We present summary statistics for production, prices, profits and rejections in the three treatments. We then report estimates for a behavioral model that includes non-monetary preferences and errors.
4.1 Summary statistics
Table
1 reports average rates for production, high prices for high and low quality, rejections and players’ earnings. We report standard errors in parenthesis, and we use the session average as a unit of analysis (recall that each treatment includes four sessions).
Table 1
Summary statistics
High prices for high quality | 0.256 (0.090) | 0.695 (0.177) | 0.589 (0.083) |
Production | 0.569 (0.156) | 0.821 (0.183) | 0.771 (0.126) |
Low prices rejected | 0.140 (0.139) | 0.527 (0.185) | 0.105 (0.137) |
High prices for low quality | 0.075 (0.027) | 0.003 (0.007) | 0.103 (0.136) |
High prices rejected | 0.000 (0.000) | 0.000 (0.000) | 0.003 (0.004) |
Seller earnings | 2.154 (0.027) | 3.205 (0.688) | 2.909 (0.221) |
Buyer earnings | 4.523 (0.469) | 3.848 (0.344) | 4.401 (0.335) |
All p values reported are for a t test with four independent session-level observations. We examine the results as they relate to H1 pertaining to the impunity treatment. As hypothesized, the proportion of high prices given for high quality is significantly above zero in the impunity treatment (p = 0.010). In fact, the proportion of high prices for high quality is not significantly different from the hypothesized 0.1785 (p = 0.168), indicating that sellers with low \(\alpha\) values are nearly indifferent, on average, between producing and not producing. Last, as predicted, the proportion of production is significantly above zero (p = 0.0053). These aspects of the data are consistent with H1.
However, two aspects of the data are not entirely consistent with the theory. First, the proportion of high prices given for low quality is low, but is significantly above zero (p = 0.012). Second, the proportion of rejections is significantly above zero in the impunity treatment (p = 0.011). However, both are sufficiently small in absolute terms to be attributed to errors as we will show in the model estimation.
We now turn our attention to H2, concerned with the comparison of the impunity and reciprocity treatments. We find that the data are consistent with H2 in that the proportion of high prices given for high quality is significantly higher in the reciprocity treatment than in the impunity treatment (p = 0.004), and the proportion of production is higher in the reciprocity treatment than in the impunity treatment (although only weakly significant; p = 0.080).
H3 is concerned with the comparison of the impunity and reputation treatments. We find the patterns in the data to be consistent with H3. Specifically, the proportion of high prices for high quality in the reputation treatment is above the corresponding proportion in the impunity treatment (p = 0.002), and the proportion of production in the reputation treatment is higher than the corresponding proportion in the impunity treatment (weakly so; p = 0.086).
4.3 Estimation
In this section, we jointly estimate behavioral parameters
\(\alpha\) and
\(\tau\) for the behavioral model presented in Sect.
2.3. We estimate behavioral parameters for sellers only. The buyers are assumed to anticipate seller’s reactions, and we capture their decisions with a dynamic equilibrium approximation. Sellers make two decisions—production and accept/reject—and these decisions are not independent. The production decision of seller
j in period
t results in the probability of production
\(P_{jt} \left( {\text{Produce}} \right)\), specified in Eq. (
5) (but now indexed by
j and
t because we are using panel data for estimation). This production decision depends, in turn, on the probabilities of accepting price
\(p_{k} ,\) \(k \in \left\{ {L,H} \right\},\) \(P_{jt} \left( {p_{k} ,A} \right)\), the seller’s second decision is determined by Eq. (
7). Because the two decisions are not independent, we estimate them jointly through a joint likelihood function.
Both of the seller’s decisions depend on the seller’s forecast of the buyer’s conditional probability of paying a high price \(P_{jit} \left( {p_{\rm H} |q_{\rm H} } \right)\), where i denotes the buyer who has been matched with seller j in period t. We assume that in the impunity and the reciprocity treatments, these forecasts are simply the average probability that seller j observed high prices in the past, multiplied by the unconditional probability of high quality. Specifically, in the estimation for impunity and reciprocity treatments, \(P_{jit} \left( {p_{\rm H} |q_{\rm H} } \right) = \frac{1}{t - 1}\mathop \sum \nolimits_{s = 1}^{t - 1} \left( {P_{js} = p_{\rm H} } \right)\). Note that subscript i does not appear on the right hand side because the seller cannot distinguish among different buyers in the impunity and the reciprocity treatments. In the reputation treatment, on the other hand, the seller has historical information specific to buyer i: \(P_{jit} \left( {p_{\rm H} |q_{\rm H} } \right) = \frac{1}{t - 1}\mathop \sum \nolimits_{s = 1}^{t - 1} \left( {P_{jis} = p_{\rm H} } \right).\)
The joint log-likelihood is defined as
$$LL = \mathop \sum \limits_{j = 1}^{n} \mathop \sum \limits_{t = 1}^{T} \left[ {\ln \left( {P_{jt} \left( {\Pr oduce} \right)} \right)\Pr oduce_{jt} + \ln \left( {1 - P_{jt} \left( {\text{Produce}} \right)} \right)\left( {1 - {\text{Produce}}_{jt} } \right) + \ln \left( {P_{jt} \left( {p_{jt} ,A} \right)} \right){\text{Accept}}_{jt} + \ln \left( {1 - P_{jt} \left( {p_{jt} ,A} \right)} \right)\left( {1 - {\text{Accept}}_{jt} } \right)} \right],$$
where
n is the total number of sellers in the session (
n = 4),
T is the number of periods in a session (
T = 100),
\({\text{Produce}}_{jt}\) is 1 if seller
j decided to produce in period
t and 0 otherwise, and
\({\text{Accept}}_{jt}\) is 1 if seller
j accepted the price the buyer offered in period
t and 0 otherwise.
The joint estimation implies that the parameter \(\alpha\) is estimated in a way that maximizes the fit not only of the acceptance/rejection decision but also of the production decision. In the impunity and reputation treatments, where it is optimal to always accept, one could expect that the production decision would have the greater influence over the estimate of \(\alpha\), whereas in the reciprocity treatment, where acceptance depends largely on inequality aversion, it would be the accept/reject decision that would have the greater impact on the estimate.
We report results of the estimation in Table
2.
Table 2
Estimation results and predictions based on MLE
Fit |
Log likelihood | − 927.05 | − 629.61 | − 699.30 |
Parameters | 3 | 3 | 3 |
χ2 (restricted \(\tau\)) | 13.068** | 15.38** | 4.19* |
Estimated parameters |
\(\tau\) Production | 1.562** (0.029) | 2.633** (0.141) | 1.880** (0.131) |
\(\tau\) Acceptance | 2.342** (0.162) | 1.435** (0.168) | 1.564** (0.079) |
\(\alpha\) | 0.042** (0.009) | 0.102** (0.011) | 0.042** (0.013) |
Predictions| MLEs |
High prices for high quality | 0.260 | 0.763 | 0.510 |
Production | 0.569 | 0.996 | 0.894 |
Rejection rate | 0.253 | 0.446 | 0.188 |
Seller profit | 2.285 | 4.115 | 3.191 |
Buyer profit | 4.562 | 4.275 | 5.383 |
The main takeaway from the estimation has to do with the comparison between predicted behavior, based on the estimates of
\(\alpha\) and
\(\tau\) under the dynamic equilibrium approximation analyzed in Sect.
2.35 (see bottom section of Table
2), and the actual behavior (see Table
1). We stress that even though the dynamic equilibrium approximation model in Sect.
2.3 is only a rough approximation for the actual setting, its prediction qualitatively matches virtually all important aspects of the data:
1.
Proportions of high prices for high quality and production rates are lowest in the impunity treatment, highest in the reciprocity treatment, and in between in the reputation treatment. None of the high price proportions are different from predictions.
2.
Proportions of low prices rejected are highest in the reciprocity treatment, lowest in the reputation treatment, and in between in the impunity treatment. None of the rejection rates are significantly different from predictions.
3.
Seller profits are highest in the reciprocity treatment and lowest in the impunity treatment. None of the seller’s profits are significantly different from predictions.
4.
Buyer’s profits are lowest in the impunity treatment. Buyer profits in the impunity and reciprocity treatments are not significantly different from predictions.
The only qualitative difference between predictions and the actual data is that buyer’s profits are predicted to be higher in the reputation than in the impunity treatment, while there is no statistically significant difference between them in the data (p = 0.719). In fact, average buyer profits in the reputation treatment are significantly lower than predicted (p = 0.031).
A deviation from predictions is that quantitatively the proportion of high prices offered for high quality and production rates are slightly lower than predicted in the reciprocity and reputation treatments. This may be due to individual heterogeneity—we computed predictions based on average values of \(\alpha\) and \(\tau\). In fact, there is a good deal of heterogeneity in behavior (see Appendix B).
Last, inequality aversion appears low (although significant) in all three treatments. The estimates are lower than estimates reported in the literature (for example, De Bruyn and Bolton (
2008) report
\(\alpha = 1.03\) in the linear version of the model—of course they analyze bargaining games that are structurally quite different from ours). In terms of our treatments, estimated
\(\alpha\)’s are not significantly different between the impunity and reputation treatments (
\(\chi^{2} = 0.002, p = 0.989\)) but are significantly higher in the reciprocity treatment (
\(\chi^{2} = 15.51\) for the comparison with impunity and
\(\chi^{2} = 10.89\) for the comparison with reputation;
\(p < 0.001\) for both comparisons). It is possible that inequality aversion is more salient in the reciprocity treatment than in the other two treatments because the seller can implement a fair split by punishing the buyer in that treatment. Saliency of inequality aversion is, however, beyond the scope of this paper.