The random lottery incentive system is widely used in experimental economics to motivate subjects. This paper investigates its validity. It reports three experiments which compare responses given to decision tasks which are embedded in random lottery designs with responses in ‘single choice’ designs in which each subject faces just one task for real. The experiments were designed to detect cross-task contamination effects in the random lottery treatment. No significant differences between treatments, and no significant contamination effects, were found. Over the three experiments, observed differences between the treatments are adequately explained as sampling variation.

Experiments are reported that add to the growing literature on the voluntary provision of public goods. Information conditions are manipulated to address whether early findings of above-equilibrium contributions to a public good are a result of complete information regarding the symmetry of the game. No significant information effect was found. Further, by examining designs with an interior Nash equilibrium, this research suggests that the nonzero contributions observed in the previous dominant strategy environments, where the prediction was a zero level of provision of the public good, were not simply transitional errors as the system converged to a boundary equilibrium.

This paper presents and tests a simple model of competitive and unilateral market power regimes that yields countercyclical markups. Following a decrease in demand in the short run, capacity-constrained firms may have a strong incentive not to lower their prices to the new competitive price. Demand shocks may introduce market power into a previously competitive market. Experimental posted offer markets support this conjecture with complete information on the market structure. With only private information, there appears to be a hysteresis effect concerning supracompetitive prices, i.e., markets with a history of supracompetitive pricing continue to generate supracompetitive prices following demand shocks. However, competitive markets also remain competitive following demand shocks when firms only have private information on costs and capacities.

A reciprocal action is an action meant to have a similar influence on another's payoff as another's action has on one's own. One hypothesis asserts that reciprocal action is triggered by the reciprocator's belief that another's action was good or ill intended. The other hypothesis says that the reciprocator is simply acting to implement fixed preferences over payoff allocations. We report on an experiment that allows us to study both positive (reward) and negative (punishment) reciprocal action in a single framework. Knowing the preferences for payoff allocations is sufficient to account for nearly all the reciprocal action we observe in our experiment.

This article investigates the use of standard econometric models for quantal choice to study equilibria of extensive form games. Players make choices based on a quantal-choice model and assume other players do so as well. We define an agent quantal response equilibrium (AQRE), which applies QRE to the agent normal form of an extensive form game and imposes a statistical version of sequential rationality. We also define a parametric specification, called logit-AQRE, in which quantal-choice probabilities are given by logit response functions. AQRE makes predictions that contradict the invariance principle in systematic ways. We show that these predictions match up with some experimental findings by Schotter et al. (1994) about the play of games that differ only with respect to inessential transformations of the extensive form. The logit-AQRE also implies a unique selection from the set of sequential equilibria in generic extensive form games. We examine data from signaling game experiments by Banks et al. (1994) and Brandts and Holt(1993). We find that the logit-AQRE selection applied to these games succeeds in predicting patterns of behavior observed in these experiments, even when our prediction conflicts with more standard equilibrium refinements, such as the intuitive criterion. We also reexamine data from the McKelvey and Palfrey (1992) centipede experiment and find that the AQRE model can account for behavior that had previously been explained in terms of altruistic behavior.

The sealed bid k-double auction is a mechanism used to structure bilateral bargaining under two-sided incomplete information. This mechanism is tested in two experiments in which subjects are asked to bargain repeatedly for 50 rounds with the same partner under conditions of information disparity favoring either the buyer (Condition BA) or seller (Condition SA). Qualitatively, the observed bid and offer functions are in agreement with the Bayesian linear equilibrium solution (LES) constructed by Chatterjee and Samuelson (1983). A trader favored by the information disparity, whether buyer or seller, receives a larger share of the realized gain from trade than the other trader. Comparison with previous results reported by Daniel, Seale, and Rapoport (1998), who used randomly matched rather than fixed pairs, shows that when reputation effects are present this advantage is significantly enhanced. A reinforcement-based learning model captures the major features of the offer and bid functions, accounting for most of the variability in the round-to-round individual decisions.

We use numerical methods to compute Nash equilibrium (NE) bid functions for four agents bidding in a first-price auction. Each bidder i is randomly assigned: ri [0, rmax], where 1 — ri is the Arrow-Pratt measure of constant relative risk aversion. Each ri is independently drawn from the cumulative distribution function Φ(·), a beta distribution on [0, rmax]. For various values of the maximum propensity to seek risk, rmax, the expected value of any bidder's risk characteristic, E(ri), and the probability that any bidder is risk seeking, P (ri > 1), we determine the nonlinear characteristics of the (NE) bid functions.

The Bonn Workshop 1997—Theories of Bounded Rationality, (May 6-10, 1997) was an international meeting of researchers interested in behavioral theories in economics. It was held in honor of Reinhard Selten. One goal of the workshop was to provide a platform for the introduction of new theories improving the understanding for the boundedly rational behavior of economic agents. Another goal was to support the search for links between existing theories of bounded rationality. We restricted the focus to the following topics:

1. (1) Individual Decision Making;

2. (2) Learning and Coordination;

3. (3) Bargaining and Reciprocity;

4. (4) Markets and Economic Institutions.

In order to generate a common basis for discussion, we invited four researchers to give state of the art presentations on each of the four topics. The presentations were general overviews of the corresponding experimental, empirical, and theoretical literature. Each presentation also confronted conflicting approaches and provided an insight into the problems of theory formation. The state of the art contributions were the fulcrum of vigorous discussions and had a major impact on the proceeding of the workshop. We are convinced that these contributions will be of great interest to the broader audience that they can reach through publication.

The Bonn Workshop 1997—Theories of Bounded Rationality, (May 6-10, 1997) was an international meeting of researchers interested in behavioral theories in economics. It was held in honor of Reinhard Selten. One goal of the workshop was to provide a platform for the introduction of new theories improving the understanding for the boundedly rational behavior of economic agents. Another goal was to support the search for links between existing theories of bounded rationality. We restricted the focus to the following topics:

1. (1) Individual Decision Making;

2. (2) Learning and Coordination;

3. (3) Bargaining and Reciprocity;

4. (4) Markets and Economic Institutions.

In order to generate a common basis for discussion, we invited four researchers to give state- of-the-art presentations on each of the four topics. The presentations were general overviews of the corresponding experimental, empirical, and theoretical literature. Each presentation also confronted conflicting approaches and provided an insight into the problems of theory formation. The state of the art contributions were the fulcrum of vigorous discussions and had a major impact on the proceeding of the workshop. We are convinced that these contributions will be of great interest to the broader audience that they can reach through publication.

In the evaluation of experiments often the problem arises of how to compare the predictive success of competing probabilistic theories. The quadratic scoring rule can be used for this purpose. Originally, this rule was proposed as an incentive compatible elicitation method for probabilistic expert judgments. It is shown that up to a positive linear transformation, the quadratic scoring rule is characterized by four desirable properties.

Countless experimental studies have shown that markets converge quickly and efficiently to the competitive outcome under many trading institutions, particularly the double auction mechanism. This creates difficulties for Keynesian stories of unemployment creation—which suggest a noncompetitive outcome in an essentially competitive world. Such stories were popular in the late 1960s and 1970s. One of these stories—the dual decision hypothesis of Clower—was seen then as the beginning of a story of unemployment. This article reports the results of an experiment designed to test this hypothesis. Specifically, we set up an experiment in which there are two sequential double-auction markets, in the first of which one good (labour) is traded, after which the second market (goods) is opened and the second good traded. We compare the outcome of our experiment with that of the competitive theory. One general finding is that not enough trade takes place in the two markets. In other words, the usual finding that competitive equilibrium is achieved in double-auction markets is not replicated in this sequential setting.

The main objectives of this paper are: (i) To give a pithy, opinionated summary of what has been learned about bounded rationality in individual decision making from experiments in economics and psychology (drawing on my 1995 Handbook of Experimental Economics chapter); and (ii) mention some promising new directions for research which would be included if that chapter were written today.

Bargaining and dilemma games have developed in experimental economics as fairly separate literatures. More than a few analysts are now persuaded that the patterns of behavior in these games are closely related, and considerable effort is being put into a search for models that bridge the gap between the two types of games. I focus on a handful of models that, when taken together, outline the conceptual issues, and provide a sense of the progress that has already been made.

Data created in a controlled laboratory setting are a relatively new phenomenon to economists. Traditional data analysis methods using either parametric or nonparametric tests are not necessarily the best option available to economists analyzing laboratory data. In 1935, Fisher proposed the randomization technique as an alternative data analysis method when examining treatment effects. The observed data are used to create a test statistic. Then treatment labels are shuffled across the data and the test statistic is recalculated. The original statistic can be ranked against all possible test statistics that can be generated by these data, and a p-value can be obtained. A Monte Carlo analysis of t-test, the Mann-Whitney U-test, and the exact randomization t-test is conducted. The exact randomization t-test compares favorably to the other two tests both in terms of size and power. Given the limited distributional assumptions necessary for implementation of the exact randomization test, these results suggest that experimental economists should consider using the exact randomization test more often.

This article reports two experiments that compared the standard ultimatum game played by individuals with the same game played by three-person groups. In the group treatment, the members of the allocating group conducted a brief, face-to-face discussion in order to decide, as a group, on a proposed division, whereas the members of recipient group held a discussion on whether to accept or reject the proposal. If the proposal was accepted, each group member received an equal share of his group's payoff (the pie inthe group condition was three times that in the individual condition). In both experiments, groups offered less than individuals. But as indicated by the low rejection rate in both treatments, groups were also willing to accept less.