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The handbook of experimental economics, volume 2


THE HANDBOOK OF EXPERIMENTAL ECONOMICS
VOLUME 2



THE HANDBOOK OF
EXPERIMENTAL ECONOMICS
Volume 2

Edited by John H. Kagel and Alvin E. Roth

PRINCETON UNIVERSITY PRESS
PRINCETON AND OXFORD


Copyright © 2015 Princeton University Press
Published by Princeton University Press, 41 William Street,
Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press, 6 Oxford Street,
Woodstock, Oxfordshire OX20 1TR

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All Rights Reserved
ISBN 978-0-691-13999-9
Library of Congress Control Number: 2016935744
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Typeset by Nova Techset Pvt Ltd, Bangalore, India
Printed in the United States of America
1 3 5 7 9 10 8 6 4 2


CONTENTS
Preface xiii

Chapter 1 Macroeconomics: A Survey of Laboratory Research

1

John Duffy
1.

Introduction: Laboratory Macroeconomics 1

2. Dynamic, Intertemporal Optimization 4
2.1. Optimal Consumption/Savings Decisions 4
2.2. Exponential Discounting and Infinite Horizons 12
2.3. Exponential or Hyperbolic Discounting? 13
2.4. Expectation Formation 14
3. Coordination Problems 21
3.1. Poverty Traps 21
3.2. Bank Runs 24
3.3. Resolving Coordination Problems: Sunspots 27
3.4. Resolving Coordination Problems: The Global Game Approach 30
4. Fields in Macroeconomics 32
4.1. Monetary Economics 33
4.2. Labor Economics 46
4.3. International Economics 50
4.4. Multisectoral Macroeconomics 55


5. Macroeconomic Policies 61
5.1. Ricardian Equivalence 61
5.2. Commitment versus Discretion 64
5.3. Monetary Policy 67
5.4. Fiscal and Tax Policies 73
6. Conclusions 78
Acknowledgments 79
Notes 79
References 82

Chapter 2 Using Experimental Methods to Understand Why and How We
Give to Charity 91
Lise Vesterlund
1. Introduction 91
2. Preferences for Giving 92
2.1. Is Giving Rational? 95
2.2. Motives 97


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Contents

3. Fundraising 108
3.1. Announcements: Sequential and Dynamic Giving 109
3.2. Lotteries 119
3.3. Auctions 123
3.4. Rebates and Matches 126
4. Conclusion 131
Notes 133
References 141

Chapter 3

Neuroeconomics 153

Colin F. Camerer, Jonathan D. Cohen, Ernst Fehr, Paul W. Glimcher,
and David Laibson
153
1. Neurobiological Foundations 156
1.1. The Cellular Structure of the Brain 156
1.2. From Neurons to Networks 161
1.3. Summary of Neurobiology 164

INTRODUCTION

2. Functional MRI: A Window into the Working Brain 164
2.1. Functional MRI and the BOLD Signal 165
2.2. Design Considerations 166
2.3. Image Analysis 168
2.4. Summary of Functional MRI 171
3. Risky Choice 172
3.1. Statistical Moments 172
3.2. Prospect Theory 172
3.3. Causal Manipulations 175
3.4. Logical Rationality and Biological Adaptation 176
3.5. Summary of Risky Choice 177
4. Intertemporal Choice and Self-regulation 177
4.1. Empirical Regularities 178
4.2. Multiple-Self Models with Selves That Have Overlapping Periods
of Control 181
4.3. Multiple-Self Models with Selves That Have Nonoverlapping Periods
of Control 182
4.4. Unitary-Self Models 182
4.5. Theoretical Summary 183
5. The Neural Circuitry of Social Preferences 183
5.1. Social Preferences and Reward Circuitry 184
5.2. Do Activations in Reward Circuitry Predict Choices? 186
5.3. The Role of the Prefrontal Cortex in Decisions Involving Social
Preferences 186
5.4. Summary 188
6. Strategic Thinking 189
6.1. Strategic Awareness 189
6.2. Beliefs, Iterated Beliefs, and Strategic Choice 190


Contents

6.3.
6.4.
6.5.
6.6.

7.



vii

Learning 192
Strategic Teaching and Influence Value 194
Discussion of Strategic Neuroscience 196
Summary 199

Conclusion 200
Acknowledgments 200
Notes 201
References 202

Chapter 4 Other-Regarding Preferences: A Selective Survey of
Experimental Results 217
David J. Cooper and John H. Kagel
217
Where Things Stood Circa 1995

INTRODUCTION

I.

218

II. Models of Other-Regarding Preferences, Theory, and Tests 222
A. Outcome-Based Social Preference Models 222
B. Some Initial Tests of the Bolton-Ockenfels and Fehr-Schmidt Models 225
C. Social Preferences versus Difference Aversion 231
D. Models Incorporating Reciprocity/Intentions of Proposers 233
E. Other-Regarding Behavior and Utility Maximization 235
F. Learning 236
III. Other-Regarding Behavior, Applications, and Regularities 240
A. The Investment/Trust Game 240
B. Results from Multilateral Bargaining Experiments 242
C. A Second Look at Dictator Games 244
D. Procedural Fairness 247
E. Diffusion of Responsibility 249
F. Group Identity and Social Preferences 253
G. Generalizability 255
IV. Gift Exchange Experiments 259
A. An Initial Series of Experiments 259
B. Incomplete Contracts 261
C. Wage Rigidity 262
D. The Effect of Cognitive Ability and the Big Five Personality Characteristics
in Other-Regarding Behavior 264
E. Why Does Gift Exchange Occur? 265
F. Laboratory versus Field Settings and Real Effort 267
G. Summary 274
V. Conclusions 274
Acknowledgments 276
Notes 277
References 282


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Contents

Chapter 5

Experiments in Market Design

290

Alvin E. Roth
1. Introduction 290
2. Some Early Design Experiments: Allocation of Airport Slots 295
3. FCC Spectrum Auctions 300
4. Other Auctions 307
4.1. eBay Auctions 307
4.2. A Poorly Designed Auction (for Medicare Supplies) 316
5. Labor Market Clearinghouses 318
5.1. Designing Labor Markets for Doctors 318
5.2. Matching without a Clearinghouse: The Market for Economists, and
Online Dating 327
6. Course Allocation 329
7. Conclusions 333
Notes 334
References 339

Chapter 6

Experiments in Political Economy 347

Thomas R. Palfrey
1. Introduction and Overview 347
1.1. Methodology: Relationship to Experimental Economics 348
1.2. Chapter Road Map 350
2. Experiments in Committee Bargaining 352
2.1. Unstructured Committee Bargaining 352
2.2. Committee Bargaining with a Fixed Extensive Form Structure 359
3. Elections and Candidate Competition 381
3.1. The Spatial Model of Competitive Elections and the Median Voter
Theorem 381
3.2. Multicandidate Elections 387
3.3. Candidate Competition with Valence 390
4. Voter Turnout 392
4.1. Instrumental Voting Experiments 392
4.2. The Effects of Beliefs, Communication, and Information on Turnout 397
4.3. Expressive Voting Experiments 398
5. Information Aggregation in Committees 400
5.1. Condorcet Jury Experiments 400
5.2. The Swing Voter’s Curse 406
6. Voting Mechanisms that Reflect Preference Intensity 410
6.1. Mechanisms Where a Budget of Votes Can Be Allocated
Across Issues 411
6.2. Vote Trading and Vote Markets 414
7. Where Do We Go From Here? 418


Contents
Acknowledgments 419
Notes 419
References 424

Chapter 7 Experimental Economics across Subject Populations 435
Guillaume R. Fréchette
I.

Introduction 435

II. Infrahumans 438
II.A. Methodological Notes 443
III. Children 444
III.A. Methodological Notes 449
IV. Token Economies 449
IV.A. Methodological Notes 451
V. Elderly 451
V.A. Methodological Notes 455
VI. Highly Demographically Varied (Representative) Sample 455
VI.A. Methodological Notes 460
VII. Subjects with Relevant Task Experience 461
VII.A. Methodological Notes 468
VIII. Discussion 468
VIII.A. Individual Choice 469
VIII.B. Games 470
IX.

Conclusion 471

Acknowledgments 472
Notes 472
References 475

Chapter 8 Gender 481
Muriel Niederle
I. Introduction 481
II. Gender Differences in Competitiveness 485
II.A. Do Women Shy Away from Competition? 486
II.B. Replication and Robustness of Women Shying Away
from Competition 489
II.C. Reducing the Gender Gap in Tournament Entry 492
II.D. Performance in Tournaments 497
II.E. Field Experiments on Gender Differences in Competitiveness 503
II.F. External Relevance of Competitiveness 504
III. Gender Differences in Selecting Challenging Tasks and
Speaking Up 507
III.A. Gender Differences in Task Choice 507
III.B. Gender Differences in Speaking up 510
IV. Altruism and Cooperation 512



ix


x



Contents

IV.A. Dictator-Style Games 515
IV.B. Field Evidence and External Relevance of Gender Differences in Giving

519
IV.C. Prisoner’s Dilemma and Public Good Games
IV.D. New Directions 523
IV.E. Conclusions 524

520

V. Risk 525
V.A. Early Work and Surveys by Psychologists 527
V.B. Early and Most Commonly Used Elicitation Methods in Economics 530
V.C. Early Economic Surveys 533
V.D. Recent Economic Surveys and Meta-Analyses on Specific
Elicitation Tasks 535
V.E. Stability of Risk Preferences and Their External Relevance 538
V.F. An Example of a Careful Control for Risk Aversion 543
V.G. Conclusions 545
VI. Conclusions 546
Acknowledgments
Notes 547
References 553

Chapter 9

547

Auctions: A Survey of Experimental Research 563

John H. Kagel and Dan Levin
INTRODUCTION

563

I. Single-Unit Private Value Auctions 564
1.1. Bidding above the RNNE in First-Price Private Value Auctions 565
1.2. Bidding above the RNNE and Regret Theory 568
1.3. Using Experimental Data to Corroborate Maintained Hypotheses in
Empirical Applications to Field Data 569
1.4. Second-Price Private Value Auctions 570
1.5. Asymmetric Private Value Auctions 572
1.6. Sequential Auctions 576
1.7. Procurement Auctions 578
1.8. Cash-Balance Effects and the Role of Outside Earnings On Bids 580
1.9. An Unresolved Methodological Issue 581
II. Single-Unit Common Value Auctions 582
2.1. English Auctions 583
2.2. Auctions with Insider Information 587
2.3. Common Value Auctions with an Advantaged Bidder 588
2.4. New Results in the Takeover Game: Theory and Experiments 590
2.5. Additional Common Value Auction Results 592
2.6. Is the Winner’s Curse Confined to College Sophomores? 596
III. Multiunit-Demand Auctions 598
3.1. Auctions with Homogeneous Goods—Uniform Price and Vickrey
Auctions 598
3.2. More on Multiunit-Demand Vickrey Auctions 604


Contents



3.3. Auctions with Synergies 605
3.4. Sequential Auctions with Multiunit-Demand Bidders 607

IV.
4.1.
4.2.
4.3.
4.4.
V.

Additional Topics 610
Collusion in Auctions 610
Bidder’s Choice Auctions: Creating Competition Out of Thin Air 615
Internet Auctions 617
Entry into Auctions 619

Summary and Conclusions 623
Acknowledgments 623
Notes 623
References 629

Chapter 10 Learning and the Economics of Small Decisions

638

Ido Erev and Ernan Haruvy
638
1. The Basic Properties of Decisions from Experience 641
1.1. Six Basic Regularities and a Model 641
1.2. The Effect of Limited Feedback 663
1.3. Two Choice-Prediction Competitions 665
2. Dynamic Environments 668
2.1. The Partial Reinforcement Extinction Effect and Reinforcement
Schedules 668
2.2. Spontaneous Alternation, the Gambler Fallacy, and Response
to Patterns 670
2.3. Negative and Positive Transfer 671
2.4. The Effect of Delay and Melioration 671
2.5. Models of Learning in Dynamic Settings 672

INTRODUCTION

3. Multiple Alternatives and Additional Stimuli 672
3.1. Successive Approximations, Hill Climbing, and the Neighborhood
Effect 672
3.2. Learned Helplessness 674
3.3. Multiple Alternatives with Complete Feedback 675
3.4. The Effect of Additional Stimuli (Beyond Clicking) 675
4. Social Interactions and Learning in Games 677
4.1. Social Interactions Given Limited Prior Information 678
4.2. Learning in Constant-Sum Games with Unique Mixed-Strategy
Equilibrium 680
4.3. Cooperation, Coordination, and Reciprocation 683
4.4. Fairness and Inequity Aversion 687
4.5. Summary and Alternative Approaches 688
5. Applications and the Economics of Small Decisions 688
5.1. The Negative Effect of Punishments 688
5.2. The Enforcement of Safety Rules 689
5.3. Cheating in Exams 691
5.4. Broken Windows Theory, Quality of Life, and Safety Climate 692

xi


xii



Contents

5.5. Hand Washing 692
5.6. The Effect of the Timing of Warning Signs 693
5.7. Safety Devices and the Buying-Using Gap 693
5.8. The Effect of Rare Terrorist Attacks 694
5.9. Emphasis-Change Training, Flight School, and Basketball 695
5.10. The Pat-on-the-Back Paradox 695
5.11. Gambling and the Medium-Prize Paradox 696
5.12. The Evolution of Social Groups 696
5.13. Product Updating 697
5.14. Unemployment 697
5.15. Interpersonal Conflicts and the Description-Experience Gap 698
5.16. Implications for Financial Decisions 699
5.17. Summary and the Innovations-Discoveries Gap 699

6. Conclusion 700
Acknowledgments
Notes 701
References 702

701

Editors and Contributors 717
Illustration Credits 721
Name Index 725
Subject Index 737


PREFACE
his second volume of the Handbook of Experimental Economics follows some 20
years after the original Handbook. There has been a lot of activity in a number
of areas that were not covered in the 1995 Handbook, including the emergence of
neuroeconomics, significant growth in macroeconomic experiments, and substantial
growth in experiments that support market design research. The goal here is to cover
some of these new growth topics and others not covered in the 1995 Handbook as well
as to update results in some areas of research (e.g., public goods and auctions) that were
covered in 1995. Even more so than in the 1995 Handbook, there is no way to cover the
entire field of experimental economics or to exhaustively cover the research areas each
chapter addresses. Instead we left it to the authors of each chapter to curate important
developments, with a view to reporting on series of experiments that highlight the back
and forth between different experimenters, between experimenters and theorists, and
between experimenters and practitioners. As in the 1995 Handbook, there is no chapter
explicitly devoted to experimental methodology, because we continue to believe that
methodological issues are best covered within the context of the substantive research
questions under investigation. Also, there are a number of active areas of experimental
research, both new and old, that we wish we could have reported on here, but to keep
the Handbook manageable, we do not cover them.
Most of the experiments reported here consist of laboratory studies, but several
chapters report extensively on field experiments devoted to understanding the same or
related issues studied in lab experiments, as called for by the questions being investigated. There is considerable back and forth both between lab and field experiments
and between experiments and naturally occurring field data. The ultimate goal in all
cases is to better understand economic behavior as it relates to economic theory and
policy applications, with the emphasis on the role of experiments, lab or field (as well as
naturally occurring empirical data), in achieving these goals.
Many colleagues have contributed to the Handbook in addition to the chapter writers.
Earlier chapter drafts were presented at several conferences at which members of the
experimental community were invited to comment on early outlines and drafts of the
chapters.1 In addition, each chapter has circulated among specialists to get feedback
on the results reported and to identify omissions. To be sure, not all this feedback has
been incorporated, but much of it has been included in revising chapter drafts. In what
follows we provide a brief overview of the contents of the chapters.

T

Chapter 1: “Macroeconomics: A Survey of Laboratory Research,” by John Duffy
This chapter surveys the growing body of macroeconomic experiments over the past
20 years.2 This is both possible and relevant due to changes in macroeconomic
modeling that have come to rely more and more on microfoundations. (Analogously,
evolutionary biologists can’t conduct experiments directly on the fossil record or on
species extinction, but our understanding of evolution is enhanced by experiments on
fruit flies and on DNA.)
The chapter reviews experiments directed at issues in macroeconomics ranging from
intertemporal optimization to how agents form expectations, to resolving the many


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Preface

coordination problems inherent to the macroeconomy, and to policy applications.
There are efforts to reconcile laboratory outcomes with the field data. For example,
experiments show that subjects fail to smooth consumption over their laboratory
“lifetime” outcomes, typically overconsuming to begin with, which has a clear correspondence in field data that shows massive undersaving for retirement. In each area
covered, gaps in the literature and related problems ripe for experimental investigation
are reported. So not only does this chapter provide a summary of experimental
macroeconomy research, it points macroeconomists to a number of open research
questions that can be studied experimentally.

Chapter 2: “Using Experimental Methods to Understand Why and How We Give to
Charity,” by Lise Vesterlund
The literature on voluntary giving has grown substantially since the first Handbook, with
much research devoted to determining the factors that drive generosity. Indicative of
the growth of research in the field, to have a manageable survey, this chapter focuses on
why and how people give to charities, using a blend of laboratory and field experiments,
along with relevant field data. The chapter covers two broad areas of research. The first
part of the chapter focuses on sorting out motives for giving, emphasizing results from
creative modifications of the traditional public good and dictator games. Issues under
investigation are to what extent giving is intentional and to what extent it results from
genuine concern for others (altruism), concern for self (“warm glow”), and mistakes.
Experiments are reported that investigate alternative models of charitable giving, and
self-image effects for giving.3
The second part of the chapter reviews research on fundraising mechanisms.
Fundraising differs from the classic mechanism design problem as the fundraiser’s
objective is to maximize contributions (net of expenses), and he or she must rely
on voluntary giving. Topics reported on include the potential benefits of announcing
early contributions even though this invites free riding on lead contributors, and the
benefits of different competitive contribution mechanisms such as lotteries, winnerpay and all-pay auctions. Other fundraising techniques, such as matching and rebating
contributions, are also studied. The chapter, especially in the second part, reviews
laboratory and field experiments as well as naturally occurring field data related to the
same issues.

Chapter 3: “Neuroeconomics,” by Colin Camerer, Jonathan Cohen, Ernst Fehr,
Paul Glimcher and David Laibson
At the time of the 1995 Handbook, we don’t think anyone would have envisioned that
neuroeconomics would so grip the attention of an enthusiastic band of pioneers that it
would need to have a chapter devoted to it in the subsequent Handbook. But the field
has established itself in the interim and has critical mass and vibrancy, as evidenced by
the Society of Neuroeconomics, established in 2004, and the Journal of Neuroscience,
Psychology and Economics, which started publication in 2008. The chapter is a team
effort by prominent scholars in the field.
The chapter provides an introduction to neuroscience along with a summary of
research results to date in four areas of neuroeconomics—choice under uncertainty,
intertemporal choice and self-regulation, the neural circuitry of social preferences, and
strategic thinking. The first section outlines the neurobiological foundations of the
research, providing the overall motivation and goals of the research program, along
with characterizing the relevant parts of the brain that serve as the seat of various


Preface



xv

types of behavior. This is followed by a discussion of research methods, with a focus
on fMRI studies, including exactly what is being measured and how fMRI images are
evaluated. Research summaries in each of the four substantive areas covered focus on
questions and results in relation to leading economic models in each area that would
help to pin down their validity (e.g., with respect to prospect theory, determining if
there are different parts of the brain where gains and losses are evaluated). Overall, this
is a primer for anyone interested in neuroeconomics (casually or otherwise), along with
a discussion of early experimental results. It will be interesting to come back in a decade
or two to revisit results in these four research areas and see to what extent these early
results have laid the groundwork for economics grounded in biology.

Chapter 4: “Other-Regarding Preferences: A Selective Survey of Experimental Results,”
by David J. Cooper and John H. Kagel
The study of other-regarding preferences has been intensified in experimental research
as it became increasingly clear that the standard economic model of strictly ownincome-maximizing agents fails to account for experimental outcomes for a number
of topics (e.g., bargaining, public goods provision, trust and reciprocity, and workplace
interactions). Perhaps the best way to view the research reported in this chapter is
as an inquiry intended to narrow down what exactly is meant by “other-regarding”
preferences. This research has gone hand-in-hand with the growth of behavioral
economics, as much of the anomalous experimental behavior has been incorporated
into economic models. In turn, these models have suggested new experiments to explore
their predictions, which have deepened our understanding the nature of other-regarding
preferences.
The chapter covers two broad areas of research: The first has to do with research
aimed at better understanding early results from bargaining games, many of which
were reviewed in the earlier Handbook. Those earlier results led to the development of
formal models of other-regarding preferences, which provided the motivation for whole
new classes of experiments that would probably not have been considered except for
these models. New lines of inquiry compared to those covered in the earlier Handbook
concern procedural fairness, delegation of responsibility for unkind behavior, group
identity and social preferences, in addition to such staples as the trust and dictator
games.4 The second broad area of research involves gift exchange in labor markets,
a subfield of “efficiency wage theory,” in which employers offer above-market wages
and are in turn rewarded with above-minimum effort. There is considerable discussion
of the contributions of both laboratory and field experiments to better understand
behavior in this area.

Chapter 5: “Experiments in Market Design,” by Alvin E. Roth
When the first volume of the Handbook appeared in 1995, the kinds of economic
engineering that have come to be known as market design were just developing. New
designs for spectrum auctions and for labor-market clearinghouses were proposed by
economists in the 1990s and were adopted and implemented in new forms of market
organization. Market design has continued to grow, and much of the chapter focuses
on the way experiments have complemented other forms of investigation, not only to
explore the underlying science but also to communicate it to the many interested parties
among whom new market designs have to be coordinated if they are to be implemented.
The chapter considers the various roles that experiments played in the debates
surrounding the initial design of auctions for radio spectrum licenses and the continuing


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Preface

role they have played in the development of more complicated auctions that allow
bidders to bid on packages and not just on individual licenses. It also considers how
experiments have played a role in understanding the role of the “hard-close” ending rule
in online eBay auctions, in guiding the revision of eBay’s reputation mechanism, in the
use of experiments to help design and implement labor market institutions, such as the
clearinghouse “Matches” that are used in various markets for doctors, and the signaling
mechanism used in the market for new PhD economists. Throughout, the emphasis is
on how experiments play a role as one among many tools in bringing a new design from
conception through implementation.

Chapter 6: “Experiments in Political Economy.” by Thomas R. Palfrey
The focus of this chapter is on political science experiments in the methodological
tradition of economic experiments with incentivized subjects and controlled laboratory
conditions. The experiments reported are theory driven, dealing with outcomes in
nonmarket settings: elections, committees, and so on. The issues covered deal with
resource allocations, mechanism design, efficiency and distribution. However, the
“currency” for deciding these issues is votes rather than money. Five basic areas of
research are covered, all tightly linked to formal theoretical modeling in political science:
(1) committee bargaining, (2) elections and candidate competition, (3) voter turnout,
(4) information aggregation in committees, and (5) novel voting procedures designed
to reflect the intensity of voter preferences.
The review of committee bargaining experiments includes early unstructured committee experiments within the framework of cooperative game theory, and more recent
sequential bargaining experiments with a fixed extensive form based on noncooperative game theory. The section on elections and candidate competition covers both
two-candidate and multicandidate elections, and asymmetric elections in which one
candidate (e.g., the incumbent) has a built-in advantage. Voter turnout is modeled
as a participation game, intended to rationalize turnout with costly voting in mass
elections. The section on information aggregation in committees explores institutions
designed to deal with the aggregation of agents’ private information assuming common
preferences. Among the issues explored is how the swing voter’s curse (resulting from
similar forces as the winner’s curse in common value auctions) is largely corrected
for in voting, whereas it is typically not corrected for in auctions. The section on
alternative voting mechanisms explores the inefficiency in outcomes when voters have
strong cardinal preferences and a number of alternative mechanisms designed to correct
these inefficiencies—for example, storable votes and combining voting with markets.
Each subsection concludes with a concise summary of results and discussion of open
questions to be explored in both theory and experiments.

Chapter 7: “Experimental Economics Across Subject Populations,”
by Guillaume R. Fréchette
This chapter reviews the results of experiments using nonstandard subjects. In particular, experiments using nonhuman animals, people living in token economies,
children, the elderly, demographically varied samples, and professionals are reviewed.
Investigating such diverse subject pools addresses the question of the generalizability of
findings from the standard undergraduate subject pool, as well as which behaviors are
learned and the impact of selection effects and/or experience on experimental outcomes.


Preface



xvii

Reasons for why specific subject pools are interesting to study are discussed, along with
some of the methodological issues associated with conducting experiments with these
different subject pools.
The concluding section of the paper pulls these results together with respect to
questions of interest in economics. For example, there is reasonably close adherence to
GARP (the generalized axiom of revealed preference) across subject populations, which
suggests that the behavior is fundamental, and what data there are available for children
show that violations decrease with age, so that there is a learned component. For the
voluntary contribution mechanism, contributions to the public good respond positively
to increases in the marginal per capita return but decline with repetition across both
students and nonstudents. The lone exception to this pattern is that young children
(less than 12 years of age) do not exhibit decreasing contributions with repetition of the
game. With respect to the important question of experiments with professionals versus
college students participating in an experiment designed to capture basic elements of
professional behavior (e.g., bidding in auctions), he concludes that in most cases results
from students carry over, at least qualitatively, to the professionals.

Chapter 8: “Gender,” by Muriel Niederle
This chapter reports research exploring gender differences in economic environments.
These differences were barely on experimental economists’ radar screen at the time
of the first Handbook of Experimental Economics. However, since the turn of the
millennium, there has been an explosion of research on gender differences in economics.
These have been most extensively studied with respect to attitudes toward competition
(with relevance to the glass ceiling effect), altruism and the closely related issue of
cooperation, and risk preferences. There are considerable benefits to studying gender
differences in the laboratory as this eliminates many of the potential confounds
encountered in field settings, which may be particularly important with respect to
gender; for example, is the underrepresentation of women in some occupations a
result of discrimination (real or anticipated) or a result of different attitudes to highly
competitive environments?
Results are reported in three main areas: First, with respect to gender difference in
risk preferences, the present survey is much more skeptical of consistent differences
than earlier surveys, particularly on account of inconsistencies in results across different
domains under similar procedures. This survey also notes a lack of economic significance (the small size) of gender differences typically reported. Second, the survey notes
that gender differences in altruism tend to be quite mixed, with some studies finding
stronger altruism in women, and others not, with what differences there are being
relatively small. Third, the survey reports large and consistent differences in reactions
to competition between men and women in mixed-gender tournaments, with much
smaller differences in outcomes between single-gender tournaments. Experiments exploring the implications of these results for affirmative action in labor markets, along
with possible changes in institutional structures (e.g., with respect to education) are
explored as well.

Chapter 9: “Auctions: A survey of Experimental Research,” by John H. Kagel
and Dan Levin
There has been a significant amount of new experimental research on auctions in the last
20 years; much of it motivated by the FCC wireless auctions and the growth of Internet


xviii



Preface

auctions. The first part of the chapter revisits some old issues in single-unit private value
auctions (e.g., bidding above the risk-neutral Nash equilibrium in first-price private
value auctions) as well as how techniques applied to field data can be used both to better
explore the experimental data and to better inform some of the assumptions underlying
these techniques. Other issues covered include asymmetric and sequential private value
auctions, along with new results with respect to second-price private value auctions,
including a clever field experiment. The second part of this chapter looks at singleunit common value auction experiments, including auctions with insider information
and auctions with an “advantaged bidder” who values the item more than the other
bidders, including the role of demographic and ability effects, standard issues in labor
economics, on bidders’ ability to overcome the winner’s curse. New experimental
results on the winner’s curse in the takeover game, prompted by new theoretical
models aimed at better understanding the origin of the winner’s curse, are reported on
as well.
The last half of the chapter largely covers topics that have gained prominence since
publication of the first Handbook. Foremost among these are multiunit-demand auctions in which individual bidders demand multiple items that can be either substitutes or
complements due to synergies between items (e.g., regional cell phone licenses that can
be combined to provide nationwide coverage). Both theory and experiments here are a
direct result of the FCC’s spectrum auctions. Also generating significant attention are
experiments focusing on Internet auctions, which have, and continue to be, of growing
importance, while also having a variety of interesting institutional characteristics (e.g.,
a “buy-it-now” price prior to the start of the auction). Experiments in these areas have
implications for market design issues covered in Roth (Chapter 5).

Chapter 10: “Learning and the Economics of Small Decisions,” by Ido Erev
and Ernan Haruvy
This chapter looks at economic outcomes tied to small decisions and whether or not
these decisions are reinforced; that is, it looks at economic outcomes determined by
indirect shaping processes more familiar to psychologists than economists. Unlike
“decisions from description” typical of economic experiments, where the incentive
structure is fully laid out, the experiments reported here mostly involve “decisions from
experience,” in which decision makers do not receive a prior description of the incentive
structure but must learn about it. This results in a number of notable differences from
decisions from description. For example, in choice under uncertainty, people exhibit
oversensitivity to rare events in decisions from description (as in prospect theory)
but exhibit the opposite bias when they need to rely on experience. This “experiencedescription gap” shows up in a number of other settings as well.
While many economists might be tempted to dismiss the importance of decisions
from experience versus decisions from description, their importance is particularly clear
when performance of a task requires a series of small decisions, where the consequences
of each decision are relatively small. (The importance of decisions from experience
can also be seen from the fact that in most economic experiments, even after attempts
at clearly describing the economic contingencies and payoffs, experimental outcomes
rarely exhibit equilibrium behavior to begin with, but typically rely on some sort of
learning process to move towards equilibrium outcomes.) The practical importance of
the economics of small decisions shaped by their consequences is clearly brought out in
the concluding section of the paper through examples such as the enforcement of safety


Preface



xix

rules, enhancing the performance of pilots and basketball players, and the implications
for financial decision making.
We acknowledge with thanks the work of those who contributed chapters or parts of
chapters to this edition.
John H. Kagel
Alvin E. Roth

NOTES
1. There was a conference at Harvard University in 2012, and authors circulated copies of their drafts to
specialists in their subfield for comment.
2. The results reported in this chapter, in conjunction with the participation of a number of well-recognized
macroeconomic theorists in some of these experiments attests to this.
3. Note, there is considerable overlap, but from a different perspective, in this section and the first part of
Cooper and Kagel (Chapter 4) on other-regarding behavior.
4. There is considerable overlap, but from a different perspective, between this part of Cooper and Kagel and
Vesterlund (Chapter 2).



THE HANDBOOK OF EXPERIMENTAL ECONOMICS
VOLUME 2



1
Macroeconomics:
A Survey of Laboratory Research
John Duffy

1 INTRODUCTION: LABORATORY MACROECONOMICS
Macroeconomic theories have traditionally been tested using nonexperimental field
data, most often national income account data on GDP and its components. This
practice follows from the widely held belief that macroeconomics is a purely observational science: history comes around just once and there are no “do-overs.” Controlled
manipulation of the macroeconomy to gain insight regarding the effects of alternative
institutions or policies is viewed by many as impossible, not to mention unethical, and
so, apart from the occasional natural experiment, most macroeconomists would argue
that macroeconomic questions cannot be addressed using experimental methods.1
Yet, as this survey documents, over the past twenty-five years, a wide variety of
macroeconomic models and theories have been examined using controlled laboratory
experiments with paid human subjects, and this literature is growing. The use of
laboratory methods to address macroeconomic questions has come about in large
part due to changes in macroeconomic modeling, though it has also been helped
along by changes in the technology for doing laboratory experimentation, especially
the use of large computer laboratories. The change in macroeconomic modeling is,
of course, the now widespread use of explicit microfounded models of constrained,
intertemporal choice in competitive general equilibrium, game-theoretic or searchtheoretic frameworks. The focus of these models is often on how institutional changes or
policies affect the choices of decision makers such as household and firms, in addition to
the more traditional concern with responses in the aggregate time series data (e.g., GDP)
or to the steady states of the model. While macroeconomic models are often expressed at
an aggregate level—for instance, there is a “representative” consumer or firm or a market
for the “capital good”—an implicit, working assumption of many macroeconomists is
that aggregate sectoral behavior is not different from that of the individual actors or
components that comprise each sector.2 Otherwise, macroeconomists would be obliged
to be explicit about the mechanisms by which individual choices or sectors aggregate up
to the macroeconomic representations they work with, and macroeconomists have been
largely silent on this issue. Experimentalists testing nonstrategic macroeconomic models


2



Chapter 1

have sometimes taken this representativeness assumption at face value and conducted
individual decision-making experiments with a macroeconomic flavor. But, as we shall
see, experimentalists have also considered whether small groups of subjects interacting
with one another via markets or by observing or communicating with one another might
outperform individuals in tasks that macroeconomic models assign to representative
agents.
While there is now a large body of macroeconomic experimental research as reviewed
in this survey, experimental methods are not yet a mainstream research tool used by the
typical macroeconomist, as they are in nearly every other field of economics. This state
of affairs likely arises from the training that macroeconomists receive, which does not
typically include exposure to laboratory methods and is instead heavily focused on the
construction of dynamic stochastic general equilibrium models that may not be well
suited to experimental testing. As Sargent (2008, p 27) observes,
I suspect that the main reason for fewer experiments in macro than in micro is that the
choices confronting artificial agents within even one of the simpler recursive competitive
equilibria used in macroeconomics are very complicated relative to the settings with which
experimentalists usually confront subjects.

This complexity issue can be overcome, but, as we shall see, it requires experimental
designs that simplify macroeconomic environments to their bare essence or involve
operational issues such as the specification of the mechanism used to determine equilibrium prices. Despite the complexity issue, I will argue in this survey that experimental
methods can and should serve as a complement to the modeling and empirical methods
currently used by macroeconomists as laboratory methods can shed light on important
questions regarding the empirical relevance of microeconomic foundations, questions
of causal inference, equilibrium selection and the role of institutions.3
Indeed, to date the main insights from macroeconomic experiments include (1)
an assessment of the microassumptions underlying macroeconomic models, (2) a
better understanding of the dynamics of forward-looking expectations, which play a
critical role in macroeconomic models, (3) a means of resolving equilibrium selection
(coordination) problems in environments with multiple equilibria, (4) validation of
macroeconomic model predictions for which the relevant field data are not available,
and (5) the impact of various macroeconomic institutions and policy interventions
on individual behavior. In addition, laboratory tests of macroeconomic theories have
generated new or strengthened existing experimental methodologies, including implementation of the representative-agent assumption, overlapping generations, and searchtheoretic models, methods for assisting with the roles of forecasting and optimizing,
implementation of discounting and infinite horizons, methods for assessing equilibration, and the role played by various market clearing mechanisms in characterizing
Walrasian competitive equilibrium (for which the precise mechanism of exchange is
left unmodeled).
The origins of macroeconomic experiments are unclear. Some might point to
A. W. Phillips’ (1950) experiments using a colored liquid-filled tubular flow model
of the macroeconomy, though this did not involve human subjects! Others might
cite Vernon Smith’s (1962) double-auction experiment demonstrating the importance
of centralized information to equilibration to competitive equilibrium as the first
macroeconomic experiment. Yet another candidate might be John Carlson’s (1967)
early experiment examining price expectations in stable and unstable versions of
the cobweb model. However, I will place the origins more recently with Lucas’s


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