We demonstrate how the standard usage of the random incentive system in ambiguity experiments eliciting certainty and probability equivalents might not be incentive compatible if the decision-maker is ambiguity averse. We propose a slight modification of the procedure in which the randomization takes place before decisions are made and the state is realized, and prove that if subjects evaluate the experimental environment in that way (first-risk, second-uncertainty), incentive compatibility may be restored.
Bibliographical noteFunding Information:
The research of Baillon and Li was made possible by a Vidi grant and a Veni grant of the Dutch Organization for Scientific Research (NWO). First version: May 2013.
© 2021, The Author(s), under exclusive licence to Economic Science Association.
- Ambiguity aversion
- Incentive compatibility
- Integration vs Isolation
- Non-expected utility
- Reduction of compound lotteries