Kurs "Experimental and Behavioral Economics"

Prof. Dr. Armin Falk / Dr. David Huffman

Titel: Experimentelle Wirtschaftsforschung/Experimental and Behavioral Economics

Ort und Zeit: 2 Std., Mi 11-13 in Hörsaal B, Beginn am 05.04.2006

Sprechstunde: Freitags (Anmeldung bei Iwona Werner, Tel.: 0228 38 94 509)

Kursnummer: T009 (4 Punkte)

Zielpublikum: Hauptstudium und Graduiertenprogramm

Klausureinsicht: Am Mittwoch, den 27.09.06 kann im IZA (Schaumburg-Lippe-Str. 7) zwischen 10 und 12 Uhr Einsicht in die Klausur genommen werden!

Course Description:
The Nobel Prizes for Dan Kahneman and Vernon Smith have underlined the increasing importance of both experimental and behavioral economics. Experimental economics is a tool to collect data in a highly controlled environment. Experiments have been performed in many economic fields like industrial economics, choice theory, contract theory or labor economics. Behavioral economics is a new field in economics and basically means the incorporation of psychological motives (like fairness, loss aversion or bounded rationality) into the body of economics. Showing the relevance of psychological motives typically relies on tight control. It is therefore no surprise that the development of behavioral economics relies crucially on experimental data.

This course offers an introduction to these two novel and exciting fields. In the first part of the lecture we discuss experimental methods. In the second part we talk about several economic areas where experiments have been performed, e.g. market experiments, bargaining experiments, public goods experiments and labor experiments. We also discuss the relevance of fairness motives for labor relations, the modeling of fairness and the experimental testing of different fairness theories. It is the aim of the course to make students familiar with important experimental work and to give practical advice how to perform an experiment. For this reason students are expected to design and run experiments with their classmates.

A detailed course outline will be given in the first lecture.

General literature:

Davis, Douglas and Holt, Charles, Experimental Economics. Princeton Univ. Press 1993.
Kagel, John H. and Roth, Alvin E., The Handbook of Experimental Economics. Princeton Univ. Press 1995.
Daniel Friedman, Shyam Sunder, Experimental Methods, Cambridge University Press 1994.

Program

Introduction to experimental economics

Slides: [Download PDF]

Literature:

Davis, Douglas and Holt, Charles (1993); Experimental Economics, Princeton University Press, Princeton, New Jersey: Chapter 1.
Falk, A. and Fehr, E. (2003); "Why labor market experiments?", Labour Economics 10, 399-406 (http://www.iza.org/en/papers/Falk/whylabourmEx.pdf).
Friedman, Daniel and Sunder, Shyam, Experimental Methods, Cambridge University Press 1994, Chapters 1 and 2.
Roth, Alvin E. (1988); "Laboratory Experimentation in Economics: A Methodological Overview", Economic Journal, Vol. 98, 974-1031.
Smith, Vernon L. (1989); "Theory, Experiment and Economics", Journal of Economic Perspectives, Vol. 3, No. 1, 151-169.
Smith, Vernon L. (1994); "Economics in the Laboratory", Journal of Economic Perspectives, Vol. 8, No. 1, 113-131.
Smith, Vernon L. (1976); "Experimental Economics: Induced Value Theory", American Economic Review, Vol. 66, 274-279.

Market experiments

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Literature:
- Davis, Douglas and Holt, Charles (1993); Experimental Economics, Princeton University Press, Princeton, New Jersey: Chapter 3 (Double Auction Markets) and Chapter 4 (Posted Offer Markets).
- Smith, Vernon L. and Williams, Arlington W. (1990); “The Boundaries of Competitive Price Theory: Convergence Expectations and Transaction Costs”, in: L. Green and J. H. Kagel (eds.), Advances in Behavioral Economics, Vol. 2, Ablex Publishing Corporation, Norwood, New Jersey.
- Kirchsteiger, G.; Niederle, M.; Potters, J.: „Public versus private exchanges“, Working paper 2001, (http://greywww.kub.nl:2080/greyfiles/center/2001/101.html).
Bargaining experiments

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Literature:
- Kagel, John H. and Roth, Alvin E. (1995); "Handbook of Experimental Economics", Princeton University Press, Princeton, New Jersey: Chapter 4 (Bargaining Experiments).
- Binmore, Shaked and Sutton, "Testing Non-Cooperative Bargaining Theory: A Preliminary Study." AER, 1985, 1178-80.
- Camerer, Colin and Richard Thaler, "Anomalies: Ultimatums, Dictators and Manners." Journal of Economic Perspectives, 9, 1995, 209-219.
- Cameron, Lisa (1999); "Raising the Stakes in the Ultimatum Game: Experimental Evidence from Indonesia", Economic Inquiry, Vol. 37, No. 1, 47-59.
- Forsythe, Robert, J. Horowitz, N.E. Savin and Martin Sefton, "Fairness in Simple Bargaining Experiments." Games and Economic Behavior, 1994, 6, 347-69.
- Güth, W., Schmittberger, R. and Schwarze, B. (1982); "An Experimental Analysis of Ultimatium Bargaining", Journal of Economic Behavior and Organization 3, 367-88.
- Ochs, Jack and Alvin E. Roth, "An Experimental Study of Sequential Bargaining." AER, 1989, 355-84.
- Roth, Alvin E., Vesna Prasnikar, Masahiro Okuno-Fujiwara, and Smuel Zamir, "Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study." AER, 81, 1991, 1068-95.
- Sanfey, A., Rilling, J., Aronson, J., Nystrom, L., and Cohen, J. (2003) “The Neural Basis of Economic Decision-Making in the Ultimatum Game”, Science 300, p.p. 1755-1758.
- Slonim, Robert, Alvin E. Roth, 1998. 2Learning in High Stakes Ultimatum Games: An Experiment in the Slovak Republic2, Econometrica, Vol. 66 (3) pp. 569-596.
How to do experiments

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Public goods experiments, social interaction and punishment

Slides: [Download PDF]

Literature:
- Kagel, John H. and Roth, Alvin E. (1995); "Handbook of Experimental Economics", Princeton University Press, Princeton, New Jersey: Chapter 2 (Public Goods: A Survey of Experimental Research).
- Andreoni, James (1988); "Why Free Ride?: Strategies and Learning in Public Goods Experiments", Journal of Public Economics, 37, 1988, 291-304
- Bernhard, H., Fehr, E. and Fischbacher, U. (2006) “Third-Party Punishment Within and Across Groups: An Experimental Study in Papua New Guinea”, University of Zurich working paper, forthcoming in American Economic Review Papers and Proceedings
- Falk, A. and Ichino, A. (2003): "Clean evidence on peer pressure", IZA DP 732.
- Fehr, Ernst and Gächter, Simon (2000); "Cooperation and Punishment in Public Goods Experiments", American Economic Review 90(4), September 2000, 980-994.
- Fershtman, C. and Gneezy, U. (2001) “Discrimination in a Segmented Society: An Experimental Approach”, The Quarterly Journal of Economics, 116, p.p. 351-377.
- Fischbacher, Urs, Simon Gächter and Ernst Fehr (2001); "Are People Conditionally Cooperative? Evidence from a Public Goods Experiment", Economics Letters 71 (2001) 397-404.
- Gächter, Simon and Fehr, Ernst (1997); "Social Norms as a Social Exchange", Swiss Journal of Economics and Statistics, Vol. 133, No. 2, 275-292.
- Goette, L., Huffman, D. and Meier, S. (2006) “The Impact of Group Membership on Cooperation and Norm Enforcement”, IZA DP 2020, forthcoming in American Economic Review Papers and Proceedings.
- Isaac, R. M., J. Walker and S. Thomas (1984): "Divergent evidence on free riding: An experimental examination of possible explanations", Public Choice 43(1): 113-149.
- Isaac, R. Mark, James M. Walker, and Arlington W. Williams; "Group Size and the Voluntary Provision of Public Goods: Experimental Evidence Utilizing Very Large Groups", Journal of Public Economics, 54, May 1994, 1-36.
- Keser, Claudia (1996); "Voluntary Contributions to a Public Good when Partial Contribution is a Dominant Strategy", Economics Letters 50, 359-366.
- Keser, C. and Van Winden, F. (2000): "Conditional Cooperation and Voluntary Contributions to Public Goods", Scandinavian Journal of Economics 102, 23-39.
- Palfrey, T. and Prisbrey, J. (1997); "Anomalous behavior in public goods experiments: How much and why?", American Economic Review 87, 829-846.
- Quervain, D., Fischbacher, U., Treyer, V., Schellhammer, M., Schnyder, U., Buck, A., and Fehr, E. (2004) “The Neural Basis of Altruistic Punishment”, Science 305, 1254-1258.
- Singer, T. and Fehr, E. (2006) “The Neuroeconomics of Mind Reading and Empathy”, forthcoming in American Economic Review Papers and Proceedings.
Fairness: Evidence, theories and evaluation

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a) Theories

Bolton, Gary and Axel Ockenfels (1999); "A Theory of Equity, Reciprocity, and Competition", American Economic Review 100, 166-193.
Dufwenberg, Martin and Georg Kirchsteiger (1998); "A Theory of Sequential Reciprocity", Discussion Paper, CentER, Tilburg University.
Charness, Gary, and Rabin, Matthew (2002); "Understanding Social Preferences with Simple Tests", The Quarterly Journal of Economics 117 (3), 817 - 869
Falk, Armin and Urs Fischbacher (1999); "A Theory of Reciprocity", Working paper No. 6, Institute for Empirical Research in Economics, University of Zürich
Fehr, Ernst and Klaus Schmidt (1999); "A Theory of Fairness, Competition and Cooperation", Quarterly Journal of Economics, Vol. 114, No. 3, 817-868.
Levine, David (1998); "Modeling Altruism and Spitefulness in Experiments" Review of Economic Dynamics, Vol. 1, No. 4, 593-622.

b) Evaluation of Fairness Theories
Engelmann, Dirk and Martin Strobel (2000); "An Experimental Comparison of the Fairness Models by Bolton and Ockenfels and By Fehr and Schmidt", Mimeo, Humboldt Universität zu Berlin.
Falk, Armin, Fehr, Ernst, and Fischbacher, Urs, 2000a. "Informal Sanctions", Institute for Empirical Research in Economics, University of Zurich, Working Paper No. 59.
Falk, Armin, Fehr, Ernst, and Fischbacher, Urs, 2000b. "Testing Theories of Fairness - Intentions Matter", Institute for Empirical Research in Economics, University of Zurich, Working Paper No. 63.
Falk, Armin, Fehr, Ernst, and Fischbacher, Urs (2003); "On the Nature of Fair Behavior", Economic Inquiry 41(1) (2003), 20-26.