LSE EOPP seminar

The Value of Participation and the effect of CheapTalk in a Dictator Game

Cornelius Schaub07. February 2005

- 1 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

AGENDA

1) Introduction/main idea

2) Motivation/context

3) Experimental economics

4) Research questions/my experiment (work in progress)

5) Questions/comments?

- 2 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Introduction/main idea (1)

-Main idea:I will try to answer questions on issues of participation by using the method of experimental economics

- Research Questions:Q1) How much do people value participation (procedural utility)?

Q2) How does participation (e.g. by community members) in the form of sending a preference revealing non-binding signal (cheap talk) affect the decision of a ruling elite (e.g. the allocation of a community’s budget)?

- 3 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Introduction/main idea (2)

-To answer these questions I will us a “Participatory Dictator Game”.

-“New” features of my game: -- Introducing cheap talk (CT)-- Measuring participation choice

-Evidence so far?: -- Some experiments on CT, few DG w/ CT (s. section 4)-- As far as I know no experiments measuring procedural utility (this way)

- 4 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

AGENDA

1) Introduction/main idea

2) Motivation/context

3) Experimental economics

4) Research questions/my experiment (work in progress)

5) Questions/comments?

- 5 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

PARTICIPATION

„I participateyou participate

he/she participateswe participate

…they decide!“

- 6 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Motivation/context (1)

General MotivationSome people argue that development activities work much moreeffectively if poor people are empowered. We can define an individual as being empowered if she has the ability to shape thebasic elements of her own life.Reform programs forced from outside, with weak societal commitment and ownership, are likely to fail. But if poor peopleare able to participate, they contribute strongly to the growth process.

→ Give poor people a voice (WB reports „Voices of the poor“)→ Example of Participatory Budget Schemes (PB) in South America

- 7 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Motivation/context (2)

Participatory budget schemes (PB):

- Became effectively known and visible after Porto Alegre’sexperience initiated in 1988/89 (state capital in Southern Brazil) - Spread out all over South America and further- PB consist of a participation process that allows residents of communities to “decide” on how to allocate the municipality’s budget (on public goods)- Decisions basically consist of a priority ranking of investmentpossibilities (established after several neighbourhood assemblies)

Important: I will not try to design a game that is exactly like thePB. My basic game will be much more simplistic. But it will bepossible to extend it afterwards to more complex and realisticsettings.

- 8 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Motivation/context (3)

Cheap Talk:

- Usually „no-communication protocol“ in experiments- But real world interactions usually allow for some communication- Experiments have shown that even non-binding signals can affectthe final decision taken by the other player („cheap talk“)

- 9 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

AGENDA

1) Introduction/main idea

2) Motivation/context

3) Experimental economics

4) Research questions/my experiment (work in progress)

5) Questions/comments?

- 10 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Experimental economics (1)

What is Experimental Economics?

- a particular method of generating data- in experiments, real subjects take decisions with real monetary consequences in carefully controlled lab settings- aims:

- test theoretical models/predictions- find empirical regularities as the basis for newtheories and explore the nature of preferences- „measure the unmeasurable“

- should be seen as a complementary approach (to observational data/survey approaches)

- 11 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Experimental economics (2)

Main advantages: one can ...

- avoid selection bias („controlling“ the group of participants)- overcome causality problems by defining endogenous and exogenous variables (ceteris paribus changes)- choose technology (determines set of possible actions) - set up sequence of actions and information set at eachstageand...- experiments are replicable and usually, theoretical equilibria and focal points are exactly known (benchmark)- interpretation of observed behaviour is (presumably) significant as real money is involved

- 12 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Experimental economics (3)

Main disadvantage:- External validity: transferability of results to the real world?(short time frame, finite structure, few available strategies)

Other: - endowment effect- focal point effect- experimenter effect- language effect- comprehension effect- currency effect

- 13 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Experimental economics (4)

How to practically run experiments?

1) Implementation:- pen & paper (cheap and easy) - in the lab (computer room)- on the internet (e.g. „Veconlab“ by C. Holt at Virginia Uni)

2) Funding issue

- 14 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

AGENDA

1) Introduction/main idea

2) Motivation/context

3) Experimental economics

4) Research questions/my experiment (work in progress)

5) Questions/comments?

- 15 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Research Questions (1)

Q1) How much do people value participation (procedural utility)?

Q2) How does participation (e.g. by community members) in the form of sending a preference revealing non-binding signal (cheap talk) affect the decision of a ruling elite (e.g. the allocation of a community’s budget)?

- 16 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Research Questions (2)

-Existing literature on experiments with CT in DGs: -1) COE Discussion Paper by Yamamori et al. (2004)

-- Reciprocity: “as the recipient’s request increases, the dictator’s offer increases when the request is less than 50% of the pie. […] when the request goes beyond 50% of the pie, the offer decreases as the request increases”

-- voice option (yes/no) is used in 85% of cases -- some signal is better than no signal

- 17 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Research Questions (3)

-2) WP by Charness and Rabin (2004)-- Find that in binomial choice DGs “help me” signals usually lead to higher offers

-- “help me” better than “can’t express” better than silent option

- 18 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (1)Set-up:- 2 Players: Dictator D and Recipient R

Parameters/Variables:- - Price R demands to sell right to use signal: pr

- - Randomly drawn market price: pmIf pr > pm then R does not sell right to signal, if pr < pm then

she does.- - Signal sent to D: sr

- - Pie to be allocated by D among D and R: q- - R’s share of the pie offered by D: r0 / r1 (before/after signal)- - v: true procedural utility for R (variable of interest for Q1)

- 19 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (2)Pay-offs:

- - R: Total payoff = pr + r- - receives pr (if right is sold, i.e. if pr < pm) otherwise 0- - receives r- - D: q-r

- 20 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (3)Decision tree:

D

DR payoffs

payoffs

no use of signal

R forms signal sr

DG

DG

STAGE 1.1Use signal?

STAGE 2

use of signalU

S

STAGE 1.2Form signal

R

- 21 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (2)Treatments:- Main treatment T1a: Stage 1: Choice to use signal (U) and signal formation (S): Stage 1.1 (U): R chooses whether to use the signal or not: here, R

receives right to use signal but can sell it

(1) R chooses pr , i.e. his reservation price (minimum price for which to sell his right) within given range

(2) [Stage 1.2 (S)] Then, all R players choose their signal sr (before knowing whether they will sell their right or not → generate more data

(3) In a third step (using the Becker-DeGroot-Marschak mechanism) the market price pm is randomly determined. If pr > pm, R does not sell her right to use the signal, if pr < pm then she does.

(4) Signal sr which is then sent to D (0 < sr < 1)

- 22 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (3)Value pr will be composed by (at least) two parts:1) E[r1 - r0], i.e. the expected impact a signal sr has on D’s

choice of r2) R’s “residual”/procedural utility vTo disentangle these parts, we will give R players feedback

after each round on how much on average D players adjusted r when receiving a signal (avg [r1 - r0] │sr)

In subsequent rounds, R players will be able to adjust their E[r1 - r0]. This means that we can try to measure their “residual” utility v by taking the difference:

vt = (pr,t - avg [r1 - r0]t-1 │sr)

- 23 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (4)Graph: functional relationship between vt and E{[r1 - r0]t-1 │sr} ?

vt

E{[r1 - r0]t-1│sr}

- 24 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (5)Potential problems with this feedback mechanism : 1) What exact feedback information should we give R players?2) avg [r1 - r0]t-1 │sr depends on R player’s own and others’ signals

(of the same type)→ in small groups of participants one player/pair can influence the average significantly

3) Difficult to introduce learning by Ri only along one dimension (better estimating [r1 - r0] ) w/o allowing other learning (e.g. how to influence D better)

- 25 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (6)(Control) Treatments:- T1b:

R receives right to use signal but can decide not to use it (pay-off irrelevant) → “Yes/No” choice (“opting out) → R players who chose “Yes” continue with T1a→ R players who chose “No” continue directly with the DG

Check “selection into game” effects (c.f Malmendier paper)

- 26 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (7)- T2:DG WITH signal but w/o option to sell signal righti.e. all R players get the right to send signal and cannot sell it (implies

that they have to use it).

Control for whether D players change their allocation of shares differently (from before and after signal) depending on whether R received the right of signalling…

(i) w/o selling option or (ii) with the selling option (i.e. signals only arrive if R could not

sell it at pm) → D is facing only R types with high pr , i.e. with high v or the ones who strongly overestimate (r0 - r1).

- 27 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (8)- T3:DG w/o participation choice and w/o signal (i.e. simple DG)

To see how dictators in our subject pool allocate the pie when there is no participation choice and no cheap talk

- 28 -Cornelius Schaub – Presentation LSE EOPP – 07. Feb 2005

Participatory Dictator Game (9)Possible extensions:- Introduce more Ri players

(i) more than 1 Ri playing with just 1 D individually (i.e. w/o communication among Ri)(ii) group of Ri playing with 1 D (w/ communication)→ to test for group’s calue of participation, group’s signal formation,

other group mechanisms- Introduce reputation effects via repeated play with same D

(re-election stages?)- Introduce (additional) “participation” choice for D

→ D can choose not to receive any possible signals (“opt out”)- Potential questions on D’s behaviour:

D might compare sr with her own (hypothetical) idea of what a fair share for an R player is (sd) → affects D’s choice or r?