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Introduction

Your choices in this experiment will affect your payoff. For this reason, it is important to read these instructions carefully. A quiz will follow after the instructions. Only participants who correctly answer all the questions in 4 attempts can participate in the study and receive the participation fee and the bonus.

In the study, you can earn points. At the end of the session, the points will be converted to USD at an exchange rate of 1 cent per 1.5 points (e.g., 150 points amount to 1 USD) and will determine your total payoff (fixed pay + bonus). The number of points you earn depends on your choices and the choices of another participant.

You are going to do a task in a group of two participants. You and another participant will be asked to imagine you are part of a company called Keystone, Inc. In each group of two participants at Keystone, one participant is assigned to the role of an employee and one participant is assigned to the role of a supervisor. After participants have answered the instructions quiz, the computer uses a lottery to decide which of the participants are assigned to the role of supervisor.

Because you will interact with another person, the main part of this study requires participation WITHOUT interruptions. Please don't spend more than two minutes without making a decision while interacting with the other participant.

You will participate in 8 periods. You will interact with the same supervisor/employee for all the 8 periods. Only 1 of the 8 periods will be used as the Period that Counts. Only The Period that Counts will determine your payoff in this study. After all periods, the computer will randomly select one of the 8 periods to be the Period that Counts with equal probability. Therefore, you should treat each period like the Period that Counts. Next, we explain the decisions of the employee and the supervisor for each period.

The employee decides how many winning balls to buy

In each period, the employee has a salary of 360 points and the supervisor has a salary of 400 points.

In each period, one ball is randomly drawn from a bag (the draw is simulated randomly and fairly by the computer) to determine whether Keystone’s profit is HIGH or LOW. Profit is HIGH if a winning ball is drawn. The supervisor’s payoff is higher when Keystone’s profit is HIGH. Specifically, in addition to the salary, the supervisor receives 190 points if profit is HIGH and 70 points if profit is LOW. The number of winning balls inside the bag depends on the employee’s choice.

In each period, the employee can spend a part of their salary to buy winning balls. For every winning ball bought by the employee, 1 winning ball is added to the bag and 1 losing ball is taken out of the bag. In other words, when buying winning balls, employees replace losing balls with winning balls. The bag always contains a total of 10 balls. The bag initially contains 2 winning balls and 8 losing balls. The employee can choose to do nothing (buy 0 winning balls) or buy up to 5 additional winning balls. Each winning ball costs the employee 20 points.

For example, if the employee chooses to buy 3 winning balls, there would be 5 winning balls and 5 losing balls in the bag, increasing the probability of a HIGH profit from 20% to 50%. The table below summarizes the employee’s choices.

Winning balls bought by the employee Cost to the employee Winning balls in the bag Probability of HIGH profit
0 0 2 out of 10 20%
1 20 3 out of 10 30%
2 40 4 out of 10 40%
3 60 5 out of 10 50%
4 80 6 out of 10 60%
5 100 7 out of 10 70%

The supervisor decides the bonus for the employee


The payoff summary

Employee’s payoff for each period = Salary – Cost of buying winning balls + Bonus.

Supervisor’s payoff for each period = Salary + Compensation for profit.

Note that the supervisor’s payoff does not depend on the amount of bonus awarded to the employee.

Example of an employee’s payoff. Suppose that an employee bought 3 winning balls and received a bonus of 140 in a period. The employee’s payoff will be:

Employee’s payoff = 440 points = 360 (salary) – 60 (3 × 20, cost of buying 3 winning balls) + 140 (bonus).

Example of a supervisor’s payoff. Suppose that Keystone’s profit was LOW in a period. Then the supervisor’s payoff will be:

Supervisor’s payoff = 470 points = 400 (salary) + 70 (compensation for profit).

The following figure illustrates the sequence of events: