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Experiments in the Indian Context

Over the past few years, experimental economics has become increasingly visible in research activity in India.The concluding part of this survey offers a brief overview of experiments conducted in the Indian context. These have been largely field experiments.

SURVEY OF EXPERIMENTAL ECONOMICS

5 Experiments in the Indian Context

Over the past few years, experimental economics has become increasingly visible in research activity in India. The concluding part of this survey offers a brief overview of experiments conducted in the Indian context. These have been largely field experiments.

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T
he concluding part of the survey takes an overview of some of the experiments conducted in the Indian context. Only those experiments that are not covered in the body of the survey are discussed here. Again, the aim is to illustrate rather than provide an exhaustive list. What will strike the reader is that a majority of the experiments surveyed here are field experiments rather than those conducted in a laboratory. Field experiments occupy a middle ground between laboratory experiments and naturally occurring field data. Relative to a laboratory experiment, a field experiment clearly gives up some of the control that the laboratory experimenter may have over his or her experiment. The trade-off is greater realism compared to a laboratory experiment. There are a number of reasons why field experiments may produce results that differ from laboratory experiments. The people whom one encounters in the field undertake activities that they presumably have self-selected themselves into. For instance, one might expect regular bidders to have more skills and interest in auctions compared to randomly selected university students. In addition, a laboratory experiment may not be fully representative of the real world. In the laboratory, experimenters usually induce all the theoretical modelling assumptions. In a field experiment, one has to accept real-world preferences and institutions.

The first result surveyed here is a study of institutional corruption. Bertrand et al (2007) studied the allocation of drivers’ licences in Delhi by randomly assigning 822 driving licence applicants to one of three categories – bonus, a category where individuals were paid a bonus for obtaining a permanent driving licence quickly (within 32 days of obtaining their learner’s licence); lesson, a category that was offered free driving lessons; and a comparison category. The first two categories were found to be more likely to obtain licences. However, bonus group members were more likely to make extralegal payments to obtain a licence. Also, individuals in the bonus group were more likely to obtain licences without actually knowing how to drive. This showed that corruption did not merely reflect transfers from citizens, but also distorted allocation.

In a randomised field experiment, experimenters separate participants into two or more groups – a treatment group (or groups) and a control group. Members of the treatment group receive a particular intervention, which the control group does not. This methodology is well suited to gauge the efficacy of the intervention. Sometimes randomised experiments occur naturally. Banerjee et al (2007) presented the results of two randomised experiments conducted in primary schools in Mumbai and Vadodara. A remedial education programme, Balsakhi, hired young women to teach students lagging behind in basic literacy and numeracy skills. It increased the average test scores of all children in treatment schools by a 0.28 standard deviation, mostly due to large gains by children at the bottom of the test-score distribution. A computerassisted learning programme focusing on maths increased scores by a 0.47 standard deviation. One year after the programme, the initial gains remained significant for targeted children, but they faded to about a 0.10 standard deviation.

A paper by Chattopadhyay and Duflo (2004) used political reservations for women in India to study the impact of women’s leadership on policy decisions. Following a constitutional amendment in 1992, one-third of gram panchayat pradhan (president) positions in India have been randomly reserved for women. Village councils are responsible for providing many local public goods in rural areas. Using a data set that the authors collected on 265 village councils in one district each in West Bengal (Birbhum) and Rajasthan (Udaipur), they compared the type of public goods provided in reserved and unreserved village councils. They showed that reservation affected the types of public goods provided. Specifically, leaders invested more in infrastructure that was directly relevant to the needs of their own genders. These results indicated that a politician’s gender did influence policy decisions. More generally, they provided new evidence on the political process. In particular, they provided strong evidence that the identity of a decision-maker influenced policy decisions. This provided empirical support to political economy models that seek to enrich the Downsian model. The results were consistent with earlier evidence that showed that US senators’ votes did not reflect either the wishes of their constituency or their party, and work that indicated that in Indian states where a large share of seats was reserved for minorities in the legislative assembly, the level of transfers targeted at these minorities was higher. This study of village councils had the advantage of being based on a randomised experiment where identification was entirely transparent.

Public Goods Allocation

A number of experiments have studied public goods allocation. Some of them have already been summarised in the section on public goods. The public goods problem, either viewed as a problem of extraction or that of contribution, has a long history in social science. The experimental design in Chakravarty et al (2010a) used a standard VCM game with a moderately large group of 10 and face-to-face communication. The subjects, who were villagers in the Gori-Ganga basin of the central Himalayas, were not rematched every period. A noteworthy general observation was that even with a relatively low marginal per capita return (MPCR = 0.2) and a large group, there was a steady contribution rate of around 55%, which diminished slightly at the end of the session to around 50%. The paper also delved into the demographic characteristics of the subject pool and found that individual contributions to the common pool were determined by gender, age, caste, literacy and history of cooperation in the experiment. However, face-toface communication was not seen to increase average individual contributions to the common pool.

Experiments involving the characteristics of individual preferences have also been carried out. A study by Bansal et al (2010) made two important contributions to the literature by studying consumer attitudes towards genetically modified (GM) foods.

First, given that India is a developing country, it elicited willingnessto-pay for similar food products that differed only in their GM content. Second, and more importantly, it examined how probabilistic information mattered in the formation of food preferences. The paper advanced a definition of consumers who were weakly GM averse; that is, those who did not react to probabilistic information unless it came in the form of a label. An experiment involving auctions of food products was designed to estimate weak GM aversion on the part of such consumers. In this experiment, about one-fifth of GM-averse subjects were weakly averse. The presence of such consumers may have implications for the potential market for labelled GM foods.

Chakravarty and Roy (2009) used the multiple price list method and a recursive expected utility theory of smooth ambiguity to elicit attitudes to risky and ambiguous prospects. In particular, they investigated if there were differences in agent behaviour under uncertainty over gain amounts vis-à-vis uncertainty over loss amounts. On an aggregate level, they found that subjects were risk averse over gain and risk seeking over losses, displaying a “reflection effect”, and that they were mildly ambiguity averse over gains and mildly ambiguity seeking over losses. Further analysis showed that on an individual level, with respect to both risky and ambiguous prospects, there was limited incidence of reflection effects where subjects were risk or ambiguity averse (seeking) in gains and seeking (averse) in losses, though this incidence was higher for ambiguous prospects. A very high proportion of such cases of reflection exhibited risk (ambiguity) aversion in gains and risk (ambiguity) seeking in losses, with the reverse effect being significantly present in the case of risk but almost absent in the case of ambiguity. Finally, the results suggested that reflection across gains and losses was not an individual trait but depended on whether the form of uncertainty was precise or ambiguous since we rarely find an individual who exhibits reflection in both risky and ambiguous prospects.

Chakravarty et al (2010c) reported results from an experiment comparing the effects of vague versus precise pre-play communication in a highly competitive two-player game with conflicting interests. In the classic traveller’s dilemma game, non-binding precise messages about the intent of play are pure cheap talk. The authors conjectured that a form of imprecise pre-play communication whereby subjects could submit ill-defined messages might help foster cooperation because of their vagueness. Comparing behaviour, both across modes of communication and to a baseline case without communication, the findings suggested that cooperation was highest when players could communicate using precise numerical messages. When communication with ill-defined messages was allowed, then conditional on receiving a message, subjects acted more cooperatively than when no message was received. However, overall, the ability to exchange ill-defined messages did not substantially improve cooperation.

Decisions with uncertain outcomes are often made by one party in settings where another party bears the consequences. Whenever an individual is delegated to make decisions that affect others, such as in a typical corporate structure, does he or she make decisions that reflect the risk preferences of the party bearing the consequences? Chakravarty et al (2010b) examined

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this question in two simple settings, lottery choices and sealed bid auctions, using controlled laboratory experiments. They found that when an individual made a decision for an anonymous stranger, there was a tendency to exhibit less risk aversion. This reduction in risk aversion was relative to his or her preferences, and also relative to his or her belief about the preferences of others. This result has significant implications for the design of contracts between principals and agents.

People care about relative, not absolute, income. A paper by Carlsson et al (2009) investigated the importance of relative income within and between castes in the Indian caste system using a choice experimental approach. The results indicated that slightly more than half of the marginal utility of income on average came from some kind of relative income effect. This was comparable to the results from studies in other countries. Belonging to a low caste and having a low family income were associated with a higher concern for relative income. Moreover an increase in the mean income of the caste to which the individual belonged, everything else held constant, reduced utility for the individual. Thus, the negative welfare effect of having a reduced relative income compared to the own caste average income dominated the positive welfare effect due to increased relative income of the own caste compared to the income of other castes.

Measuring Social Inequality

Carlsson et al (2003) measured social inequality aversion through a “veil of ignorance” experiment using students at Jadavpur University. Choosing from behind a veil of ignorance, or choosing between societies without knowing what characteristics one would have in different societies, including where you would be placed, has been long used to judge the fairness of societies. However, empirical work has been relatively scanty. In this study with 364 students from Jadavpur University, respondents made eight pair-wise choices between societies A and B. They were given information on the highest, lowest and average income in each society and average income as well as degree of inequality was always higher in society A compared to society B. The results enabled the authors to estimate individual specific relative risk aversion, which may be interpreted as social inequality aversion, and also econometrically test the determinants of such risk aversion. The median relative risk aversion was found to be quite high at 3, and independent of caste.

What are the mechanisms through which social discrimination affects individual achievement? A growing literature in social psychology on the stereotype threat finds that stereotype-based expectations influence individual performance in the domain of the stereotype. Hoff and Pandey (2006) investigated whether public revelation of social identity affected cognitive task performance and responses to economic opportunities by young boys in Indian villages (sixth and seventh graders drawn from the top and bottom rungs of the caste hierarchy). The subjects were asked to learn and then perform a task with incentives and the authors determined when they would know their castes. In the control condition, the subjects were anonymous within the six-person group. In the experimental condition, the experimenter revealed the names and castes of the subjects. In the anonymous condition, there was no significant difference between the performance of the low-caste and high-caste subjects. However, when the caste was revealed, a significant gap appeared, which was because of a 20% decline in the performance of the low-caste students.

Narayan and Jain (2010) investigated the challenge of designing a performance-based incentive scheme for school teachers. When teachers specialised in different subjects in a society with social prejudice, a performance-based pay that depended on average student performance made teachers coordinate their efforts to help high-status students and turn away from low-status students. Laboratory experiments with future teachers as subjects showed that a performance-based pay made teachers decrease efforts to help low-caste Hindu students compared to upper-caste Hindu or Muslim students. But one observed greater effort and lower intra-class variation in a remedial incentive design where teachers were penalised if students received zero scores.

The above is a necessarily incomplete review of experimental economics literature in the Indian context. Over the past few years, experimental economics has gained increased visibility in organised research activity in India. The first conference on experiments was held at the Centre for Experiments in Social and Behavioural Sciences, Jadavpur University in December 2008. This was followed by a conference on experimental social sciences at the Centre for Computational Social Sciences, University of Mumbai in December 2009. A third conference was held on 27-28 December 2010 at the Centre for Experiments in Social and Behavioural Sciences, Jadavpur University. Courses in experimental economics are also being taught in a few but important teaching centres such as the Department of Economics, Jadavpur University and the Department of Economics, University of Mumbai. The future for the subject in India seems bright despite its delayed emergence.

Notes pays the amount bid but receives nothing, and Gigerenzer and Brighton (2009) have shown us

(5) no conversation or collusion is permitted that very often fast and frugal computations give

1 A great deal of this section and the subsequent sections of this chapter rely on material from

among the participants. us much more predictive accuracy (not in terms of Smith (1991). 4 It is, of course, possible to come up with many mean prediction but with respect to individual naturally occurring markets whose organisation prediction) than models that compute over the

2 Experimental economists are often surprised to learn that they have been using some version of

may be better approximated by Chamberlin’s open entire set of variables. the written instructions devised by Siegel for their outcry procedures. 7 The expected utility form for a lottery (x;p) takes own experiments. A perusal of the words used by 5 In neoclassical economics, a strictly rational indi-the form E[U(x)] = p.U(x), where U(.) is concave,

Siegel (see the instructions appendix to Fouraker vidual is one who can assign a probability distri-continuous and differentiable, and p is a probability and Siegel 1963) is often useful. bution over all possible outcomes in a problem density. The linear, additive nature of this func3 The instructor offers to auction off a dollar bill in

and then choose the one that maximises his ob-tional form makes it easy to use for empirical work. the class with five rules: (1) bidding starts at jective function. 8 See Harrison (1989, 1992, 1994) for a pay-off 5 cents, (2) bidding increases in steps of 5 cents, 6 The idea of heuristics as a second-best approach, dominance critique of experiments in economics.

(3) the highest bidder gets the dollar bill and originating because of mental limitations, has 9 The three main principles that should govern paypays the amount bid, (4) the second highest bidder been recently questioned. Several studies such as ments in an economic experiment are salience,

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dominance and monotonicity. Salience requires that the payment given to a subject must be different for different outcomes in the game/decision theoretic situation. Dominance requires that the reward medium dominate decision costs for the subjects and monotonicity implies more of the reward medium is preferred to less of the reward medium. See Friedman and Sunder (1994), Harrison (1989, 1992, 1994), Plott (1991) and Smith (1989) for a more detailed exposition on monetary incentives in economic experiments.

10 For studies where the pay-offs are non-monetisable, see Ariely and Loewenstein (2005), Ariely, Loewenstein and Prelec (2003) and Berns et al (2007).

11 The evolutionary biologist Dawkins (1989) also expresses some reluctance at accepting this “as if” approach to decision-making when he states that in problems that involve spatial computation like a baseball player running to catch a ball “he behaves as if he had solved a set of equations in predicting the trajectory of the ball … at some subconscious level, something functionally equivalent to the mathematical calculations is going on.”

12 The idea that motivations beyond the simple calculus of self-aggrandisement could drive human behaviour was noted more abstractly by Hume (1969) and extended by Smith (1759) in his Theory of Moral Sentiments. Adam Smith may have been the first economist (or as they were then known, moral philosopher) to attribute psychological motivations to economic activity such as other regarding preferences and bounded rationality.

13 This approach includes the EUT (von Neumann and Morgenstern 1944) and the Subjective Expected Utility (Savage 1954).

14 These “mistakes” are far from thoughtless acts committed by people of low intelligence. They are behavioural patterns that are displayed by people of various intelligence levels and are largely indicative of preferences. Accordingly, an individual committing a “mistake” continues to deviate repeatedly from the expected behavioural norm. She or he may even suffer monetary pay-off consequences as a result of her or his choices, but her or his preferences may be diffuse enough that other rewards (some potentially non-monetisable) outweigh the observed suboptimality as measured from any one chosen behavioural norm.

15 Camerer (1995) uses an interesting example to illustrate local and global confidence. Most academics tend to be overconfident about the chances of their current research getting into a respectable journal (local overconfidence), but are much more realistic about the chances of their next 10 articles, displaying less global overconfidence.

16 Specifically the subjects were given base rates P(+PSA) = 0.05, the probability that a male in his 50s screened for the first time tests positive and P(+C)= .025, the single-point-in-time probability of prostate cancer in the same population, and asked to estimate the posteriors P(+PSA/+C), that is, the test’s sensitivity and P(+C /+PSA), the Bayesian posterior and checked by how much the ratio P(+PSA/+C) / P(+C /+PSA) deviated from 2.

17 We feel that the empirical/computational bent of psychology-based research on decision-making has made it less than attractive to mainstream economists. In decision research in psychology, benchmarks of comparison are diffuse and contextual. This often makes analyses and conclusions harder to adhere to the realm of positive economics where observed behaviour can be compared against some universal benchmark and the difference explained using a modification of the proposed underlying model. However, over the years, “anomalies” emerged, which could not be explained by trivially tweaking the standard neoclassical model. The ensuing quest to look for alternative explanations outside the field has over time strengthened the appeal of behavioural economics. Over the last decade, the role of other areas in social science, including psychology and evolutionary biology, in

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explaining human behaviour within the framework of economics has increased.

18 The independence axiom of the EUT states that if a lottery is L1L2, then a mixture of L1 and a third lottery L3 should be similarly preferred to a mixture of L2 and L3; that is,- tL1 + (1-t)L3 • tL2 + (1-t) L3, t  [0,1].

19 A second theory entitled the rank dependent expected utility model by Quiggin (1982) also explained the Allais paradox by overweighting unlikely extreme events rather than all low probability events. Rank dependent weightings were incorporated into the Cumulative Prospect Theory by Kahneman and Tversky (1992).

20 For example, Choquet (1955) essentially assumes that when a probability mass cannot be assigned with certainty across the available set of alternatives, it is assigned directly to the worst possible alternative.

21 Binswanger’s (1980) experiment would be referred to as an artifactual field experiment, in which the design is almost identical to a conventional lab experiment but with a non-standard (non-student) subject pool. For definitions and a detailed survey of field experiments, see Harrison and List (2004).

22 The OLS risk elicitation device was developed by Binswanger (1980, 1981) in an early attempt to calibrate risk attitudes using experimental procedures and real pay-offs. Each subject is presented with a choice of eight lotteries, shown in each row of panel B of Table 1, and asked to pick one. Alternative O is the safe option, offering a certain amount. All other alternatives increase the average actuarial pay-off but with increasing variance around that pay-off. For a detailed analysis of the pros and cons of different risk elicitation techniques, see Harrison and Rutstrom (2007).

23 Terminal wealth in a lottery choice situation would have decisions made over the final wealth computed by integrating the prizes of the lottery (probabilistic income) with the decision-maker’s initial level of wealth. The EU of income computes the EU only over the changes in this terminal wealth, which correspond to the prizes in the gamble.

24 The basic idea is to endow the subject with a series of lotteries, and to ask for the “selling price” (or more technically the certainty equivalent) of the lottery. The subject is then told that a “buying price” will be picked at random and that if it exceeds the stated selling price, the lottery will be sold at that price and the subject will receive that buying price. If the buying price equals or is lower than the selling price, the subject keeps the lottery and plays it. In structure this is similar to the Vickrey (1961) or second price auction (without any strategic motivations). In their important paper Karni and Safra (1987) show that the BDM is not incentive compatible when the object being valued is a lottery. Moreover, according to Horowitz (2006), the BDM may not always be incentive compatible because even in situations when the object being valued is not a lottery, an individual’s selling price may depend on the distribution of potential prices unless a very specific assumption (summarise an agent’s preference by their certainty equivalent) is made.

25 Chakravarty et al (2010a) use this multiple price list to investigate the case that lies between the real and hypothetical pay-offs in Holt and Laury (2002); that is, prizes are real but accrue not to the decisionmaker but to a third party who passively collects this payout. Individuals are seen to be more risk neutral when they make decisions on behalf of a third party vis-à-vis when they make decisions where the pay-offs accrue to themselves.

26 For example, if we have two competing models for behaviour, say the EUT and the Prospect Theory, we first compute the conditional likelihoods for these two models. We then aggregate these conditional likelihoods (using probability weights) to form the grand likelihood function which we estimate.

27 According to Harrison and List (2004), a natural field experiment is one in which the environment is where the subjects naturally undertake the tasks that they perform and where the subjects do not know that they are in an experiment.

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28 The ESA is the largest body of experimental economists in the world today.

29 They speculate that senior economists are less price sensitive than junior economists due to higher income, research grants, and the like. Also, senior economists are more experienced in decision-making in this context and thus are less prone to decision-making anomalies (List 2003).

30 An ultimatum game, first studied experimentally by Güth et al (1982), is one where a proposer sends an offer to a responder splitting a rupee in a proportion that is acceptable to him. If the responder agrees to the split (say 60p-40p) then these are the final allocations. If the responder does not agree to the split, both get zero. The Subgame Perfect Nash Equilibrium (SPNE) of this game is for the proposer to keep the full rupee and offer the responder nothing. The responder in equilibrium should accept this offer. Empirically, however, this SPNE is rarely played – proposers are mostly equity preserving in their offers and responders often reject moderately non-egalitarian offers.

31 Weird stands for western, educated, industrialised, rich and democratic.

32 Many neuroscientists believe there is a specialised “mentalising” (or “theory of mind”) module that controls a person’s inferences about what other people believe, feel, or might do. This is of particular interest to economists.

33 Natural experiments are conducted in a natural setting; that is, on their own, without intervention from the investigators. All that the experimenters do is to build in one additional stimulus in the naturally occurring phenomenon. The point is to study the effect of this additional stimulus on the outcome of the experiment.

34 A scale that allows the identification of types of subjects, who vary in cooperativeness. 35 Russell Hardin argues that risk taking is a better term than trust for the money sent by the sender.

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