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A Bayesian Examination of Anchoring Bias and Cheap Talks in Constructed Markets

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Author Info
Aadland, David
Caplan, Arthur

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Abstract

We present a theoretical framework for understanding the relationship between anchoring bias, hypothetical bias, and cheap talk in constructed markets. In our theory, interviewers provide agents with signals such as cheap talk and bid values while eliciting the value for nonmarket goods. In response to these signals, agents revise their prior distributions over the value of the good. Previous empirical studies have failed to account for the interaction between cheap talk and anchoring during this updating process, leading researchers to incorrectly assess the effects of cheap talk in reducing hypothetical bias. In particular, we predict that cheap talk will appear to be more effective for relatively large bids. We test our theory in an experimental setting where agents are asked to make a hypothetical voluntary contribution to a public good. The experimental results, as well as several recent empirical studies, are consistent with the theory.

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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2005 Annual meeting, July 24-27, Providence, RI with number 19568.

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Date of creation: 2005
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Handle: RePEc:ags:aaea05:19568

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Keywords: Marketing;

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  1. Donald M. McLeod & Olvar Bergland, 1999. "Willingness-to-Pay Estimates Using the Double-Bounded Dichotomous-Choice Contingent Valuation Format: A Test for Validity and Precision in a Bayesian Framework," Land Economics, University of Wisconsin Press, vol. 75(1), pages 115-125. [Downloadable!] (restricted)
  2. Aadland, David & Caplan, Arthur J., 2006. "Cheap talk reconsidered: New evidence from CVM," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 562-578, August. [Downloadable!] (restricted)
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  3. David Aadland & Arthur J. Caplan, 2003. "Willingness to Pay for Curbside Recycling with Detection and Mitigation of HypotheticalBias," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 85(2), pages 492-502, 05. [Downloadable!] (restricted)
  4. Anna Alberini & Barbara Kanninen & Richard T. Carson, 1997. "Modeling Response Incentive Effects in Dichotomous Choice Contingent Valuation Data," University of California at San Diego, Economics Working Paper Series 97-07, Department of Economics, UC San Diego. [Downloadable!]
  5. James Murphy & Thomas Stevens & Darryl Weatherhead, 2005. "Is Cheap Talk Effective at Eliminating Hypothetical Bias in a Provision Point Mechanism?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 30(3), pages 327-343, 03. [Downloadable!] (restricted)
  6. Richard Carson & Theodore Groves, 2007. "Incentive and informational properties of preference questions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 37(1), pages 181-210, May. [Downloadable!] (restricted)
  7. Timothy C. Haab & Ju-Chin Huang & John C. Whitehead, 1999. "Are Hypothetical Referenda Incentive Compatible? A Comment," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 186-196, February. [Downloadable!] (restricted)
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  8. Daniel McFadden, 2001. "Economic Choices," American Economic Review, American Economic Association, vol. 91(3), pages 351-378, June. [Downloadable!] (restricted)
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  9. Brown, Thomas C. & Ajzen, Icek & Hrubes, Daniel, 2003. "Further tests of entreaties to avoid hypothetical bias in referendum contingent valuation," Journal of Environmental Economics and Management, Elsevier, vol. 46(2), pages 353-361, September. [Downloadable!] (restricted)
  10. Trudy Ann Cameron & Michelle D. James, 1986. "Efficient Estimation Methods for "Closed-Ended" Contingent Valuation Surveys," UCLA Economics Working Papers 404, UCLA Department of Economics. [Downloadable!]
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  11. Cummings, Ronald G, et al, 1997. "Are Hypothetical Referenda Incentive Compatible?," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 609-21, June.
  12. Cummings, Ronald G & Harrison, Glenn W & Rutstrom, E Elisabet, 1995. "Homegrown Values and Hypothetical Surveys: Is the Dichotomous Choice Approach Incentive-Compatible?," American Economic Review, American Economic Association, vol. 85(1), pages 260-66, March.
  13. John A. List, 2001. "Do Explicit Warnings Eliminate the Hypothetical Bias in Elicitation Procedures? Evidence from Field Auctions for Sportscards," American Economic Review, American Economic Association, vol. 91(5), pages 1498-1507, December. [Downloadable!] (restricted)
  14. Gregory Poe & Jeremy Clark & Daniel Rondeau & William Schulze, 2002. "Provision Point Mechanisms and Field Validity Tests of Contingent Valuation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 23(1), pages 105-131, September. [Downloadable!] (restricted)
  15. Lusk, Jayson, 2002. "Effects Of Cheap Talk On Consumer Willingness-To-Pay For Golden Rice," 2002 Annual meeting, July 28-31, Long Beach, CA 19597, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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  16. Brookshire, David S, et al, 1982. "Valuing Public Goods: A Comparison of Survey and Hedonic Approaches," American Economic Review, American Economic Association, vol. 72(1), pages 165-77, March. [Downloadable!] (restricted)
  17. Neill Helen R., 1995. "The Context for Substitutes in CVM Studies: Some Empirical Observations," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages 393-397, November. [Downloadable!] (restricted)
  18. Herriges, Joseph A. & Shogren, Jason F., 1996. "Starting Point Bias in Dichotomous Choice Valuation with Follow-Up Questioning," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 112-131, January. [Downloadable!] (restricted)
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  19. Ronald G. Cummings & Laura O. Taylor, 1999. "Unbiased Value Estimates for Environmental Goods: A Cheap Talk Design for the Contingent Valuation Method," American Economic Review, American Economic Association, vol. 89(3), pages 649-665, June. [Downloadable!] (restricted)
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