The Chair Multidisciplinary Micro-economics
We take a multidisciplinary approach and a thorough quantitative and analytical basis as a point of departure. For this reason we consider methodological rigor and the integration of multidisciplinary insights the key features of our research. Our research focusses on understanding (individual, firm, market) behavior as a consequence of monetary and non-monetary incentives, taking into account the interdependence with formal and informal institutions.
Thematic focus areas:
- Strategic framing and endogenous preferences
This research is part of what Rabin (2002) refers to as third-wave behavioral economics. In first-wave behavioral economics, anomalies and deviations from rational behavior were pointed out. In the second wage these anomalies were formalized. In third-wave behavioral economics, these are no longer considered as deviations, but they are integrated into economic theory. An important next step, which is taken in our research and which makes the research innovative, is to consider the possibility of manipulation. Whereas in standard game theory, each individual player, based on her information, plays an optimal best response to other players’ actions, in the current research, it is possible that one player manipulates another player. Reference-dependent preferences based on prospect theory, and the possibility of framing linked to it, provide a tight theoretical framework under which manipulation can be analyzed and predictions can be made. Those predictions can subsequently be tested rigorously in the laboratory. The research thus provides a combination of theory development together with rigorous experimental testing that improves understanding of the strategic manipulation of reference points.
Application: Executive compensation, monopolistic pricing, health economics
Another important further step, which is taken in our research is to consider the possibility that individuals have instable preferences. The large empirical literature showing that individuals deviate from expected utility maximization may suggest that individual preferences are shaped by formal and informal institutions rather than the other way around. Our research investigates concrete instances in which such a reversal of causality may take place.
Application: Online auction versioning, (local) public goods provision
2. The microeconomic origin and impact of institutions
People make (consumption, production, investment) decisions in an institutional environment of values and norms, of laws and regulations, and of different types of organizations and contracts. These institutions exert a powerful influence on economic actors, who in turn create and influence institutions. In order to fully understand this interrelation, we need to understand why and how institutions change, and how institutions persist in a changing environment. These questions are difficult to address when institutions are purely viewed from a game-theoretic perspective in which they are considered self-enforcing (institutions-as-equilibria), and in which all behavior is generated endogenously. To integrate the game-theoretic perspective on institutions with complementary perspectives requires a more dynamic approach than presently offered by the notion of self-enforcing institutions. For this purpose our research follows two lines: investigating empirically the success of specific institutions in a comparative approach, and extending the theoretical framework by introducing shared beliefs and institutional reinforcement.
Application: Worker participation and corporate governance, communication, cultural variation of cooperative behavior
3. Sustainable decision making
Policymakers have encountered substantial difficulties over the past three decades trying to induce people to change consumption behaviors and to adopt new, more sustainable behavioral patterns, even when these behaviors appear to be in the consumers’ own (financial) interests. Individuals decide as “Humans” rather than as “Econs” (Thaler & Sunstein, 2008): While “Econs” may not make perfect forecasts, they at least make unbiased forecasts. And they respond primarily to incentives—their decisions are not affected by seemingly “irrelevant” factors such as the display of a set of alternatives, or the order in which options are offered. In contrast, “Humans” make systematic and predictable errors—their forecasts are flawed and biased in systematic ways. For example, people tend to suffer from the so-called “status-quo” bias—a strong tendency to stick to the status quo and go along with a default option, even if an alternative option exists that would offer superior benefits for them. Therefore, a growing body of (mainly experimental) research in psychology and behavioral economics suggests that non-price interventions that take into account these systematic biases can potentially be just as powerful as prices in changing choices and behavior—and potentially much less costly. Recent studies have yielded increasingly compelling results. Understandably, this insight has triggered the interest of policymakers, as the prospect of enhancing sustainable decision making both more effectively and efficiently is compelling. Behavioral economists thus agree that individuals can be nudged, i.e. subtly pushed, to alter their choices and behavior towards, for example, (more) socially-desirable behavior. However, what “nudges” to use most effectively is far from clear. An important next step, which is taken in our research, is to distinguish between individuals in different roles (consumer, manager) and rigorously develop theory and test predictions in large scale experiments, and to design adequate field experiments to test whether findings are transposable to the real world.
Application: Energy efficiency, food consumption behavior, charity donation
4. Social and Economic Networks
This research studies network formation and behavior on networks under different institutional arrangements. The aim is to develop innovative theory on the interdependence between the interaction structure and behavior of strategic decision makers (individuals, firms, governments). We test this theory with complementary data from experiments, from alliance formation among firms, and from international trade relations.
A wide range of theoretical and empirical research from various disciplines suggests that social networks are highly relevant in determining the outcomes of cooperation and coordination problems. These findings add to the more general notion that social networks have important effects on many types of social phenomena, including (but not limited to) social inequality, labor market outcomes, the diffusion of innovations, and the spread of information or diseases. A natural next question, then, is where these network structures come from. An often implicit assumption in theories of network effects is that social networks are fixed structures, or exogenously exposed on the actors. While in some cases it may be reasonable to assume that people have little or no control over their social environment (e.g., in kin relations), many social relations actually result from people’s choices. Moreover, the notion that networks have important consequences for behavior suggests that people do not only often have the opportunity to change their social relations, but also have incentives to do so. Given that networks potentially produce benefits for the actors in the network, it seems reasonable that actors will consciously form relationships to optimize their benefits from the network.
Application: Trade networks and development, information provision, money laundering, microfinance institutions