General instructions (all instructions translated from German)
Welcome to the experiment. Please read through the instructions carefully. They are identical for all participants. In this experiment, you and the other participants will have to make decisions. At the end of the experiment, you will receive a payment depending on your own decisions and the decisions of the other participants. In addition, you will receive a fixed show-up fee of 4 Euro.
During the entire experiment, you may not talk to other participants, use your mobile phone, or start any programs on the computer. Should you break this rule, we will have to exclude you from the experiment and from receiving any payment. Whenever you have a question, please raise your hand. The experimenter will come to your seat to answer your question. If the question is relevant to all participants, the experimenter will repeat the question and answer it aloud.
During the experiment, we calculate payments in points instead of Euros. At the end of the experiment, the total number of points will be converted into Euros at the rate of 10 points = 1 Euro. Before we start the experiment, you will have to answer six written questions regarding the experiment to make sure that you have correctly understood the instructions.
The experiment is confidential; no other participant will receive any information regarding your answers, decisions, or final payment.
The experiment consists of two parts: In the first part, you will have to make decisions that will determine your success in the experiment and, consequently, your final payment. In the second part, you will have to answer several questions that have no influence on your success in the experiment. Your answers to these questions will be treated as strictly confidential.
Specific instructions [D: Deduct Treatment; B: Bonus-Malus Treatment]
The experiment consists of five periods. Before period 1, you will be randomly and anonymously allocated into fixed groups of four. The group composition will remain unchanged during the entire experiment.
At the beginning of each period, each participant will receive an endowment of 25 [Deduct: 27] points, thus totaling 125 [D: 135] points over the five periods. In each period, each participant runs the risk of losing a part of his or her endowment. The following losses can occur with the following probabilities in each period:
In each period, given the above probabilities, a computer randomly determines for each participant independently if any of the above losses occur. The amounts of the potential losses and the probabilities remain constant over all periods. Your decisions or losses in earlier periods, therefore, have no influence on the probability or the amount of future losses.
In order to compensate for potential losses, the four group members together build a mutual insurance group. This setup ensures that each group member automatically pays an insurance premium of 5 points [BoMa: no points mentioned here] on a joint group account (“insurance account”) at the beginning of each period.
In order to receive payment from the insurance account, group members can retrieve indemnities from the insurance account. [D: There is a deductible of 5 points.] Each group member only has the possibility to retrieve 0 points, 10 points or 15 points from the insurance account. If a group member retrieves an indemnity, he or she receives the corresponding amount from the insurance account. The other group members have no influence on this payment; it will be made automatically.
[BoMa: The insurance premium of each participant is 5 points in the first period. The insurance premium in periods 2–5 is dependent on whether indemnities have been retrieved in earlier periods. If, in a given period, an indemnity is retrieved from the insurance account, then the insurance premium in the next period increases by 2 points. If no indemnity is retrieved, the insurance premium in the next period decreases by 1 point. The following table summarizes this relation for the first three periods:
end of insertion for BoMa]
Any indemnity payment from the insurance account results in additional transaction costs of 40 percent. Therefore, if a group member retrieves an indemnity of 10 points, the insurance account will be debited with 4 additional points (14 points overall). If 15 points are retrieved, the insurance account will be debited with 6 additional points. The following table summarizes this relation:
Potential credit and debit balances of the insurance account are summed up over all five periods. During the experiment, you will receive no information regarding the balance of the insurance account. After the last period, the insurance account is automatically and equally balanced by all group members. If the insurance account has a negative balance, each group member has to pay one-fourth of the balance from his or her winnings up to that point. On the other hand, if the insurance account has a positive balance, each group member receives one-fourth of the balance in addition to his or her winnings up to this point.
The timing of your decisions in each period is as follows:
- Step 1
At the beginning of each period, you receive your period endowment of 25 [D: 27] points.
- Step 2
You must acknowledge the payment of the insurance premium of 5 points [B: no points mentioned] to the insurance account.
- Step 3
You will make three decisions in each period: For each potential loss situation, you must decide how many points you will retrieve from the insurance account. Thus, for a situation in which you have not incurred a loss, you have to decide whether you want to retrieve 0 points, 10 points, or 15 points from the insurance account. You must make the same decision twice more for the situations in which you have incurred a low loss or a high loss, respectively.
- Step 4
Only after you have made all three decisions will you find out whether you have indeed incurred a loss in this period. If you have incurred a loss, you will also learn whether it was a low or a high loss. You will then automatically receive the indemnity from the insurance account that you requested in step 3 for this particular situation. [B: If an indemnity is retrieved from the insurance account in this period, then the insurance premium in the next period increases by 2 points. If no indemnity is retrieved, the insurance premium in the next period decreases by 1 point.]
After the last period, the second part of the experiment will start, and you will have to answer several questions. After you have filled in the questionnaire on the computer, you will receive detailed information regarding the balance of the insurance account, your earned points, and your payment in Euros.
Please pack up your personal belongings after the experiment and sit quietly in your seat. We will call you in a random order to collect your payment outside the lab room. Thank you for your participation.