In Chapter 1, I consider a voting model with asymmetric information of the type analyzed in Feddersen-Pesendorfer (1997, 1998). There are two alternatives and two states of the world; voters receive private signals about the true state; conditional on the true state, all voters have the same preference over alternatives. The twist introduced by this paper is that with probability 1-[theta] a voter is sincere, meaning that he votes according to his signal. The presence of sincere voters improves information aggregation in the sense that sincere voters' private information is directly reflected in their votes. And the presence of sincere voters exacerbates the "swing voter's curse" among the sophisticated voters, as the information brought in by sincere voters enriches the information implicit in equilibrium, which pushes the sophisticated voters to put less weight on their own signals. But the exacerbation of the "swing voter's curse" can improve collective decisions, as it can alleviate the negative influence caused by the wrong votes made by sincere voters who receive wrong signals. In Chapter 2, Bo Li and I consider a standard Glosten-Milgrom sequential trading model in which some traders use both their private information and historical information when making decisions, while other traders trade randomly. We introduce a third category of traders who rely only on their private information to decide whether to trade. We find that behavioral heterogeneity (at least three types of traders) provides one explanation for the occurrence of locked/crossed markets (negative bid/ask spreads), supported by various empirical statistics, even in competitive markets that are informationally efficient. In Chapter 3, Bo Li and I consider a voluntary voting model with asymmetric information of the type analyzed in Feddersen-Pesendorfer (1999). Voters share a common state-contingent preference on alternatives but have different beliefs about the state of the world. The twist introduced by this paper is that with probability 1-[theta] a voter is sincere who always participates in voting and votes according his private signal only. We find that the presence of sincere voters exacerbates the "swing voter's curse", and the exacerbation of the "swing voter's curse" imposes a signal-contingent effect on sophisticated voters' participation.

This book is a collection of essays which examine how the properties of aggregate variables are influenced by the actions and interactions of heterogenous individuals in different economic contexts. The common denominator of the essays is a critique of the representative agent hypothesis. If this hypothesis were correct, the behaviour of the aggregate variable would simply be the reproduction of individual optimising behaviour. In the methodology of the hard sciences, one of the achievements of the quantum revolution has been the rebuttal of the notion that aggregate behaviour can be explained on the basis of the behaviour of a single unit: the elementary particle does not even exist as a single entity but as a network, a system of interacting units. In this book, new tracks in economics which parallel the developments in physics mentioned above are explored. The essays, in fact are contributions to the analysis of the economy as a complex evolving system of interacting agents.

Following my research interests, this dissertation covers two fields of economics--behavioral economics (Chapters 1 and 2) and microeconomic theory (Chapters 3 and 4). Behavioral economics. In the first strand of my research, I develop and experimentally test theories to better understand individual-level behavioral phenomena and biases. In the last decades, behavioral economists have documented a variety of behavioral phenomena and biases across a range of economic environments, including information avoidance in health and financial domains, default effects in dynamic choice, belief distortions and probability weighting in choices over lotteries, and time inconsistency in preferences over consumption sequences. Behavioral economists typically explain each of these phenomena with a distinct mechanism. In the first chapter titled ``Emotional Inattention'' (joint with Collin B. Raymond), I develop a model that can simultaneously generate all of these phenomena and more, helping provide a unified account for many observed biases. It is a model of attention allocation, where in addition to its usual instrumental role, attention generates and regulates emotions. This role has been highlighted by psychologists but is rarely formally studied by economists. This second role of attention leads decision-makers to ignore low-payoff situations, leading to the so-called ostrich effect (where individuals ignore poorly performing financial assets), avoidance of potentially negative health tests, and pessimistic defaults in order to account for future inattention. When attention is allocated across possible realizations of an unknown state, the decision-maker has as-if distorted beliefs with additional weight on states that receive high attention. Similarly, when attention is allocated across time, the decision-maker develops preferences over the timing of consumption--they value consumption more in time periods with high attention, leading to as-if discounting. Because my model suggests these biases all emerge from a desire to manage emotions, it comes with many new predictions and implications for policymaking. Many documented deviations from the Bayesian benchmark--e.g., individuals' tendency to neglect correlation when processing information--are traditionally attributed to bounded rationality and hence thought of as cognitive mistakes. In the second chapter, titled ``Motivated Mislearning: The Case of Correlation Neglect'' (with Tony Q. Fan), I show that such cognitive ``mistakes'' can arise because of preferences and may thus not be actual mistakes. We designed an experiment to study the role of motivated reasoning in correlation neglect. In the main treatment, participants receive potentially redundant signals about an ego-relevant state--their IQ test performance. We then ask them how likely the signals are from the same source (and thus contain redundant information). Participants generally underappreciate the extent to which identical signals are more likely to come from the same source, but the bias is stronger for identical ego-favorable signals than for identical ego-unfavorable signals. This suggests that individuals may neglect the correlation between desirable signals to sustain motivated beliefs. Thus, cognitive ``mistakes'' that have traditionally been attributed to bounded rationality may, in fact, be utility maximizing. Microeconomic theory. The second strand of my work uses the tools of applied microeconomic theory to understand equilibrium outcomes when economic agents interact. In the third chapter, titled ``Robust contracting under double moral hazard'' (with Gabriel Carroll; forthcoming at Theoretical Economics), I seek to understand the prevalence of profit-sharing rules in agency relationships between private agents. In franchising partnerships, for instance, the franchisee typically pays an upfront fee and a fixed share of the revenue as royalties to the franchisor. We study a general contracting problem between a principal and an agent where both parties need to exert effort for production to take place. We identify a specific virtue of linear contracts: They are robust to uncertainty about the details of the environment and provide the highest payoff guarantees. We thus offer a tractable general-purpose model of double moral hazard and specifically express the robustness intuition underlying linear contracts. In the fourth chapter, titled ``Interactions across multiple games: cooperation, corruption, and organizational design, '' (with Jonathan B. Bendor, Nicole Immorlica, and Matthew O. Jackson), I built a model to understand how desired cooperation and undesired cooperation (e.g., corruption) are interlinked and how organizations can encourage the former while discouraging the latter. We show that because cooperation in one situation may depend on expectations of cooperation in others, it may be impossible to get desirable types of cooperation without also getting undesirable ones. More generally, we characterize this interdependency and study how the level of cooperation depends on the assignment of workers to teams and teams to tasks. Lastly, we study performance bonuses, occupational safety, and whistle-blowing rewards as possibly effective tools to promote desired and limit undesired cooperation.

The objective of this thesis is to improve the understanding of human behavior that goes beyond monetary rewards. In particular, it investigates social influences in individual’s decision making in situations that involve coordination, competition, and deciding for others. Further, it compares how monetary and social outcomes are perceived. The common theme of all studies is uncertainty. The first four essays study individual decisions that have uncertain consequences, be it due to the actions of others or chance. The last essay, in turn, uses the advances in research on decision making under uncertainty to predict behavior in riskless choices. The first essay, Fairness Versus Efficiency: How Procedural Fairness Concerns Affect Coordination, investigates whether preferences for fair rules undermine the efficiency of coordination mechanisms that put some individuals at a disadvantage. The results from a laboratory experiment show that the existence of coordination mechanisms, such as action recommendations, increases efficiency, even if one party is strongly disadvantaged by the mechanism. Further, it is demonstrated that while individuals’ behavior does not depend on the fairness of the coordination mechanism, their beliefs about people’s behavior do. The second essay, Dishonesty and Competition. Evidence from a stiff competition environment, explores whether and how the possibility to behave dishonestly affects the willingness to compete and who the winner is in a competition between similarly skilled individuals. We do not find differences in competition entry between competitions in which dishonesty is possible and in which it is not. However, we find that due to the heterogeneity in propensity to behave dishonestly, around 20% of winners are not the best-performing individuals. This implies that the efficient allocation of resources cannot be ensured in a stiff competition in which behavior is unmonitored. The third essay, Tracing Risky Decision Making for Oneself and Others: The Role of Intuition and Deliberation, explores how individuals make choices under risk for themselves and on behalf of other people. The findings demonstrate that while there are no differences in preferences for taking risks when deciding for oneself and for others, individuals have greater decision error when choosing for other individuals. The differences in the decision error can be partly attributed to the differences in information processing; individuals employ more deliberative cognitive processing when deciding for themselves than when deciding for others. Conducting more information processing when deciding for others is related to the reduction in decision error. The fourth essay, The Effect of Decision Fatigue on Surgeons’ Clinical Decision Making, investigates how mental depletion, caused by a long session of decision making, affects surgeon’s decision to operate. Exploiting a natural experiment, we find that surgeons are less likely to schedule an operation for patients who have appointment late during the work shift than for patients who have appointment at the beginning of the work shift. Understanding how the quality of medical decisions depends on when the patient is seen is important for achieving both efficiency and fairness in health care, where long shifts are popular. The fifth essay, Preferences for Outcome Editing in Monetary and Social Contexts, compares whether individuals use the same rules for mental representation of monetary outcomes (e.g., purchases, expenses) as for social outcomes (e.g., having nice time with friends). Outcome editing is an operation in mental accounting that determines whether individuals prefer to first combine multiple outcomes before their evaluation (integration) or evaluate each outcome separately (segregation). I find that the majority of individuals express different preferences for outcome editing in the monetary context than in the social context. Further, while the results on the editing of monetary outcomes are consistent with theoretical predictions, no existing model can explain the editing of social outcomes.

Back in the good old days on the fourth floor of the Altbau of Bonn's Ju ridicum, Werner Hildenbrand put an end to a debate about a festschrift in honor of an economist on the occasion of his turning 60 with a laconic: "Much too early." Remembering his position five years ago, we did not dare to think about one for him. But now he has turned 65. If consulted, he would most likely still answer: "Much too early." However, he has to take his official re tirement, and we believe that this is the right moment for such an endeavor. No doubt Werner Hildenbrand will not really retire. As professor emeritus, free from the constraints of a rigid teaching schedule and the burden of com mittee meetings, he will be able to indulge his passions. We expect him to pursue, with undiminished enthusiasm, his research, travel, golfing, the arts, and culinary pleasures - escaping real retirement.

Recognising that the economy is a complex system with boundedly rational interacting agents, the book presents a theory of behavioral rationality and heterogeneous expectations in complex economic systems and confronts the nonlinear dynamic models with empirical stylized facts and laboratory experiments. The complexity modeling paradigm has been strongly advocated since the late 1980s by some economists and by multidisciplinary scientists from various fields, such as physics, computer science and biology. More recently the complexity view has also drawn the attention of policy makers, who are faced with complex phenomena, irregular fluctuations and sudden, unpredictable market transitions. The complexity tools - bifurcations, chaos, multiple equilibria - discussed in this book will help students, researchers and policy makers to build more realistic behavioral models with heterogeneous expectations to describe financial market movements and macro-economic fluctuations, in order to better manage crises in a complex global economy.