Document Type

Article

Publication Date

2014

Abstract

This paper presents an experimental study of the random incentive mechanisms which are a standard procedure in economic and psychological experiments. Random incentive mechanisms have several advantages but are incentivecompatible only if responses to the single tasks are independent. This is true if either the independence axiom of expected utility theory or the isolation hypothesis of prospect theory holds. We present a simple test of this in the context of choice under risk. In the baseline (one task) treatment we observe risk behavior in a given choice problem. We show that by integrating a second, asymmetrically dominated choice problem in a random incentive mechanism risk behavior can be manipulated systematically. This implies that the isolation hypothesis is violated and the random incentive mechanism does not elicit true preferences in our example.

Comments

Originally published in:

Cox JC, Sadiraj V, Schmidt U (2014) Asymmetrically Dominated Choice Problems, the Isolation Hypothesis and Random Incentive Mechanisms. PLOS ONE, 9(3), March 2014, e90742. doi:10.1371/journal.pone.0090742.

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Creative Commons Attribution 4.0 License
This work is licensed under a Creative Commons Attribution 4.0 License.

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