19 publications ordered by:
: Peer Reviewed
Articles Falk A., Meier S. & Zehnder C. (in press). Do Lab Experiments Misrepresent Social Preferences? The case of self-selected student samples. Journal of the European Economic Association. [pdf] [abstract]
Social preference research has received considerable attention among economists in recent years. However, the empirical foundation of social preferences is largely based on laboratory experiments with self-selected students as participants. This is potentially problematic as students participating in experiments may behave systematically different than non-participating students or non-students. In this paper we empirically investigate whether laboratory experiments with student samples misrepresent the importance of social preferences. Our first study shows that students who exhibit stronger prosocial inclinations in an unrelated field donation are not more likely to participate in experiments. This suggests that self-selection of more prosocial students into experiments is not a major issue. Our second study compares behavior of students and participants recruited from the general population in a trust experiment. In general, we find very similar behavioral patterns for the two groups, but non-students make significantly more generous repayments suggesting that results from student samples might be seen as a lower bound for the importance of prosocial behavior.
Falk A. & Zehnder C. (in press). A City-Wide Experiment on Trust Discrimination. Journal of Public Economics. [doi] [pdf]
Barmettler F., Fehr E. & Zehnder C. (2012). Big Experimenter Is Watching You! Anonymity and Prosocial Behavior in the Laboratory. Games and Economic Behavior, 75(1), 17-34. [doi] [abstract]
Researchers have demonstrated that the presence of people with social preferences has important economic implications. However, the empirical basis of this research relies to a large extent on experiments that do not provide anonymity between experimenter and subject. It has been argued that this lack of experimenter-subject anonymity may create selfish incentives to engage in seemingly other-regarding behavior. If this were the case, these experiments would overestimate the importance of social preferences. Previous studies provide mixed results and methodological differences within and across studies make it difficult to isolate the impact of experimenter-subject anonymity. In this paper we use a novel procedure that allows us to examine the impact of the exact same ceteris-paribus variation in anonymity on behavior in three of the most commonly used games in the social preference literature. We find that the introduction of experimenter-subject anonymity has no significant effect in any of the three games.
Fehr E., Hart O. & Zehnder C. (2011). Contracts as Reference Points - Experimental Evidence. American Economic Review, 101(2), 493-525. [doi] [abstract]
Hart and John Moore (2008) introduce new behavioral assumptions that can explain long-term contracts and the employment relation. We examine experimentally their idea that contracts serve as reference points. The evidence confirms the prediction that there is a trade-off between rigidity and flexibility. Flexible contracts-which would dominate rigid contracts under standard assumptions-cause significant shading in ex post performance, while under rigid contracts much less shading occurs. The experiment appears to reveal a new behavioral force: ex ante competition legitimizes the terms of a contract, and aggrievement and shading occur mainly about outcomes within the contract.
Brown M. & Zehnder C. (2010). The Emergence of Information Sharing in Credit Markets. Journal of Financial Intermediation, 19(2), 255-278. [doi] [abstract]
We provide the first systematic empirical analysis of how asymmetric information and competition in the credit market affect voluntary information sharing between lenders. We study an experimental credit market in which information sharing can help lenders to distinguish good borrowers from bad ones. Lenders may, however, also lose market power by sharing information with competitors. Our results suggest that asymmetric information in the credit market increases the frequency of information sharing between lenders significantly. Stronger competition between lenders reduces information sharing. In credit markets where lenders may fail to coordinate on sharing information, the degree of information asymmetry, rather than lender competition, drives actual information sharing behavior.
Fehr E., Brown M. & Zehnder C. (2009). On Reputation - A Microfoundation of Contract Enforcement and Price Rigidity. The Economic Journal, 119(536), 333-353. [doi] [abstract]
We study the impact of reputational incentives in markets characterised by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterised by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks.
Fehr E., Goette L. & Zehnder C. (2009). A Behavioral Account of the Labor Market: The Role of Fairness Concerns. Annual Review of Economics, 1, 355-384. [url] [abstract]
In this paper, we argue that important labor market phenomena can be better understood if one takes (a) the inherent incompleteness and relational nature of most employment contracts and (b) the existence of reference-dependent fairness concerns among a substantial share of the population into account. Theory shows and experiments confirm that, even if fairness concerns were to exert only weak effects in one-shot interactions, repeated interactions greatly magnify the relevance of such concerns on economic outcomes. We also review evidence from laboratory and field experiments examining the role of wages and fairness on effort, derive predictions from our approach for entry-level wages and incumbent workers' wages, confront these predictions with the evidence, and show that reference-dependent fairness concerns may have important consequences for the effects of economic policies such as minimum wage laws.
Fehr E., Hart O. & Zehnder C. (2009). Contracts, Reference Points, and Competition - Behavioral Effects of the Fundamental Transformation. Journal of the European Economic Association, 7(2-3), 561-572. [abstract]
In this paper we study the role of incomplete ex ante contracts for ex post trade. Previous experimental evidence indicates that a contract provides a reference point for entitlements when the terms are negotiated in a competitive market. We show that this finding no longer holds when the terms are determined in a non-competitive way. Our results imply that the presence of a "fundamental transformation" (i.e., the transition from a competitive market to a bilateral relationship) is important for a contract to become a reference point. To the best of our knowledge this behavioral aspect of the fundamental transformation has not been shown before.
Brown M. & Zehnder C. (2007). Credit Registries, Relationship Banking and Loan Repayment. Journal of Money, Credit and Banking, 39(8), 1883-1918. [abstract]
How does information sharing between lenders affect borrowers repayment behavior ? We show-in a laboratory credit market-that information sharing increases repayment rates, as borrowers anticipate that a good credit record improves their access to credit. This incentive effect of information sharing is substantial when repayment is not third-party enforceable and lending is dominated by one-shot transactions. If, however, repeat interaction between borrowers and lenders is feasible, the incentive effect of credit reporting is negligible, as bilateral banking relationships discipline borrowers. Information sharing nevertheless affects market outcome by weakening lenders' ability to extract rents from relationships.
Falk A., Fehr E. & Zehnder C. (2006). Fairness Perceptions and Reservation Wages - The Behavioral Effects of Minimum Wage Laws. Quarterly Journal of Economics, 121(4), 1347-1381. [abstract]
In a laboratory experiment we show that minimum wages have significant and lasting effects on subjects' reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects' reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity to pay less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people's behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.
Book Sections Fehr E. & Zehnder C. (2009). Altruism (Economics perspective). In Sander David & Scherer Klaus (Eds.), The Oxford Companion to Emotion and the Affective Sciences (pp. 24-26). Oxford University Press.
Fehr E. & Zehnder C. (2009). Trust. In Sander David & Scherer Klaus (Eds.), The Oxford Companion to Emotion and the Affective Sciences (pp. 392-393). Oxford University Press.
Chapter Zehnder C. (2011). A Behavioral View of Employment: The Role of Fairness for Motivation. Responsible Management Practices for the 21st Century. Palazzo G. Wentland M.
Fehr E., Goette L. & Zehnder C. (2009). The Behavioral Economics of the Labor Market: Central Findings and Their Policy Implications. In Foote C. L., Goette L. & Meier S. (Eds.), Policymaking Insight From Behavioral Economics (pp. 355-384). Federal Reserve Bank of Boston, Boston, Massachusetts.
In Proceedings Grieder M., Zehnder C. & Krings F. (2011). The Value of Voice - How Granting And Denying Voice Affects Reciprocity. 12th Congress of the Swiss Psychological Society, Fribourg, Switzerland.
Working papers Falk Armin & Zehnder Christian (2009). Discrimination and In-group Favoritism in a Citywide Trust Experiment. University of Lausanne.
Fehr Ernst & Zehnder Christian (2009). Reputation and Credit Market Formation: How Relational Incentives and Legal Contract Enforcement Interact. University of Lausanne.
Fehr E., Hart O.D. & Zehnder C. (2008). Contracts as Reference Points - Experimental Evidence (14501). NBER (National Bureau of Economic Research).
Thesis Zehnder C., Fehr E. & Schmutzler A. (Dir.) (2005). Reciprocity, Reputation and Performance. Universität Zürich. [pdf] [abstract]
In this thesis I experimentally show that the presence of people with social preferences significantly affects aggregated outcomes in a number of important economic settings. While the existing literature provides convincing evidence that the decisions of many people are shaped by social considerations, only little is known about the impact of social preferences on market outcomes. I investigate the role of reciprocal agents in three environments that are part of many economists' research agenda: Low wage labor markets, credit markets and markets for experience goods. I do not only provide evidence that social preferences can have a decisive impact on market performance but I also argue that taking into account that some people are motivated by fairness concerns plausibly explains many phenomena that are otherwise considered as puzzles. In Chapter 2 I investigate the economic consequences of minimum wage laws in labor markets with bargaining power of firms. In contrast to prevailing labor market models, I show that fairness considerations may be important determinants of workersâ reservation wages. The introduction of a minimum wage affects the workersâ fairness perceptions and therefore leads to a strong rise in workers' reservation wages. Surprisingly, the high reservation wages persist even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. Chapter 3 examines the behavioral forces behind the formation of credit markets. I find that in a worst-case scenario where neither the repayment of debt nor the project choice of borrowers is enforceable a fraction of borrowers with social preferences alone is not enough to guarantee the existence of a functioning credit market. However, when lenders and borrowers have the possibility to engage in long-term relationships the borrowers' incentive problems are considerably mitigated. By conditioning their contract renewals on past repayment behavior, lenders succeed in motivating selfish borrowers to repay their debt such that mutually beneficial trades can take place. The introduction of third party enforcement of debt repayment generates surprisingly small efficiency gains. This is due to the fact that third party enforcement of debt repayment not only solves the moral hazard problem associated with debt repayment but also exacerbates the moral hazard problem that is associated with project choices. Thus, my findings suggest that social preferences combined with a relational reputation mechanism are a decisive determinant of credit market performance. In chapter 4 I provide experimental evidence for the importance of social preferences and reputation effects in markets with experience goods. In this type of markets high quality cannot be enforced by complete and enforceable contracts. As a consequence there is the danger of low market efficiency due to the sellers' incentives to sell low quality. A potential remedy to overcome these inefficiencies is reputation formation. In order to study the causal effect of reputation formation on market performance I analyze two treatments. In the no reputation treatment reputation formation is ruled out by design. Although some sellers are willing to reciprocate high price offers with high quality, average quality and prices remain rather low in this treatment. In the reputation treatment, buyers exchange information such that previous quality choices of sellers are publicly known. This treatment difference generates vast changes in how markets function. I find that buyers are willing to pay rents to performing sellers. This creates strong incentives for sellers to invest in a good reputation. Thus, selfish sellers mimic reciprocal behavior and provide high qualities. As a consequence a significantly higher market efficiency is reached compared to the market where reputation formation is impossible. Reputation formation also changes the way how trades are initiated and how rents are shared between sellers and buyers.