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The Effects of Payoff-Relevant and Payoff-Irrelevant Information on Decision-Making and Market Outcomes
Abstract
This dissertation addresses the impact of payoff-relevant and payoff-irrelevant information on individual decision-making and strategic games. These studies highlight the value of using experimental tools to inform policy questions on how information might affect market outcomes and efficiency.
The first chapter examines whether informational interventions on travel times can be targeted at drivers to improve the overall efficiency of roadways. This study explores the effects of informational interventions using Selten et al.’s binary choice traffic experiment by selectively disseminating information about travel times on the non-chosen road when subjects already have a past history of play. Informational interventions neither alter aggregate nor individual payoffs. As a follow-up study, co-authors and I isolate subject-level response to information by matching subjects with distributions of play from past sessions. Information alters subject play: subjects switch roads more often and receive higher payoffs conditional on switching roads. Because switching reduces payoffs unconditionally, information does not generally improve payoffs overall. Only subjects that receive information upon starting the game appear to increase their payoffs due to the information treatment. Subjects that pick the slower route earn more and this type of response is correlated with the cognitive reflection task. A many steps of thinking model, such as level-k, can classify road choice when travel times are not equal and higher level thinkers earn more. Lastly, subjects most likely to benefit from information are identified, and those who need to be prodded to consider the opportunity cost of taking an alternative route.
The second chapter studies school choice mechanisms in the lab in a complete information setting to test whether the existence of justified-envy differentially impacts subjects with identical earnings. This study provides evidence that subjects do not perceive their earnings as unfair when experiencing justified-envy. Related to the perception of earnings, subjects exhibit a sort of self-serving bias where they attribute high equilibrium payoffs to their own ability and low equilibrium payoffs to the mechanisms. This study adds to a large body of literature on subjects’ failure not reporting preferences in line with theoretical predictions; subjects often fail to report preferences truthfully when they have incentives to do so, and fail to misreport preferences in a manipulable mechanism. In the manipulable case, a cognitive hierarchical model summarizes failures to report equilibrium strategies extremely well. Findings suggest one way to improve welfare outcomes is to implement a mechanism from a set of strategy-proof mechanisms with different ex-post implications.
The third chapter provides a clean test of the salience theory by relying only on payoff mono-tonicity and non-parametric assumptions of the theory. This study examines the salience theory in the context of choice reversals and violations of first-order stochastic dominance by varying whether binary choice lotteries are correlated, and when correlated by changing the sign or magnitude of the underlying correlation. Our findings provide evidence that predictions in line with salience theory emerge when correlation itself is made a salient feature of the decision environment. This suggests that agents do not perceive correlation as a salient feature unless the choice architecture emphasizes it. The implications of this finding are significant since policymakers can induce local thinking through the choice architecture and affect risk-taking behavior.
These three chapters address economic questions in the domains of risk-taking, school choice and traffic, and suggest solutions to practical problems for policymakers to enhance efficiency and re-consider market outcomes.
Citation
Vitaku, Valon (2023). The Effects of Payoff-Relevant and Payoff-Irrelevant Information on Decision-Making and Market Outcomes. Doctoral dissertation, Texas A&M University. Available electronically from https : / /hdl .handle .net /1969 .1 /199071.