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Behavioral Heterogeneity in Economic Institutions: An Experimental Approach


Tan,  Fangfang
Public Economics, MPI for Tax Law and Public Finance, Max Planck Society;

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Tan, F. (2012). Behavioral Heterogeneity in Economic Institutions: An Experimental Approach. Tilburg: CentER, Tilburg University.

Cite as: https://hdl.handle.net/11858/00-001M-0000-000E-A0E5-4
This thesis experimentally examines the performances of economic institutions, and how the behavior of heterogeneous players affects their robustness and the established properties. It consists of three parts. The first part, Chapter 2 and Chapter 3, test two compliance mechanisms in the field of public economics. Chapter 2 asks if replacing a fixed-probability tax audit rule with a fixed-number rule, which is deterrence equivalent but a better representation of the actual auditing procedure, results in any actual differences in compliance behavior? The results suggest that the performance of a fixed-number rule is at least as good as the fixed-probability rule, and could be even better if the degree of strategic uncertainty is high. Chapter 3 investigates whether the intervention of an independent third-party judge could improve the effectiveness of peer punishment in promoting cooperation. Punishment towards cooperators and defectors are both lowered if a third party intervenes. As a result, the effectiveness of punishment on promoting cooperation is diminished when antisocial punishment is rare. The second part, Chapter 4 and Chapter 5, study how the behavior of heterogeneous players influences the performance of institutional rules. Chapter 4 asks if groups play a more subgame perfect equilibrium in both one-shot and finitely-repeated games. The results indicate that this is not the case, due to the nature of the game and the effect of the time horizon in aggregating the heterogeneous preferences of group members. Chapter 5 examines the impact of contribution cost on public goods provision. The cooperation rate is lower when groups have different costs to contribute than where each has the same cost. The third part, Chapter 6, offers an example of how heterogeneous players affect institutional choices. If players with various costs in cooperation have the opportunity to select an institution that governs them, will they vote for the most efficient institutions? The answer is that it is much harder for them to vote for an ex-post efficient institution compared to a homogenous group studied in the literature. Driven by self-interest, players vote defensively and attempt to avoid possible punishment that might target at themselves.