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CONTENTS Preface xiii
Chapter 1 Macroeconomics: A Survey of Laboratory Research
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
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
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
6.3. 6.4. 6.5. 6.6.
Learning 192 Strategic Teaching and Influence Value 194 Discussion of Strategic Neuroscience 196 Summary 199
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
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
Experiments in Market Design
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
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
Chapter 7 Experimental Economics across Subject Populations 435 Guillaume R. Fréchette I.
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.
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
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
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
Auctions: A Survey of Experimental Research 563
John H. Kagel and Dan Levin INTRODUCTION
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
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
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
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
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
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.
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
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
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
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.
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
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
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
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