Abstract

We propose an extension of the classical regret theory model (Loomes & Sugden, 1982;henceforth LS) incorporating the notion of a reference point. As in LS, the model can account for a number of documented deviations from expected utility theory. Additionally, we show that our model is consistent with a class of behaviors known as omission bias, for example a reluctance to exchange lottery tickets, and generates predictions which are consistent with recent empirical evidence on the common-ratio effect with correlated outcomes. The model also provides a novel interpretation for risk aversion in small-stakes, equiprobable gambles. The predictive power of the theory, as well as its relative shortcomings and advantages, are examined and compared to that of other extensions of regret theory and three alternative reference-dependent models.

Abstract

We examine a common-value dynamic matching environment where adverse selection accrues slowly over time. Theoretical best responses are therefore time varying, and where the prior experimental literature suggests that sequential environments might lead to greater understanding of adverse selection in this dynamic setting. However, while a sophisticated minority in our experiment do condition on time and are close to a best response, the majority use a stationary response, even after extended experience. In an environment with persistent uncertainty, our results indicate that sequentiality is insufficient for the large majority of participants to recognize the effects of adverse selection.

Abstract

This paper uses a new experimental task to study the effect of exposure to unawareness on risk taking. Our design exposes subjects to unawareness in a natural way by employing an experimental task whose solutions are difficult to understand, but easy to verify. That is, subjects experience the complexity of the task, which can be readily understood once pointed out. We find that exposure to unawareness alone does not affect risk taking. Specifically, the average amount invested in an investment game (Gneezy and Potters, 1997) is similar across treatments varying the degree of unawareness. The role of context, however, is shown to be important. For the treatments that induce unawareness, subjects are more risk averse when the investment decision is framed in the same context as the complex task versus framed in a neutral way; we observe no such differences for the control treatment.

Abstract

Wages in the public sector might respond to political, rather than market, forces, resulting in persistent differences relative to the private sector. Economists have long been interested in studying public-private wage gaps, as the presence of a gap could redirect resources in ways that have major impacts for the economy. This paper studies the public-private wage gap while controlling for selection bias, which has been the main empirical challenge in this literature. I focus on the Brazilian labor market, where workers can only obtain a government job by securing a sufficiently high score in public-sector exams. I construct a novel dataset with over 2 million individuals that took an exam at least once. Using a fuzzy regression discontinuity design exploring discontinuities around the approval cutoffs, I find a large and significant public-sector wage premium. The estimated coefficients are almost twice as large as OLS coefficients, resulting from a negative selection bias term. Finally, a survey experiment with Brazilian undergraduates show that students who prefer to work in the public sector expect a positive and large public-private wage gap, while those not interested in the public sector expect a (small) negative wage gap. The survey results lend support to an interpretation of negative selection on unobserved ability or productivity.

Media: InfoMoney (Brazil)