TRANSACTION RISK AND BIDDING BEHAVIOR

This paper analyzes a model of consumer behavior where transaction risk in the form of a divergence between bid and executed demand is incorporated into the consumer's decision process. A neutral assumption concerning risk preferences, combined with income and expenditure constraints, is shown to be sufficient to generate behavior commonly associated with risk aversion. Such responses to transaction risk are referred to as objective reactions as opposed to subjective attitudes toward risk. The income effect is shown to play an important role in determining behavioral reactions to this type of risk.     

CAPACITY CONSTRAINTS AND INFORMATION REVELATION IN PROCUREMENT AUCTIONS

We utilize laboratory experiments to study behavior in sequential procurement auctions where winning an auction round increases a bidder's future costs. The game admits competitive as well as bid‐rotation style collusive equilibria. We find that (a) bidders show some propensity to account for the opportunity cost of winning an auction, but underestimate its magnitude; (b) revealing all bids (instead of only the winning bid) after each round leads to dramatically higher procurement costs. The rise in procurement costs is accompanied by an increase in very high (extreme) bids, a fraction of which appear to be collusive in nature. (JEL C91, D44, L44)     

INDIVIDUAL BEHAVIOR AND BIDDING HETEROGENEITY IN SEALED BID AUCTIONS WHERE THE NUMBER OF BIDDERS IS UNKNOWN

This article uses laboratory data from a series of first‐price (FP) and second‐price (SP) sealed bid auctions in which the number of bidders is unknown to test for possible deviations of individual behavior from theory and study the source of heterogeneity in bidding. In SP auctions we find a substantial amount of coincidence with theory. We observe systematic deviations from risk neutral bidding in FP auctions and show theoretically that these deviations are consistent with risk averse preferences. We find essentially no heterogeneity in bidding in SP auctions where risk preferences and the number of bidders do not affect the optimal bid, while in the FP auctions heterogeneity in bidding persists with experience. We find that heterogeneity in bidding in FP auctions is consistent with heterogeneity in risk preferences, the attempt to count the number of bidders in the auction, and bidder specific noise. (JEL D44, C91)     

SELECTION INTO AUCTIONS FOR RISKY AND AMBIGUOUS PROSPECTS

We study experimentally the selection into first‐price sealed‐bid auctions for a risky or an ambiguous prospect. Most subjects chose to submit a bid for the risky prospect, leading to thinner markets for the ambiguous prospect. Transaction prices for both prospects were equal although subjects expected the ambiguous markets to be smaller. Evidence of a positive correlation between risk and ambiguity aversion suggests that the ambiguous markets were populated by relatively risk tolerant bidders. A control experiment with selection in a simple choice task shows that subjects correctly anticipate the effects of selection on market size and risk attitudes. (JEL C91, D44, D81)     

RISK AVERSION AND OVERBIDDING IN FIRST PRICE SEALED BID AUCTIONS: NEW EXPERIMENTAL EVIDENCE

Bidding above the risk‐neutral Nash equilibrium in first price sealed bid auctions has traditionally been ascribed to risk aversion. Later studies, however, offer other explanations and even argue that risk aversion plays no or a minor role. In a novel experimental design, we directly test the relationship between risk aversion and overbidding by systematically varying the distribution of risk attitudes in auction markets. We find a significant relationship between our measure of risk aversion and overbidding. (JEL D44, C91)     

CODE CREATION IN ENDOGENOUS MERGER EXPERIMENTS

We study the conflict that can occur in a merger due to firms' use of specialized language, or “code,” and whether participants accurately forecast this difficulty. After creating a shared code to describe different pictures accurately, subjects bid for extra payments to join a merged group. The two lowest bidders are placed in the merged group. Values inferred from two different bidding procedures indicate fairly accurate general appraisals of the cost of the merger, but the values of those subjects who bid the least, and choose to join the merged group, are too optimistic, reflecting an “organizational winner's curse.” (JEL D23, D83, G34, L21, M14)     

DESIGNED TO FAIL: THE MEDICARE AUCTION FOR DURABLE MEDICAL EQUIPMENT

We examine the theoretical properties of the auction for Medicare Durable Medical Equipment. Two unique features of the Medicare auction are (1) winners are paid the median winning bid and (2) bids are nonbinding. We show that median pricing results in allocation inefficiencies as some high‐cost firms potentially displace low‐cost firms as winners. Further, the auction may leave demand unfulfilled as some winners refuse to supply because the price is set below their cost. We also introduce a model of nonbinding bids that establishes the rationality of a lowball bid strategy employed by many bidders in the actual Medicare auctions and recently replicated in Caltech experiments. We contrast the median‐price auction with the standard clearing‐price auction where each firm bids true costs as a dominant strategy, resulting in competitive equilibrium prices and full efficiency. (JEL D44, I11, H57)     

FREEDOM, ECONOMIC OPPORTUNITY, AND FERTILITY: BLACK AMERICANS, 1860–1910

Black fertility declined sharply following Reconstruction. Demographers argue that explanations of post-bellum white fertility behavior are inapplicable to blacks. This paper hypothesizes that the reduced fertility was due to economic factors. An economic model of fertility is developed and estimated econometrically; it is consistent with the fertility experience of both races. It is concluded that several products of emancipation, including urbanization, increased literacy levels, and a shift in the economic burden of child maintenance from the slave owner to the family, were instrumental in increasing the opportunity cost of black children to their parents.     

MONETARY REWARDS AND DECISION COST IN EXPERIMENTAL ECONOMICS

A survey of thirty-one experimental studies which report data on the comparative effects of monetary rewards and opportunity cost shows: (1) several studies in which increased rewards shift the central tendency of the data toward the predictions of rational models; (2) in virtually all cases rewards reduce the variance of the data around the predicted outcome. This is consistent with a model in which rewards are balanced against decision cost in agent behavior and explicates the argument that when rational models fail it can be attributed to low opportunity cost of deviations from the rational prediction.     

STICKY WAGES AND IMPLICIT CONTRACTS: A TRANSACTIONAL APPROACH

Sticky wages have been explained in the recent implicit contracts literature as a risk shifting device. Risk averse employees purchase insurance via an implicit contract from risk neutral firms. This paper offers an alternative explanation of the phenomenon. Various alternative organizational forms for labor markets are analyzed from a transactions cost viewpoint. Observed labor market institutions (including sticky wages) are seen as ways to economize on transactions costs. In fact, it is argued that sticky wages would be observed even if workers were risk neutral. Thus the emphasis on risk shifting in the implicit contracts literature seems misplaced.
A fall (in price) arising from temporary distress will be attended probably with no correspondent fall in the rate of wages: for the fall in price, and the distress, will be understood to be temporary, and the rate of wages, we know, is not so variable as the price of goods.     

The Relationship between Marcellus Shale Gas Development in Pennsylvania and Local Perceptions of Risk and Opportunity

Recent advances in gas and oil drilling technology have led to dramatic boomtown development in many rural areas that have endured extended periods of economic decline. In Pennsylvania's Marcellus gas fields, the recent development of unconventional shale gas resources has not been without controversy. It has been variously framed as a major opportunity for economic revitalization at the local and regional levels and energy independence at the national level, but also as a significant environmental risk, with uncertain and uneven economic benefits. We use data from a survey conducted in 309 school districts located within Pennsylvania's Marcellus Shale region to study the ways local stakeholders perceive both risk and opportunity associated with gas extraction from Marcellus Shale. Our analyses indicate that there is a strong positive association between perceptions of risk and opportunity associated with gas extraction. Further, the intensity of perception of both risk and opportunity is directly associated with the amount of local drilling, suggesting the complexity of local contexts within which local stakeholders evaluate rapid boomtown‐associated community change. In total, these findings complicate the framing of unconventional gas extraction in the Marcellus Shale region, and indeed boomtown growth overall, as fundamentally polarizing issues.     

LABOR MARKET REGULATION AND THE WINNER'S CURSE

This paper analyzes the impact British Columbia's 1992 Skill Development and Fair Wage Policy (SDFWP) on bid price determination. Econometric analysis of the public school projects tendered between 1989 and 1995 shows that prior to the SDFWP, the common values auction model applied, and bidders facing higher competition surcharged cost estimates in order to avoid the winner s curse. After the SDFWP, collective uncertainty concerning wages declined, and the independent values model became relevant. During this period, bidders responded to rising competition by lowering their bids. This adjustment explains, at least in part, why wage regulation did not raise bid prices. ( JEL D44, J38, L74, H57)     

Central tendency bias in belief elicitation

We conduct an experiment in which subjects participate in a first-price auction against an automaton that bids randomly in a given range. The subjects first place a bid in the auction. They are then given an incentivized elicitation of their beliefs of the opponent’s bid. Despite having been told that the bid of the opponent is drawn from a uniform distribution, we find that a majority of subjects report beliefs that have a peak in the interior of the range. This result is robust across seven different experimental treatments. While not expected at the outset, these single-peaked beliefs have precedence in the experimental psychology judgments literature. Our results suggest that an elicitation of probability beliefs can result in responses that are more concentrated than the objectively known or induced truth. We provide indicative evidence that such individual belief reports can be rationalized by well-defined subjective beliefs that differ from the objective truth. Our findings offer an explanation for the conservatism and overprecision biases in Bayesian updating. Finally, our findings suggest that probabilistic forecasts of uncertain events might have less variance than the actual events.     

Bidder Preferences among Auction Institutions

This study examines bidder preferences between alternative auction institutions. We seek to characterize experimentally the degree to which bidders prefer an ascending auction to a sealed bid auction. We find very strong ceteris paribus preferences for the ascending institution with bidders choosing it overwhelmingly often when entry prices for the two auctions are the same. When the entry prices of the two auctions differ, many subjects can be shown to be willing to pay more to enter the ascending auction than is explainable by their risk attitudes when accounting for their expectations about the risk preferences of their opponents. (JEL C91 , D44 )     

Book Review

The prevalence of suicide suggests social workers will encounter clients at risk for suicide, but research shows social workers receive little to no training on suicide and suicide prevention and feel unprepared to work effectively with clients at risk. Baseline results from a randomized intervention study of the Question, Persuade, and Refer suicide prevention gatekeeper training with 73 advanced master’s of social work student interns show suicide knowledge was average, attitudes about suicide prevention were generally neutral, and use of suicide prevention practice skills was low. These results indicate an opportunity for enhancing student outcomes through training and inform social work education regarding necessary preparation for student interns and new graduates to identify and respond effectively to client suicide risk.     

Independence pays: a cost and resource analysis of direct payments in two local authorities

Although there is an increasing amount of literature on direct payments (DP), to date there have been few studies which have examined in any detail the costs and resources associated with them. This paper presents findings from a two year study conducted in two Welsh local authorities that jointly fund an Independent Living Support (ILS) scheme. The main study was not designed to provide definitive cost comparisons with conventional services, however, cost and resource implications of DP were considered and an analysis to determine comparative costs between DP and traditional services was undertaken. The study notes the difficulty in identifying the true cost of DP and reasonable comparators with traditional services. A set of four case studies are presented comparing actual costs of DP and in‐house and independent sector services in the two local authorities studied. The comparison of costs and resources, which did not include significant costs for traditional local authority services but included the cost of the DP support scheme, found that DP was cheaper than traditional in‐house service provision and relatively cost neutral when compared with independent sector provision. User satisfaction, however, was significantly greater with DP than traditional service delivery methods. The paper also examines factors which can potentially influence the cost of DP. The study suggests that DP represent a substantial improvement over traditional arrangements from a cost–benefit perspective. There is strong evidence to suggest that greater ‘opportunity cost’ savings can be anticipated when DP schemes become more fully integrated into policy, practice and procedures.     

Nuns and monkeys: investigating the behavior of our oldest old

The use of nonhuman primates, particularly rhesus macaques (Macaca mulatta), as the best model for human physiological and cognitive aging is broadly accepted. Studies employing nonhuman primates to investigate behavioral changes that may occur with increasing age, however, are not common mostly because of the unavailability of appropriate subjects. Recent longitudinal human studies suggest that individual personality might play a large role in aging "successfully" and in the retention of high levels of cognition into old age. As a result of the demographic trend of increasing numbers of aged monkeys and apes in captivity, an opportunity exists to further investigate behavioral aging using the monkey model.     

IDENTIFYING THE ROLE OF RISK SHOCKS IN THE BUSINESS CYCLE USING STOCK PRICE DATA

I analyze the sources of U.S. business cycle fluctuations in an estimated Dynamic Stochastic General Equilibrium model with a rich set of nominal and real rigidities and various exogenous disturbances. The model includes a shock to the expected risk‐premium, which introduces a time‐varying wedge between the policy rate set by the central bank and the cost‐of‐capital of firms. In the aggregate data, most U.S. corporations finance their investment using internal funds, and stock prices reveal the opportunity cost of this type of financing. I therefore use corporate market value and dividend data in the Bayesian estimation of the model to identify risk shocks. Variance decomposition exercises show that these shocks account for a substantial part of the variation in the stock market, as well as the variation in output and investment, especially at short forecast horizons. The variation of these variables at longer forecast horizons are mainly captured by shocks to investment‐specific technological change. Historical decomposition points to the important role played by risk shocks in the run up of stock prices and output in the late 90s, and in the reversal of these variables in the early 2000s and during the recent recession. (JEL E32, E44)     

THE IMPORTANCE OF FINANCIAL CONSIDERATIONS IN DIVORCE DECISIONS

This paper studies the linkage between the expected financial consequences of divorce and the decision to become divorced. A standard choice-theoretic model predicts that the probability of divorce will be negatively related to the financial opportunity cost of divorce. This opportunity cost is measured as the difference in the present values of the future income streams that a married woman might expect if she were to stay married rather than become divorced. Our empirical results indicate that the expected short-term financial consequences are a better predictor of subsequent divorce than are the longer-term consequences.     

Assessing Risk: A Public Analysis of the Medfly Eradication Program

The Mediterranean Fruit Fly eradication program provided anopportunity to assess public attitudes toward technologicalrisks. This is a case study of 126 residents from a metropolitanarea who, during the 1981–82 Mediterranean Fruitfly Crisis,were undergoing exposure to aerial spraying with a pesticide.While only one-third of the subjects expressed fear of dangerto their health and to the environment, 94 percent undertookone or more major behavioral precautions. Individual differencesin risk perception were related to perceived benefits of theprogram, political ideology, faith in experts, and media exposure.Individual differences in risk acceptability varied primarilyas a function of risk perception. Federal, state, and businessagencies were perceived as influential in decision making, withindividual citizens having little opportunity for input.