Abstracts of Cason's Recent Research

by
Timothy N. Cason
Purdue University
and
Charles F. Mason
University of Wyoming
(Published in Economic Inquiry, 1999)
April 1998

Abstract
This paper reports 45 laboratory duopoly markets that examine the importance of information sharing in facilitating tacit collusion under conditions of demand uncertainty. Sellers in these repeated laboratory markets generally shared information when possible to reduce their demand uncertainty, which led to output reductions in some demand states. Risk aversion is a likely explanation for this sharing, but some sellers also appeared to employ a strategy of information concealment to punish non-colluding rivals. Nevertheless, output choices were similar in control treatments that forced sellers to share or conceal information, so the information sharing itself did not substantially increase tacit collusion.

by
Timothy N. Cason
University of Southern California
and
Vai-Lam Mui
University of Southern California
(Published in the Journal of Mathematical Psychology, 1998)
January 1998

Abstract
This paper introduces the sequential dictator game to study how social influence may affect subjects' choices when making dictator allocations. Subjects made dictator allocations of $40 before and after learning the allocation made by one other subject in the Relevant Information treatment, or the birthday of one other subject in the Irrelevant Information treatment. Subjects on average become more self-regarding in the Irrelevant Information treatment, but observing relevant information constrains some subjects from moving toward more self-regarding choices. We also find that subjects who exhibit more self-regarding behavior on their first decisions are less likely to change choices between their first and second decisions, and the use of the Strategy Method in this setting does not significantly alter choices. The relationships between our findings and the economic and psychological literature regarding how social influence operates are also explored.

by
Seema Arora
Owen Graduate School of Management
Vanderbilt University
and
Timothy N. Cason
University of Southern California
(Published in Land Economics, 1996)
May 1995

Abstract
The paper examines participation decisions in EPA's 33/50 program to assess the potential for voluntary environmental regulation to achieve improvements in environmental performance. The 33/50 program is a major EPA initiative to reduce the releases and transfers of 17 high-priority toxic chemicals by 50 percent between 1988 and 1995. The results indicate that the program has the potential to obtain results because large firms with the greatest toxic releases are most likely to participate. The results also identify a demand-based participation incentive, since participation rates are higher in industries with greater consumer contact (proxied by advertising expenditures). This suggests that public recognition is a key element to improve the success of voluntary environmental regulation.

by
Seema Arora
Owen Graduate School of Management
Vanderbilt University
and
Timothy N. Cason
Purdue University
(Published in the Southern Economic Journal, 1999)
August 1997

Abstract
This research uses neighborhood characteristics (at the zipcode level) in 1990 to explain toxic releases in 1993. It combines the Toxics Release Inventory data with demographic data from the 1990 US Census. We first analyze the location of manufacturing facilities in a particular neighborhood using a sample selection model, and then estimate the relationship between releases in 1993 and the demographic characteristics of the neighborhood in 1990. We conduct the analysis for the entire US as well as for different geographic regions to study regional differences in determinants of environmental outcomes. Releases in the Southeastern US exhibit a pattern suggesting that race and gender characteristics might be important determinants of release patterns. Economic characteristics of neighborhoods (such as income levels and unemployment) also affect releases. We find no evidence that the propensity for communities to engage in political action influences environmental outcomes.

by
Timothy N. Cason
University of Southern California
and
Daniel Friedman
University of California at Santa Cruz
(Published in Econometrica, 1997)
Draft: July 1995

Abstract
This paper reports a laboratory experiment designed to examine the price formation process in a simple market institution, the single call market. The experiment features random values and costs each period, so each period generates a new price formation observation. Other design features are intended to enhance the predictive power of the Bayesian Nash Equilibrium (BNE) theory developed recently for this trading institution. We find that the data support several qualitative implications of the BNE, but that subjects' bid and ask behavior is not as responsive to changes in the pricing rule as the BNE predictions. Bids and asks tend to reveal more of the underlying values and costs than predicted, particularly when subjects are experienced. Nevertheless, observed trading efficiency falls below the BNE prediction. The results offer more support for the BNE when subjects compete against Nash "robot" opponents. A simple learning model accounts for several of the deviations from BNE.

by
Timothy N. Cason
Purdue University
and
Feisal U. Khan
University of Southern California
(Published in the Journal of Development Economics, 1999)
November 1997

Abstract
This paper reports seventeen laboratory sessions that introduce imperfect contribution monitoring in the voluntary contributions mechanism. In the imperfect monitoring treatment subjects learn others' public good contributions every six periods, and the experiment also includes face-to-face verbal communication as a treatment variable. The results demonstrate that improved contribution monitoring does not increase contributions without verbal communication, and that communication (even with imperfect monitoring) dramatically improves subjects' ability to efficiently provide the public good. The results have implications for the design of development programs that feature a prominent role for collective action.

by
Timothy N. Cason
Purdue University
and
Daniel Friedman
University of California at Santa Cruz
(Published in E. de Antoni, P. Howitt and A. Leijonhufvud (eds.), Money, Markets and Method: Essays in Honour of Robert W. Clower (1999))
Draft: June 1996

Abstract
This paper compares the performance of four different trading institutions in laboratory markets. Two institutions, the continuous double auction and the single call market, are commonly employed on organized exchanges. Two other "hybrid" institutions, the uniform price double auction and multiple call market, link the other institutions in different dimensions. The laboratory environment features four buyers and four sellers who receive random values and costs in each period and who have a one-unit trading capacity. Therefore, each period provides an observation of price formation and exchange in a thin market environment. We find that trading efficiency is lowest in the institutions that permit only one transaction opportunity each period, primarily due to insufficient trading volume. However, the institutions that permit a single trading opportunity force all traders to transact at a uniform price, which tends to generate prices that more accurately reflect underlying market conditions.

by
Timothy N. Cason
Purdue University
and
Daniel Friedman
University of California at Santa Cruz
(Published in Experimental Economics, 1999)
Draft: January 1999

Abstract
We propose a simple adaptive learning model to study behavior in the single call market. The laboratory environment features buyers and sellers who receive a new random value or cost in each period, so they must learn a strategy that maps these random draws into bids or asks. We focus on buyers’ adjustment of the "mark-down" ratio of bids relative to private value and sellers’ adjustment of the corresponding "mark-up" ratio of asks relative to private cost. The learning model involves partial adjustment of these ratios towards the ex post optimum each period. The model explains a substantial proportion of the variation in traders’ strategies. Parameter estimates indicate strong recency effects and negligible autonomous trend, but strongly asymmetric response to different kinds of ex post error. The asymmetry is only slightly attenuated in "observational learning" from other traders’ ex post errors. Simulations show that the model can account for the main systematic deviations from equilibrium predictions observed in this market institution and environment.

by
Timothy N. Cason
Purdue University
Draft: April 1999
(Published in Review of Financial Studies, 2000)

Abstract
This paper reports an asset market experiment in which asymmetrically informed traders transact through competing dealers, who continuously post bid and ask quotes that traders can accept. Dealers face a classic adverse selection problem when pricing the asset, because one set of traders has private information regarding the asset value while another set of traders is uninformed and must satisfy an exogenous liquidity demand. With no non-market communication between subjects, dealers price the asset competitively and the market is informationally efficient in most sessions. When dealers communicate privately between periods, in most sessions they successfully collude to widen spreads and increase profit. Another treatment permits traders to post limit orders, while still allowing dealers to communicate. Limit orders restore informational efficiency and narrow spreads, but cause dealers to earn negative trading profits.

by
Timothy N. Cason
University of Southern California
and
Lata Gangadharan
University of Melbourne
(Published in the Journal of Regulatory Economics, 1998)
Draft: August 1997

Abstract
This paper reports a laboratory experiment that studies several specific features of the Regional Clean Air Incentives Market (RECLAIM), a tradable emission permit program intended to lower the cost of meeting federal air quality standards in the Los Angeles area. It assesses the impact of some permit trading rules and alternative regulatory policies on market performance. The experiment focuses on a new centralized system of trading called the Electronic Bulletin Board Market. In this trading institution firms wanting to buy and sell permits can publicly post basic information about their requirements and proposed terms of trade, and potential trading partners can review this information online. Transactions are executed following bilateral negotiation. We compare the performance of this institution with the continuous double auction (CDA) trading institution. The environment implemented in the experiment includes specific trading restrictions implemented in RECLAIM due to the geography of the Los Angeles area. We find that the bulletin board market performs well and prices reflect market conditions as accurately as in the CDA. These results suggest that reliance on the electronic bulletin board market will not lead to inaccurate transaction prices.

by
Timothy N. Cason
Purdue University
Tatsuyoshi Saijo
Osaka University
Takehiko Yamato
Tokyo Institute of Technology
and
Konomu Yokotani
The Government Housing Loan Corporation
(Published in Games and Economic Behavior, 2004)
Draft: October 2003

Abstract
We conduct a two-stage game experiment with a non-excludable public good. In the first stage, two subjects choose simultaneously whether or not they commit to contributing nothing to provide a pure public good. In the second stage, knowing the other subject's commitment decision, subjects who did not to commit in the first stage choose contributions to the public good. We found no support for the evolutionary stable strategy equilibrium, and the ratio of subjects who did not commit to contributing nothing increased as periods advanced; that is, the free-riding rate declined over time. Furthermore, this behavior did not arise due to altruism or kindness among subjects, but from spiteful behavior of subjects.

by
Timothy N. Cason
Purdue University
Tatsuyoshi Saijo
Osaka University
Takehiko Yamato
Tokyo Institute of Technology
(Published in Experimental Economics, 2002)
Draft: July 2000

Abstract
This paper studies public good provision in the laboratory using the voluntary contribution mechanism, in a cross-cultural experiment conducted in the United States and Japan. Our environment differs from the standard voluntary contribution mechanism because in one treatment, subjects first decide whether or not to participate in providing this public good. This participation decision is conveyed to the other subject prior to the subjects’ contribution decisions. We find that only the American data support the evolutionary stable strategy Nash equilibrium predictions, and that behavior is significantly different across countries. Japanese subjects are more likely to act spitefully in the early periods of the experiment, even though our design changes subject pairings each period so that subjects never interact twice with the same opponent. Surprisingly, this spiteful behavior eventually leads to more efficient public good contributions for Japanese subjects than for American subjects.

Abstract
This paper studies whether psychological considerations can exacerbate distributional conflicts and prevent agents from adopting innovations that are potential Pareto improvements. In the innovation game without the sharing option, a participant A subject chooses whether to introduce an innovation that increases A's payoff, but reduces B's payoff, relative to the "status quo" payoff of each participant. If A innovates, B then decides whether to accept or reject the innovation. In all payoff treatments, (innovate, accept) is the unique subgame perfect equilibrium if both participants are only concerned with maximizing their pecuniary payoffs. We find that this outcome is observed less than one-half of the time overall when the sharing option is not available. A participants only innovate about 75 percent of the time, and B participants reject the innovation nearly 40 percent of the time. In the innovation game with the sharing option, A has the additional option to invest resources to share his gain from the innovation with B. We find that the availability of the sharing option increases the rate at which participant A subjects innovate in one of the two payoff treatments.

by
Timothy N. Cason
Purdue University
and
Daniel Friedman
University of California at Santa Cruz
(Published in M. Baye (ed.), Advances in Applied Microeconomics, vol. 8 (1999))
Draft: June 1999

Abstract
Posted offer markets with costly buyer search are investigated in 18 laboratory sessions. Each period sellers simultaneously post prices. Then each buyer costlessly observes one or two of the posted prices and either accepts an observed price, drops out, or pays a cost to search again that period. The sessions vary the number of observed prices (one or two), the search cost, and the number and kind of buyers. When there are more buyers (especially robot buyers), observed transaction prices conform remarkably closely to theory (competitive Bertrand prices when buyers observe two prices and monopoly Diamond prices when buyers observe only one price). With human subject buyers we observe less extreme prices, but outcomes are closer to theory than outcomes in previous laboratory experiments with similar environments.

by
Timothy N. Cason
Purdue University
and
Tridib Sharma
ITAM
(Published in Journal of Political Economy, 2001)
Draft: November 2000

Abstract
This paper presents a model in which a durable goods monopolist sells a product to two buyers. Each buyer is privately informed about his own valuation. Thus all players are imperfectly informed about market demand. We study the monopolist's pricing behavior as players' uncertainty regarding demand vanishes in the limit. In the limit, players are perfectly informed about the downward sloping demand. We show that in all games belonging to a fixed and open neighborhood of the limit game there exists a generically unique equilibrium outcome which exhibits Coasian dynamics and where play lasts for at most two periods. A laboratory experiment shows that, consistent with our theory, outcomes in the Certain and Uncertain Demand treatments are the same. Median opening prices in both treatments are roughly at the level predicted and considerably below the monopoly price. Consistent with Coasian dynamics, these prices are lower for higher discount factors. Demand withholding, however, leads to more trading periods than predicted.

by
Timothy N. Cason
Purdue University
and
Lata Gangadharan
University of Melbourne
(Published in Journal of Environmental Economics and Management, 2002)
Draft: April 2000

Abstract
Survey evidence suggests that consumers care about the environment and are willing to pay a higher price for a product that generates less environmental harm. We induce buyer preferences over quality in a laboratory posted offer market to study sellers' incentives to offer products of differing quality. Buyers are unaware of the product quality before purchase, as is often the case for goods with differing environmental quality. We first document the market failure that arises from incomplete information when no signaling or reputations are possible. We then study various treatments that could remedy this failure. Seller reputations and unverified "cheap talk" signals sometimes increase the number of higher-valued 'green' goods. The only reliable way to improve product quality in the experiment, however, is to use a third party that charges a fee to certify product quality claims.

by
Timothy N. Cason
Purdue University
and
Daniel Friedman
University of California, Santa Cruz
(Published in Advances in Economic Analysis & Policy, 2002)
Draft: April 2000

Abstract
In our laboratory customer markets, sellers post price and buyers incur cost (controlled at zero, low and high values) when they switch to a new seller. Sellers’ induced costs follow various random walks in 28 sessions, each with 50-100 trading periods. We find that prices are sticky, and sellers absorb almost half of their cost shocks. Sellers price about 10 percent higher when buyers face either high or low switch costs, and trading efficiency is slightly impaired. Experienced buyers switch about 10 percent of the time with either high or low switch costs. Buyers switch more often when they face a higher posted price, have a lower valuation for the good, face lower switch costs, have more time remaining, and have more favorable information on alternative prices. Sellers price higher when they have more attached buyers, when buyers have less information on rivals’ prices, when rivals post higher prices, and when less time remains.

by
Timothy N. Cason
Purdue University
and
Daniel Friedman
University of California, Santa Cruz
(Published in Journal of Economic Theory, 2003)
Draft: August 2001

Abstract
We study posted offer markets with costly buyer search in 18 laboratory sessions. Each period sellers simultaneously post prices. Then each buyer costlessly observes one or (with probability 1-q) two of the posted prices, and either accepts an observed price, drops out, or pays a cost to search again that period. The sessions vary q, the search cost, and the number and kind of buyers. Equilibrium theory predicts a unified very low (very high) price for q=0 (q=1) and predicts specific distributions of dispersed prices for q=1/3 and 2/3. Actual transaction prices conform rather closely to the predictions, especially in treatments with many robot buyers. Buyers' reservation prices are biased away from the extremes, however, and sellers' posted prices have positive autocorrelation and cross sectional correlation.

by
Rafael Tenorio
DePaul University
and
Timothy N. Cason
Purdue University
(Published in The Economic Journal, 2002)
Draft: July 2000

Abstract
The Wheel is a sequential game of perfect information played twice during each taping of the television game show The Price is Right. This game has simple rules and the stakes are high. We derive the unique subgame perfect Nash equilibrium (USPNE) for The Wheel and test its predictive ability using data from both the television show and laboratory plays of this game. We find that contestants frequently deviate from the USPNE when the decisions are difficult. The pattern of these deviations is (a) largely independent of the stakes of the game, and (b) is consistent with a psychological bias of the omission-commission type.

by
Timothy N. Cason
Purdue University
and
Lata Gangadharan
University of Melbourne
(Published in the Journal of Regulatory Economics, 2003)
Draft: December 2000

Abstract
In recent years many countries have considered and some have adopted incentive approaches for environmental regulation, such as tradable permit schemes to control pollution. In this paper we use laboratory experiments to study the design features of tradable permit programs, focusing on the transaction costs incurred by participants. In the absence of transaction costs, in a competitive market the initial distribution of permits affects equity but has no impact on the efficiency of final allocations. In the presence of transaction costs, however, even in a competitive market the initial distribution of permits can affect both efficiency and equity. We study treatments in which marginal transaction costs are zero, constant and declining. Traders transact through the continuous double auction institution. Our results show that consistent with theory, when marginal transaction costs are declining prices deviate less from the competitive equilibrium if the “misallocation” of the initial permit distribution is greater. The deviation from the zero transaction cost competitive equilibrium does not vary with the initial permit endowment when marginal transaction costs are constant.

by
Timothy N. Cason
Purdue University
and
Dan Friedman and Garrett Milam
University of California at Santa Cruz
(Published in International Journal of Industrial Organization, 2003)
Draft: October 2001

Abstract
We compare posted price and bilateral bargaining (or “haggle”) market institutions in 12 pairs of laboratory market sessions. Each session runs 50-75 periods in a customer market environment, where buyers incur a cost to switch sellers. Costs evolve following a random walk process. Coasian and New Institutionalist traditions provide competing conjectures on relative market performance. We find that efficiency is lower, sellers price higher, and prices are stickier under haggle than under posted offer.

by
Timothy N. Cason
Purdue University
(Published in Environmental and Resource Economics, 2003)
Draft: June 2002

Abstract
This paper reports a preliminary laboratory experiment in which traders make investments to increase the reliability of tradable instruments that represent greenhouse gas emissions allowances. In one half of the sessions these investments are unobservable, while in the other half traders can invite costless and accurate inspections that make reliability investments public. We implement a buyer liability rule, so that if emissions reductions are unreliable (i.e., sellers default), the buyer of the allowances cannot redeem them to cover emissions. We find that allowing inspections significantly increases the reliability investment rate and overall efficiency. Prices of uninspected allowances usually trade at a substantial discount due to the buyer liability rule, which provides a strong market incentive for sellers to invest in reliability.

Bounded Rationality in Laboratory Bargaining with Asymmetric Information

by
Timothy N. Cason
Purdue University
and
Stan Reynolds
University of Arizona
(Published in Economic Theory, 2005)
Draft: February 2003

Abstract
This paper reports an experiment on two-player sequential bargaining with asymmetric information. The experimental design is simple enough to permit computation of predictions of models of bounded rationality and/or learning, yet rich enough to capture the forces at work in multi-round monopoly pricing environments. Buyer-seller pairs play a series of bargaining games that last for either one or two rounds of offers. The treatment variable is the probability of continuing into a second round. Data from four different continuation probabilities are used to test equilibrium predictions. We also consider quantal response equilibrium (QRE) to capture bounded rationality of subjects, and this approach captures many of the important features of the results.

by
Timothy N. Cason
Purdue University
and
Vai-Lam Mui
University of Notre Dame
(Published in European Journal of Political Economy, 2005)
Draft: December 2004

Abstract
This paper presents a participation game experiment to study the impact of uncertainty on the incidence of reform in the presence of both inter- and intra-group conflicts. Fernandez and Rodrik (1991) show that uncertainty about who will ultimately gain or lose as a result of a reform can prevent its adoption. We introduce intra-group conflict into this framework by incorporating costly political participation. Costly political participation creates a natural incentive for free-riding on fellow group members’ efforts to influence policy outcomes. An agent, however, may still be willing to participate if her participation is likely to affect the policy outcome given the probabilities of participation by others. Our experimental findings show that uncertainty reduces the incidence of reform even with costly political participation, and that an increase in the cost of political participation reduces the participation of all agents, regardless of whether they belong to the majority and minority. This second result cannot be reconciled with the standard mixed strategy Nash equilibrium, but is consistent with the quantal response equilibrium.

by
Timothy N. Cason
Purdue University
Lata Gangadharan
University of Melbourne
and
Charlotte Duke
Economics Branch, Natural Resources and the Environment, Victoria
(Published in Journal of Environmental Economics and Management, 2003)
Draft: May 2002

Abstract
Non-point source pollution, such as nutrient runoff to waterways from agricultural production, is an environmental problem that typically involves asymmetric information. Land use changes to reduce pollution incur opportunity costs that are privately known to landholders, but these changes provide environmental benefits that may be more accurately estimated by regulators. This paper reports a testbed laboratory experiment in which landholder/sellers in multi-round, sealed-offer auctions compete to obtain part of a fixed budget allocated by the regulator to subsidize pollution abatement. In one treatment the regulator reveals to landholders the environmental benefits estimated for their alternative projects, and in another treatment the regulator conceals the potential projects’ “environmental quality.” The results show that sellers’ offers misrepresent their costs more for high quality projects when quality is revealed, so total abatement is lower and seller profits are higher when landholders know their projects’ environmental benefits. This suggests that concealing this information may improve regulatory efficiency.

by
Timothy N. Cason
Purdue University
Lata Gangadharan
University of Melbourne
and
Charlotte Duke
Economics Branch, Natural Resources and the Environment, Victoria
(Published in Ecological Economics, 2003)
Draft: August 2002

Abstract
In theory, competitive emission permit markets minimise total abatement cost for any emission ceiling. Permit markets are often imperfectly competitive, however, if they are thin and dominated by large firms. The dominant firm(s) could exercise market power and increase other firms’ costs of pollution control, while reducing their own emission control costs. This paper reports a testbed laboratory experiment to examine whether a dominant firm can exercise market power in a permit market organised using the double auction trading institution. Our parameters approximate the abatement costs of sources in a proposed tradable emissions market for the reduction of nitrogen in the Port Phillip Watershed in Victoria, Australia. We vary across treatments the initial (pre-trade) allocation of permits to sources, so that in one treatment the seller of permits is a monopolist and in another treatment the selling side of the market is duopolistic. We also vary the information that subjects have about the number and abatement costs of their competitors. We find that prices and seller profits are higher and efficiency is lower on average in the monopoly sessions compared to the duopoly sessions, but the differences are not substantial and are not statistically significant due to pronounced variation across sessions. Moreover, prices, profits and transaction volumes are usually much closer to the competitive equilibrium than the monopoly equilibrium.

by
Timothy N. Cason
Purdue University
Daniel Friedman
University of California, Santa Cruz
and
Florian Wagener
University of Amsterdam
(Published in Journal of Economic Dynamics and Control, 2005)
Draft: April 2003

Abstract
Hypotheses on the dynamics of dispersed prices are extracted from computer simulations, as well as traditional and recent theory. The hypotheses are tested on existing laboratory data. As predicted in some variations of the Edgeworth hypothesis, the laboratory data exhibit a significant cycle. Relative to the unique stationary distribution, the empirical distribution of posted prices has excess mass in an interval that moves downward over time until it approaches the lower boundary of the stationary distribution. Then the excess mass jumps upward and the downward cycle resumes. The amplitude of the cycle seems fairly constant over the longer experimental sessions. Of the simulations we consider, the one closest to Edgeworth’s 1925 account, a hybrid of gradient dynamics and logit dynamics, seems to best reproduce the observed dynamics.

by
Timothy N. Cason
Purdue University
and
Charles Noussair
Emory University

(Published in International Economic Review, 2007)
Draft: March 2003

Abstract
We construct a laboratory market with the structure studied by Burdett, Shi, and Wright (2001). The model is a simple and natural way to represent a market in which there is a friction in the matching process between buyers and sellers. Sellers first simultaneously post prices at which they are willing to sell their single unit of a good. Buyers then simultaneously choose a seller, from whom to attempt to purchase a unit. If more than one buyer chooses the same seller, the good is randomly sold to one of the buyers. If a seller is not chosen by any buyer, his unit is not sold. Our experimental results show a broad consistency with the model of Burdett et al. and less support for an alternative model, which is analogous to Montgomery (1991), which has different assumptions on the strategic interaction between sellers. The main departure that we observe from the Burdett et al. model is that prices exceed the equilibrium level when there are only two sellers.

by
Timothy N. Cason
Purdue University
Tatsuyoshi Saijo
Osaka University
Tomas Sjöström
Penn State University
and
Takehiko Yamato
Tokyo Institute of Technology

(Published in Games and Economic Behavior, 2006)
Draft: November 2003

Abstract
Strategy-proofness, requiring that truth-telling is a dominant strategy, is a standard concept used in social choice theory. Saijo et al. (2003) argue that this concept has serious drawbacks. In particular, announcing one's true preference may not be a unique dominant strategy, and almost all strategy-proof mechanisms have a continuum of Nash equilibria. For only a subset of strategy-proof mechanisms do the set of Nash equilibria and the set of dominant strategy equilibria coincide. For example, this double coincidence occurs in the Groves mechanism when preferences are single-peaked. We report experiments using two strategy-proof mechanisms where one of them has a large number of Nash equilibria, but the other has a unique Nash equilibrium. We found clear differences in the rate of dominant strategy play between the two.

by
Timothy N. Cason
Purdue University
and
Lata Gangadharan
University of Melbourne
(Published in Land Economics, 2005)
Draft: May 2003

Abstract
Land use changes to reduce non-point source pollution, such as nutrient runoff to waterways from agricultural production, incur opportunity costs that are privately known to landholders. Auctions may permit the regulator to identify those management changes that have greater environmental benefit and lower opportunity cost. This paper reports a testbed laboratory experiment in which landowner/sellers compete in sealed-offer auctions to obtain part of a fixed budget allocated by the regulator to subsidize pollution abatement. One treatment employs uniform price auction rules in which the price is set at the lowest price per unit of environmental benefits submitted by a seller who had all of her offers rejected, so sellers have an incentive to offer their projects at cost. Another treatment employs discriminative price rules that are not incentive compatible, because successful sellers receive their offer price. Our results indicate that subjects recognize the cost-revelation incentives of the uniform price auction as a majority of offers are within 3 percent of cost. By contrast, a majority of offers in the discriminative price auction are at least 10 percent greater than cost. But the regulator spends more per unit of environmental benefit in the uniform price auction, and the discriminative price auction has superior overall market performance.

by
Timothy N. Cason
Purdue University
and
Lata Gangadharan
University of Melbourne

(Published in Economic Inquiry, 2006)
Draft: June 2004

Abstract
Evidence suggests that a large majority of firms and individuals comply with regulations and tax laws even though the frequency of inspections and audits is often low. Moreover, fines for noncompliance are also typically low when regulatory violations are discovered. These observations are not consistent with static compliance models. Harrington (1988) modified these static models by specifying a dynamic game in which some agents have an incentive to comply even when the cost of compliance each period is greater than the expected penalty. This paper reports a laboratory experiment based on the Harrington model framework, in which subjects move between two inspection groups that differ in the probability of inspection and severity of fine. Subjects decide to comply or not in the presence of low, medium or high compliance costs. Enforcement leverage arises in the Harrington model from movement between the inspection groups based on previous observed compliance and noncompliance. Our results indicate that consistent with the model, violation rates increase when compliance costs become higher and as the probability of switching groups becomes lower. Behavior does not change as sharply as the model predicts, however, since violation rates do not jump from 0 to 1 as parameters vary across critical thresholds. A simple model of bounded rationality explains these deviations from optimal behavior.

by
Timothy N. Cason
Purdue University
and
Lata Gangadharan
University of Melbourne
(Published in Journal of Economic Behavior and Organization, 2006).

Draft: June 2004

Abstract
Unexpected variation in emissions can have a substantial impact on the prices and efficiency of tradable emission permit markets. In this paper we report results from a laboratory experiment in which subjects participate in an emissions trading market in the presence of emissions uncertainty. Subjects face exogenous, random positive or negative shocks to their emission levels after they make production and emission control plans. In some sessions we allow subjects to bank their unused permits for future use. In all sessions, subjects can trade in a reconciliation period to buy or sell extra permits following the shock realization. Subjects then report their emissions to the regulatory authority and they are placed in different inspection groups depending on their compliance history. The design of our experiment allows us to identify important interactions between emission shocks, banking, compliance and enforcement. We find that the relationship between emission shocks and price changes is significantly stronger without banking, so banking helps smooth out the price variability arising from the imperfect control of emissions. This greater price stability comes at a cost, however, since noncompliance and emissions are significantly greater when banking is allowed.

by
Timothy N. Cason
Purdue University
and
Charles Plott
California Institute of Technology

(Published in Economic Inquiry, 2005)
Draft: June 2004

Abstract
The research addresses a widely held belief among regulators that any additional information about the objectives and intentions of one side of a market made available to other market participants will improve market performance. The belief is about the principles of market behavior in general in that the coordination of exchange will be better facilitated by any such information revelation and both sides will be better off. The experiment reported here is specifically motivated by regulatory hearings before the California Public Utility Commission on the California wholesale electricity market. Electricity suppliers argue that the California public would pay lower prices if the market demand by the major (public utility) buyers is known to sellers. The markets studied are in the form of decentralized, privately negotiated contracts, typical of the wholesale electricity markets. The experiment demonstrates that such markets generally converge to the competitive equilibrium. However, forced disclosure of demand works to the disadvantage of the disclosing side of the market. If the principles of market adjustment observed in the laboratory are also operating in the California wholesale electricity market, the proposed regulation forcing such disclosure would result in higher electricity prices for the consuming California public.

An Experimental Study of Price Dispersion in an Optimal Search Model with Advertising

by
Timothy N. Cason
Purdue University
and
Shakun Datta
Purdue University

(Published in International Journal of Industrial Organization, 2006)
Draft: August 2005

Abstract
This paper reports a laboratory experiment to study pricing and advertising behavior in a market with costly buyer search. Sellers simultaneously post prices and decide whether or not to incur an exogenous cost to advertise this price. Sellers are not capacity constrained, and each buyer demands one unit per period. In the unique symmetric equilibrium, sellers either charge a high unadvertised price or randomize in an interval of lower advertised prices. Theory predicts that increases in either search or advertising costs raise equilibrium prices, and that equilibrium advertising intensity decreases with lower search costs and higher advertising costs. To test the predictions regarding the level and dispersion of prices and advertising intensity, we vary the costs of search and advertising across different experimental treatments. Our results support the model’s comparative static predictions, and sellers also post high unadvertised prices as predicted. In all treatments, however, sellers advertise more intensely than in equilibrium.

Costly Buyer Search in Laboratory Markets with Seller Advertising

by
Timothy N. Cason
Purdue University
and
Shakun Datta
Purdue University

(Published in Journal of Industrial Economics, 2009)
Draft: March 2007

Abstract
In this laboratory experiment sellers simultaneously post prices and choose whether to advertise this price. Buyers then decide whether to buy from a seller whose advertisement they have received, or engage in costly sequential search to obtain price quotes from other sellers. In the unique symmetric equilibrium, sellers either charge a high unadvertised price or randomize in an interval of lower advertised prices Increases in either search or advertising costs raise equilibrium prices, and equilibrium advertising intensity decreases with lower search costs and higher advertising costs. Our results support most of the model’s comparative static predictions, and sellers also post lower advertised than unadvertised prices as predicted. In all treatments, however, sellers price much lower than the equilibrium price interval and earn very low profits. Buyers’ search decisions are approximately optimal, but sellers advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium that features significant seller market power.

Recommended Play and Correlated Equilibria: An Experimental Study

by
Timothy N. Cason
Purdue University
and
Tridib Sharma
Instituto Tecnológico Autónomo de México

(Published in Economic Theory, 2007)
Draft: September 2005

Abstract
This study reports a laboratory experiment wherein subjects play a hawk-dove game. We try to induce players to play a correlated equilibrium with payoffs outside the convex hull of Nash equilibrium payoffs by privately recommending play to each subject. We find that subjects are reluctant to follow certain recommendations. We are able to implement this correlated equilibrium, however, when subjects play against robots that always follow recommendations. The same is true in a control treatment in which the robot "earnings" are transferred to human subjects. This indicates that the lack of mutual knowledge of conjectures, rather than social preferences, explains subjects' failure to play the suggested correlated equilibrium when facing other human players.

A Test Bed Experiment for Water and Salinity Rights Trading in Irrigation Regions of the Murray Darling Basin, Australia

by
Charlotte Duke
University of Melbourne
Lata Gangadharan
University of Melbourne
and
Timothy Cason
Purdue University
Draft: August 2005

Abstract
The Murray Darling Basin, located in Eastern Australia, accounts for 14% of Australia’s total land area, and supports 71% of Australia’s irrigated agricultural production. Irrigated agriculture contributes an estimated 20-25% of Australia’s gross value of agricultural output, but irrigation has a significant negative impact on the environment. Removal of native vegetation and the application of irrigation water to agricultural crops has resulted in rising groundwater and increased salt concentrations in rivers and streams. This paper reports a pilot test bed experiment implemented to explore the operation of simultaneous double auctions for water and salinity rights in the Murray River. The experimental parameters approximate field conditions for one of the Basin’s large irrigation regions located in northern Victoria and called The Sunraysia. In the first treatment, irrigators trade water rights in a manner similar to the emerging electronic water markets in the Basin. In the second treatment we introduce a salinity market where irrigators must purchase salinity rights to account for the environmental impact of their water use. In a third treatment we introduce endogenous technological change to represent private abatement in the salinity market. We examine whether these simultaneous markets can efficiently allocate salinity, abatement and water rights between irrigators. This research would inform the Commonwealth of Australia in its national initiative to improve environmental quality across the Murray Darling Basin.

Communication and Coordination in the Collective Resistance Game

by
Timothy N. Cason
Purdue University
and
Vai-Lam Mui
Monash University

(Published in Experimental Economics, 2007)
Draft: April 2006

Abstract
This paper presents a laboratory collective resistance (CR) game to study how different forms of non-binding communication among subordinates can help coordinate their collective resistance against a leader who transgresses against their rights. Contrary to the predictions of analysis based on purely self-regarding preferences, we find that non-binding communication about intended resistance increases the incidence of no transgression even in the one-shot laboratory CR game. In particular, we find that the incidence of no transgression increases from 7 percent with no communication to 16-37 percent depending on whether communication occurs before or after the leader’s transgression decision. Subordinates’ messages are different when the leaders can observe them, and the leaders also appear to use the observed messages to target specific subordinates for transgression.

Moral Hazard and Peer Monitoring in a Laboratory Microfinance Experiment

by
Timothy N. Cason
Purdue University
Pushkar Maitra
Monash University
and
Lata Gangadharan
University of Melbourne
Draft: February 2007

Abstract
Most problems with formal sector credit lending to the poor in developing countries can be attributed to the lack of information and inadequate collateral. One common feature of successful credit mechanisms is group-lending, where the loan is advanced to an individual if he/she is a part of a group and members of the borrowing group can monitor each other. Since group members have better information about each other compared to lenders, peer monitoring is less expensive than lender monitoring. Theoretically this leads to greater monitoring and greater rates of loan repayments. This paper reports the results from a laboratory experiment of group lending in the presence of moral hazard and (costly) peer monitoring. We compare peer monitoring treatments when credit is provided to members of the group sequentially and simultaneously, and a case of individual lending with bank monitoring. Our results suggest that peer monitoring results in higher loan frequencies, higher monitoring and higher repayment rates compared to bank monitoring. Although the dynamic incentives provided by sequential leading generate the greatest equilibrium efficiency, simultaneous group leading provides equivalent empirical performance.

Explicit versus Implicit Contracts for Dividing the Benefits of Cooperation

by
Marco Casari
Purdue University
and
Timothy N. Cason
Purdue University
Draft: May 2007

Abstract
Explicit contracts are used most frequently by theorists to model many relationships, ranging from labor markets to investment projects. Experimental evidence has accumulated recently highlighting the limitations of formal and explicit contracts in certain situations, and has documented environments in which informal and implicit contracts are more efficient. This paper compares the performance of explicit and implicit contracts in a new partnership environment in which both contracting parties must incur effort to generate a joint surplus, and one (“strong”) agent controls the surplus division. In the treatment in which the strong agent makes a non-binding “bonus” offer to the weak agent, this unenforceable promise doubles the rate of joint high effort compared to a baseline with no promise. The strong agents most frequently offered a bonus to split the gains of the high effort equally, but actually delivered this bonus amount only about one-quarter of the time. An explicit and enforceable contract offer performs substantially better, however, raising the rate of the most efficient outcome by over 200 percent relative to the baseline. Very low and high offers helped agents coordinate on the low effort equilibrium.

Spite and Counter-Spite in Auctions

by
Naoko Nishimura
Shinshu University
Timothy N. Cason
Purdue University
Tatsuyoshi Saijo
Osaka University
and
Yoshikazu Ikeda
Shinshu University
Draft: October 2007

Abstract
The paper presents a complete information model of bidding in second price sealed bid and ascending price (English) auctions, in which potential buyers know the unit valuation of other bidders and may spitefully prefer that their rivals earn a lower surplus. Bidders with spiteful preferences should overbid in equilibrium when they know their rival has a higher value than their own, and bidders with a higher value underbid to “counter” spite the overbidding of the lower value bidders. The model also predicts different bidding behavior in second price as compared to ascending price auctions. The paper also presents experimental evidence broadly consistent with the model. In the complete information environment, lower value bidders overbid more than higher value bidders, and they overbid more frequently in the second price auction than in the ascending price auction. Overall, the lower value bidder submits bids that exceed value about half the time. These patterns are not found in the incomplete information environment, consistent with the model.

Coordinating Collective Resistance through Communication and Repeated Interaction

by
Timothy N. Cason
Purdue University
and
Vai-Lam Mui
Monash University
Draft: June 2008

Abstract
The paper presents a laboratory collective resistance (CR) game to study how different forms of repeated interactions, with and without communication, can help coordinate subordinates’ collective resistance to a “divide-and-conquer” transgression against their personal interests. In the one-shot CR game, a first–mover (the “leader”) decides whether to transgress against two responders. Successful transgression increases the payoff of the leader at the expense of the victim(s) of transgression. The two responders then simultaneously decide whether to challenge the leader. The subordinates face a coordination problem in that their challenge against the leader’s transgression will only succeed if both of them incur the cost to do so. The outcome without transgression can occur in equilibrium with standard money-maximizing preferences with repeated interactions, but this outcome is not an equilibrium with standard preferences when adding non-binding subordinate “cheap talk” communication in the one-shot game. Nevertheless, we find that communication (in the one-shot game) is at least as effective as repetition (with no communication) in reducing the transgression rate. Moreover, communication is better than repetition in coordinating resistance, because it makes it easier for subordinates to identify others who have social preferences and are willing to incur the cost to punish a violation of social norms.

Contests with Random Noise and a Shared Prize

by
Roman M. Sheremeta
Purdue University
Willaim A. Masters
Purdue University
and
Timothy N. Cason
Purdue University
Draft: June 2008

Abstract
The paper introduces a contest with random noise and a shared prize that combines features of Tullock (1980) and Lazear and Rosen (1981). As in Lazear and Rosen the effort expended by a player is observed with noise, but here players who expend some positive effort receive a share of the prize according to their relative performance. The share of the prize is modeled as a Tullock contest success function. We show that this contest generates similar results to Lazear and Rosen. In particular, as the level of noise increases the equilibrium effort decreases. We also show that, as the noise variance approaches to zero, the equilibrium effort in a contest with a random noise approaches to the equilibrium effort of a simple lottery contest.