ESSAYS ON BEHAVIORAL AND ORGANIZATIONAL ECONOMICS: AN EXPERIMENTAL APPROACH ZHANG JIANLIN B . S C . ( S T C L A S S H O N S ) , L O N D O N , M . S C . ( M E R I T ) , L S E A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY (ECONOMICS) DEPARTMENT OF ECONOMICS NATIONAL UNIVERSITY OF SINGAPORE 2009 i Table of Contents Summary Page v List of Tables vii List of Figures ix CHAPTER I: Introduction CHAPTER II: Delegation of Formal and Real Authority in the Lab 2.1 Introduction 2.2 The Aghion and Tirole Model and the Testable Hypotheses 16 2.2.1 The Model 16 2.2.2 Hypothesis 20 2.3 Experimental Design and Procedures 22 2.3.1 Nash Equilibrium Effort 22 2.3.2 Experimental Design 25 2.4 Experimental Results 34 2.5 Comparative Statics Analysis 51 2.6 Conclusion 55 CHAPTER III: Social Norms with Free-riding, Demotivated Third Parties 57 3.1 Introduction 58 3.2 Motivations for the Experiment and Experimental Hypothesis 63 i i 3.3 Methods and Design of the Experiment 67 3.4 Experimental Results and Analysis 71 3.4.1 The Stability of Decisions 72 3.4.2 Third Party Observer’s Behavior 75 3.4.3 Dictator’s Behavior 80 3.4.4 The Effect of Weakening the Impact of Punishment Behaviour 81 3.4.5 The Impact of the Number of Third Party Observers on Dictator’s Behavior 84 3.5 Conclusion 90 CHAPTER IV: Does Social Comparison of Ability Reduce Generosity? An Experimental Investigation 92 4.1 Introduction 93 4.2 Experimental Background 96 4.3 Experimental Design and Procedures 99 4.4 Experimental Results 102 4.5 A Robustness Check: The Charity Game 111 4.6 Gender Differences in Giving Behaviour 117 4.7 Concluding Remarks 119 CHAPTER V: An Egalitarian Regime Breeds Generosity: The Effect of Endowment Procedures on Social Preferences 122 5.1 Introduction 123 5.2 Experimental Design and Procedures 126 i i i 5.3 Experimental Results 128 5.4 Concluding Remarks 140 CHAPTER VI: Conclusion 142 BIBLIOGRAPHY 145 APPENDIX A: Experimental Instruction for Chapter II 151 B: Experimental Instructions for Chapter III 154 C: Experimental Instructions for Chapter IV 165 D: Experimental Instructions for Chapter V 175 i v Summary Most economic models assume that people are exclusively motivated by material self-interests. Recently, countless evidence from many economic experiments has systematically refuted this rational self-interest hypothesis. The evidence has led many people to conclude that people also care about fairness and other people’s wellbeing, and exhibits reciprocity towards others. Many theories have been written to explain the observed evidence and some of them have shed lights on issues that have puzzled economists for a long time. In this thesis, I investigate some issues of other-regarding preference. In the first and second essay, I investigate the impact of other regarding preference on behaviour inside organization and in the society at large respectively. I investigate the nature of otherregarding preference under different institutional arrangements in the third and fourth essay. In the first essay, I study the role of delegation in the principal-agent relationship based on the theoretical construction of Aghion and Tirole (1997). Using a simple experiment, the experimental results shows considerable supports to the main thesis of Aghion and Tirole (1997). That is, delegation of formal authority to the agent motivates the agent to exert higher effort, albeit the payoff to the owner is less clear-cut. Many new findings that are not predicted by the theory have also been uncovered. In particular, agents did not behave in a completely selfish manner, and both the principal and the agent exhibited a noticeable degree of fairness even at their private cost. In the second essay, I investigate the characteristics and the nature of social norms using modified third party punishment game (Fehr and Fischbacher, 2004). The main experimental quest is whether having multiple third party observers will lead to free-ridings on other’s motive to punish the violation of social norms. The experimental results not only prove the existence of free-ridings motives among the third party observers, the results also shows that this free-riding effect was strong. By twisting the impact of the third party observer’s punishment on the dictator, I also found that the incentive to punish was weakened when the impact of punishment was low. When looking at the v behavioural response of the dictators when the number of third party observers varied, I incidentally found a strong negative relationship between the dictator’s transfer and the number of third party observer presented in the game. The third essay evaluates the property of other-regarding behaviour by manipulating the social environment that participants are in. The experimental results show that disclosing information on the relative ranking of the dictators’ ability and the distribution of their scores results in their giving a lower amount. This finding suggests that a meritocratic environment that is characterized by an explicit social comparison will result in a society that exhibits less generosity towards others. The property of other-regarding preference is further investigated in the fourth essay. In the fourth property, I investigate the possible link between the procedure with which the money endowment is generated and distributed among individuals and the allocation decisions of these individuals using a two-stage dictator game. The experimental results show that the allocators were more generous under the egalitarian treatment, in which the allocators’ endowments were imposed to be the average earnings from performing the required task in stage one of the modified dictator game, than under the meritocratic treatment of which the allocators’ endowments reflected their true ability in performing the required task. Thus, in essence, the egalitarian treatment gave rise to a stronger other regarding behaviour of the allocators. Most interestingly, being taxed and “forced” to subsidize the low performers did not diminish the high performers’ generosity. The findings thus tie closely with Boulding (1973) and Moody (2008)’s serial reciprocity and further implies that people’s otherregarding preference might not be inherently stable. v i List of Tables Table 2.1: Possible Outcomes and their Related Probabilities Page 18 Table 2.2: The Nash Effort 24 Table 2.3: Project Payoffs when   ✁ ✂ ✄ ☎ ✆ ✝ ✁ ✞ ✄ ✟ ✆ ✠ ✁ ✞ ✄ ✡ and ✁ ✞ ✄ ☞ ☛ 25 Table 2.4: Scaled project Payoffs table 26 Table 2.5: Theoretical Effort Cost table for the Principal 27 Table 2.6: Theoretical Effort Cost table for the Agent 27 Table 2.7: Effort Cost table for the Principal 28 Table 2.8: Effort Cost table for the Agent 28 Table 2.9: Experimental Nash Effort Choices 28 Table 2.10: Experimental Sessions 32 Table 2.11: P-values for the Sign test and the Signed Rank test (two-sided) 37 Table 2.12: Mean Payoffs per Round 39 Table 2.13: The Mann–Whitney–Wilcoxon Test on the Mean Effort Choices 52 Table 2.14: The Mann–Whitney–Wilcoxon Test on Probabilities of Delegation, Overruling, Selfishness, Fairness and Gambling behaviours 54 Table 3.1: Design of Experiment 67 Table 3.2: Number of Participants 70 Table 3.3: Mean amount of transferred and mean amount of punishment from round to round 72 Table 3.4: Mean Amount of Punishment in the TPP and the MPP3 Treatment 76 Table 3.5: Mean amount of Transfer in the TPP and the MPP3 Treatment 80 Table 3.6: Mean Amounts of Transfer and Mean Amount of Punishment in the MPP3 and MPP1 Treatment 82 v i i Table 3.7: Mean Amount of Transfer from Dictator 87 Table 4.1: Summary of the Descriptive Statistics 103 Table 4.2: Some Statistical Tests 104 Table 4.3: Estimates of Probit Regressions 108 Table 4.4: Descriptive Statistics of the Contribution Rate 109 Table 4.5: Non-parametric K-Sample Test for the Equality of Medians 110 Table 4.6: Summary of the Descriptive Statistics 112 Table 4.7: Estimates of Probit Regressions 115 Table 4.8: Descriptive Statistics of the Contribution Rates 116 Table 4.9: Non-parametric K-Sample Test for the Equality of Medians 116 Table 4.10: Gender Analysis 117 Table 4.11: Non-parametric K-Sample Test for the Equality of Medians 118 Table 5.1: Summary of the Descriptive Statistics 128 Table 5.2: Statistical Tests on the Allocators’ Scores 130 Table 5.3: The Descriptive Statistics of the Contribution Rate 131 Table 5.4: Wilcoxon-Mann-Whitney Test for the Equality of Means 134 Table 5.5: OLS Regressions with the Contribution Rate as the Dependent Variable 135 Table 5.6: OLS Regressions with the Absolute Contribution as the Dependent Variable 136 Table 5.7: OLS Regressions with the Contribution Rate of the Low and High Scorers as the Dependent Variables 138 v i i i List of Figures Figure 2.1: Timing of Interaction in the P-form organization Page 18 Figure 2.2: Timing of Interaction in the A-form organization 19 Figure 2.3: Mean Effort Choices in Treatment 35 Figure 2.4: Mean Effort Choices in Treatment 35 Figure 2.5: Mean Effort Choices in Treatment 36 Figure 2.6: Proportion of the Uninformed Agent Recommending a Project Randomly across Rounds 49 Figure 3.1: Time Series plots on Mean Amount of Transfer and Mean Amount of Punishment 73 Figure 3.2: Proportion of third party observers Decided to Punish across Rounds in the TPP and MPP3 treatments 76 Figure 3.3: Distributions of Amount of Punishment in the TPP and the MPP3 Treatments 77-78 Figure 3.4: Amount of Punishment Against Level of Transfer in the TPP and the MPP3 Treatment 79 Figure 3.5: Distributions of Amount of Punishment in the MPP3 and the MPP1 Treatments 83 Figure 3.6: Distributions of Dictator’s Transfer in the DG, TPP and MPP1 Treatments 86 Figure 3.7: Mean Transfers between the TPP and the DG Treatment 87 Figure 3.8: Boxplots of Amount of Transfer for DG, TPP and MPP1 treatments 88 Figure 4.1: Distribution of the Scores 104 Figure 4.2: Distributions of the Contribution Rates 105 Figure 4.3: Contribution Patterns across Treatments 106 – 107 Figure 4.4: Distribution of the Contribution Rates 113 Figure 4.5: Contribution Patterns across Treatments 114 i x Figure 5.1: The Allocators’ Scores Across Treatments 129 Figure 5.2: The Histograms of the Contribution Rates 131 Figure 5.3: The Histograms of the Contribution Rate for the Low and High Scorers Across Treatments 132 x . ESSAYS ON BEHAVIORAL AND ORGANIZATIONAL ECONOMICS: AN EXPERIMENTAL APPROACH ZHANG JIANLIN A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY (ECONOMICS) . institutional arrangements in the third and fourth essay. In the first essay, I study the role of delegation in the principal-agent relationship based on the theoretical construction of Aghion and. 3.5: Mean amount of Transfer in the TPP and the MPP3 Treatment 80 Table 3.6: Mean Amounts of Transfer and Mean Amount of Punishment in the MPP3 and MPP1 Treatment 82 Table 3.7: Mean Amount