Pay One or Pay All: Random Selection of One Choice for Payment

Abstract

It has become increasingly common in economics experiments to elicit a series of choices from participants, and then pay for only one, selected at random, after all have been made. This allows the researcher to observe a large number of individual decisions, and to increase payoffs for each decision since only one of them will be used for payment. It has not been demonstrated, however, whether subjects behave as if each of these choices involves the stated payoffs, or if subjects scale-down payoffs to account for the random selection that is made. This paper reports an experiment that tests this directly. In an environment where payoff scale effects have been demonstrated to matter, three treatments are conducted: pay for one of 10 choices under low payoffs, pay for all 10 choices under low payoffs, and pay for 1 of 10 choices under 10x the low payoff level. Increasing payoff scale has a significant effect on choices compared with the low payoff treatments where all 10 decisions are paid, or where one decision is paid. However, there is no significant difference in choices between paying for one or all 10 decisions at the low payoff level. This supports the validity of using the random-choice payment method.

Keywords: experiments, risk aversion, salience