Economic Engineering of Trust
Final Report Abstract
We study problems related to moral hazard and adverse selection arising in decentralized markets. In Part A, the focus was on psychological determinants of trust and trustworthiness in bilateral advice. We show that what looks like straightforward measures for promoting better advice, such as easing access to information for customers and monetary sanctions for verifiable lying, may backfire. On a more general level, we show how image concerns affect information transmission. Finally, we find that people often comply with the revealed trust of others (guilt aversion), even if actual behavioral norms are also revealed. In Part B, a number of projects were dealing with the design of optimal feedback systems in online markets. Cristescu, Greiner, and Ockenfels (work in progress) study the relative performance of onesided and two-sided feedback mechanisms under one- and two-sided moral hazard. Bolton, Ferecatu, and Kusterer examine feedback giving biases that can be corrected with a redesigned feedback system. Bolton and Ferecatu consider the link between traders’ fairness preferences and their feedback scores. Bolton, Dimant, and Schmidt study the effect of social feedback on the incentives for prosocial behavior depending on whether reputational concerns are monetary or not. Bolton, Mans, and Ockenfels show that shared group identity improves the frequency of feedback giving without making feedback given more lenient. Conflict resolution systems are of great practical importance for all institutions utilizing feedback systems. Bolton, Greiner, and Ockenfels demonstrate that mutual feedback withdrawal options can easily backfire and contrary to the intended purpose produce dispute escalation and distort feedback giving. A related topic of practical importance, especially for firms, within the realm of feedback systems is the matter of group communication. Ockenfels, Sliwka, and Werner hypothesize that the informativeness of feedback information can be increased and conflicts due to ‘negotiating feedback’ can be decreased when groups of agents instead of a single agent decide about feedback and evaluations. Bolton and Karagözoğlu extend their previous work on the influence of focal points under asymmetric exposure to risk by investigating which informational conditions are necessary in order for a focal point to facilitate settlements. In a related project Stangl, Bolton, and Katok find that forecast from trusted authorities in the form of probabilities are better at inducing the preventative action than are recommendations, independently of numeracy skills. A series of publications is concerned with climate change. By advocating alongside with many other well-known economists for a global carbon price, Ockenfels offers guidance for challenging upcoming climate negotiations. This line of work and related projects will be further pursued under an ERC Advanced Grant to Ockenfels. Cramton and Ockenfels study the German 4G spectrum auction in 2010 with a focus on communication via the language of bids. The study contributes to the literature by demonstrating how the auction design affects negotiations through bidding and has important implications for market and negotiation design in case of large asymmetries and multiple focal points.
Publications
- (2015). Surprising Gifts: Theory and Laboratory Evidence. Journal of Economic Theory, 159, 163-208
Khalmetski, K., A. Ockenfels, and P. Werner
(See online at https://doi.org/10.1016/j.jet.2015.05.008) - (2016). Testing Guilt Aversion with an Exogenous Shift in Beliefs. Games and Economic Behavior, 97, 110-119
Khalmetski, K.
(See online at https://doi.org/10.1016/j.geb.2016.04.003) - (2017). Evasive Lying in Strategic Communication. Journal of Public Economics, 156, 59-72
Khalmetski, K., B. Rockenbach, and P. Werner
(See online at https://doi.org/10.1016/j.jpubeco.2017.10.002) - (2017). The German 4G Spectrum Auction: Design and Behaviour. The Economic Journal, 127(605), 305-324
Cramton, P., and A. Ockenfels
(See online at https://doi.org/10.1111/ecoj.12406) - (2018). Cry Wolf or Equivocate? Credible Forecast Guidance in a Cost-Loss Game. Management Science, 64(3), 983-1476
Bolton, G. E., and E. Katok
(See online at https://doi.org/10.1287/mnsc.2016.2645) - (2018). Dispute Resolution or Escalation? The Strategic Gaming of Feedback Withdrawal Options in Online Markets. Management Science, 64(9), 3971-4470
Bolton, G. E., B. Greiner, and A. Ockenfels
(See online at https://doi.org/10.1287/mnsc.2017.2802) - (2018). Inflated Reputations Uncertainty, Leniency & Moral Wiggle Room in Trader Feedback Systems. Management Science
Bolton, G. E., D. Kusterer, and J. Mans
(See online at https://doi.org/10.1287/mnsc.2018.3191) - (2018). Sharing Guilt: How Better Access to Information May Backfire. Management Science
Inderst, R., K. Khalmetski, and A. Ockenfels
(See online at https://doi.org/10.1287/mnsc.2018.3101)
