In the Varian (1980; American Economic Review 70(4) (1980), 651–59) model of price competition, a change from simultaneous to sequential price setting dramatically changes equilibrium strategies, and in the unique symmetric, equilibrium prices are pushed up to the monopoly price. There also exists an asymmetric equilibrium with lower average prices. Our main contribution is to test these predictions in the laboratory. Our data strongly support the qualitative model predictions. However, a fraction of players set low prices in accordance with the asymmetric equilibrium, which is puzzling. We show that the puzzle to a large extent can be resolved by introducing competitive preferences in the model.

We introduce loss aversion in an infinite‐horizon, alternating‐offers model. When outside options serve as reference points, the equilibrium of our model follows that of the standard Rubinstein bargaining model, i.e., outside options do not affect the equilibrium unless they are binding. However, when reference points are given by the resources players contribute to the pie, the bargaining outcome changes such that a player's share increases in her contribution. We test our model's predictions in the laboratory. As predicted, only binding outside options impact the division of the pie. Data also show that contributions matter for bargaining outcomes when they are activated as reference points, but not quite as predicted by our theory. Proposers gain a higher share of the pie only when they have contributed a higher share than the opponent has. This article is protected by copyright. All rights reserved.

We experimentally investigate the role of two-sided reputation-building in dynamic bargaining. In the absence of outside options, rational bargainers have an incentive to imitate obstinate types that are committed to an aggressive demand, inducing delay. Outside options remove this incentive and ensure immediate agreement whenever two rational bargainers match. Our data support the hypothesis that outside options cut down on imitation and ensure timely agreements, but only if subjects share a belief about what constitutes obstinacy. Further, we find that outside options are exercised excessively and that efficiency is no better than it is in their absence. We ascribe this result to the presence of fairness preferences in the subject pool.

We investigate the effects of wages and uncertainty on political corruption as measured by rent-taking. First, our laboratory data show that contrary to standard theory, rent-taking is not independent of, but decreases with wages in the absence of popularity shocks. Second, the orthodox view that rent-taking is greater in the presence of popularity shocks, given wages, is not necessarily true. Third, we find that in the presence of popularity or ideological shocks rent-taking is increasing in the variance of the shock for given wages, and is decreasing in wages for a given variance of the shock. While our third finding is in line with the directional predictions of the Nash equilibria, the deviation from Nash is large when the variance of the popularity shock is high and wages are low. We show that the deviations can be explained using a Quantal Response Equilibrium approach and taking risk-attitudes into account.

We experimentally test the effects of information quality in a global game of regime change. The game features a payoff structure such that more dispersed private information induces agents to attack more often and reduces regime stability in the Bayesian Nash Equilibrium. We show that subjects in the lab do not play as predicted by equilibrium theory. Instead, more dispersed information makes subjects more cautious, increasing regime stability. We show that this finding is consistent with a modified global game model in which agents engage in level-k thinking. In the level-k model, information quality affects agents' actions through a novel channel, that enables a strategic attenuation effect. As information quality worsens, strategic complementarities between different level-k types weaken, generating a force that is capable of reversing the comparative statics from the equilibrium model.

In this paper we study anti-competitive e¤ects of entry within a search framework, and test the implications in an experiment.The starting point for our theoretical analysis is the search model of Varian (1980).In this model, sellers set prices independently and simultaneously.Buyers are either informed about the price quotes or not.All the informed buyers visit the seller with the lowest price quote.The uninformed buyers visit the sellers at random, and buy as long as the price quote is no higher than their reservation value.In equilibrium, sellers randomize over prices, and as the fraction of uninformed buyers goes to zero, the equilibrium expected transaction price converges to zero.Within this model framework, we introduce an entrant.The entrant sets her price after observing the price quotes of the other sellers.In the only symmetric equilibrium of the model, the incumbents set their price equal to the reservation price of the buyers, while the entrant undercuts this price slightly.We test the predictions in the lab.In a pilot study we observe prices that are broadly consistent with our theoretical …ndings.

We experimentally investigate the impact of strategic uncertainty and complementarity on leader and follower behavior using the model of Farrell and Saloner (1985). At the core of the model are endogenous timing, irreversible actions and private valuations. We find that strategic complementarity strongly determines follower behavior. Once a subject decides to abandon the status quo the probability that other players jump on the bandwagon increases sharply. However, there is a reluctance to lead when leading is a conditional best response. We explain this deviation from the neo-classical equilibrium by injecting some noise in the equilibrium concept. We also find that cheap talk improves efficiency. (C) 2018 Elsevier B.V. All rights reserved.

We present results of a laboratory experiment on costly lobbying, comparing the behavior of elite politicians and students. Our main finding is that members of the Norwegian national assembly deviate more from equilibrium predictions than students. This is in opposition to earlier experimental findings comparing the behavior of students and experienced public relations officers. Our finding is somewhat troubling, given that the underlying model addresses experienced real-world, decision makers. Ours is the first systematic study using members of a national parliament as subjects in a lobbying experiment.

We experimentally investigate buyer and seller behavior in small markets with two kinds of frictions. First, a subset of buyers may have (severely) limited information about prices, and choose a seller at random. Second, sellers may not be able to serve all potential customers. Such capacity constraints can lead to coordination frictions where some sellers and buyers may not be able to trade. Theory predicts very different equilibrium outcomes when we vary the set-up along these two dimensions. In particular, it implies that a higher number of informed buyers will lead to lower prices when sellers do not face capacity constraints, while prices may actually increase if sellers are capacity constrained, as shown by Lester (2011). In the experiment, the differences between the constrained and non-constrained case are confirmed; prices fall when sellers are not capacity constrained but either do not fall by much or even increase when they are not. We find that prices are quite close to the predicted equilibrium values except in treatments where unconstrained sellers face a large fraction of informed buyers. However, introducing noise into the theoretical decision making process produces a pattern of deviations that fits well with the observed ones.

Under the 2015 Paris climate agreement, each party sets its own mitigation target by submitting a Nationally Determined Contribution (NDC) every five years. An important question is whether including conditional components in NDCs might enhance the agreement's effectiveness. We report the results of a closely controlled laboratory experiment-based on a mixed sequential-simultaneous public good game with one leader and three followers-that helps answer this question. The experiment investigates how two factors influence the effectiveness of leadership based on intrinsically conditional commitments. Measuring effectiveness in terms of followers' and total contributions, we find that it may help if the conditional promise is credible and if its implementation influences followers' welfare substantially. Importantly, however, for both factors we find a significant effect only if the leader does not reap disproportionate gains from the group's efforts. These findings have important implications concerning the future success of the Paris Agreement.

We study experimentally how enforcement influences public goods provision when subjects face two free-rider options that roughly parallel the nonparticipation and noncompliance options available for countries in relation to multilateral environmental agreements (MEAs). Our results add to the MEA literature in two ways. First, they suggest that compliance enforcement will fail to enhance compliance in the absence of participation enforcement. Second, they indicate that compliance enforcement will boost compliance significantly in the presence of participation enforcement. Our results also add to the experimental literature on public goods provision, again in two ways. First, they reveal that previous experimental findings of enforcement boosting cooperation are valid only in settings with forced (or enforced) participation. Second, they show that subjects' willingness to allocate costly punishment points is significantly stronger when the enforcement system permits punishment of both types of free riding than when it permits punishment of only one type.

Electoral agency models suggest that government efficiency improves when voters penalize poor performance, and party competition is balanced. Uncertainty in the electoral mechanism dilutes the incentive to produce efficiently. We test this proposition using panel data on local governments. The dataset includes a broad set of indicators on service output and quality, which facilitates the measurement of cost efficiency. We use historical data on local voting in national elections to measure partisan bias, while electoral volatility is measured on past variations in neighboring municipalities. The empirical analyses show that partisan bias lowers cost efficiency, particularly in municipalities with large electoral volatility.

Emerging literature explores experimental platform selection games. These games converge rapidly on the superior platform under a wide range of conditions. We replicate the remarkable results of Hossain and Morgan (2009) in which such a game tips almost perfectly to the superior platform. Next, we show that platform coordination fails when seemingly innocent increases in out-of-equilibrium payoffs are introduced. The inflated payoffs keep the best reply structure unchanged and do not influence players’ security levels. Our design allows control for the explanatory force of risk dominance. We find that equilibrium selection theory is unable to account for coordination failure while observed behavior is consistent with non-rational learning. Furthermore, and contrary to the literature, we find that efficiency suffers when an inferior platform is granted initial monopoly.

Models of electoral agency address the levels of discipline and selection that voters can achieve in elections. The models are demanding in terms of individual belief formation and consistency of behavior. We investigate a baseline model of electoral agency in a controlled laboratory environment. This baseline model, although simple, forms the central plank of more complex electoral agency models. Our design seeks to limit the behavioral impact of social preferences. We find little support for the baseline model in our data. However, simple (non-rational) learning rules explain behavioral patterns well. Simulations indicate that non-rational learning drives behavior most forcefully towards equilibrium in situations that are favorable to Bayesian updating.

First, we replicate the remarkable result of Hossain & Morgan (AER 2009), in which subjects in an experimental market tip almost perfectly to the superior platform even if an inferior platform enjoys initial monopoly. Next, we show that this result disappear when seemingly innocent in

Representative democracy does not necessarily eliminate political corruption. Existing models explain the survival of rent-taking politicians by ideological divisions in the electorate and/or informational asymmetries. The current paper demonstrate that rent extraction can persist even if voters are fully informed and ideologically homogenous.We show that in such an environment, voters may gain by persistently reelecting a rent-taker that limits his rent extraction. Such an equilibrium occurs when voters and politicians do not discount the future too heavily, and the share of honest candidates is relatively small. ∗Economics Department, BI Norwegian School of Management, Nydalsveien 37, NO-0442 Oslo. E-mail: leif.helland@bi.no. Phone +47 46410579 (corresponding author) †Economics Department, BI Norwegian School of Management, Nydalsveien 37, NO-0442 Oslo. E-mail: rune.sorensen@bi.no.

Representative democracy does not necessarily eliminate political corruption. Existing models explain the survival of rent-taking politicians by ideological divisions in the electorate and/or informational asymmetries. The current paper demonstrate that rent extraction can persist even if voters are fully informed and ideologically homogenous. We show that in such an environment, voters may gain by persistently reelecting a rent-taker that limits his rent extraction. Such an equilibrium occurs when voters and politicians do not discount the future too heavily, and the share of honest candidates is relatively small.