experiment, one participant A is matched with one participant B. You are participants A. All participants A are in this room but all participants B are in another room. You will not be told who your matched participant B is either during or after the experiment, and your matched participant B will not be told who you are either during or after the experiment. There are two steps involved in this experiment. The following describes the two steps. Step One Each participant A is required to answer 20 multiple choice questions in 15 minutes. They are English questions, logic questions and mathematical questions. Please answer each question by choosing one correct answer from several choices of answers provided. If you not know the answer for the question, please choose “I don’t know” which is provided as one of the choices. Each correct answer adds one point to your individual scores. However, each incorrect answer deducts one point from your individual scores. If you not know the answer and choose ‘I don’t know’ option, your individual scores will not be affected. When the time allowed to answer the questions (15 minutes) is up, computer will submit your answer for marking automatically. Once your answers are submitted, the computer will mark your answers immediately. You will be informed the number of correct answers, number of incorrect answers and number of question unanswered based on the answers you have provided. Once all participants have submitting their answers, the computer will also inform you about your individual ranking of scores among all the participants A. You will thus know your performance relative to other participants A in the computer lab. Upon knowing your individual rankings of scores, we will distribute the Step Two of experimental instruction to you. The Step Two of experimental instruction will specify the following: e. How your individual scores are translated into individual earnings. f. Further decisions you need to make. Step Two You have known your individual scores from answering the questions in Step One. With the conversion rate of ‘1 point = Singapore Dollar’, your individual earnings will be the dollar amount of your individual scores obtained from Step One plus Singapore Dollars show-up fee. After knowing your individual earnings, you will be asked to make a transfer from your individual earnings to your matched participant B in the other room. The amount you can transfer ranges from Singapore Dollar up to your individual earnings. Please note, the smallest unit of your transfer will be in dollar, i.e., no decimal point is allowed. Your final earning will be your total earning net of your transfer to your matched participant B. This is how we calculate participants A’s and B’s final earnings. Participant A’s final earning amounts to + Singapore Dollars + The amount of money participant A earned from Step One − The amount of money participant A decided to transfer to his/her matched participant B Participant B’s final earning amounts to + Singapore Dollars + The amount of money participant A decided to transfer to the matched participant B Supplementary Material B: Experimental instruction for the egalitarian treatment General Information You are taking part in an experiment on decision making. By participating, you will be paid a showup fee of Singapore Dollars. In addition, you will be able to earn a substantial amount of money by answering some multiple choice questions. However, it is also possible that some of your answers lead to losses. It is therefore very important that you read the instruction thoroughly and make your decisions carefully. In this experiment, your total earnings will be calculated in point scores. They will be converted into Singapore Dollar at the rate of point = Singapore Dollar Your individual earnings will be paid to you in cash immediately in sealed envelopes which will be put in a designated place for you to pick up at the end of the experiment. Please note that your earnings will be rounded up or down to the nearest dollar. To preserve your anonymity, each of you is given a unique user ID. You will be identified only by your user ID throughout the whole experiment. Thus, neither the experimenters not other participants will know your personal identities. Please note that during the decision making process no communication is allowed. If you have questions, please raise your hand and we will attend to you in private. Specific Instructions In this experiment, participants will be randomly split up into groups. Each group consists of one participant “A”, one participant “B”. Throughout the whole experiment, one participant A is matched with one participant B. You are participants A. All participants A are in this room but all participants B are in another room. You will not be told who your matched participant B is either during or after the experiment, and your matched participant B will not be told who you are either during or after the experiment. There are two steps involved in this experiment. The following describes the two steps. Step One Each participant A is required to answer 20 multiple choice questions in 15 minutes. They are English questions, logic questions and mathematical questions. Please answer each question by choosing one correct answer from several choices of answers provided. If you not know the answer for the question, please choose “I don’t know” which is provided as one of the choices. Each correct answer adds one point to your individual scores. However, each incorrect answer deducts one point from your individual scores. If you not know the answer and choose ‘I don’t know’ option, your individual scores will not be affected. When the time allowed to answer the questions (15 minutes) is up, computer will submit your answer for marking automatically. Once your answers are submitted, the computer will mark your answers immediately. You will be informed the number of correct answers, number of incorrect answers and number of question unanswered based on the answers you have provided. Once all participants have submitting their answers, the computer will also inform you about your individual ranking of scores among all the participants A. You will thus know your performance relative to other participants A in the computer lab. Upon knowing your individual rankings of scores, we will distribute the Step Two of experimental instruction to you. The Step Two of experimental instruction will specify the following: c. How your individual scores are translated into individual earnings. d. Further decisions you need to make. Step Two You have known your individual scores from answering the questions in Step One. In this experiment, your individual earnings will be the average earnings of all participants A in the computer lab. With the conversion rate of ‘1 point = Singapore Dollar’, your individual earnings will be the dollar amount of the average individual scores obtained by all participants A in Step One plus Singapore Dollars show-up fee. After knowing your individual earnings, you will be asked to make a transfer from your individual earnings to your matched participant B in the other room. The amount you can transfer ranges from Singapore Dollar up to your individual earnings. Please note, the smallest unit of your transfer will be in dollar, i.e., no decimal point is allowed. Your final earning will be your total earning net of your transfer to your matched participant B. This is how we calculate participants A’s and B’s final earnings. Participant A’s final earning amounts to + Singapore Dollars + The amount of money participant A earned from Step One − The amount of money participant A decided to transfer to his/her matched participant B Participant B’s final earning amounts to + Singapore Dollars + The amount of money participant A decided to transfer to the matched participant B [...]... predictions Section 2. 3 discusses the experimental design and procedures Experimental results and explanations are presented in Section 2. 4 Section 2. 5 concludes 2. 2 The Aghion and Tirole (20 07) Model and the Testable Hypotheses In this section, we first outline the key theoretical constructions of Aghion and Tirole (1997) and the corresponding theoretical predictions Using these theoretical predictions,... Agent 12 12 12 12 12 12 12 12 11 11 12 12 Table 2. 10: Experimental Sessions 2 3 To avoid the impact of possible end game effect on the experimental analysis, we did not include data obtained from round 12 and round 23 for the experimental analysis in Section 2. 4 Excluding round 1, 2 and round 12, we thus have 21 6 interactions between the principal and the agent for treatment 1, 21 6 interactions for treatment... obtain project payoff information 2 2 Based on the effort cost functions of ( 9 ) and (10 ) , the principal’s and the agent’s objective functions in the P-form organization are shown in (11) and ( 12 ) U P = EB + [1 − E ] eα B − 4 2 E 5 1 U A = E β b + [1 − E ] eb − e 2 2 (11) ( 12 ) The first order condition of the above leads to the basic trade-off of ‘loss of control and initiative’ shown below, E=... interactions for treatment 2 and 20 7 interactions for treatment 3 in the P-form organization Excluding round 13 and round 23 , we have 21 6, 21 6 and 20 7 interactions for treatment 1, 2 and 3 in the A-form organization Participants were undergraduate students from the National University of Singapore with various academic backgrounds They were recruited from campus-wide advertisement No participant was allowed to... in Table 2. 7 and Table 2. 8, the corresponding Nash effort levels are shown in Table 2. 9 The effort choices listed in Table 2. 9 were used to test Hypothesis 1 Treatment 1 2 3 α 0 .2 0 .2 0.8 Parameters β B 0 .2 1.3 0.8 1.3 0 .2 1.3 b 0.7 0.7 0.7 Best projects given {130,14} and {26 ,70} {130,56} and {26 ,70} {130,14} and {104,70} P-Form E e 7.88 1.48 7.88 1.48 6.56 2. 41 A-Form E e 2. 75 6.61 4.47 4.5 2. 75 6.61... game and the gift exchange games, Fehr and Falk conclude that “Contract theory and principal – agent theory, for example, typically restrict their attention to the motives to achieve income through effort and to avoid risks …… this narrow view of human motivation may severely limit progress in understanding incentives.” (Fehr and Falk (20 02) page 687 – 688) While the existing experiments have contributed... set up our experimental hypotheses These experimental hypotheses will then be evaluated in section 2. 4 2. 2.1 The Model In Aghion and Tirole (1997), the organization consists of one principal and one agent In each period, the organization needs to decide whether or not to implement a project from n available projects choices, and n ≥ 3 The principal hires the agent to collect the information about the... delegation acts as an instrument to induce different belief and a commitment device to make bargaining aggressive In Bartling and Fischbacher (20 08), delegation is a strategy to shift blame away from the delegator to the delegated second party In Aghion and Tirole (1997), however, delegation is used as an incentive device to induce effort Furthermore, the interactions in both Fershtman and Gneezy (20 01) and. .. decision straightforward to the participants Substituting these effort levels into the effort cost functions of ( 9 ) and (10 ) , the resulting effort cost tables are shown in Table 2. 5 and Table 2. 6 Effort Cost Probability 0 0 0 0.1 0.008 0.1 0 .2 0.0 32 0 .2 0.3 0.0 72 0.3 0.4 0. 128 0.4 0.5 0 .20 0.5 0.6 0 .28 8 0.6 0.7 0.3 92 0.7 0.8 0.5 12 0.8 0.9 0.648 0.9 1 0.80 1 0.8 0. 32 0.8 0.9 0.405 0.9 1 0.50 1 Table 2. 5:... Bartling and Fischbacher (20 08) are not based on a principalagent relationship Instead, they are based on modified ultimatum and dictator games To the best of 4 1 our knowledge, no experiment has been conducted to analyze the role of delegation as an incentive mechanism in the principal-agent interaction We designed a simple experiment that closely follows the theoretical construction of Aghion and Tirole . Section 2. 5 concludes. 2. 2 The Aghion and Tirole (20 07) Model and the Testable Hypotheses In this section, we first outline the key theoretical constructions of Aghion and Tirole (1997) and. Aghion and Tirole (1997) as well as their theoretical predictions. Section 2. 3 discusses the experimental design and procedures. Experimental results and explanations are presented in Section 2. 4 Aghion and Tirole (1997), however, delegation is used as an incentive device to induce effort. Furthermore, the interactions in both Fershtman and Gneezy (20 01) and Bartling and Fischbacher (20 08)