HANDBOOK OFEXPERIMENTAL

ECONOMICS RESULTS

Edited by

CHARLES R. PLOTT

California Institute of Technology

and

VERNON L. SMITH

Chapman University

NORTH-HOLLANDAMSTERDAM NEW YORK OXFORD TOKYO

CONTENTS OF VOLUME 1

Introduction to the Series vii

Preface ixIntroduction ixThe Book Organization xiiReferences xii

PART 1: MARKETS

Markets 33

1.1. Institutional Environments 3

1.2. Imperfect Competition 8

1.3. Dynamics of Market Adjustments 11

References 13

PART 1.1: INSTITUTIONAL ENVIRONMENTS

PART 1.1.1: PROPERTIES OF THE DOUBLE AUCTION

Chapter 1

Properties of Disequilibrium Adjustment in Double Auction MarketsCHARLES R. PLOTT 16References 20

Chapter 2From Market Jaws to the Newton Method: The Geometry of How a MarketCan Solve Systems of EquationsPETER BOSSAERTS AND CHARLES R. PLOTT 22References 24

Chapter 3Exogenous Uncertainty Increases the Bid-Ask Spread in the ContinuousDouble AuctionVERNON L. SMITH AND MARK VAN BOENING 251. Experimental Design 25

xiv Contents of Volume 1

2. Exogenous Uncertainty and the Bid/Ask Spread 273. Conclusion 30References 30

Chapter 4Zero-Intelligence Robots and the Double Auction Market: A Graphical TourPAUL J. BREWER 311. Environment 32

1.1. Values and Costs 32

1.2. Profits 32

1.3. Limitations on Trading 32

1.4. Market Rules 32

1.5. Budget Constraints 33

1.6. Trades Involve Arbitrage; No Speculative Trades 33

2. Robot Agents 342.1. Zero Intelligence Robots - Trading Algorithm 34

2.2. UNIT Robots - Trading Algorithm 34

2.3. Kaplan's Parasitic Robots1-Trading Algorithm 35

3. Literature - Robots and the Double Auction 353.1. Types of Questions 35

3.2. Major Results from the Literature - A Chronology 37

References 44

Chapter 5Effect of Non-binding Price Controls in Double Auction TradingVERNON L. SMITH AND ARLINGTON W WILLIAMS 461. Introduction 462. Experimental Design 463. Experimental Results 484. Why Do Non-binding Price Controls Interfere with the DA Market Process? 535. Conclusions 53References 53

PART 1.1.2: PROPERTIES OF POSTED OFFER PROCESSES

Chapter 6 rFairness and Short Run Price Adjustment in Posted Offer MarketsPRAVEEN KUJAL AND VERNON L. SMITH 551. Introduction 552. Market Experiments 55

2.1. Extension: Posted Bid vs Posted Offer 56

2.2. Our Experiments 57

3. Hypothesis and Experimental Results 57

Contents of Volume 1 xv

4. Discussion 584.1. What is Fairness? 60

References 61

Chapter 7Mixed Strategy Nash Equilibrium Predictions as a Means of Organizing Be-havior in Posted-Offer Market ExperimentsDOUGLAS D. DAVIS AND BART J. WILSON 621. Introduction 622. Equilibrium Mixed Strategy Pricing Distributions 633. Pricing Performance with Market Power 644. Pricing Densities Relative to Static Nash Equilibrium Predictions 675. Performancepf Alternative Theories 686. Summary 69References ' 69

Chapter 8Simulated and Real Buyers in Posted Offer MarketsJAMIE BROWN KRUSE 711. Introduction 712. Summary of the Experimental Design 713. Results 72Acknowledgements 76References 76

Chapter 9The Performance of Double-Auction and Posted-Offer Markets with AdvanceProductionSTUART MESTELMAN J 11References 82

PART 1.1.3: CALL MARKETS AND SEALED BIDS

Chapjer 10Strategy-Proof Equilibrium Behavior in Two-Sided AuctionsVERNON L. SMITH 841-. Strategy-Proof Equilibria in the Sealed Bid-Offer Auction 852. Strategy-Proof Equilibria in the Uniform Price Double Auction (UPDA) 883. Summary^ - 89References , 91

Chapter 11First Price Independent Private Values AuctionsJAMES C. COX 92

xvi Contents of Volume 1

1. Tests of the RNM with Market Prices 922. Tests of the RNM with Subject Payoff Data 943. Tests of the CRRAM and the RNM with Individual Bid Data 954. Tests of the LCM with Individual Bid Data 965. Summary of the Test Results 98Acknowledgement 98References 98

PART 1.1.4: ALTERNATIVE MARKET INSTITUTIONS

Chapter 12The Walrasian AuctionCORINNE BRONFMAN, KEVIN MCCABE, DAVID PORTER, STEPHENRASSENTI AND VERNON SMITH 1001. Introduction 1002. Experimental Environments 100

2.1. Baseline 100

2.2. Multi-unit Non-stationary Supply and Demand Environment 101

3. Walrasian Auction Design and Computerized Implementation 1024. Experimental Results 104

4.1. The El Environment Replication 104

4.2. Baseline and Treatment Effects 104

4.3. Individual Behavior 105

References 108-?

Chapter 13The Matching Market InstitutionDANIEL FRIEDMAN AND CHANGHUA RICH 1091. Experimental Procedures 1092. Results J 1113. Discussion 114References 114

Chapter 14Tatonnement

t , CHARLES R. PLOTT 115Reference [ 117

f

PART 1.2: IMPERFECT COMPETITION

PART 1.2.1: MARKET POWER

Chapter 15Wage Differentials in Experimental Efficiency Wage Markets

Contents of Volume 1 xvii

ERNST FEHR AND SIMON GACHTER 1201. Wage Differentials: Experiments Help to Test Explanations 1202. The Fair Wage-Effort Version of Efficiency Wage Theory 121

2.1. Experimental Design 121

2.2. Results 121

3. The Shirking Version of Efficiency Wage Theory 1233.1. Design 1233.2. Results 124

4. Summary 125References 126

Chapter 16The Paradox of PowerYVONNE DURHAM, JACK HIRSHLEIFER AND VERNON L. SMITH 1271. The Model 1282. Implementing the Model 1323. Experimental Procedures and Design 1324. Results 133

4.1. Nash vs Cooperative Comparisons 133

4.2. Predictions of the Model 135

4.3. Charting the Observations 136

References 136

Chapter 17The Exercise of Market Power in Laboratory ExperimentsDOUGLAS D. DAVIS AND CHARLES A. HOLT 1381. Introduction 1382. Market Power 1393. Applications of Market Power 143References 145

Chapter 18The Classical Experiments on Cournot OligopolyANTONI BOSCH-DOMENECH AND NICOLAAS J. VRIEND 1461. Sauermann and Selten's Results 1462! Hoggatt's Result^ 1483. Fouraker and Siegel's Results 149References , 152

Chapter 19Experiments in Decentralized Monopoly RestraintJAMES C. COX AND R. MARK ISAAC 1531. Market Institutions for Monopoly Restraint 153

xviii Contents of Volume 1

2. Contestable Markets 1553. The Loeb-Magat Mechanism 1564. The Finsinger-Vogelsang Mechanism 1575. The Cox-Isaac Mechanism 159Acknowledgement 161References 161

PART 1.2.2: COLLUSION

Chapter 20Price Signaling and "Cheap Talk" in Laboratory Posted Offer MarketsTIMOTHY N. CASON 1641. Multi-Market versus Single-Market Competition 1652. The Importance of the Signaling Language 1673. Summary 168References 168

Chapter 21The Effects of Collusion in Laboratory ExperimentsDOUGLAS D. DAVIS AND CHARLES A. HOLT 1701. Introduction 1702. Collusion with and without Secret Discounts 1713. Recent Work 175References 176

Chapter 22Predatory Pricing: Rare Like a Unicorn?ROSARIO GOMEZ, JACOB K. GOEREE AND CHARLES A. HOLT 1781: Introduction 1782. Single Market Designs 1783. Multiple Market Designs 1804. Summary 183References 184

Chapter 23 fSome Results on' Anti-Competitive Behavior in Multi-Unit Ascending PriceAuctionsKATERINA SHERSTYUK 1851. Experiments on Demand Reduction 1862. Experiments on Bidder Collusion 192Acknowledgement 197References 197

Contents of Volume I xix

PART 1.2.3: NON-CONVEXITIES

Chapter 24

Non-Convexities, Economies of Scale, Natural Monopoly and MonopolisticCompetitionCHARLES R. PLOTT 200References 205

Chapter 25Avoidable Cost Structures and Competitive Market InstitutionsMARK V. BOENING AND NATHANIEL T. WILCOX 2061. A Simple Avoidable Cost Structure 2062. Three Market Institutions 2083. The Results 2094. A Next Step: Cooperative Arrangements? 211References 211

PART 1.3: DYNAMICS OF MARKET ADJUSTMENTS

Chapter 26Principles of Market Adjustment and StabilityCHARLES R. PLOTT 2141. Theory • 214

1.1. Cobweb Dynamics 215

1.2. The Walrasian (Hicks, Samuelson) Dynamics 216

1.3. Marshallian Dynamics 216

2. Experiments 2172.1. Instability does not Occur under Conditions Predicted by the Cobweb Model 217

2.2. Walrasian Dynamics and not Marshallian Dynamics Capture the Backward-Bending Case 219

2.3. The Marshallian Model and not the Walrasian Model Best Describes Market Behavior

in the Case of a Marshallian Externality or a "Fad" 223

3. Summary 226. References 227

£ *?

Chapter 27 rOff-floor Trading, Market Disintegration and Price Volatility in Bid/Ask MarketsVERNON L. SMITH AND MARK VAN BOENING 2281. The Problem ' 2282. The Environment 2283. Results 2294. Discussion: Implications for, and Barriers to, Institutional Redesign 232References 232

xx Contents of Volume 1

Chapter 28Quantitative Restrictions in Experimental Posted-offer MarketsPRAVEEN KUJAL ' 2341. Introduction 234

1.1. Quotas 2342. Quota Experiments 2353. Experimental Design 236

3.1. Market equilibrium 2374. Experimental Results 2385. Conclusion 240References 241

Chapter 29Price Bubbles in Large Financial Asset MarketsARLINGTON W. WILLIAMS 242References 246

Chapter 30Price BubblesDAVID PORTER AND VERNON L. SMITH 2471. Introduction 2472. Empirical Results from Laboratory Asset Markets 247References 255

yChapter 31Experiments with Arbitrage Across AssetsERIC O'N. FISHER 256References 259

Chapter 32Bubbles and Crashes in Experimental Asset Markets: Common KnowledgeFailure?CHARLES NOUSSAIR AND CHARLES PLOTT 260References 263

'' Chapter 33 fA'Comparison of Market InstitutionsTIMOTHY N. CASON AND DANIEL FRIEDMAN 2641. Market Institutions 2642. Market Environment 2663. Related Work 2664. Results 267

4.1. Market Efficiency 267

Contents of Volume 1 xxi

4.2. Transaction Prices 269

4.3. Transaction Volume 271

5. Discussion 271References 271

Chapter 34Coordination Success in Non-cooperative Large Group Market Entry GamesAMNON RAPOPORT AND DARRYL A. SEALE 2731. The Market Entry Game 2732. Results 274

2.1. Sundali, Rapoport, and Seale (1995) 274

2.2. Rapoport et al. (1998) 281

2.3. Rapoport, Seale, and Winter (1997) 282

3. Adaptive Learning 293Acknowledgement 294References 294

PART 2: MARKET ECONOMICS OF UNCERTAINTY AND INFORMATION

Market Economics of Uncertainty and Information 299

Chapter 35Learning to Forecast RationallyHUGH KELLEY AND DANIEL FRIEDMAN 3031. Introduction 3032. The Tasks 303

2.1. Orange Juice Forecasting (OJ) 303

2.2. The Medical Diagnosis Task'(MD) 305

3. Results / 3053.1. Rolling Regressions 305

3.2. OJ Learning Curves 306

3.3. MD Learning Curves 308

4. Discussion 308References 310

'- 1

Chapter 36 fLaboratory Tests of Job Search ModelsJAMES C. COX AND RONALD L. OAXACA 3111. Basic Search Experiments 3112. Precommitment/No Precommitment Experiments 3133. Recall Experiments 3164. Extensions of the Standard Search Model 318Acknowledgements 318

xxii Contents of Volume 1

References 318

Chapter 37Reciprocity and Contract EnforcementSIMON GACHTER AND ERNST FEHR 3191. The Contract Enforcement Problem 3192. Experimental Design and Results of Fehr and Gachter (1998a) 320

2.1. Design 3202.2. Results 320

3. Contract Enforcement with an Imperfect Verification Technology 3234. Summary 324References 324

Chapter 38Reciprocity in Experimental MarketsERNST FEHR AND ARMIN FALK 3251. Introduction 3252. Experimental Design 326

2.1. Common Features of All Treatments 326

2.2. The One-sided Auction-treatment 327

2.3. The Double Auction-treatment 327

2.4. The Bilateral Bargaining-treatment 328

2.5. Standard Predictions 328

3. Results ' 3284. Reciprocity Under Conditions of High Stakes 3295. Related Experiments 330Acknowledgement 333References 334

Chapter 39Information Cascade ExperimentsLISA R. ANDERSON AND CHARLES A. HOLT 3351. Cascades 3352. Market Applications and Alternative Institutions 340References r 342Further reading • 343

Chapter 40Markets and Information Aggregation MechanismsKAY-YUT CHEN AND CHARLES R. PLOTT 3441. Are The Lessons From The Simple Cases Useful? 348References 352

Contents of Volume 1 xxiii

PART 3: GENERAL EQUILIBRIUM'AND THE ECONOMICS OF MUL-TIPLE MARKET SYSTEMS

General Equilibrium and Multiple Market Systems 355

Chapter 41Comparative Advantage and International Trade

CHARLES R. PLOTTReference

Chapter 42Asset PricingPETER BOSSAERTS1. What theTheory Predicts2. The Empirical Question3. What the Field Data Teach Us4. What the Experiments Teach UsReferences

Chapter 43Price Discovery and Allocation in Chains and Networks of MarketsCHARLES R. PLOTT AND JACKIE YEUNGReference

Chapter 44Multiple Market Systems and the Classical Principles of Price Dynamics inGeneral EquilibriumCHARLES R. PLOTTReferences ,Further reading

PART 4: GAMES

Games• f- 4.1. Accuracy of the Nash Model

4.2. Learning in Games

358363

364364365365366369

370375

376382383

387387389

PART 4.1: ACCURACY OF THE NASH MODEL

Chapter 45Experimental Beauty Contest Games: Levels of Reasoning and Convergenceto EquilibriumROSEMARIE NAGEL 3911. Introduction 391

xxiv Contents of Volume 1

2. Variations on the Beauty Contest Game 3923. Bounded Rational Behavior 401

3.1. Iterated Best Reply Model 401

3.2. Learning 404

Appendix A: Instructions (from Duffy and Nagel, 1997) 407A.I. General 407

A.2. The Rules 407

A.3. What is the Median 408

A.4. Payoffs 408

A.5. Explanation Sheet 408

Appendix B: 408References 409

Chapter 46Reciprocity in Ultimatum and Dictator Games: An IntroductionELIZABETH HOFFMAN, KEVIN MCCABE AND VERNON SMITH 4111. Motivation 4112. Ultimatum and Dictator Games Described 4123. Experimental Designs and Summary Results 4124. Interpretations and Discussion 414References 415

Chapter 47Preferences and Property Rights in Ultimatum and Dictator GamesELIZABETH HOFFMAN, KEVIN MCCABE AND VERNON SMITH 4171. Property Rights Defined 4172. Experimental Design 4173. Ultimatum Results 4194. Dictator Games and Results 4205. Discussion 421References 422

Chapter'48Prompting Strategic Reasoning Increases Other-regarding Behavior

; ELIZABETH HOFFMAN,} KEVIN MCCABE AND VERNON SMITH 4231. Introduction 423

1.1. Previous Results 423

1.2. The Current Experiment • 425

2. Experimental Design and Subject Recruitment 4253. Experimental Results 4264. Discussion 426References 428

Contents of Volume 1 xxv

Chapter 49Social Distance and Reciprocity in Dictator GamesELIZABETH HOFFMAN, KEVIN MCCABE AND VERNON SMITH 4291. Defining Variations on Perceived Social Distance in Dictator Games 4292. Experimental Design 429

2.1. Replicating Forsythe et al. (1994) 430

2.2. FHSS-V 431

2.3. Double Blind 2 (DB2) 433

2.4. Single Blind 1 (SB1) 433

2.5. Single Blind 2 (SB2) 433

3. Experimental Design and Research Hypothesis 4344. Results 435References / 435

Chapter 50Fairness in Ultimatum BargainingJ. KEITH MURNIGHAN 4361. Defining and Investigating the Impact of Fairness Concerns 4372. "My Offer is Fair" 4403. Fairness, Anger, and Spite 4454. Ultimatum Bargaining by Children 4495. Ultimatums Dividing Money and M&Ms 4496. Conclusions 451Acknowledgements 452References 452Further reading 453

Chapter 51Coordination Failure in Market Statistic GamesJOHN VAN HUYCK AND RAYMOND BATTALIO 4541. Introduction 4542. Strategic Uncertainty and Coordination Failure 4553. The Influence of Out-of-Equilibrium Payoffs 4574. The Influence of Group Size, Grid Size, and Order Statistic 4585. The Separatrix \ 459Acknowledgements f 461References ; 461

Chapter 52The Problem of Common Choice in Symmetric N-person Coordination GamesCARL M. RHODES AND RICK K. WILSON 4631. The Problem 4632. Experimental Design 464

xxvi Contents of Volume 1

3. Single Stage Results 4664. Repeated Play Results 4675. Conclusion 470Acknowledgements 471References 471

Chapter 53Equilibrium Convergence in Normal Form GamesNICOLE BOUCHEZ AND DANIEL FRIEDMAN 4721. Laboratory Procedures and Treatments 4722. Results 4753. Discussion 479References 479

Chapter 54Analyzing Choice with Revealed Preference: Is Altruism Rational?JAMES ANDREONI AND JOHN H. MILLER 4811. Introduction 4812. The Choice Task 4833. Checking GARP 4834. Conclusion 486References 487

Chapter 55 ,•Testing Theories of Other-regarding Behavior: A Sequence of Four Labora-tory StudiesGARY E. BOLTON, JORDI BRANDTS, ELENA KATOK, AXEL OCKEN-FELS AND RAMIZWICK 4881. Introduction 4882. Bolton and Zwick (1995): Reputation Building versus Self-centered Fair-

ness in an Ultimatum Game 4893. Bolton, Katok and Zwick (1998): The Nature of Giving Behavior in Dic-

tator Games 4924. Selten)and Ockenfels (1998) and Ockenfels and Weimann (1999): The

FixedTotal Sacrifice Effect in the Solidarity Game 4945. Bolton, Brandts, and Ocjkenfels (1998): Distribution versus Intentions in a

2-person Dilemma Game 4956. Summary: Regularities for Theory Building 498References ' 498Further reading 499

Chapter 56Focal Points and Bargaining

Contents of Volume 1 xxvii

KEN BINMORE AND JOSEPH SWIERZBINSKI 500References 507

PART 4.2: ALTERNATIVES TO NASH

Chapter 57Differences in the Economic Decisions of Men and Women: ExperimentalEvidenceCATHERINE C. ECKEL AND PHILIP J. GROSSMAN 509Abstract- 5091. Public Goods Experiments 5102. Ultimatum Experiments 5133. Dictator Experiments 5154. Conclusions 518References' 518

Chapter 58Emergent Conventions in Evolutionary GamesJOHN VAN HUYCK 5201. Introduction 5202. Inefficient Conventions 5213. Coordination Conventions: Labels and Populations 5224. Unequal Division Bargaining Conventions 527Acknowledgements 529References 529Further reading 530

Chapter 59Self-centered Fairness in Games with More Than Two PlayersGARY E. BOLTON AND AXEL7 OCKENFELS 5311. Introduction 5312. Sketch of ERC Preferences 5323. Evidence in Games with More Than Two Players 534

,3.1. The Guth-van Damme Bargaining Game 534

3.2. Market Game 537

3.3. The Fixed Total Sacrifice Effect 538

4. Summary I 539References -, 540

Chapter 60Quantal Response Equilibria: A Brief SynopsisRICHARD D. MCKELVEY AND THOMAS R. PALFREY 5411. Introduction 5412. The Model 541

xxviii Contents of Volume 1

3. Properties of the QRE 5424. Fit to Experimental Data 543

4.1. Learning to Play Nash Over Time 543

4.2. Systematic Bias Away from the Nash Equilibrium 543

4.3. Nash Equilibrium Selection 544

Acknowledgement 547References 548

Chapter 61Logit Equilibrium Models of Anomalous Behavior: What to do when theNash Equilibrium Says One Thing and the Data Say Something ElseSIMON P. ANDERSON, JACOB K. GOEREE AND CHARLES A. HOLT 5491. Background: The Logit Approach 5512. How to Find a Logit Equilibrium 5523. Comparative Static Properties 554Acknowledgement 557References 557

PART 4.3: LEARNING IN GAMES

Chapter 62Asymmetric Two-person Bargaining Under Incomplete Information: Strate-gic Play and Adaptive LearningAMNON RAROPORT, TERRY E. DANIEL AND DARRYL A. SEALE 5601. Most Participants Behave Strategically in General Accordance with the

Linear Equilibrium Strategy 5612. There is an Information Advantage Exceeding the Predictions of the LES 5633. Repeated Play with a Fixed Partner Enhances Strategic Advantages 5654. Explanation of the Findings in Terms of Adaptive Learning 565References 571

Chapter 63The Effect of Message Space Size on Learning and Outcomes in Sender-Receiver GamesANDREAS BLUME, DOUGLAS V. DEJONG AND GEOFFREY B. SPRIN-KLE f 5721. Introduction 5722. The Games 5723. Results- 574

3.1. Game 1 5743.2. Game 2 575

4. Summary 584References 584

Contents of Volume 1 xxix

Chapter 64Learning in Entry Limit Pricing GamesDAVID J. COOPER 5851. Introduction 5852. The Limit-pricing Game 5853. Experimental Procedures 5884. Adaptive Learning 5885. Experimental Results 5926. Conclusions 592References 597

Chapter 65Payoff Uncertainty and Cooperation in Finitely-repeated Prisoner's DilemmaGamesLAWRENCE M. KAHN AND J. KEITH MURNIGHAN 5981. Methods 5992. The Experimental Design 5993. Results 6024. Discussion and Conclusions 604Acknowledgements 605References 605

Chapter 66Learning and'Equilibrium in GamesCOLIN F. CAMERER, TECK H. HO AND JUIN-KUAN CHONG 6071. Introduction 6072. Adaptive EWA and Other Learning Models 6073. Sophisticated EWA and Equilibrium Models 611References . 615

PART 5: MECHANISM DESIGN AND POLICY APPLICATIONS

Mechanism Design and Policy Applications 6195.1.' Abstract, Theory Driven 619

5.2. Applied,;Problem Driven 620

5.3. From the Lab to the Field 622

References 623

PART 5.1: ABSTRACT, THEORY DRIVEN

Chapter 67Incentive-compatible Mechanisms for Pure Public Goods: A Survey of Ex-perimental Research

xxx Contents of Volume 1

YAN CHEN 6251. Introduction 625

1.1. Theoretical Results and Unresolved Issues 625

1.2. Economic Environments in Experiments 627

2. Dominant Strategy Mechanisms 6283. Nash-efficient Mechanisms 6304. Mechanisms Using Refinements of Nash as Implementation Concepts 635

4.1. Perfect Nash Mechanisms 635

4.2. Subgame Perfect Mechanisms 637

5. Other Mechanisms 6386. Concluding Remarks 639Acknowledgements 640References 640

Chapter 68The Combinatorial AuctionSTEPHEN J. RASSENTI AND VERNON L. SMITH 6441. The Environment 645

1.1. Two Market Mechanisms: The Independent Auction and the Combinatorial Auction 646

2. The After Market 6493. Results 649References 653

PART 5.2: APPLIED, PROBLEM DRIVEN

Chapter 69Share Trading and Coupon Banking Interact to Improve Performance in Emis-sion Trading MarketsSTUART MESTELMAN AND R. ANDREW MULLER 655References 659

Chapter 70Trading Institutions and Emission AllowancesTIMOTHY N. CASON 6611. The Federal Sulfur Dioxide Allowance Program and the EPA Emissions

Trading Auction { 6612. Other Emission Allowance Trading Assessments: China, Ontario and Los

Angeles 6653. Summary ' 667References 667

Chapter 71Procurement Contracting

Contents of Volume 1 xxxi

JAMES C. COX AND R. MARK ISAAC 6691. A Model of Cost Information Asymmetry 6692. Linear Contracts 6703. Testable Hypotheses 6704. Experimental Results 671Acknowledgements 674References 675

Chapter 72Electric Power Market Design Issues and Laboratory ExperimentsSTEPHEN RASSENTI AND VERNON SMITH 6761. Nodal Price Theory for Lossy Lines 677Acknowledgements 679References 679

Chapter 73Energy, Reserve and Adjustment Market Behavior With Industry Network,Demand and Generator ParametersMARK A. OLSON, STEPHEN RASSENTI AND VERNON L. SMITH 6811. Modeling Generators 6812. Modeling Demand 6853. Market Design 6874. Sealed Bid Day-Ahead Energy Market 6875. Reserj/e Market 6886. Load Adjustment Market 6897. Continuous Double Auction Energy Market 6908. The Network 6909. Optimization 691lO.Subjects / 69111 .Data Analysis: Questions and Answers 692

11.1 .What is the Competitive Efficiency of the Two Markets Based on Marginal Energy Costs? 692

11.2.Do SBO Prices and CDA Weighted Average Prices Converge to Comparable Levels? 694

11.3.What are the Profitability Levels for the Various Agents in the System? 694

•' "11.4.Do Nodal Prices Reflect Distance Sensitivity and Line Constraints? 694

Reference , 699

• ! . ' IChapter 74Transmission Constraints, Incentive Auction Rules and Trader Experience inan Electric'Power MarketSTEVEN BACKERMAN, STEPHEN RASSENTI AND VERNON L. SMITH 7001. Experimental Network Environment 7002. Experimental Design 7033. The Mechanism: A Continuously Updated Nodal Uniform Price Auction 703

xxxii

4. Hypotheses and Tests5. Regression Results6. Further Results7. ConclusionsReferences

Chapter 75A Smart Market for the Spot Pricing and Pricing of TransmissionPower GridHUNG-PO CHAO AND CHARLES R. PLOTT1. Kirchoff's Law and Resource Constraints2. The Mechanism

2.1. Notation

2.2. Notation

2.3. Dual Linear Program for Continuous-time Double Auction

3. Parameter and the Testbed4. PerformanceReferenceFurther reading

Contents of Volume 1

Through a

705707707708709

710710711712713713714715718718

PART 5.3: FROM THE LAB TO THE FIELD

Chapter 76Asset Market Manipulation: A Field Experiment with Racetrack BettingCOLIN F. CAMERER 7201. Experimental Design 7202. Experimental Results 7223. Conclusion 723References 724

Chapter 77Pre-testing International Climate Change Policies: Methods and ResultsPETER BOHM 7251. Testing Gains from Emissions Quota Trade among a Few Countries

(Bohrri; 1997) 7261.1. Test Design t 7261.2. Test Results:' 727

2. Testing International Acceptability of a 'Global' Tradable-quota Treatywith Diplomats as Subjects (Bohm, 1997b) 730

References 732

Chapter 78Quasi-experimental Evaluation of Regional Employment Subsidies

Contents of Volume 1 xxxiii

PETER BOHM 7331. Experimental Design 7332. Results 734Further reading 735

Chapter 79Field-test Elicitations of Demand for Public GoodsPETER BOHM 736References 740

Chapter 80Results from a Dozen Years of Election Futures Markets ResearchJOYCE BERG, ROBERT FORS YTHE, FORREST NELSON AND THOMAS 'RIETZ * 7421. Introduction and Description of Election Futures Markets 7422. Market Mechanism 7433. Results from Share Markets 744

3.1. Absolute Market Accuracy 744

3.2. Accuracy Relative to Polls 746

4. How and why do Election Futures Markets "Work?" 7485. Other Issues Studied and Future Research Potential 749Acknowledgements 750References. 751

i

Chapter 81Experimental Evidence on the Existence of Hypothetical Bias in Value Elici-tation MethodsGLENN W. HARRISON AND E. ELISABET RUTSTROM 7521. The CVM Literature and/tests with Private Goods 7532. The CVM Literature and Tests with Public Goods 7553. Open-ended Elicitation in the Lab 7584. Dichotomous Choice Elicitation in the Lab 7605. Social Elicitation in the Lab 7616. Constructive Solutions 762

6.1. Instrument Calibration 762

6.2. Statistical Calibration 763

7. Conclusions \ 765References • 766

PART 6: NON-MARKET AND ORGANIZATIONAL RESEARCH

Non-market and Organizational Research 771Introduction 771

xxxiv Contents of Volume 1

6.1. Public Goods and Externalities 771

6.2. Committees and Voting Groups 773

Reference 774

PART 6.1: PUBLIC GOODS, EXTERNALITIES AND COMMON POOLS

Chapter 82Partners versus Strangers: Random Rematching in Public Goods ExperimentsJAMES ANDREONI AND RACHEL CROSON 7761. Introduction 7762. Partners versus Strangers 7773. A Closer Look 7774. Partners, Strangers, Warm-glow and Confusion 7815. What is Next? 781References 782

Chapter 83Differentiating Altruism and ReciprocityRACHEL T.A. CROSON 7841. Introduction 7842. Hypotheses 7853. The Experiments and Results 7854. Types of Reciprocity 7885. Discussion.and Conclusion 789References 791

Chapter 84Voluntary Provision of Public Goods: Experimental Results with InteriorNash EquilibriaSUSAN K. LAURY AND CHARLES A. HOLT 7921. Introduction 7922. Dominant Strategy Designs 7933. Non-dominant Strategy Designs 7954. Treatment Effects 7995. Final Observations 800Acknowledgements \ 800References 800

Chapter 85Spiteful Behavior in Voluntary Contribution Mechanism ExperimentsTATSUYOSHISAIJO 8021. Saijo-Nakamura Experiments 8032. Non-excludable Public Good Experiments 810

Contents of Volume 1 xxxv

Acknowledgement 816References 816

Chapter 86Explaining the Comparative Statics in Step-Level Public Good GamesARTHUR SCHRAM, THEO OFFERMAN AND JOEP SONNEMANS 8171. Introduction 8172. Basic Experimental Tools 8183. Treatments 8184. Interpreting the Results 821References 824

Chapter 87Cooperation in VCM Experiments: Results Using the Contribution FunctionApproachJORDI BRANDTS AND ARTHUR SCHRAM 8251. Introduction 8252. Description of the Design 8253. Results 8264. Some Insights 829References 829

Chapter 88Voluntary Provision of Public GoodsKENNETH S. CHAN, STUART MESTELMAN AND R. ANDREW MULLER 831References 835

Chapter 89Intrinsic Motivation in a Public Good EnvironmentFRANS VAN WINDEN, FRANS VAN DDK AND JOEP SONNEMANS 8361. Introduction 8362. Experimental Design 8373. Main Observations 841

3.1. Different Intrinsic Motivation for Contributing 841

3.2. Intrinsic Motivation Changes with Social Interaction 841

3.3. Effect of Success of Social Interaction (Social Ties) 841

3.4. Group Formation 844

4. Conclusions 844References , 844

Chapter 90Theoretical Explanations of Treatment Effects in Voluntary Contributions Ex-periments

xxxvi Contents of Volume 1

CHARLES A. HOLT AND SUSAN K. LAURY 8461. Introduction 8462. Generalized Preferences 8483. Noisy Decision Making 8504. Evolution and Adaptation 851

4.1. Cooperation and Signaling 852

5. Final Observations 854Acknowledgement 854References 854

PART 6.2: COMMITTEES AND VOTING GROUPS

Chapter 91Institutional Modifications of Majority RuleWILLIAM P. BOTTOM, RONALD A. KING, LARRY HANDLIN ANDGARY J. MILLER 8571. General Introduction 8572. Agenda Control 858

2.1. One-dimensional Agenda Control 858

2.2. Decentralized Agenda Control 861

3. Extraordinary Majorities and the Veto 8644. Bicameralism 867Acknowledgements 870References ••> 870

Chapter 92Endogenous Properties of Equilibrium and Disequilibrium in Spatial Com-mittee GamesRICK K. WILSON 8721. Theoretical Background 8722. Experimental Design 8733. Endogenous Preferences . 874

3.1. The Core 874

3.2. Star Preferences 875

3.3. Skew Star Preferences 877

4. Discussion [ 878Acknowledgements 878References 879

Chapter 93Structure Induced Equilibrium in Spatial Committee GamesRICK K. WILSON 8801. Theoretical Basics 880

Contents of Volume 1 xxxvii

2. Experimental Design 8813. Monopoly Agenda Setting 8824. Backward Voting Agenda 8845. Conclusion 887Acknowledgements 888References 888

Chapter 94Three-way Experimental Election Results: Strategic Voting, CoordinatedOutcomes and Duverger's LawTHOMAS RIETZ 8891. Introduction, 8892. The Experiments 891

2.1. Common Procedures 891

2.2. Equilibria 891

2.3. Specific Treatments 892

3. Results 8933.1. Candidate Winning Frequencies 893

3.2. Other Results 895

4. Conclusions and Other Issues Studied with Similar Experiments 895Acknowledgements 896References 896

•1

Chapter 95Participation Game Experiments: Explaining Voter TurnoutJOEP SONNEMANS AND ARTHUR SCHRAM 898References , 901

PART 6.3: BEHAVIOR AND ORGANIZATIONS

Chapter 96Growing Organizational Culture in the LaboratoryCOLIN F. CAMERER AND ROBERTO WEBER 903References j 907

PART 7: INDIVIDUAL CHOICE, BELIEFS AND BEHAVIOR

Individual Choice, Beliefs and Behavior 911Risk: Effect of Stakes and Sex 911Endowment effects 912References 913

xxxviii Contents of Volume 1

Chapter 97Motivation Theory and Experimental Behavior under the Decision Cost Hy-pothesisVERNON L. SMITH AND JAMES M. WALKER 9141. Payoffs and Behavior 914

1.1. Decision Making and Decision Cost Under Uncertainty 915

1.2. Two-person Interactive Model of Decision Cost 917

References 920

Chapter 98Intertemporal Choice under Habit FormationERNST FEHR AND PETER K. ZYCH 9231. Introduction 9232. Experimental Design 9233. Results 9244. Conclusions 927References 928

Chapter 99Preference Reversal: Now You See it, Now You Do Not!PETER BOHM 929Concluding remarks 937References 938

Chapter 100The Endowment Effect: Evidence of Losses Valued More than GainsDANIEL KAHNEMAN, JACK L. KNETSCH AND RICHARD H. THALER 9391. Experimental Verification 9402. Exchanges J 9413. Repeated Trials 9434. Buy, Sell, and Choose 9435. Market Transactions 9466. Summary 946References 947

Chapter'101 , fThe Endowment EffectPRAVEEN KUJAL AND VERNON L. SMITH 9491. The Background 9492. The Experiments 950

2.1. Kahneman-Knetsch-Thaler Choice Experiments 950

2.2. Franciosi et al. Choice Experiments 950

2.3. Kahneman, Knetsch and Thaler (1991) Exchange Experiments 952

Contents of Volume I xxxix

2.4. Mug Exchange Experiments using Uniform Price Double Auction 953

References 955

Chapter 102The Becker-DeGroot-Marschak Mechanism is not Generally Incentive-Compatible in PracticePETER BOHM 9561. Experimental design 9562. Conclusions 957References 957

Chapter 103Utility MaximizationJAMES C. COX 9581. The Utility Hypothesis 9582. A Complete, Disaggregated Data Set 9603. Test Results and Power 9614. Are the Inconsistencies with Utility Maximization Significant? 963Acknowledgement 965References 965

Chapter 104Preference ReversalsJAMES-C. COX 9671. Seminal Experiments 9682. Independence Axiom Treatments 9693. Incentive Treatment 9714. Transitivity Treatments j 9725. Risk Neutrality Treatment /' 9736. Market Treatment 974Acknowledgement 975References 975

Chapter 105Rationality the Fast and Frugal Way: IntroductionGERD GIGERENZ^R AND PETER M. TODD 9761. Heuristics \ 9772. A Fast and Frugal Heuristic 9773. The Adaptive Toolbox 979

3.1. Heuristic Principles for Guiding Search 979

3.2. Heuristic Principles for Stopping Search 980

3.3. Heuristic Principles for Decision Making 980

4. Emergency Room Decisions 981

xl Contents of Volume 1

5. Ecological Rationality 9836. What is to Come 984References 985

Chapter 106The Recognition Heuristic and the Less-Is-More EffectDANIEL G. GOLDSTEIN AND GERD GIGERENZER 9871. Accuracy of the Recognition Heuristic 9882. The Less-is-More Effect 9883. Do People Use the Recognition Heuristic? 9904. Does the Less-is-More Effect Occur in Human Reasoning? 9915. The Underpinnings of the Recognition Heuristic 992References 992

Chapter 107The Recognition Heuristic: A Fast and Frugal Way to Investment Choice?ANDREAS ORTMANN, GERD GIGERENZER, BERNHARD BORGESAND DANIEL G. GOLDSTEIN 9931. Investment Theory and Practice 9932. Recognition-based Investment Decisions 994

2.1. When Choosing a Subset from a Larger Set, Choose Those Objects in the Larger Set

That are Highly Recognized 994

3. Study 1 . 9943.1. Study Design 994

3.2. How Did High Recognition Portfolios Perform Relative to Low Recognition Portfolios? 997

3.3. How Did High Recognition Portfolios Perform Relative to Market Indices? 997

3.4. How Did High Recognition Perform Relative to Managed Funds? 998

3.5. How Did High Recognition Portfolios Perform Relative to Random Stock Picks? 999

3.6. How Did High Recognition Portfolios Perform Relative to Individuals' Investment Choices? 1000

4. From Recognition to Riches? 10005. Study 2 1000

5.1. Study Design .1001

5.2. How Did High Recognition Portfolios Perform Relative to Low Recognition Portfolios? 1001

5.3. How Did High Recognition Portfolios Perform Relative to Various Benchmarks? 1002

5.4. What About Gender Effects? 1002

5.5. From Recognition to Riches? 1002

6." Conclusion ' 1003References 1003

Chapter 108One-Reason Decision MakingGERD GIGERENZER, LAURA MARTIGNON, ULRICH HOFFRAGE,JORG RIESKAMP, JEAN CZERLINSKI AND DANIEL G. GOLDSTEIN 1004

Contents of Volume 1 xii

1. "Take The Best" and Minimalist 10042. Simple Rules for Search 10063. Predicting Homelessness 10084. Fast and Frugal Heuristics Versus Linear Models: A Competition 10085. Fast and Frugal Heuristics Versus Bayesian Methods 10096. Why is Take The Best so Robust? 10107. Ecological Rationality: Which Environmental Structures Can Take The

Best Exploit 10118. Non-compensatory Information 10119. Scarce Information 101210.Abundant Information 101311 .Do People Intuitively Adapt Heuristics to Environmental Structures? 101312.Does the Use of Lexicographic Strategies Depend on Time Pressure? 101413.An Intelligent System Must Ignore Information 1015References 1016

Chapter 109Cognitive Illusions ReconsideredGERD GIGERENZER, RALPH HERTWIG, ULRICH HOFFRAGE ANDPETER SEDLMEIER . 10181. Base Rate Fallacy Reconsidered 10182. The Ecological Argument 10193. Helping John Q. Public 10204. Helping Physicians 10215. Helping AIDS Counselors 10236. Helping Lawyers and Judges 10237. How to Teach Bayesian Reasoning 10248. Overconfidence Bias Reconsidered 10259. Conjunction Fallacy Reconsidered 102710.Availability Reconsidered 103011.Conclusion 1033References 1033

Chapter 110Social HeuristicsPETER M. TODp, JORG RIESKAMP AND GERD GIGERENZER 10351. Social Heuristics for Cooperation 10352. Detecting Cheaters 10373. Cheater Detection Versus Social Contracts 10404. Cheater Detection Versus Logical Reasoning 10415. Searching for Mates 10426. Conclusion 1045References 1045

xlii Contents of Volume 1

Chapter 111Payoff Scale Effects and Risk Preference Under Real and Hypothetical ConditionsSUSAN K. LAURY AND CHARLES A. HOLT 10471. Introduction 10472. Incentive Effects for Choices Involving Gains 10483. Choices in the Loss Domain, and the Reflection Effect 10504. Conclusion 1052References 1053

Chapter 112Rewards and Behavior in First Price AuctionsVERNON L. SMITH AND JAMES M. WALKER 10541. The First Price Auction 10542. The Experimental Environment 10553. Behavior 1056References 1060

Chapter 113Men, Women and Risk Aversion: Experimental EvidenceCATHERINE C. ECKEL AND PHILIP J. GROSSMAN 10611. Abstract Gamble Experiments 10622. Contextual Environment Experiments 10663. Evidence From Field Studies 10694. Discussion'' 1071References 1072

PART 8: METHODS

8. Methods .. 1077

Chapter 114Experimetrics: The Use of Market Experiments to Evaluate the Performanceof Econometric EstimatorsJAMES G. COX AND RONALD L. OAXACA 10781. Designing Experiments to Study the Properties of Estimators 10792. Performance of the Estimators 10803. Explanation of the Posted Offer Results 1083Acknowledgement 1085References " 1086

Chapter 115On the Performance of the Lottery Procedure for Controlling Risk PreferencesJOYCE E. BERG, THOMAS A. RIETZ AND JOHN W. DICKHAUT 1087

Contents of Volume 1 xliii

1. Introduction 10872. Inducing Risk Preferences in Theory 10873. Evidence 1090

3.1. Inducing Risk Neutrality: Evidence from Sealed Bid Auctions 1090

3.2. Inducing Risk Aversion and Risk Seeking: Evidence from Paired Choice Tasks 1092

3.3. Inducing Risk Aversion and Risk Seeking: Evidence from the Becker-DeGroot-

Marshak Procedure 1093

4. Summary 1094Acknowledgements 1096References 1096

Author Index of Volume 1 I-1

Subject Index of Volume 1 1-19