The Willingness to Pay for Diversification

Diversification is a fundamental concept in economics and finance. This paper argues that decision makers have an intrinsic preference for diversification that is responsive to cost and that this willingness to pay for diversification is driven by risk aversion and loss aversion. In an experiment replicating a portfolio choice problem, the value of diversification is estimated to be at 5% of the initial endowment of approximately $100. Moreover, risk-averse and loss-averse individuals are willing to pay more for diversification. These findings point to the idea that diversification is a fundamental preference and may help explain portfolio choice anomalies such as irrational diversification, the diversification bias, and overdiversification. This paper was accepted by Tomasz Piskorski, finance.

Fear and Promise of the Unknown: How Losses Discourage and Promote Exploration

Many situations involving search, such as commuters trying out new routes or organizations testing new procedures, can subject the explorer to the potential for subjective losses – situations that are worse than the status quo. How does the potential for experiencing losses during the course of a search affect individuals’ appetite for exploration? In three incentivized studies, we manipulate search outcomes by presenting participants either with a gain-only environment or a gain-loss environment. The gain-loss environment offers identical relative incentives for exploration, but payoffs are shifted down and participants receive an initial endowment to offset the difference. In both conditions, participants engage in a novel search task in which they decide how to explore a one-dimensional environment, receiving payoffs based on their location in each period. Payoffs between neighboring options are correlated, and movement is restricted in each turn to immediately adjacent locations. We predict and find that participants are motivated to avoid losses, which increases exploration when they are incurring losses, but decreases exploration when they face the prospect of losses. We conclude that exploration is driven by hope of anticipated gains, constrained by fear of anticipated losses, and motivated by avoidance of experienced losses.

On inequality, growth and trust: some evidence from the lab

In a novel experimental design, we investigate the impact of exogenous variation in economic growth and inequality on trusting behaviour. In addition to a control with uniform endowment, three treatments were implemented where the initial endowment is exogenously changed to produce inequality and three growth scenarios where average endowments increase (boom), decrease (recession) or remain unaltered (steady state). We find that aggregate trust and trustworthiness both decrease due to the induced heterogeneity in endowments. Also, trust (but not trustworthiness) decreases (increases) due to recessions (booms). The impact of inequality on trust is greatest in a recession and absent in a boom. These aggregate effects are driven mainly by the reactions of those who, after treatment, end up at the bottom of the endowment distribution. These findings are close in sign and in the order of magnitude to those reported in observational studies on the relationship between growth, inequality and trust.

Endowment effects in the risky investment game?

The risky investment game of Gneezy and Potters (Q J Econ 112(2):631–645, 1997) has been proposed as a simple tool to measure risk aversion in applied settings, especially attractive in settings where participants may have limited education. However, this game can produce a significant endowment effect (attached to the initial position), so that analysis of the behavior in this game should not be done in the Expected Utility Theory (EUT) framework. The paper illustrates this point, by showing that risk tolerance can be much higher when the initial endowment concerns a risky lottery.

On the Core, Bargaining Set and the Set of Competitive Allocations of Fuzzy Exchange Economy with a Continuum of Agents

In this paper, we present a new model closer to the real-life — called the fuzzy exchange economy with a continuum of agents (FXE-CA) — that combines fuzzy consumption and fuzzy initial endowment with the agent’s fuzzy preference in the fuzzy consumption set. To characterize the fuzzy competitive allocations of the FXE-CA, we define the indifference fuzzy core of a FXE-CA as the set of all fuzzy allocations that cannot be dominated by any coalition of agents. We also propose the Mas-Colell indifference fuzzy bargaining set, in which no coalition has a justified objection at a fuzzy allocation against any other coalition. Finally, we verify that the indifference fuzzy core and the indifference fuzzy bargaining set of a FXE-CA coincide with the set of all fuzzy competitive allocations under some conditions, respectively. This indicates that the agents unanimously distribute the fuzzy competitive allocations of a FXE-CA.

Introduction to Part 1

International trade and investment across countries, both developed and developing economies, are a major source of economic growth by improving allocative efficiency of resources and rapid flow of advanced technologies. Several developing and socialist economies that pursued inward orientation since the last forty years started to open up their economies for international trade and investment. Countries that had initial endowment of industrial, technological endowments, and basic institutions have able to take advantage of this phenomenon. India fits this bill. It acquired basic industrial, technological, and capitalist institutions. The reforms operate on the basis of these endowments. The objective of the book is to trace out the underlying theoretical and empirical factors that demonstrate the effect of the reforms It explains the reason for dividing the book into two part: (1) International Trade Behaviour: the Pre-reform Era and (2) International Trade and Investment Behaviour: The Post-reform era.

Is there a link between endowment inequality and deception? – An analysis of students and chess players

This paper investigates experimentally the relationship between inequality in endowment and deception. Our basic design is adopted from Gneezy (2005): two players interact in a deception game. It is common knowledge that player 1 has private information about the payoffs for both players of two alternative ac-tions. Player 1 sends a message to player 2, indicating which alternative putatively will end up in a higher payoff for player 2. The message, which can either be true or false, does not affect the payoffs of the players. Player 2 has no information about the payoffs. However, player 2 selects one of the two alternatives A or B, which is payoff-relevant for both players. Our paper adds value to the literature by extending Gneezy (2005) in two elements. First, we systematically vary the initial endowment of the players 1 and 2 (common knowledge to both of them). Second, we do not limit ourselves to the standard population of university students but also recruit chess players that are not enrolled in any degree program. Doing so, we want to find out if our results remain robust over a non-standard subject population which is known to be experienced to some extent in strategic interactions. Our main findings are: (i) non-students behave more honestly than students, (ii) students are more likely to trust the opponent’s message, and (iii) students and non-students be-have differently to variation in initial endowment.

Organizational context matters: explaining different responses to militant leadership targeting

Scholars are increasingly investigating the effectiveness of removing militant groups’ leaders; to date, their findings have been mixed. Rather than seeking consistent evidence, this article explains why some militant organizations demonstrate resilience to leadership targeting while others do not. The author argues that organizational context, especially the initial endowment set, determines the extent of institutionalization and ease of leadership succession. Organizations formed by appealing to shared identity and norms are less likely to implement institutionalized systems, instead depending heavily on charismatic leaders; conversely, groups with access to economic resources develop highly structured functions, leading to the routinization of leadership succession. Analysis of 153 militant organizations between 1970 and 2008 shows that organizations based on economic endowment show high resilience to this strategy. Groups that employ negative strategies against local communities as the product of their initial economic endowment are much less likely to be affected by forced leadership removal.

Object Reachability via Swaps along a Line

The HOUSING MARKET problem is a widely studied resources allocation problem. In this problem, each agent can only receive a single object and has preferences over all objects. Starting from an initial endowment, we want to reach a certain assignment via a sequence of rational trades. We consider the problem whether an object is reachable for a given agent under a social network, where a trade between two agents is allowed if they are neighbors in the network and no participant has a deficit from the trade. Assume that the preferences of the agents are strict (no tie is allowed). This problem is polynomially solvable in a star-network and NPcomplete in a tree-network. It is left as a challenging open problem whether the problem is polynomially solvable when the network is a path. We answer this open problem positively by giving a polynomial-time algorithm. Furthermore, we show that the problem on a path will become NP-hard when the preferences of the agents are weak (ties are allowed).