Do Workers Ignore Ambiguity?

Xueting Yang and John Hey

Abstract: Many labour contracts are (deliberately or necessarily?) ambiguous in nature. This paper experimentally investigates the implications. We ran an experiment in which subjects, as workers, are given a choice between an ambiguous contract and a contract with a fixed and known income for carrying out a specific task. The task, which they are then asked to complete, is also part of the experiment, and we observe what they do. Ambiguity is a key part of the ambiguous contract – subjects know the possible payments but are not told the chances of getting them. To understand the results, we need to use one of the many theoretical models of decision-making under ambiguity. We chose a subset, namely: αMaxMin, MaxMin, Expected Utility (EU), and Rank Dependent Expected Utility (RDEU). The first two of these explicitly characterise ambiguity; the last two reduce ambiguity to risk. We fit each of these four models to our experimental data and rank the models according to the Akaike criterion. EU emerges as clearly the best. This implies that the workers in our experiment are effectively ignoring the ambiguity and treating it as risk. Whether this is because of the complexity of the problem, or something inherent remains to be discovered.

Parameter estimates: Yang and Hey (MS Excel , 78kb)