Incentives and payment mechanisms in preference elicitation

Abstract

Previous literature analyzing the effects of incentive compatibility of experimental payment mechanisms is dominated by theory. With overwhelming evidence of theory violations in a multiplicity of domains, we fill this gap by empirically exploring the effects of different payment mechanisms in induced preference elicitation using a large sample of over 3800 participants across three experiments. In Experiment 1, we collected responses for offer prices to sell a card like in Cason and Plott (2014), systematically varying on a between-subjects basis the way subjects received payments over repeated rounds, by either paying for all decisions (and various modifications) or just one, as well as making the payments certain, probabilistic or purely hypothetical. While we find that the magnitude of the induced value and the range of the prices used to draw a random price significantly affect misbidding behavior, neither the payment mechanism nor the certainty of payment affected misbidding. In Experiment 2, we replaced the BDM mechanism with a second price auction and found similar results, albeit less misbidding rates. In Experiment 3, we examine the effect of payment mechanisms on choice under risk and find portfolio effects (i.e., paying all rounds) when the lottery pairs do not involve options with certainty. Overall, our empirical exercise shows that payment mechanism design considerations should place more weight on the choice architecture rather than on incentive compatibility.

Andreas C. Drichoutis

Professor of Consumer Behavior

His research interests are focused on decision making across a broad spectrum of topics pertinent to agricultural/food economics. His contributions are notably diversified spanning the area of contingent valuation and experimental auctions methods, choice under risk, inter-temporal decision making and applied demand analysis. Most of his research applies experimental economics methods to answer questions relevant to agricultural economists and decision scientists.