This article is connected with recent attempts to estimate EU and Generalised EU preference funct... more This article is connected with recent attempts to estimate EU and Generalised EU preference functionals using (complete ranking) experimental data and maximum likelihood estimation techniques. In particular we explore, using Monte Carlo techniques, the power of such procedures in correctly determining the true preference functional. We conclude that several of the more popular generalisations to EU are very difficult to disentangle, and that the techniques are rather poor at correctly identifying EU when it is the correct functional.
This article is connected with recent attempts to estimate EU and Generalised EU preference funct... more This article is connected with recent attempts to estimate EU and Generalised EU preference functionals using (complete ranking) experimental data and maximum likelihood estimation techniques. In particular we explore, using Monte Carlo techniques, the power of such procedures in correctly determining the true preference functional. We conclude that several of the more popular generalisations to EU are very difficult to disentangle, and that the techniques are rather poor at correctly identifying EU when it is the correct functional.
Ž. Ž. Two recent papers, Harless and Camerer 1994 and Hey and Orme 1994 are both addressed to the... more Ž. Ž. Two recent papers, Harless and Camerer 1994 and Hey and Orme 1994 are both addressed to the same question: which is the 'best' theory of decision making under risk? As an essential part of their separate approaches to an answer to this question, both sets of authors had to make an assumption about the underlying stochastic nature of their data. In this context this implied an assumption about the 'errors' made by the subjects in the experiments generating the data under analysis. The two different sets of authors adopted different assumptions: the purpose of this current paper is to compare and contrast these two different error storiesᎏin an attempt to discover which of the two is 'best'.
The Geneva Papers On Risk And Insurance - Issues And Practice, Jun 1, 1995
Page 1. The Geneva Papers on Risk and Insurance Theory, 20:111-133 (1995) 9 1995 The Geneva Assoc... more Page 1. The Geneva Papers on Risk and Insurance Theory, 20:111-133 (1995) 9 1995 The Geneva Association A Comparison of the Estimates of Expected Utility and Non-Expected-Utility Preference Functionals ENRICA CARBONE ...
This text may be downloaded for personal research purposes only. Any additional reproduction for ... more This text may be downloaded for personal research purposes only. Any additional reproduction for other purposes, whether in hard copy or electronically, requires the consent of the author(s), editor(s). If cited or quoted, reference should be made to the full name of the author(s), editor(s), the title, the working paper or other series, the year, and the publisher. The author(s)/editor(s) should inform the Economics Department of the EUI if the paper is to be published elsewhere, and should also assume responsibility for any consequent obligation(s).
Previous experimental results (Ballinger et al. (2003) and Carbone and Hey (2004)) have found tha... more Previous experimental results (Ballinger et al. (2003) and Carbone and Hey (2004)) have found that many agents fail to correctly take into account the length of the planning horizon also nding some sup
This paper reports results from a laboratory experiment exploring the relationship between reputa... more This paper reports results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We propose a procurement model with reputation and entry assigning to the entrant a reputational advantage of varying size across treatments. There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new (smaller or foreign) firms in public procurement markets. Our results suggest that while some reputational mechanisms indeed reduce the frequency of entry, appropriately designed reputation mechanisms actually stimulate it. Since quality increases but not prices, our data also suggest that the introduction of reputation may generate large welfare gains for the buyer.
Two recent papers, Harless and Camerer, 1994 and Hey and Orme, 1994 are both addressed to the sam... more Two recent papers, Harless and Camerer, 1994 and Hey and Orme, 1994 are both addressed to the same question: which is the`best' theory of decision making under risk? As an essential part of their separate approaches to an answer to this question, both sets of authors had to make an assumption about the underlying stochastic nature of their data. In this context this implied an assumption about thè errors' made by the subjects in the experiments generating the data under analysis. The two di erent sets of authors adopted di erent assumptions: the purpose of this current paper is to compare and contrast these two di erent error stories-in an attempt to discover which of the two is`best'.
When imposing traffic congestion pricing around downtown commercial centers, there is a concern t... more When imposing traffic congestion pricing around downtown commercial centers, there is a concern that commercial activities will have to consider relocating due to reduced demand, at a cost to merchants. Concerns like these were important in the debates before the introductions of congestion charges in both London and Stockholm and influenced the final policy design choices. This study introduces a sequential experimental game to study reactions to congestion pricing in the commercial sector. In the game merchants first make location choices. Consumers, who drive to do their shopping, subsequently choose where to shop. Initial responses to the introduction of congestion pricing and equilibrium selection adjustments over time are observed. These observations are compared to responses and adjustments in a condition where congestion pricing is reduced from an initially high level. Payoffs are non-linear and non-transparent, making it less than obvious that the efficient equilibrium will be selected, and introducing possibilities that participants need to discover their preferences and anchor on past experiences. We find that initial responses reflect standard inverse price-demand relation, and that adjustments over time rely on signaling by consumers leading to the efficient equilibrium. There is also evidence that priming from initial experiences influence play somewhat. We confirm that commercial activities relocate following the introduction of congestion pricing and that the adjustment process is costly to merchants. JEL Classifications: C72 Noncooperative Games D9 Micro-Based Behavioral Economics R41 Transportation: Demand, Supply and Congestion R48 Government Pricing and Policy *Corresponding author. Professor of Economics, Department of Political Science “Jean Monnet”, Università della Campania “Luigi Vanvitelli”, Caserta, Italy. Email: [email protected] ORCID ID:0000-0003-2051-9160 **Professor, School of Civil and Environmental Engineering, University of New South Wales, Australia. Email: [email protected] ORCID ID: 0000-0001-7643-409X *** Program Director, Center for Economic Analysis of Risk, Georgia State University, Atlanta GA 30309, USA; Guest Professor, Department of Economics, Örebro University; Honorary Professor, Department of Economics, University of Cape Town, South Africa (Rutström). Email: [email protected] ORCID ID:0000-0001-8616-3318 Acknowledgments: We are grateful to Glenn Harrison, Essam Radwan and Rami Harb for their input and comments at early stages of the research, and to US Federal Highway Administration for funding under Cooperative Agreement DTFH61-09-H-00012.
We report results from a laboratory experiment exploring the extent to which in-dividuals can sol... more We report results from a laboratory experiment exploring the extent to which in-dividuals can solve a deterministic, intertemporal lifecycle consumption optimization problem and the effect of revealing social information on past average consumption amounts; as all individuals have identical induced preferences and lifetime incomes, such social information could be useful in solving for the optimal consumption path. Instead, we find that the provision of social information on past average levels of con-sumption results in a greater deviation of consumption from both the unconditional and the conditionally optimal paths. We find some improvement in consumption plan-ning relative to the conditional optimum when social concerns (external habits) are explicitly incorporated into subject’s period utility functions as in external habit for-mation preference specifications. Our results on the effects of social information on consumption behavior may help to explain the phenomenon of over-co...
When imposing congestion pricing in a transportation network, especially around city centers, the... more When imposing congestion pricing in a transportation network, especially around city centers, there is an expressed concern that commercial activities will have to consider relocating. Such relocations can be both risky and costly. Charges that are aimed at shifting traffic out of downtown areas during times of days when congestion is worst have been implemented in several cities and studies show that drivers often respond very quickly to such price changes, but the effects on commercial activities are less understood. We design an experimental game where merchants predict how drivers will respond before selecting locations. The game is a binary location choice experiment involving introduction of and changes in toll charges around city centers. We model a level of toll charges that implies multiple equilibria and implement two treatments that differ in the history of experiences with toll charges to test its effect on equilibrium selection. We reject the SPNE prediction that mercha...
When imposing congestion pricing in a transportation network, especially around city centers, the... more When imposing congestion pricing in a transportation network, especially around city centers, there is an expressed concern that commercial activities will have to consider relocating. Such relocations can be both risky and costly. Charges that are aimed at shifting traffic out of downtown areas during times of days when congestion is worst have been implemented in several cities and studies show that drivers often respond very quickly to such price changes, but the effects on commercial activities are less understood. We design an experimental game where merchants predict how drivers will respond before selecting locations. The game is a binary location choice experiment involving introduction of and changes in toll charges around city centers. We model a level of toll charges that implies multiple equilibria and implement two treatments that differ in the history of experiences with toll charges to test its effect on equilibrium selection. We reject the SPNE prediction that mercha...
When imposing traffic congestion pricing around downtown commercial centers, there is a concern t... more When imposing traffic congestion pricing around downtown commercial centers, there is a concern that commercial activities will have to consider relocating due to reduced demand, at a cost to merchants. Concerns like these were important in the debates before the introductions of congestion charges in both London and Stockholm and influenced the final policy design choices. This study introduces a sequential experimental game to study reactions to congestion pricing in the commercial sector. In the game merchants first make location choices. Consumers, who drive to do their shopping, subsequently choose where to shop. Initial responses to the introduction of congestion pricing and equilibrium selection adjustments over time are observed. These observations are compared to responses and adjustments in a condition where congestion pricing is reduced from an initially high level. Payoffs are non-linear and non-transparent, making it less than obvious that the efficient equilibrium will be selected, and introducing possibilities that participants need to discover their preferences and anchor on past experiences. We find that initial responses reflect standard inverse price-demand relation, and that adjustments over time rely on signaling by consumers leading to the efficient equilibrium. There is also evidence that priming from initial experiences influence play somewhat. We confirm that commercial activities relocate following the introduction of congestion pricing and that the adjustment process is costly to merchants. JEL Classifications: C72 Noncooperative Games D9 Micro-Based Behavioral Economics R41 Transportation: Demand, Supply and Congestion R48 Government Pricing and Policy *Corresponding author. Professor of Economics, Department of Political Science “Jean Monnet”, Università della Campania “Luigi Vanvitelli”, Caserta, Italy. Email: [email protected] ORCID ID:0000-0003-2051-9160 **Professor, School of Civil and Environmental Engineering, University of New South Wales, Australia. Email: [email protected] ORCID ID: 0000-0001-7643-409X *** Program Director, Center for Economic Analysis of Risk, Georgia State University, Atlanta GA 30309, USA; Guest Professor, Department of Economics, Örebro University; Honorary Professor, Department of Economics, University of Cape Town, South Africa (Rutström). Email: [email protected] ORCID ID:0000-0001-8616-3318 Acknowledgments: We are grateful to Glenn Harrison, Essam Radwan and Rami Harb for their input and comments at early stages of the research, and to US Federal Highway Administration for funding under Cooperative Agreement DTFH61-09-H-00012.
The Lucas (1978) asset pricing model lies at the heart of modern macro-finance. At its core, it p... more The Lucas (1978) asset pricing model lies at the heart of modern macro-finance. At its core, it provides an analysis of the equilibrium price of a long-lived financial asset in an economy where consumption is the objective, and the sole purpose of the asset is to smooth consumption through time. Experimental tests of the model are mainly confined to Crockett et al (forthcoming 2019) and Asparouhova et al (2016), both of them using a particular instantiation of the Lucas Model. Here we adopt a different instantiation, extending their analyses from a two-period oscillating world to a three-period cyclical world. We also go one step further, and compare this asset market solution (to a consumption-smoothing problem) with the perhaps intuitively more reasonable solution provided by a credit market, in which agents can directly trade consumption between periods. We find that the latter is more efficient in smoothing consumption, and that prices in the credit market are closer to their eq...
This paper represents an intersection between two lines of research. The first is portfolio choic... more This paper represents an intersection between two lines of research. The first is portfolio choice theory, which underlies much of finance; the second is the elicitation of preferences under uncertainty. The theory of the behaviour of financial markets builds heavily on portfolio choice theory; until recently this has assumed that preferences are of a particularly simple kind. In contrast research on preferences has revealed that people have more sophisticated preferences. This paper tries to bring the two fields together by investigating, in a portfolio choice context, the preferences that are revealed by decisions. In the second of these two fields, researchers are increasingly using allocation problems to elicit the preferences of subjects, believing that such problems are more informative, and perhaps more natural, than other elicitation methods. At the same time portfolio choice theory is itself concerned with an allocation problem. Usually in experimental finance the allocatio...
This paper represents an intersection between two lines of research. The first is portfolio choic... more This paper represents an intersection between two lines of research. The first is portfolio choice theory, which underlies much of finance; the second is the elicitation of preferences under uncertainty. The theory of the behaviour of financial markets builds heavily on portfolio choice theory; until recently this has assumed that preferences are of a particularly simple kind. In contrast research on preferences has revealed that people have more sophisticated preferences. This paper tries to bring the two fields together by investigating, in a portfolio choice context, the preferences that are revealed by decisions. In the second of these two fields, researchers are increasingly using allocation problems to elicit the preferences of subjects, believing that such problems are more informative, and perhaps more natural, than other elicitation methods. At the same time portfolio choice theory is itself concerned with an allocation problem. Usually in experimental finance the allocatio...
There is widespread concern that favoring suppliers with good past performance, a standard practi... more There is widespread concern that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. In this paper we report results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We implement a repeated procurement game with reputational incentives for quality and the possibility of entry. We allow also the entrant to start off with a positive reputational score. Our results suggest that while some past-performance based reputational mechanisms do reduce the frequency of entry, appropriately designed mechanisms can significantly increase it. Moreover, the reputational mechanism we investigate typically increases quality but not prices, suggesting that well designed mechanisms may generate very large gains for buyers and taxpayers.
Experiments on intertemporal consumption typically show that people have difficulties in optimall... more Experiments on intertemporal consumption typically show that people have difficulties in optimally solving this kind of problems. Previous studies have focused on contexts in which agents are faced with risk on future income and have to plan over long horizons. We present an experiment comparing decision making under certainty, risk and ambiguity, over a shorter life-cycle. Results show that planning in the ambiguity treatment is markedly different than in the risk condition and it is characterized by a significant pattern of under-consumption.
Over the last ten years the literature in experimental economics has seen a growing interest in g... more Over the last ten years the literature in experimental economics has seen a growing interest in groups and how they compare to individuals in different settings. This paper contributes to the literature on this topic by investigating the comparison between groups and individuals with respect to intertemporal consumption problems. Empirical evidence has shown how dynamic optimization problems, representing intertemporal consumption decisions, involve computational difficulties that agents are not always equipped to solve optimally. Several econometric estimations on household and aggregate data seem to show that people do not save enough. Similarly, in many experiments, results suggest that people are very different in how they solve this class of problems and in how they react to changes in the decision environment. We present an experiment comparing group and individual planning under risk and uncertainty. Our study is focussed on investigating how groups perform in intertemporal decision making tasks, 1 1 INTRODUCTION in particular observing the significance of group planning compared to individuals when choosing under risk and uncertainty. Results suggest that groups perform better than individuals when planning under risk, while the opposite happens in the case of planning under uncertainty. Interestingly, when comparing the behaviour of our agents in the second lifecycle (denominated "sequence") groups seem to lose all their advantage on individuals (in terms of less deviation from optimum). We interpret this as a "stability effect" caused by the random matching rule adopted during the groups sessions.
This article is connected with recent attempts to estimate EU and Generalised EU preference funct... more This article is connected with recent attempts to estimate EU and Generalised EU preference functionals using (complete ranking) experimental data and maximum likelihood estimation techniques. In particular we explore, using Monte Carlo techniques, the power of such procedures in correctly determining the true preference functional. We conclude that several of the more popular generalisations to EU are very difficult to disentangle, and that the techniques are rather poor at correctly identifying EU when it is the correct functional.
This article is connected with recent attempts to estimate EU and Generalised EU preference funct... more This article is connected with recent attempts to estimate EU and Generalised EU preference functionals using (complete ranking) experimental data and maximum likelihood estimation techniques. In particular we explore, using Monte Carlo techniques, the power of such procedures in correctly determining the true preference functional. We conclude that several of the more popular generalisations to EU are very difficult to disentangle, and that the techniques are rather poor at correctly identifying EU when it is the correct functional.
Ž. Ž. Two recent papers, Harless and Camerer 1994 and Hey and Orme 1994 are both addressed to the... more Ž. Ž. Two recent papers, Harless and Camerer 1994 and Hey and Orme 1994 are both addressed to the same question: which is the 'best' theory of decision making under risk? As an essential part of their separate approaches to an answer to this question, both sets of authors had to make an assumption about the underlying stochastic nature of their data. In this context this implied an assumption about the 'errors' made by the subjects in the experiments generating the data under analysis. The two different sets of authors adopted different assumptions: the purpose of this current paper is to compare and contrast these two different error storiesᎏin an attempt to discover which of the two is 'best'.
The Geneva Papers On Risk And Insurance - Issues And Practice, Jun 1, 1995
Page 1. The Geneva Papers on Risk and Insurance Theory, 20:111-133 (1995) 9 1995 The Geneva Assoc... more Page 1. The Geneva Papers on Risk and Insurance Theory, 20:111-133 (1995) 9 1995 The Geneva Association A Comparison of the Estimates of Expected Utility and Non-Expected-Utility Preference Functionals ENRICA CARBONE ...
This text may be downloaded for personal research purposes only. Any additional reproduction for ... more This text may be downloaded for personal research purposes only. Any additional reproduction for other purposes, whether in hard copy or electronically, requires the consent of the author(s), editor(s). If cited or quoted, reference should be made to the full name of the author(s), editor(s), the title, the working paper or other series, the year, and the publisher. The author(s)/editor(s) should inform the Economics Department of the EUI if the paper is to be published elsewhere, and should also assume responsibility for any consequent obligation(s).
Previous experimental results (Ballinger et al. (2003) and Carbone and Hey (2004)) have found tha... more Previous experimental results (Ballinger et al. (2003) and Carbone and Hey (2004)) have found that many agents fail to correctly take into account the length of the planning horizon also nding some sup
This paper reports results from a laboratory experiment exploring the relationship between reputa... more This paper reports results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We propose a procurement model with reputation and entry assigning to the entrant a reputational advantage of varying size across treatments. There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new (smaller or foreign) firms in public procurement markets. Our results suggest that while some reputational mechanisms indeed reduce the frequency of entry, appropriately designed reputation mechanisms actually stimulate it. Since quality increases but not prices, our data also suggest that the introduction of reputation may generate large welfare gains for the buyer.
Two recent papers, Harless and Camerer, 1994 and Hey and Orme, 1994 are both addressed to the sam... more Two recent papers, Harless and Camerer, 1994 and Hey and Orme, 1994 are both addressed to the same question: which is the`best' theory of decision making under risk? As an essential part of their separate approaches to an answer to this question, both sets of authors had to make an assumption about the underlying stochastic nature of their data. In this context this implied an assumption about thè errors' made by the subjects in the experiments generating the data under analysis. The two di erent sets of authors adopted di erent assumptions: the purpose of this current paper is to compare and contrast these two di erent error stories-in an attempt to discover which of the two is`best'.
When imposing traffic congestion pricing around downtown commercial centers, there is a concern t... more When imposing traffic congestion pricing around downtown commercial centers, there is a concern that commercial activities will have to consider relocating due to reduced demand, at a cost to merchants. Concerns like these were important in the debates before the introductions of congestion charges in both London and Stockholm and influenced the final policy design choices. This study introduces a sequential experimental game to study reactions to congestion pricing in the commercial sector. In the game merchants first make location choices. Consumers, who drive to do their shopping, subsequently choose where to shop. Initial responses to the introduction of congestion pricing and equilibrium selection adjustments over time are observed. These observations are compared to responses and adjustments in a condition where congestion pricing is reduced from an initially high level. Payoffs are non-linear and non-transparent, making it less than obvious that the efficient equilibrium will be selected, and introducing possibilities that participants need to discover their preferences and anchor on past experiences. We find that initial responses reflect standard inverse price-demand relation, and that adjustments over time rely on signaling by consumers leading to the efficient equilibrium. There is also evidence that priming from initial experiences influence play somewhat. We confirm that commercial activities relocate following the introduction of congestion pricing and that the adjustment process is costly to merchants. JEL Classifications: C72 Noncooperative Games D9 Micro-Based Behavioral Economics R41 Transportation: Demand, Supply and Congestion R48 Government Pricing and Policy *Corresponding author. Professor of Economics, Department of Political Science “Jean Monnet”, Università della Campania “Luigi Vanvitelli”, Caserta, Italy. Email: [email protected] ORCID ID:0000-0003-2051-9160 **Professor, School of Civil and Environmental Engineering, University of New South Wales, Australia. Email: [email protected] ORCID ID: 0000-0001-7643-409X *** Program Director, Center for Economic Analysis of Risk, Georgia State University, Atlanta GA 30309, USA; Guest Professor, Department of Economics, Örebro University; Honorary Professor, Department of Economics, University of Cape Town, South Africa (Rutström). Email: [email protected] ORCID ID:0000-0001-8616-3318 Acknowledgments: We are grateful to Glenn Harrison, Essam Radwan and Rami Harb for their input and comments at early stages of the research, and to US Federal Highway Administration for funding under Cooperative Agreement DTFH61-09-H-00012.
We report results from a laboratory experiment exploring the extent to which in-dividuals can sol... more We report results from a laboratory experiment exploring the extent to which in-dividuals can solve a deterministic, intertemporal lifecycle consumption optimization problem and the effect of revealing social information on past average consumption amounts; as all individuals have identical induced preferences and lifetime incomes, such social information could be useful in solving for the optimal consumption path. Instead, we find that the provision of social information on past average levels of con-sumption results in a greater deviation of consumption from both the unconditional and the conditionally optimal paths. We find some improvement in consumption plan-ning relative to the conditional optimum when social concerns (external habits) are explicitly incorporated into subject’s period utility functions as in external habit for-mation preference specifications. Our results on the effects of social information on consumption behavior may help to explain the phenomenon of over-co...
When imposing congestion pricing in a transportation network, especially around city centers, the... more When imposing congestion pricing in a transportation network, especially around city centers, there is an expressed concern that commercial activities will have to consider relocating. Such relocations can be both risky and costly. Charges that are aimed at shifting traffic out of downtown areas during times of days when congestion is worst have been implemented in several cities and studies show that drivers often respond very quickly to such price changes, but the effects on commercial activities are less understood. We design an experimental game where merchants predict how drivers will respond before selecting locations. The game is a binary location choice experiment involving introduction of and changes in toll charges around city centers. We model a level of toll charges that implies multiple equilibria and implement two treatments that differ in the history of experiences with toll charges to test its effect on equilibrium selection. We reject the SPNE prediction that mercha...
When imposing congestion pricing in a transportation network, especially around city centers, the... more When imposing congestion pricing in a transportation network, especially around city centers, there is an expressed concern that commercial activities will have to consider relocating. Such relocations can be both risky and costly. Charges that are aimed at shifting traffic out of downtown areas during times of days when congestion is worst have been implemented in several cities and studies show that drivers often respond very quickly to such price changes, but the effects on commercial activities are less understood. We design an experimental game where merchants predict how drivers will respond before selecting locations. The game is a binary location choice experiment involving introduction of and changes in toll charges around city centers. We model a level of toll charges that implies multiple equilibria and implement two treatments that differ in the history of experiences with toll charges to test its effect on equilibrium selection. We reject the SPNE prediction that mercha...
When imposing traffic congestion pricing around downtown commercial centers, there is a concern t... more When imposing traffic congestion pricing around downtown commercial centers, there is a concern that commercial activities will have to consider relocating due to reduced demand, at a cost to merchants. Concerns like these were important in the debates before the introductions of congestion charges in both London and Stockholm and influenced the final policy design choices. This study introduces a sequential experimental game to study reactions to congestion pricing in the commercial sector. In the game merchants first make location choices. Consumers, who drive to do their shopping, subsequently choose where to shop. Initial responses to the introduction of congestion pricing and equilibrium selection adjustments over time are observed. These observations are compared to responses and adjustments in a condition where congestion pricing is reduced from an initially high level. Payoffs are non-linear and non-transparent, making it less than obvious that the efficient equilibrium will be selected, and introducing possibilities that participants need to discover their preferences and anchor on past experiences. We find that initial responses reflect standard inverse price-demand relation, and that adjustments over time rely on signaling by consumers leading to the efficient equilibrium. There is also evidence that priming from initial experiences influence play somewhat. We confirm that commercial activities relocate following the introduction of congestion pricing and that the adjustment process is costly to merchants. JEL Classifications: C72 Noncooperative Games D9 Micro-Based Behavioral Economics R41 Transportation: Demand, Supply and Congestion R48 Government Pricing and Policy *Corresponding author. Professor of Economics, Department of Political Science “Jean Monnet”, Università della Campania “Luigi Vanvitelli”, Caserta, Italy. Email: [email protected] ORCID ID:0000-0003-2051-9160 **Professor, School of Civil and Environmental Engineering, University of New South Wales, Australia. Email: [email protected] ORCID ID: 0000-0001-7643-409X *** Program Director, Center for Economic Analysis of Risk, Georgia State University, Atlanta GA 30309, USA; Guest Professor, Department of Economics, Örebro University; Honorary Professor, Department of Economics, University of Cape Town, South Africa (Rutström). Email: [email protected] ORCID ID:0000-0001-8616-3318 Acknowledgments: We are grateful to Glenn Harrison, Essam Radwan and Rami Harb for their input and comments at early stages of the research, and to US Federal Highway Administration for funding under Cooperative Agreement DTFH61-09-H-00012.
The Lucas (1978) asset pricing model lies at the heart of modern macro-finance. At its core, it p... more The Lucas (1978) asset pricing model lies at the heart of modern macro-finance. At its core, it provides an analysis of the equilibrium price of a long-lived financial asset in an economy where consumption is the objective, and the sole purpose of the asset is to smooth consumption through time. Experimental tests of the model are mainly confined to Crockett et al (forthcoming 2019) and Asparouhova et al (2016), both of them using a particular instantiation of the Lucas Model. Here we adopt a different instantiation, extending their analyses from a two-period oscillating world to a three-period cyclical world. We also go one step further, and compare this asset market solution (to a consumption-smoothing problem) with the perhaps intuitively more reasonable solution provided by a credit market, in which agents can directly trade consumption between periods. We find that the latter is more efficient in smoothing consumption, and that prices in the credit market are closer to their eq...
This paper represents an intersection between two lines of research. The first is portfolio choic... more This paper represents an intersection between two lines of research. The first is portfolio choice theory, which underlies much of finance; the second is the elicitation of preferences under uncertainty. The theory of the behaviour of financial markets builds heavily on portfolio choice theory; until recently this has assumed that preferences are of a particularly simple kind. In contrast research on preferences has revealed that people have more sophisticated preferences. This paper tries to bring the two fields together by investigating, in a portfolio choice context, the preferences that are revealed by decisions. In the second of these two fields, researchers are increasingly using allocation problems to elicit the preferences of subjects, believing that such problems are more informative, and perhaps more natural, than other elicitation methods. At the same time portfolio choice theory is itself concerned with an allocation problem. Usually in experimental finance the allocatio...
This paper represents an intersection between two lines of research. The first is portfolio choic... more This paper represents an intersection between two lines of research. The first is portfolio choice theory, which underlies much of finance; the second is the elicitation of preferences under uncertainty. The theory of the behaviour of financial markets builds heavily on portfolio choice theory; until recently this has assumed that preferences are of a particularly simple kind. In contrast research on preferences has revealed that people have more sophisticated preferences. This paper tries to bring the two fields together by investigating, in a portfolio choice context, the preferences that are revealed by decisions. In the second of these two fields, researchers are increasingly using allocation problems to elicit the preferences of subjects, believing that such problems are more informative, and perhaps more natural, than other elicitation methods. At the same time portfolio choice theory is itself concerned with an allocation problem. Usually in experimental finance the allocatio...
There is widespread concern that favoring suppliers with good past performance, a standard practi... more There is widespread concern that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. In this paper we report results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We implement a repeated procurement game with reputational incentives for quality and the possibility of entry. We allow also the entrant to start off with a positive reputational score. Our results suggest that while some past-performance based reputational mechanisms do reduce the frequency of entry, appropriately designed mechanisms can significantly increase it. Moreover, the reputational mechanism we investigate typically increases quality but not prices, suggesting that well designed mechanisms may generate very large gains for buyers and taxpayers.
Experiments on intertemporal consumption typically show that people have difficulties in optimall... more Experiments on intertemporal consumption typically show that people have difficulties in optimally solving this kind of problems. Previous studies have focused on contexts in which agents are faced with risk on future income and have to plan over long horizons. We present an experiment comparing decision making under certainty, risk and ambiguity, over a shorter life-cycle. Results show that planning in the ambiguity treatment is markedly different than in the risk condition and it is characterized by a significant pattern of under-consumption.
Over the last ten years the literature in experimental economics has seen a growing interest in g... more Over the last ten years the literature in experimental economics has seen a growing interest in groups and how they compare to individuals in different settings. This paper contributes to the literature on this topic by investigating the comparison between groups and individuals with respect to intertemporal consumption problems. Empirical evidence has shown how dynamic optimization problems, representing intertemporal consumption decisions, involve computational difficulties that agents are not always equipped to solve optimally. Several econometric estimations on household and aggregate data seem to show that people do not save enough. Similarly, in many experiments, results suggest that people are very different in how they solve this class of problems and in how they react to changes in the decision environment. We present an experiment comparing group and individual planning under risk and uncertainty. Our study is focussed on investigating how groups perform in intertemporal decision making tasks, 1 1 INTRODUCTION in particular observing the significance of group planning compared to individuals when choosing under risk and uncertainty. Results suggest that groups perform better than individuals when planning under risk, while the opposite happens in the case of planning under uncertainty. Interestingly, when comparing the behaviour of our agents in the second lifecycle (denominated "sequence") groups seem to lose all their advantage on individuals (in terms of less deviation from optimum). We interpret this as a "stability effect" caused by the random matching rule adopted during the groups sessions.
We present the results of an experiment comparing group and individual planning in the domain of ... more We present the results of an experiment comparing group and individual planning in the domain of life-cycle consumption/saving decisions. Individual decision making is compared to two group treatments, which differ for the presence of a re-matching rule. Our findings show that 1) individuals and groups differ in how they solve the intertemporal consumption problem, but not in how they improve their planning within a sequence; 2) in the first life-cycle groups deviate significantly less from optimum; 3) groups are unable to improve their decision making in the second sequence; 4) re-matching groups may have a detrimental effect on subsequent performance. These results offer new insights into the comparison of individual and groups, revealing the importance of the stability of the decision maker on the efficiency of planning.
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