Exposure to Risk and Risk Aversion: A Laboratory Experiment (with Fuhai Hong)

Abstract: We examine whether prior exposure to environments with a varying degree of risk affects individuals’ risk-taking behavior. Using a laboratory experiment, we find that subjects exposed to a high risk environment exhibit higher levels of risk aversion than those who were exposed to a moderate or low risk environment. This effect is not driven by subjects’ realized outcomes from the risk. The finding has implications for theoretical models of decision-making under uncertainty, and can speak to a few current policy debates.

PDF for download

Image Credit : cc licensed ( BY-SA 2.0 ) flickr photo shared by KoiQuestion

Tax or Transfer? The Framing Effect of Redistribution Policy: Experimental Evidence

Abstract: This paper investigates whether the framing of redistribution policy affects work effort decisions. I devise two theoretically equivalent treatments: the redistributive tax (TAX) treatment and the redistributive transfer (TRANSFER) treatment and study subjects’ work effort choices in a novel public goods experiment. I find evidence supporting the existence of the framing effect. On average, subjects in the TRANSFER treatment group chose 25.27% higher effort levels than those in the TAX treatment group. Then, I explore possible mechanisms that may account for the framing effect. The results of the experiment do not support the cognitive ability hypothesis. When the fairness perception hypothesis is tested I find there is no significant difference in fairness perception between the two treatments. However, surprisingly, the negative effect of using the TAX rather than the TRANSFER framing is significantly larger among subjects who judge their mechanism to be unfair. The results can shed light on the normative debate about the extent to which taxes or transfers should be used more actively to address widening income inequality.

PDF for download

Image Credit : cc licensed ( BY-NC-ND 2.0 ) flickr photo shared by eyemage

Overreaction or Under-reaction: How do People Respond to Wage Changes?

Abstract: This paper experimentally examines individuals’ work effort choices in response to wage changes. I designed a simple, real-effort experiment with four treatments. Subjects experience a wage increase in one treatment and a wage decrease in another treatment; the other two treatments are used as control treatments in comparison with the former two treatments. I find that subjects overreact to the wage increase but under-react to the wage decrease. Male subjects’ average effort is higher than female subjects. However, interestingly, the wage increase and the wage decrease both have a more pronounced effect on female subjects than their male counterparts. The results have important implications for research on the wage elasticities of labor supply.

PDF for download

Image Credit : cc licensed ( BY-SA 2.0 ) flickr photo shared by 401(K) 2013

Voluntary Contribution Mechanism with Costly Monitoring

Abstract: This paper investigates the effect of costly monitoring in a voluntary contribution mechanism (VCM) experiment with punishment opportunities. Unlike the standard VCM with punishment, in which an individual’s allocation to the group account is released to other members in the group without any cost, a unique feature of our experimental design is that subjects need to specify the members whose allocation(s) they wish to observe. Subjects pay a fixed amount per group member monitored in the costly monitoring treatments, and can observe contributions of each member they select at no additional cost in the free monitoring treatments. Consistent with the findings in related experimental studies on incomplete information, we show that the hindrance to information reduces both contributions and average net payoffs. We also find that pro-social subjects are more likely to pay to monitor other members in their groups. Surprisingly, the extra cost of monitoring has significant effects on punishment behavior. Conditional on monitoring, a subject gives more punishment to a low contributor when monitoring is costly than when it is free.

Image Credit : cc licensed ( BY 2.0 ) flickr photo shared by Images of Money