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The Control Premium: A Preference for Payoff Autonomy

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Author Info

  • Owens, David
  • Grossman , Zachary
  • Fackler , Ryan

Abstract

We document a lower bound for thecontrol premium: agents' willingness to pay to control their own payoff. Participants choose between an asset that will pay only if they later answer a particular quiz question correctly and one that pays only if their partner answers a different question correctly. However, they first estimate the likelihood that each asset will pay off. Participants are 20% more likely to choose to control their payoff than a group of payoff-maximizers with accurate beliefs. While some of this deviation is explained by overconfidence, 34% of it can only be explained by the control premium. The average participant expresses a control premium equivalent to 8% to 15% of the expected asset-earnings. Our results show that even agents with accurate beliefs may incur costs to avoid delegating and suggest that to correctly infer beliefs from choices, one should account for the control premium.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt5bg845s1.

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Date of creation: 14 Mar 2012
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Handle: RePEc:cdl:ucsbec:qt5bg845s1

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Keywords: Social and Behavioral Sciences; experiment; principal-agent; overconfidence; control premium; desire for control; control; Delegation;

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References

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  1. John R. Hamman & George Loewenstein & Roberto A. Weber, 2010. "Self-Interest through Delegation: An Additional Rationale for the Principal-Agent Relationship," American Economic Review, American Economic Association, vol. 100(4), pages 1826-46, September.
  2. Erik Hoelzl & Aldo Rustichini, 2005. "Overconfident: Do You Put Your Money On It?," Economic Journal, Royal Economic Society, vol. 115(503), pages 305-318, 04.
  3. Armin Falk & Michael Kosfeld, . "The Hidden Costs of Control," IEW - Working Papers 250, Institute for Empirical Research in Economics - University of Zurich.
  4. Theo Offerman & Joep Sonnemans & Gijs Van De Kuilen & Peter P. Wakker, 2009. "A Truth Serum for Non-Bayesians: Correcting Proper Scoring Rules for Risk Attitudes ," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1461-1489.
  5. Ernst Fehr & Holger Herz & Tom Wilkening, 2012. "The lure of authority: Motivation and incentive effects of power," UBSCENTER - Working Papers 002, UBS International Center of Economics in Society - Department of Economics - University of Zurich.
  6. Björn Bartling & Urs Fischbacher, 2008. "Shifting the Blame: On Delegation and Responsibility," TWI Research Paper Series 32, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  7. Holt, Charles A. & Smith, Angela M., 2009. "An update on Bayesian updating," Journal of Economic Behavior & Organization, Elsevier, vol. 69(2), pages 125-134, February.
  8. Grether, David M., 1992. "Testing bayes rule and the representativeness heuristic: Some experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 31-57, January.
  9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  10. Grossman, Zachary & Oexl, Regine, 2011. "Delegating to a Powerless Intermediary: Does It Reduce Punishment?," University of California at Santa Barbara, Economics Working Paper Series qt0119d201, Department of Economics, UC Santa Barbara.
  11. Gary Charness & Uri Gneezy, 2010. "Portfolio Choice And Risk Attitudes: An Experiment," Economic Inquiry, Western Economic Association International, vol. 48(1), pages 133-146, 01.
  12. Reinhard Selten, 1998. "Axiomatic Characterization of the Quadratic Scoring Rule," Experimental Economics, Springer, vol. 1(1), pages 43-61, June.
  13. Keith M. Marzilli Ericson, 2011. "Forgetting We Forget: Overconfidence And Memory," Journal of the European Economic Association, European Economic Association, vol. 9(1), pages 43-60, 02.
  14. repec:bla:restud:v:76:y:2009:i:4:p:1461-1489 is not listed on IDEAS
  15. Ulrike Malmendier & Geoffrey Tate, 2004. "CEO Overconfidence and Corporate Investment," NBER Working Papers 10807, National Bureau of Economic Research, Inc.
  16. Li Hao & Daniel Houser, 2010. "Getting It Right the First Time: Belief Elicitation with Novice Participants," Working Papers 1015, George Mason University, Interdisciplinary Center for Economic Science.
  17. Guillaume Hollard & Sébastien Massoni & Jean-Christophe Vergnaud, 2010. "Subjective beliefs formation and elicitation rules : experimental evidence," Documents de travail du Centre d'Economie de la Sorbonne 10088, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  18. Lucas C. Coffman, 2011. "Intermediation Reduces Punishment (and Reward)," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 77-106, November.
  19. Edi Karni, 2009. "A Mechanism for Eliciting Probabilities," Econometrica, Econometric Society, vol. 77(2), pages 603-606, 03.
  20. repec:kap:expeco:v:1:y:1998:i:1:p:43-62 is not listed on IDEAS
  21. Grossman, Zachary & Owens, David, 2011. "An Unlucky Feeling: Persistent Overestimation of Absolute Performance with Noisy Feedback," University of California at Santa Barbara, Economics Working Paper Series qt0dh5s03j, Department of Economics, UC Santa Barbara.
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Citations

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Cited by:
  1. Björn Bartling & Ernst Fehr & Holger Herz, 2013. "The intrinsic value of decision rights," ECON - Working Papers 120, Department of Economics - University of Zurich.
  2. Silvia Dominguez Martinez & Randolph Sloof & Ferdinand von Siemens, 2010. "Monitoring your Friends, not your Foes: Strategic Ignorance and the Delegation of Real Authority," Tinbergen Institute Discussion Papers 10-101/1, Tinbergen Institute.
  3. Danz, David & Hüber, Frank & Kübler, Dorothea & Mechtenberg, Lydia & Schmid, Julia, 2013. "'I'll do it by myself as I knew it all along': On the failure of hindsight-biased principals to delegate optimally," Discussion Papers, Research Unit: Market Behavior SP II 2013-203, Social Science Research Center Berlin (WZB).

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