Economics 310 Experimental Microeconomics

J.R. Carter

Spring 2004

Graded Assignments

Problem Sets, Quizzes, and Presentation 15%

First Exam March 2 25%

Second Exam April 15 25%

Research Project May 6 25%

Final Exam May 8 10%

Late problem sets are accepted with penalty until answer sheets are distributed. Lab participation is required. Exemptions from labs, problem sets, quizzes, and exams require a note from your class dean. Makeups are not given; assignment weights are redistributed. The research project is described separately.

Outline and Reserve Readings (Subject to Change)

O. Course Preliminaries

I. Introduction: Microeconomics as an Experimental Science

Singleton, Jr., Royce A., Straits, Bruce C. and Straits, Margaret M. Approaches to Social Research, 2nd ed. New York: Oxford University Press, 1993. Ch. 2, "The Nature of Science," pp. 17-34.

Singleton, Ch. 3, "The Logic of Scientific Reasoning," pp. 40-60.

Smith, Vernon. "Theory, Experiment and Economics." Journal of Economic Perspectives, Winter 1989, 3(1), pp. 151-156.

Singleton, Ch. 4, "Elements of Research Design," pp. 72-75, 81-87.

II. Double-Auction Markets

Davis, Douglas D. and Holt, Charles A. Experimental Economics. Princeton: Princeton University Press, 1993. Ch. 3, "Double-Auction Markets," pp. 125-135, 167-168.

Smith, Vernon L. and Williams, Arlington W. "The Boundaries of Competitive Price Theory: Convergence, Expectations, and Transaction Costs," in Leonard Green and John H. Kagel, eds., Advances in Behavioral Economics, vol. 2. Norwood, NJ: Ablex Publishing, 1990, pp. 31-53.

Jamal, Karim and Sunder, Shyam. "Money vs. Gaming: Effects of Salient Monetary Payments in Double Oral Auctions." Organizational Behavior and Human Decision Processes, June 1991, 49(1), pp. 151-166.

Gode, Dhananjay K. and Sunder, Shyam. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality." Journal of Political Economy, February 1993, 101(1), pp. 119-137.

III. Expected Utility Theory

Binmore, Ken. Fun and Games. Lexington, MA: D.C. Heath, 1992. Ch. 3.4, "Making Risky Choices," and Ch. 3.5, "Utility Scales," pp. 104-115.

Davis and Holt, Ch. 8, "Individual Decisions in Risky Situations," pp. 435-457, 472-476.

Harrison, Glenn W. "Expected Utility Theory and the Experimentalists." Empirical Economics, 1994, 19(2), pp. 223-231.

Burke, Michael S., Carter, John R., Gominiak, Robert D., and Ohl, Daniel F. "An Empirical Note on the Allais Paradox and Monetary Incentives." Empirical Economics, 1996, 21(4), pp. 617-632.

Harsanyi, John C. "Normative Validity and Meaning of von Neumann-Morgenstern Utilities," in Ken Binmore et al., eds., Frontiers of Game Theory. Cambridge, MA: The MIT Press, 1993, pp. 307-319.

IV. Game Theory: The Logic of Rational Self-Interest

A. Static, Sequential, and Repeated Games with Complete Information

Romp, Graham. Game Theory: Introduction and Applications. New York: Oxford University Press, 1997. Ch. 2, "Static Game Theory, pp. 8-27.

Romp, Ch. 3, "Dynamic Game Theory," pp. 29-49.

B. Incomplete Information and Backward Induction in the Centipede Game

Kreps, David M. Game Theory and Economic Modelling. Oxford: Oxford University Press, 1990. "The Importance of What Players Know About Others," pp. 77-82.

V. Experimental Games: Self Interest and Beyond

A. Sequential Bargaining, Dictator, and Trust Games

Binmore, Ken. Fun and Games. Lexington, MA: D. C. Heath, 1992. Ch. 5.8, "Bargaining Models," pp. 196-201.

Guth, Werner, Schmittberger, Rolf, and Schwarze, Bernd. "An Experimental Analysis of Ultimatum Bargaining." Journal of Economic Behavior & Organization, December 1982, 3, pp. 367-388.

Kahneman, Daniel, Knetsch, Jack L., and Thaler, Richard H. "Fairness and the Assumptions of Economics." Journal of Business, October 1986, 59, pp. S285-S300.

Carter, John R. and Irons, Michael D. "Are Economists Different, and If So, Why?" Journal of Economic Perspectives, Spring 1991, 5(2), pp. 171‑177.

Forsythe, Robert, Horowitz, Joel L., Savin, N. E., and Sefton, Martin. "Fairness in Simple Bargaining Experiments." Games and Economic Behavior, May 1994, 6(3), pp. 347-369.

Hoffman, Elizabeth, McCabe, Kevin, Shachat, Keith and Smith, Vernon. "Preferences, Property Rights, and Anonymity in Bargaining Games." Games and Economic Behavior, November 1994, 7(3), pp. 346-380.

Hoffman, Elizabeth, McCabe, Kevin and Smith, Vernon. "Ultimatum and Dictator Games." Journal of Economic Perspectives, Fall 1995, 9(4), pp. 236‑239.

Falk, Armin, Fehr, Ernst, and Fischbacher, Urs. "On the Nature of Fair Behavior." Economic Inquiry, January 2003, 41(1), pp. 20-26.

Berg, Joyce, Dickhaut, John, and McCabe, Kevin. "Trust, Reciprocity, and Social History." Games and Economic Behavior, July 1995, 10(1), pp. 122-142.

Gachter, Simon and Falk, Armin. "Reputation or Reciprocity? Consequences for the Labour Relation." Scandinavian Journal of Economics, March 2002, 104(1), pp. 1-26.

McCabe, Kevin A., Rigdon, Mary L., and Smith, Vernon L. "Positive Reciprocity and Intentions in Trust Games." Journal of Economic Behavior & Organization, October 2003, 52(2), pp. 267-275.

B. Dilemma Games

Marwell, Gerald and Ames, Ruth E. "Economists Free Ride, Does Anyone Else?" Journal of Public Economics, June 1981, 15, pp. 295-310.

Fehr, Ernst, and Gachter, Simon. "Cooperation and Punishment in Public Goods Experiments." American Economic Review, September 2000, 90(4), pp. 980-994.

Bolton, Gary E., Brandts, Jordi, and Ockenfels, Axel. "Measuring Motivations for the Reciprocal Responses Observed in a Simple Dilemma Game." Experimental Economics, 1998, 1, pp. 207-219.

VI. Probability and Statistical Inference (for review by students as needed)

Gujarati, Damodar. Essentials of Econometrics. New York: McGraw-Hill, Inc., 1992. Ch. 2, "A Review of Basic Statistical Concepts," pp. 17-42.

Newbold, Paul. Statistics for Business and Economics, 4th ed. Englewood Cliffs, NJ: Prentice Hall, 1995. Ch. 3.8, "Bayes Rule," pp. 113-117; Ch. 9, "Hypothesis Testing," pp. 352-362; Ch. 10, "Some Nonparametric Tests," pp. 385-399; and Ch. 11, "Goodness-of-Fit Tests and Contingency Tables," pp. 415-419.

Selected References

Conlisk, John. "Three Variants on the Allais Example." American Economic Review, June 1989, 79(3), pp. 392-407.

Carlin, Paul S. "Violations of the Reduction and Independence Axioms in Allais-Type and Common-Ratio Effect Experiments." Journal of Economic Behavior and Organization, October 1992, 19(2), pp. 213-235.

Starmer, Chris and Sugden, Robert. "Does the Random-Lottery Incentive System Elicit True Preferences? An Experimental Investigation." American Economic Review, September 1991, 81(4), pp. 971-978.

Cooper, Russell W., DeJong, Douglas V., Forsythe, Robert and Ross, Thomas W. "Selection Criteria in Coordination Games: Some Experimental Results." American Economic Review, March 1990, 80(1), pp. 218-233.

Schotter, Andrew, Weigelt, Keith and Wilson, Charles. "A Laboratory Investigation of Multiperson Rationality and Presentation Effects." Games and Economic Behavior, May 1994, 6(3), pp. 445-468.

Cooper, Russell W., DeJong, Douglas V., and Forsythe, Robert. "Cooperation without Reputation: Experimental Evidence from Prisoner's Dilemma Games." Games and Economic Behavior, February 1996, 12(2), pp. 187-218.

Roth, Alvin E. and Murnighan. "Equilibrium Behavior and Repeated Play of the Prisoner's Dilemma." Journal of Mathematical Psychology, April 1978, 17(2), pp. 189-198.

McKelvey, Richard D. and Palfrey, Thomas R. "An Experimental Study of the Centipede Game." Econometrica, July 1992, 60(4), pp. 803-836.

McKelvey, Richard D. and Palfrey, Thomas R. "An Experimental Study of Constant-Sum Centipede Games." International Journal of Game Theory, 1996, 25, pp. 269-287.

Roth, Alvin E., Prasnikar, Vesna, Okuno-Fujiwara, Masahiro and Zamir, Shmuel. "Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study." American Economic Review, December 1991, 81(5), pp. 1068-1095.

Ochs, Jack and Roth, Alvin. "An Experimental Study of Sequential Bargaining." American Economic Review, June 1989, 79(3), pp. 355-384.

Hoffman, Elizabeth, McCabe, Kevin and Smith, Vernon. "On Expectations and the Monetary Stakes in Ultimatum Games." International Journal of Game Theory, 1996, 25(3), pp. 289-301.

Bolton, Gary E. and Zwick, Rami. "Anonymity versus Punishment in Ultimatum Bargaining." Games and Economic Behavior, July 1995, 10(1), pp. 95‑121.

Blount, Sally. "When Social Outcomes Aren't Fair: The Effect of Causal Attributions on Preferences." Organizational Behavior and Human Decision Processes, August 1995, 63(2), pp. 131-144.

Carter, John R. and Anderton, Charles H. "An Experimental Test of a Predator-Prey Model of Appropriation." Journal of Economic Behavior & Organization, May 2001, 45(1), pp. 83-97.

Carter, John R. and McAloon, Shannon A. "A Test for Comparative Income Effects in an Ultimatum Bargaining Experiment." Journal of Economic Behavior & Organization, December 1996, 31(3), pp. 369-380.

Camerer, Colin, and Thaler, Richard H. "Ultimatums, Dictators and Manners," Journal of Economic Perspectives, Spring 1995, 9(2), pp. 209-219.

Hoffman, Elizabeth, McCabe, Kevin, and Smith, Vernon L. "Social Distance and Other-Regarding Behavior in Dictator Games." American Economic Review, June 1996, 86(3), pp. 653-660.

Henrich, Joseph, Boyd, Robert, Bowles, Samuel, Camerer, Colin, Fehr, Ernst, Gintis, Herbert, and McElreath, Richard. "In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies." American Economic Review, May 2001, 91(2), pp. 73-78.

Isaac, R. Mark and Walker, James M. "Group Size Effects in Public Goods Provision: The Voluntary Contributions Mechanism." Quarterly Journal of Economics, February 1988, 103, pp. 179-199.

Isaac, R. Mark and Walker, James M. "Communication and Free-Riding Behavior: The Voluntary Contribution Mechanism." Economic Inquiry, October 1988, 26, pp. 585-608.

Andreoni, James. "Why Free Ride? Strategies and Learning in Public Goods Experiments." Journal of Public Economics, December 1988, 37(3), pp. 291-304.

Andreoni, James and Miller, John H. "Rational Cooperation in the Finitely Repeated Prisoner's Dilemma: Experimental Evidence." Economic Journal, May 1993, 103, pp. 570-585.

Keser, Claudia. "Voluntary Contributions to a Public Good When Partial Contribution is a Dominant Strategy." Econonomics Letters, March 1996, 50(3), pp. 359-366.

Croson, Rachel T. A. "Partners and Strangers Revisited." Economics Letters, October 1996, 53(1), pp. 25-32.

Fehr, Ernst, Kirchsteiger, Georg, and Riedl, Arno. "Does Fairness Prevent Market Clearing? An Experimental Investigation." Quarterly Journal of Economics, May 1993, 108(2), pp. 437-459.

Falk, Armin, Fehr, Ernst, and Fischbacher, Urs. "Testing Theories of Fairness – Intentions Matter." Institute for Empirical Research in Economics, University of Zurich, September 2000.

Binmore, Ken and Samuelson, Larry. "An Economist's Perspective on the Evolution of Norms." Journal of Institutional and Theoretical Economics, 1994, 150(1), pp. 45-63.

Rabin, Matthew. "Incorporating Fairness into Game Theory and Economics." American Economic Review, December 1993, 83(5), pp. 1281-1302.

Fehr, Ernst and Schmidt, Klaus M. "A Theory of Fairness, Competition, and Cooperation." Quarterly Journal of Economics, August 1999, 114(3), pp. 817-868.

Bolton, Gary E. and Ockenfels, Axel. "ERC: A Theory of Equity, Reciprocity, and Competition." American Economic Review, March 2000, 90(1), pp. 166-193.

Falk, Armin, and Fischbacher, Urs. "A Theory of Reciprocity." Institute for Empirical Research in Economics, University of Zurich, July 2000.

McCabe, Kevin A., and Smith, Vernon L., and LePore, Michael. "Intentionality Detection and 'Mindreading': Why Does Game Form Matter?" Proceedings of the National Academy of Science, April 11, 2000, 97(8), pp. 4404-4409.

McCabe, Kevin A., and Smith, Vernon L. "Goodwill Accounting and the Process of Exchange," in G. Gigerenzer and R. Selten, eds., Bounded Rationality: The Adaptive Toolbox. Cambridge, MA: MIT Press, 2001, pp. 219-240.

Smith, Vernon L. "Constructivist and Ecological Rationality in Economics." American Economic Review, June 2003, 93(3), pp. 465-508.

Gintis, Herbert, Bowles, Samuel, Boyd, Robert, and Fehr, Ernst. "Explaining Altruistic Behavior in Humans." Evolution and Human Behavior, 2003, 24, pp. 153-172.