John Duffy

Working Papers

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"Asset Prices and Bank Runs: Theory and Experimental Evidence" with Diemo Dietrich, Aikaterini Karadimitropoulou and Melanie Parravano, October 2024.

We use a modified Diamond-Dybvig model with an interbank asset market to explore the impact of regional variations in liquidity shocks on asset prices and the stability of the banking system. The model posits banks in two distinct regions, each experiencing offsetting liquidity needs among depositors, thus eliminating aggregate risk. Bankers initially allocate customer deposits between cash and assets. After learning the state of the world, bankers can adjust asset and cash holdings via an interbank asset market to mitigate liquidity or solvency issues. Patient depositors decide whether to run on a bank conditional on asset price realizations and the implications for the liquidity or solvency of their bank. Despite theoretical predictions of no bank runs in the rational expectations equilibrium, our laboratory experiments reveal that bankers frequently over-allocate deposits to cash, thereby inflating asset prices. Also, bank runs remain prevalent in the absence of aggregate risk, highlighting how strategic uncertainty in interbank asset markets can lead to distorted allocation decisions, asset mispricing, and destabilization of the banking sector.

"Bargaining Under Liquidity Constraints: Experimental Evidence" with Lucie Lebeau and Daniela Puzzello, November 2023.

Bargaining is widely used in monetary, labor and finance models to determine terms of trade. The chosen bargaining solution can matter for welfare analysis, for example when agents are liquidity constrained. Here we report on an experiment in which buyers and sellers engage in semi-structured bargaining to determine the terms of trade with the aim of evaluating the empirical relevance of two bargaining solutions, the generalized Nash bargaining solution and Kalai’s proportional bargaining solution. These bargaining solutions predict different outcomes when buyers are constrained in their money holdings. We first use the case when the buyer is not liquidity constrained to estimate the bargaining power parameter, which we find to be equal to 1/2. Then, imposing liquidity constraints on buyers, we find strong evidence in support of the Kalai proportional solution. Our findings have policy implications, e.g., for the welfare cost of inflation in search-theoretic models of money.

"Liquidity Constraints, Income Variance, and Buffer Stock Savings: Experimental Evidence" with Andreas Orland, September 2024.

We provide a direct, experimental test of the buffer stock model of savings behavior. We use a three-period intertemporal model of consumption/savings decisions where liquidity in the second period is constrained (and, thus, borrowing is not possible). We contrast behavior in this constrained version of the model with an unconstrained version where there is no liquidity constraint. A second treatment variable is the variance of the stochastic income process, resulting in a 2×2 experimental design. We test the comparative statics predictions of the model and find strong support for all predictions (e.g., the impact of a higher variance of income on savings behavior and differences between period 1 and period 2 savings) but the predicted effect of the liquidity constraint on first-period savings. In further analyses, we find that we can rationalize this observed departure from model predictions by some combination of debt aversion, heterogeneity in cognitive abilities and/or learning.

"ETF Indexing Strategies and Asset Prices: Experimental Evidence" with Peter Bossaerts, Jean Paul Rabanal, Olga Rud, and Nitin Yadav, October 2024

We examine whether and how the indexing strategy used by ETFs affects prices of constituent assets in experimental markets. We study this issue in both the primary market (ETF creations and redemptions using bots as Authorized Participants) and in the secondary market (trades of existing ETF assets). The experiment includes three different environments: (i) no ETF index assets, (ii) an equal weighted ETF index asset, and (iii) a market cap weighted ETF index asset. We find that ETF products significantly affect the value of the constituent assets, and in particular the value of assets that are in shortest supply. For such assets, we find a much larger bid-ask spread when the ETF index asset is equally weighted than when it is weighted by market capitalization.

Trade, Voting, and ESG Policies: Theory and Evidence with Daniel Friedman, Jean Paul Rabanal and Olga Rud, October 2024

Environment, social and governance (ESG) policies have become important to many investors. We model the interaction between ESG policy proposals and shareholder trading and voting under different sets of preferences, and we test the predictions of our model in a laboratory experiment. In a first stage, shares are traded with knowledge of the policy costs and benefits. In a second stage, shareholders vote for or against the policy, which yields a positive externality if adopted. In one environment, voter preferences are highly polarized regarding the policy while in a second environment voter preferences are more dispersed, following a uniform distribution. Our experiment reveals that low policy costs generally favor adoption of the policy in both environments, even when rejection is an equilibrium outcome. For intermediate costs, the adoption rate is lower under dispersed preferences than under polarized preferences. In the experiment, share prices are usually well above the equilibrium prediction when the policy is adopted, apparently due to a voting premium. This suggests that the cost to shareholders of adopting ESG policies may be less than anticipated.

Facing the Grim Truth: Repeated Prisoner's Dilemma Against Robot Opponents with Ed Hopkins and Tatiana Kornienko, August 2024.

Cooperation in repeated interactions is important for much socio-economic activity. In this paper we put subjects in the simplest dynamic setting that can rationalize cooperative behavior while eliminating confounding factors such as multiple equilibria, strategic uncertainty, and other regarding concerns - we have them play against a computer that plays the Grim strategy and this is known to subjects. We find that, over all supergames, only 1-2% of subjects behave perfectly consistently with rational choice predictions, and only 3-5% behave consistently with the theory at least 95% of the time, both in the standard subject pool and in a more representative online subject pool. We document that while the majority of subjects make dominated choices resulting in money left on the table, a substantial minority are able to earn payoffs in excess of rational choice predictions by "end-timing", or gambling on the end to a supergame.

"On the Origin of Polarization" with Seung Han Yoo, March 2024.

We provide a model of group sorting or polarization based on group identity alone. In our model, agents differ from one another in terms of an observable binary group identity. Groups may also differ in terms of the distribution of abilities (types) but the true distribution is uncertain, so agents have to form beliefs about that distribution in making both investment and location decisions. Each agent's ability is private information, whereas group identity is publicly observable. Agents have no preferences or special facilities for interacting with members of their own group. In this environment, we show that, in equilibrium, agents endogenously sort themselves according to their group identity to two different locations under rational belief updating, and we identify conditions under which the society becomes completely polarized with members of each group rationally choosing to congregate in distinct locations.

"Paying to Avoid the Spotlight" with Te Bao and Nobuyuki Hanaki, September 2024.

In the digital age, privacy in economic activities is increasingly threatened. In considering policies to address this threat, it is useful to consider what value, if any, people attach to privacy in their economic activities. This valuation may be influenced by a mixture of concerns including the desire for personal autonomy, concerns about the exposure of confidential information, and the risk of reputational damage due to dishonest or stigmatized behavior. Our focus is primarily on reputational concerns as we assess individuals' willingness to pay (WTP) to avoid scrutiny of their potentially dishonest behavior in a simple coin flipping task. We gather and analyze data from Japan, China, and the U.S.A. to determine if there are notable differences across these nations in WTP. Our findings reveal that people's WTP to "avoid the spotlight" is positive and economically sizable across all three countries and is the largest in Japan.

"(Re-) Inventing the Traffic Light: Designing Recommendation Devices for Play of Strategic Games" with Mikhail Anufriev, Valentyn Panchenko and Benjamin Young, August 2024.

We present the results of a novel experiment investigating individuals' ability to design incentive-compatible recommendation devices for five canonical 2x2 games played by rational robot players. Human designers were incentivized to achieve Pareto efficiency and fairness. Most subjects succeeded in Matching Pennies and Battle of the Sexes. However, only a minority did so in the two Chicken games, though many did design an incentive-compatible device. In the Prisoner's Dilemma, the vast majority failed to design such a device, not recognizing the conflict between strategic incentives and social efficiency. The study's task requires a holistic approach to equilibrium reasoning, and our findings suggest it is most challenging when strategic incentives are not aligned with cooperative outcomes.

"(De)-Anchoring Beliefs in Beauty Contest Games" with Jess Benhabib and Rosemarie Nagel, November 2019.

The beauty contest game (BCG) serves as a core framework for demonstrating behavioral non-equilibrium patterns such as focal points and level-k reasoning. We introduce a new version of the BCG that removes the bounded choice interval and thus eliminates iterative elimination of dominated strategies. We further add correlated idiosyncratic signals that can serve as (equilibrium) coordination devices. We find that choices in these new versions of the BCG are closer to equilibrium as compared with the standard BCG. Indeed, we show how variations in the design of BCGs can greatly affect the use of focal points and level-k reasoning.

Publications

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"Do Tax Deferred Accounts Improve Lifecycle Savings? Experimental Evidence" with Yue Li, forthcoming in Review of Economics and Statistics.

In an individual decision-making experiment, we investigate the impact of Tax Deferred Accounts (TDAs). We design six treatments to study various channels through which TDAs may affect decisions. Across both student and Mturk samples, we consistently find that TDAs significantly increase retirement wealth compared to environments with only one non-tax advantaged, liquid saving account. This increase is primarily explained by the requirement of making retirement saving decisions precede consumption decisions. Educating participants by providing a tax calculator has minimal effects. Our results highlight the effectiveness of TDAs in enhancing retirement preparedness and the significance of the order of consumption/saving decisions.

"Least Squares Learning? Evidence from the Laboratory" with Te Bao and Yun Dai, forthcoming in Journal of Economic Dynamics and Control.

We report on an experiment testing the empirical relevance of least squares (LS) learning, a common way of modelling how individuals learn a rational expectations equilibrium (REE). Subjects are endowed with the correct perceived law of motion (PLM) for a price level variable they are seeking to forecast, but do not know the true parameterization of that PLM. Instead, they must choose and can adjust the parameters of this PLM over 50 periods. Consistent with the E-stability of the REE in the model studied, 97.8% of subjects achieve weak convergence to the REE in terms of their price level predictions. However, the number of participants that can be characterized as least squares learners via the adjustments they make to the parameterization of the PLM over time depends on properties of the data generating process of the dependent and independent variables. Participants learn the REE faster, and behave more like least squares learners when there is greater variance in the independent variable of the model. We consider several alternatives to least squares learning and find evidence that many subjects employ a simple satisficing approach.

"Heterogeneous Experience and Constant-Gain Learning" with Michael Shin, Journal of Economic Dynamics and Control, 164 (2024), 104881.

Recent evidence suggests that agents may base their forecasts for macroeconomic variables mainly on their personal life experiences. We connect this behavior to the concept of constant-gain learning (CGL) in macroeconomics. Our approach incorporates both heterogeneity in the life cycle via the perpetual youth model and learning from experience (LfE) into a linear expectations model where agents are born and die with some probability every period. For LfE, agents employ a decreasing-gain learning (DGL) model using data only from their own lifetimes. While agents are using DGL individually, we show that in the aggregate, expectations follow an approach related to CGL, where the gain is now tied to the probabilities of birth and death. We provide a precise characterization of the relationship between CGL and our model of perpetual youth learning (PYL) and show that PYL can well approximate CGL while pinning down the gain parameter with demographic data. Calibrating the model to U.S. demographics leads to gain parameters similar to those found in the literature. Further, variation in birth and death rates across countries and time periods can help explain the empirical time-variation in gains.

"Regulation and the Demand for Credit Default Swaps in Experimental Bond Markets" with Matthias Weber and Arthur Schram, European Economic Review, 165 (2024), 104745.

Credit default swaps (CDS) played an important role in the financial crisis of 2008 leading to calls for regulation. Here, we seek to understand the impact of CDS regulation using a controlled laboratory experiment analyzing CDS pricing in a bond market subject to default risk. Our results show that the regulation achieves the goal of increasing the use of CDS for hedging purposes while reducing the use of CDS for speculation. This success does not come at the expense of lower initial public offering (IPO) prices for the bonds or worse pricing of bonds or CDS in the secondary market.

"Information Ambiguity, Market Institutions and Asset Prices: Experimental Evidence" with Te Bao and Jiahua Zhu, forthcoming in Management Science.

We explore how information ambiguity and traders’ attitudes toward such ambiguity affect expectations and asset prices under three different market institutions. Specifically, we test the prediction of Epstein and Schneider (2008) that information ambiguity will lead market prices to overreact to bad news and to underreact to good news. We find that such an asymmetric reaction exists and is strongest in individual prediction markets. It occurs to a lesser extent in single price call markets. It is weakest of all in double auction markets, where buyers’ asymmetric reaction to good/bad news is cancelled out by the opposite asymmetric reaction of sellers.

The impact of ETF index inclusion on stock prices with Daniel Friedman, Jean Paul Rabanal and Olga Rud, forthcoming in Management Science.

A growing body of evidence suggests that assets included in market indexes trade at a premium relative to excluded assets. Here we look for evidence of such an index inclusion premium in a carefully controlled laboratory experiment. Our environment involves three assets and an Exchange Traded Fund (ETF) index asset. We model Authorized Participants (APs) as bots that create and redeem ETF shares by scanning the order books of the underlying assets. In one treatment, all three assets are included in the ETF index asset. In a second treatment, one of the three assets is excluded from the ETF index and is replaced by a second unit of one of the included assets; the included and excluded assets have identical fundamental values enabling a clean test of whether there exists an index inclusion premium. In a further variant of the excluded asset treatment, short-selling is allowed. We find that inclusion of an asset in the ETF index results in a substantial price premium. This is due to investors' strong demand for the ETF asset and use of a buy-and-hold strategy that reduces the tradeable supply of the assets that underlie the ETF asset and increases their price. Short-selling helps to alleviate the supply problem, but given the strong demand for the ETF asset, the inclusion premium persists.

"Pricing Indefinitely Lived Assets: Experimental Evidence" with Janet Hua Jiang and Huan Xie, forthcoming in Management Science.

We study indefinitely lived assets in experimental markets and find that the traded prices of these assets are on average about 40% of the risk neutral fundamental value. Neither uncertainty about the value of total dividend payments nor horizon uncertainty about the duration of trade can account for this low traded price. An Epstein and Zin (1989) recursive preference specification that models the dynamic realization of dividend payments, combined with either probability weighting or subjects' heterogeneous risk attitudes, can rationalize the low traded prices observed in our indefinitely lived asset market.

"Search, Unemployment, and the Beveridge Curve: Experimental Evidence" with Brian C. Jenkins, Labour Economics 87 (2024), 102518.

We report on a laboratory experiment testing the predictions of the Diamond-Mortensen-Pissarides (DMP) search-and-matching model, which is a workhorse, decentralized model of unemployment and the labor market. We focus on the job vacancy posting problem that firms face in the DMP model. We explore the model's comparative statics predictions concerning variations in the separation rate, the vacancy posting cost, and the firm's surplus earned per employee. Across all treatments, we find strong evidence for an inverse relationship between vacancies and unemployment, consistent with the Beveridge curve. We also find that the results of our various comparative statics exercises are in-line with the predictions of the theory.

"Public Good Bargaining under Mandatory and Discretionary Rules: Experimental Evidence" with SunTak Kim, Experimental Economics 27 (2024), 175-214.

We report on an experiment comparing two institutions governing bargaining over public good allocations. In our setting, two parties bargain over how to allocate a fixed endowment between a public good and two private accounts, one for each party. Parties attach either high or low weight to the public good and the difference in these weights reflects the degree of polarization. Under discretionary bargaining rules, the status quo default allocation to the group account (in the event of disagreement) is zero while under the mandatory bargaining rule it is equal to the level last agreed upon. The mandatory rule thus creates a dynamic relationship between current decisions and future payoffs, and our experiment tests the theoretical prediction that the efficient level of public good is provided under the mandatory rule while the level of public good funding is at a sub-optimal level under the discretionary rule. Consistent with the theory we find that proposers (particularly high types) propose significantly greater allocations to the public good under mandatory rules than under discretionary rules and this result is strengthened with an increase in polarization. Still, public good allocations under mandatory rules fall short of steady state predictions, primarily due to fairness concerns that prevent proposers from exercising full proposer power.

"Individual Evolutionary Learning in Repeated Beauty Contest Games" with Mikhail Anufriev and Valentyn Panchenko, Journal of Economic Behavior and Organization 218 (2024), 550-567.

The Individual Evolutionary Learning (IEL) algorithm was proposed as a portable learning model for games with large strategy spaces. In principle, IEL benchmark simulations could substitute or supplement expensive experiments with human subjects. We evaluate the ability of the IEL model to replicate experimental findings observed in repeated Keynesian Beauty Contest (KBC) games, which have a large strategy space. The IEL specification with standard parameter values is able to capture major dynamical features and differences between treatments in both one-dimensional (Nagel 1995; Duffy and Nagel 1997) and two-dimensional (Anufriev et al. 2022) versions of KBC games. We compare IEL with some other simple learning models and find that it performs relatively better across multiple treatments. We also use IEL to predict behavior in repeated KBC games that have not yet been conducted experimentally.

"Market Reactions to Stock Splits: Experimental Evidence" with Jean Paul Rabanal and Olga Rud, Journal of Economic Behavior and Organization 214 (2023), 325-345.

Stock splits and reverse splits often result in short-term abnormal returns even though such split events do not change any fundamental factors affecting the valuation of the firm. In this paper we report on an experiment designed to better understand market reactions to stock splits and reverse splits. In one treatment, two assets have increasing fundamental values, and one asset is subject to a 2-for-1 share split while the other asset is not. In a second treatment, the fundamental values of both assets are decreasing, and one asset is subject to a 1-for-2 reverse split while the other asset is not. We find that in both cases, share prices do not fully adjust to changes in fundamental values per share following a split announcement. We provide evidence that the less than complete adjustment of share prices to splits or reverse splits can be attributed to heterogeneity in the cognitive abilities of traders.

"Adoption of a New Payment Method: Experimental Evidence" with Jasmina Arifovic and Janet Hua Jiang, European Economic Review, 154, (2023), 104410. Online Appendix.

We develop a framework for studying the introduction of a new payment method in a controlled laboratory environment, where consumers (buyers) and merchants (sellers) can learn to coordinate their adoption decisions over time. The underlying game exhibits network adoption effects as emphasized by the theoretical literature. We elicit players’ beliefs about the adoption decisions of the other side of the market so that we can directly test for network effects. We investigate how the additional fixed cost of adopting the new payment method, relative to its savings on per transaction costs, affects merchant’s decisions to adopt the new payment method and how that in turn affects buyer’s adoption decisions. We find that a low fixed cost favors quick adoption of the new payment method by all participants, while for a sufficiently high fixed cost, merchants gradually learn to reject the new payment method. We also find strong evidence of network effects and that the fixed costs are important for the strong response of seller acceptance decisions to buyer adoption decisions. An evolutionary learning model provides a good characterization of the dynamic adjustment paths found in our experimental data.

"Contests with Entry Fees: Theory and Evidence" with Alexander Matros, and Zehra Valencia, Review of Economic Design, 27 (2023), 725-761.

We provide some theory and experimental evidence on contests with entry fees. In our setup, players must simultaneously decide whether or not to pay a fee to enter a contest and on the amount they wish to bid should they choose to enter the contest. In a general n-bidder game, we show that the addition of contest entry fees increases the contest designer's expected revenue and that there is a unique revenue maximizing entry fee. In an experimental test of this theory we vary both the entry fee and the number of bidders. We find over-bidding for all entry fees and bidder group sizes, n. We also find under-participation in the contest for low entry fees and over-participation for higher entry fees. Overall, the revenue maximizing entry fee for the contest designer is found to be greater than the theoretically optimal entry fee. We offer some possible explanations for these departures from theoretical predictions.

"Market Experiments with Multiple Assets: A Survey" with Jean Paul Rabanal and Olga Rud, in S. Fullbrunn and E. Haruvy, eds., Handbook of Experimental Finance, Edward Elgar, 2022, pp. 213-224.

In this chapter, we review the small but growing experimental literature on trade in multiple assets as well as trade in more complex financial instruments, such as derivatives and indices, the value of which is derived from underlying assets.

"Learning in Two-Dimensional Beauty Contest Games: Theory and Experimental Evidence*" with Mikhail Anufriev and Valentyn Panchenko, Journal of Economic Theory, 201 (2022) 105417. Supplementary online appendix.

We extend the beauty contest game to two dimensions: each player chooses two numbers to be as close as possible to certain target values, which are linear functions of the averages of the two number choices. One of the targets depends on the averages of both numbers, making the choices interrelated. We report on an experiment where we vary the eigenvalues of the associated two-dimensional linear system and find that subjects can learn the Pareto-optimal Nash Equilibrium of the system if both eigenvalues are stable and cannot learn it if both eigenvalues are unstable. Interestingly, subjects can also learn it if the system has the saddlepath property -- with one stable and one unstable eigenvalue –- but only if the one unstable eigenvalue is negative. We show theoretically that our results cannot be explained by homogeneous level-k models where all agents apply the same level k depth of reasoning to their choices, including the naïve learning model. However, our results can be explained by a mixed cognitive-levels model, including the adaptive learning model. We also run a horserace between many models used in the literature with the winner being a simple mixed model with levels 0, 1, and equilibrium reasoning.

The Friedman Rule: Experimental Evidence with Daniela Puzzello, International Economic Review 63 (2022), 671-698.

We explore the celebrated Friedman rule for optimal monetary policy in the context of a laboratory economy based on the Lagos-Wright model. The rule that Friedman proposed can be shown to be optimal in a wide variety of different monetary models, including the Lagos-Wright model. However, we are not aware of any prior empirical evidence evaluating the welfare consequences of the Friedman rule. We explore two implementations of the Friedman rule in the laboratory. The first is based on a deflationary monetary policy where the money supply contracts to offset time discounting. The second implementation pays interest on money removing the private marginal cost from holding money. We explore the welfare consequences of these two theoretically equivalent implementations of the Friedman Rule and compare results with two other policy regimes, a constant money supply regime and another regime advocated by Friedman, where the supply of money grows at a constant k-percent rate. We find that, counter to theory, the Friedman rule is not welfare improving, performing no better than a constant money regime. By one welfare measure, we find that the k-percent money growth rate regime performs best.

"Why Macroeconomics Needs Experimental Evidence," Japanese Economic Review 73 (2022), 5-29.

This paper discusses how macroeconomics can and already has begun to make use of controlled experimental methods to address the assumptions and predictions of macroeconomic models as well as to evaluate the impacts of macroeconomic policy interventions. Specifc issues addressed include rational expectations and alternatives, intertemporal optimization with an application to household consumption and savings decisions and the efficacy of various monetary policies.

"All-Pay Auctions Versus Lotteries as Provisional Fixed-Prize Fundraising Mechanisms: Theory and Evidence" with Alexander Matros, Journal of Economic Behavior and Organization 192 (2021), 434-464.

We compare two fixed-prize mechanisms for funding public goods, an all-pay auction and a lottery, where public good provision can only occur if the participants’ contributions equal or exceed the fixed-prize value. We show that the provisional nature of the fixed- prize means that efficiency and endowment conditions must both be satisfied to assure positive public good provision. Our main finding is that provisional fixed-prize lotteries can outperform provisional fixed-prize all-pay auctions in terms of public good provision when endowments are large relative to prize values. We test these predictions in a labora- tory experiment where we vary the number of participants, the marginal per capita return (mpcr) on the public good, and the mechanism for awarding the prize, either a lottery or an all-pay auction. Consistent with the theory, we find that the mpcr matters for contribution amounts under the lottery mechanism. However, inconsistent with the theory, bids are significantly higher than predicted and there is no significant difference in the level of public good provision under either provisional, fixed-prize mechanism. We consider sev- eral different modifications to our framework that might help to explain these departures from theoretical predictions.

"The Impact of ETFs in Secondary Asset Markets: Experimental Evidence" with Jean Paul Rabanal and Olga Rud, Journal of Economic Behavior and Organization 188 (2021), 674-696.

We examine how exchange traded funds (ETFs) affect asset pricing, and trade volume in a laboratory asset market. We focus on behavior in secondary markets with or without ETF assets and whether there is zero or negative correlation in asset dividends. In the latter case, the diversification benefits of ETFs are most salient. We find that when the dividends are negatively correlated, ETFs reduce mispricing without decreasing trading volume. When dividends are uncorrelated, the ETF has no impact on these same measures. Thus, our findings suggest that ETFs do not harm, and may in fact improve, price discovery and liquidity in asset markets.

"Social Conformity Under Evolving Private Preferences" with Jonathan Lafky, Games and Economic Behavior 128 (2021), 104-124.

We propose a model of how social norms change in response to the evolution of privately held preferences. Our aim is to rationalize the tendency for individuals who hold minority preferences to take actions favored by the majority. We do this using a game involving a tension between a desire to act according to one's underlying preferences and a desire to conform to the majority opinion. In an experimental setting, we find that even after a majority of the population shares what was previously an unpopular minority opinion, members of the new majority are slow to change their behavior. The timing and speed with which behavior transitions to match new, majority-held opinions depends on the size of the reward for conformity. When the rewards for conformity are low, the transition is gradual, with considerable periods of costly public disagreement. When the rewards for conformity are high, transitions are slow to start but conclude rapidly once they begin.

"Conducting Large, Repeated, Multi-game Economic Experiments Using Mobile Platforms" with Zhi Li, Po-Hsuan Lin, Si-Yuan Kong and Dongwu Wang, PLOS ONE 16(4) (2021), e0250668.

We demonstrate the possibility of conducting synchronous, repeated, multi-game economic decision-making experiments with hundreds of subjects in-person or remotely with live streaming using entirely mobile platforms. Our experiment provides important proof-of-concept that such experiments are not only possible, but yield recognizable results as well as new insights, blurring the line between laboratory and field experiments. Specifically, our findings from 8 different experimental economics games and tasks replicate existing results from traditional laboratory experiments despite the fact that subjects play those games/task in a specific order and regardless of whether the experiment was conducted in person or remotely. We further leverage our large subject population to study the effect of large (N=100) versus small (N=10) group sizes on behavior in three of the scalable games that we study. While our results are largely consistent with existing findings for small groups, increases in group size are shown to matter for the robustness of those findings.

"Lone Wolf or Herd Animal? Information Choice and Learning from Others" with Ed Hopkins and Tatiana Kornienko, European Economic Review 134 (2021), 103690.

We report on an experiment that distinguishes between rational social learning and behavioral information source bias. Subjects are asked to correctly guess the current binary state of the world. Differently from other social learning studies, subjects must choose between receiving a private, noisy signal about the current state or observing the past guesses of other subjects in the prior period. Our design varies the persistence of the state across time, which affects whether private or social information is optimal. Thus our design enables us to separate subjects who choose information optimally from those who excessively use either social information (``herd animals'') or private information (``lone wolves''). We find sizable proportions of both behavioral types.

"Signal Extraction: Experimental Evidence" with Te Bao, Theory and Decision 90 (2021), 219-232.

We report on an experiment examining whether individuals can solve a simple signal extraction problem of the type found in models with imperfect information. In one treatment, subjects must form point predictions based on observing both public and private signals, while in another they receive the same information but must decide on the weight to attach to each signal, which then determines their point prediction. We find that, at the aggregate level, signal extraction provides a good characterization of subjects' behavior in both treatments, but at the individual level, there is considerable heterogeneity in subjects' ability to perform signal extraction.

"Central Bank Reputation, Cheap Talk and Transparency as Substitutes for Commitment: Experimental Evidence" with Frank Heinemann, Journal of Monetary Economics 117 (2021), 887-903.

We implement a repeated version of the Barro-Gordon monetary policy game in the laboratory and ask whether reputation serves as a substitute for commitment, enabling the central bank to achieve the efficient Ramsey equilibrium and avoid the inefficient, time-inconsistent one-shot Nash equilibrium. We find that reputation is a poor substitute for commitment. We then explore whether central bank cheap talk, policy transparency, both cheap talk and policy transparency or economic transparency or committees of central bankers yield improvements in the direction of the Ramsey equilibrium under the discretionary policy regime. Our findings suggest that these mechanisms have only small or transitory effects on welfare. Surprisingly, the real effects of supply shocks are better mitigated by a commitment regime than by any discretionary policy. Thus, we find that there is no trade-off between flexibility and credibility.

"A Double-Slit Experiment with Human Subjects" with Ted Loch-Temzelides, PLOS ONE 16(2) (2021), e0246526.

We study a sequence of “double-slit” experiments designed to perform repeated measurements of an attribute in a large pool of subjects using Amazon’s Mechanical Turk. Our findings contrast the prescriptions of decision theory in novel and interesting ways. The response to an identical sequel measurement of the same attribute can be at significant variance with the initial measurement. Furthermore, the response to the sequel measurement depends on whether the initial measurement has taken place. In the absence of the initial measurement, the sequel measurement reveals additional variability, leading to a multimodal frequency distribution which is largely absent if the first measurement has taken place.

"Innovate versus Imitate: Theory and Experimental Evidence" with Jason Ralston, Journal of Economic Behavior and Organization 177 (2020), 727-751.

We model and experimentally evaluate the trade-off between innovation and imitation commonly faced by firms and individuals. Innovation involves searching for a high payoff opportunity, but paying a cost to do so. Imitation involves avoiding the search cost and copying the most successful payoff opportunity uncovered thus far. We formulate a novel model of sequential innovation versus imitation decisions made by a group of n regret minimizing agents. We analyze the consequences of complete versus incomplete information about the distribution of payoffs from innovation on agent's decisions. We then study these predictions in a laboratory experiment where we find evidence in support of our theoretical predictions.

"Information Choice in a Social Learning Experiment" with Ed Hopkins, Tatiana Kornienko, and Mingye Ma, Games and Economic Behavior 118 (2019), 295-315.

We document heterogeneity of rationality and bias in information acquisition in a social learning experiment, where subjects, prior to guessing an unknown binary state of the world, must choose between receiving a private signal or seeing social information containing the guesses made by previous subjects in the sequence, rather than observing both pieces of information as in the classic design of Anderson and Holt (1997). By requiring subjects to make this information choice at different points in the sequence, our within-subject design allows us to separate biased from optimal information choices. Overall, the majority of subjects exhibit a suboptimal bias in favor of choosing social rather than private information, consistent with underestimating both mistakes made by other subjects and the frequency of uninformative social information. Furthermore, a substantial minority behave according to a refined equilibrium prediction, while some subjects consistently choose social information and others consistently choose private information.

"Financial Contagion in the Laboratory: Does Network Structure Matter?" with Aikaterini Karadimitropoulou and Melanie Parravano, Journal of Money, Credit, and Banking 51 (2019), 1097-1136.

We design and report on the first laboratory experiment exploring the role of interbank network structure and premature liquidation costs for the likelihood of a financial contagion. The laboratory provides the control necessary to understand the role played by interbank network configurations and liquidation costs for the fragility of the financial system. Specifically, we study the likelihood of financial contagion in complete and incomplete networks of banks that are linked in terms of interbank deposits as in the model of Allen and Gale (2000) and we further vary the cost of premature liquidation. Subjects play the role of depositors who must decide whether or not to withdraw their funds from their interconnected banks. We find that when liquidation costs are high, a complete network structure enabling efficient risk sharing is significantly less vulnerable to financial contagions than an incomplete network structure. However, when liquidation costs are low, network structure does not matter as much for the frequency of financial contagions. We conclude that low liquation costs or a more complete network structure can be viewed as substitutes for reducing the frequency of financial contagions.

"Lifecycle Consumption Under Different Income Profiles: Evidence and Theory" with Yue Li, Journal of Economic Dynamics and Control 104 (2019), 74-94.

We report on a series of economic decision-making experiments exploring how individuals make lifecycle consumption and saving plans when they face different income profiles, representing different pension replacement rates. We aim to assess whether variations in pension replacement rates might aid or hinder individuals' ability to make good lifecycle consumption and saving plans. We find that pension replacement rates matter for subjects' experimental payoffs and consumption behavior. In particular, our treatment with a 100% pension replacement rate yields the highest experimental payoff, and more subjects in this treatment choose the status quo strategy of consuming endowments in every period. We show that a model of rational inattention is useful for explaining subjects' responses to different pension replacement rates.

"Learning Correlated Equilibrium: An Evolutionary Approach" with Jasmina Arifovic and Joshua F. Boitnott, Journal of Economic Behavior and Organization 157 (2019), 171-190.

Correlated equilibrium (Aumann 1974, 1987) is an important generalization of the Nash equilibrium concept for multiplayer non-cooperative games. In a correlated equilibrium, players rationally condition their strategies on realizations of a common external randomization device and, as a consequence, can achieve payoffs that Pareto dominate any of the game's Nash equilibria. In this paper we explore whether such correlated equilibria can be learned over time using an evolutionary learning model where agents do not start with any knowledge of the distribution of random draws made by the external randomization device. Furthermore, we validate our learning algorithm findings by comparing the end behavior of simulations of our algorithm with both the correlated equilibrium of the game and the behavior of human subjects that play that same game. Our results suggest that the evolutionary learning model is capable of learning the correlated equilibria of these games in a manner that approximates well the learning behavior of human subjects and that our findings are robust to changes in the specification and parameterization of the model.

"A Classroom Experiment in Monetary Policy" with Brian Jenkins, Journal of Economic Education 50 (2019), 89-107.

We propose a classroom experiment implementing a simple version of a New Keynesian model suitable for courses in intermediate macroeconomics and money and banking. Students play as either the central bank or members of the private sector. The central banker sets interest rates to meet either twin objectives for inflation and the output gap or to meet only an inflation target. In both settings, private sector agents are concerned with correctly forecasting the inflation rate. We show that an experiment implementing this setup is feasible and yields results that enhance understanding of the New Keynesian model of monetary policy. We propose alternative versions where the central bank is replaced by a policy rule and we provide suggestions for discussing the experimental results with students.

"An Experimental Test of the Lucas Asset Pricing Model" with Sean Crockett and Yehuda Izhakian, Review of Economic Studies 86 (2019), 627–667.

We implement a dynamic asset pricing experiment in the spirit of Lucas (1978) with storable assets and non-storable cash. In the first treatment, we impose diminishing marginal returns to cash to incentivize consumption smoothing across periods. We find that subjects use the asset to smooth consumption, although the asset trades at a discount relative to the risk-neutral fundamental price. This under-pricing is a departure from the asset price "bubbles" observed in the large experimental asset pricing literature originating with Smith et al. (1988) and can be rationalized by considering subjects' risk aversion with respect to uncertain money earnings. In a second treatment, with no induced motivation for trade à la the Smith et al. design, we find that the asset trades at a premium relative to its expected value and that shareholdings are highly concentrated. Elimination of asset price uncertainty in additional experimental treatments serves to reinforce the same observations, and suggests that speculative behavior explains the departure of prices from fundamental value in the absence of a consumption-smoothing motive for asset trades.

"An Experimental Study of Bond Market Pricing" with Matthias Weber and Arthur Schram, Journal of Finance 73 (2018), 1857-1892.

An important feature of bond markets is the relationship between the IPO price and the probability that the issuer defaults. On the one hand, the default probability affects the IPO price. On the other hand, IPO prices affect the default probability. It is a priori unclear whether agents can competitively price such assets and our paper is the first to explore this question. We do so using laboratory experiments. We develop two flexible bond market models that are easily implemented in the laboratory. We find that subjects learn to price the bonds well after only a few repetitions.

"Equilibrium Selection in Similar Repeated Games: Experimental Evidence on the Role of Precedents" with Dietmar Fehr, Experimental Economics 21 (2018), 573–600.

We report on an experiment examining behavior and equilibrium selection in two similar, infinitely repeated games, Stag Hunt and Prisoner's Dilemma under anonymous random matching. We are interested in the role that historical precedents may play for equilibrium selection between these two repeated games. We find that a precedent for efficient play in the repeated Stag Hunt game does not carry over to the repeated Prisoner's Dilemma game despite the possibility that efficient play can be sustained as an equilibrium of the indefinitely repeated game. Similarly, a precedent for inefficient play in the repeated Prisoner's Dilemma game does not extend to the repeated Stag Hunt game. We conclude that equilibrium selection between similar repeated games may have less to do with historical precedents and might instead depend more on strategic considerations associated with the different payoffs of these similar repeated games.

"Heterogeneous Agent Modeling: Experimental Evidence" with Jasmina Arifovic, in: C. Hommes and B. LeBaron (Eds.), Handbook of Computational Economics Volume 4, Amsterdam: North-Holland, 2018, pp. 491-540.

We report on experimental evidence rationalizing the use of heterogeneous agent models. We provide compelling evidence that subjects in laboratory experiments often behave in ways that depart from the rational choice ideal. Further, these subjects' heuristic approaches often differ from one another in distinct, classifiable ways. It follows that models of heterogeneous, boundedly rational agents can often deliver predictions that are a better fit to the experimental data at both the micro and the macro levels of analysis than can rational-choice, single-actor models. Our focus in this chapter is on experimental studies developed to address questions in macroeconomics and finance.

"Coordination via Correlation: An Experimental Study" with Ernest K. Lai and Wooyoung Lim, Economic Theory 64 (2017), 265-304.

We report on an experiment exploring whether and how subjects may learn to use a correlation device to coordinate on a correlated equilibrium of the Battle of the Sexes game which Pareto dominates the mixed-strategy Nash equilibrium of that game. We consider a direct correlation device with messages phrased in terms of players' actions as well as an indirect device with a priori meaningless messages. According to the revelation principle, it does not matter whether the correlation device is direct or indirect so long as it implements a correlated equilibrium. However, we find that subjects had an easier time coordinating on the efficient correlated equilibrium with a direct rather than an indirect device. Nevertheless, subjects were able to learn to use the indirect device to better coordinate their play. We further find that, when paired with a fixed partner, subjects utilized history-contingent strategies (e.g., "alternation") as a coordinating device and were more likely to ignore the correlation device in this setting; the fixed-matching protocol can thus serve as a substitute for a correlation device in achieving an efficient coordination outcome.

"Stochastic Asymmetric Blotto Games: An Experimental Study" with Alexander Matros, Journal of Economic Behavior and Organization 139 (2017), 88-105.

We consider a model where two players compete for n items having different common values in a Blotto game. Players must decide how to allocate their common budgets across all n items. The winner of each item is determined stochastically using a lottery mechanism which yields a unique equilibrium in pure strategies. We analyze behavior under two competing payoff objectives found in the Blotto games literature that have not been previously compared: (i) players aim to maximize their total expected payoff and (ii) players maximize the probability of winning a majority value of all n items. We report results from an experiment where subjects face both payoff objectives and we find support for the differing theoretical predictions.

"Voting with Endogenous Information Acquisition: Experimental Evidence," with Sourav Bhattacharya and SunTak Kim, Games and Economic Behavior 102 (2017), 316-338.

The Condorcet jury model with costless but informative signals about the true state of the world predicts that the efficiency of group decision-making increases unambiguously with the group size. However, if signal acquisition is made an endogenous and costly decision, then rational voters have disincentives to purchase information as the group size becomes larger. We investigate the extent to which human subjects recognize this trade-off between better information aggregation and greater incentives to free-ride in a laboratory experiment where we vary the group size, the cost of information acquisition and the precision of signals. We find that the theory predicts well in the case of precise signals. However, when signals are imprecise, free-riding incentives appear to be much weaker as there is a pronounced tendency for subjects to over-acquire information relative to equilibrium predictions. We rationalize the latter finding using a quantal response equilibrium that allows for risk aversion

"Macroeconomics: A Survey of Laboratory Research," in: J.H. Kagel and A.E. Roth (Eds.), Handbook of Experimental Economics Volume 2, Princeton: Princeton University Press, 2016, pp. 1-90.

This chapter surveys laboratory experiments addressing macroeconomic phenomena. The first part focuses on experimental tests of the microfoundations of macroeconomic models discussing laboratory studies of intertemporal consumption/savings decisions, time (in)consistency of preferences and rational expectations. Part two explores coordination problems of interest to macroeconomists and mechanisms for resolving these problems. Part three looks at experiments in specific macroeconomic sectors including monetary economics, labor economics, international economics as well-as large scale, multi-sector models that combine several sectors simultaneously. The final section addresses experimental tests of macroeconomic policy issues.

"Group Size and Cooperation Among Strangers" with Huan Xie, Journal of Economic Behavior and Organization, Volume 126, Part A (2016), 55-74.

We study how group size affects cooperation in an infinitely repeated n-player Prisoner’s Dilemma (PD) game. In each repetition of the game, groups of size n ≤ M are randomly and anonymously matched from a fixed population of size M to play the n-player PD stage game. We provide conditions for which the contagious strategy (Kandori, 1992) sustains a social norm of cooperation among all M players. Our main finding is that if agents are sufficiently patient, a social norm of society-wide cooperation becomes easier to sustain under the contagious strategy as n increases toward M. In an experiment where the population size M is fixed and conditions identified by our theoretical analysis hold, we find strong evidence that cooperation rates are higher with larger group sizes than with smaller group sizes in treatments where each subject interacts with M-1 robot players who follow the contagious strategy. When the number of human subjects increases in the population, the cooperation rates decrease significantly, indicating that it is the strategic uncertainty among the human subjects that hinders cooperation.

"Adaptive versus Eductive Learning: Theory and Evidence" with Te Bao, European Economic Review 83 (2016), 64-89.

Adaptive and eductive learning are two widely used ways of modeling the process by which agents learn a rational expectation equilibrium (REE). In this paper we report on an experiment where we exploit differences in the conditions under which adaptive and eductive learning converge to REE so as to investigate which approach provides the better description of the learning behavior of human subjects. Our results suggest that the path by which the system converges appears to be a mixture of both adaptive and eductive learning model predictions.

"Birth, Death and Public Good Provision" with Jonathan Lafky, Experimental Economics 19 (2016), 317-341.

We explore the effect of fixed versus dynamic group membership on public good provision. In a novel experimental design, we modify the traditional voluntary contribution mechanism (VCM) by periodically replacing old members of a group with new members over time. Under this dynamic, overlapping generations matching protocol we find that average contributions experience significantly less decay over time relative to a traditional VCM environment with fixed group membership. These findings suggest that the traditional pattern of contribution and decay seen in many public goods experiments may not accurately reflect behavior in groups with changing membership, as is the case in many real-world environments.

"Stochastic asymmetric Blotto games: Some new results" with Alexander Matros, Economics Letters 134 (2015), 4-8.

We develop some new theoretical results for stochastic asymmetric Blotto games.

"Real-Time Learning via Parameterized Expectations" with Michele Berardi, Macroeconomic Dynamics 19 (2015), 245-269.

We explore real time, adaptive nonlinear learning dynamics in stochastic macroeconomic systems. Rather than linearizing nonlinear Euler equations where expectations play a role around a steady state, we instead approximate the nonlinear expected values using the method of parameterized expectations. Further we suppose that these approximated expectations are updated in real time as new data become available. We argue that this method of real-time parameterized expectations learning provides a plausible alternative to real-time adaptive learning dynamics under linearized versions of the same nonlinear system.

"Cooperation and Signaling with Uncertain Social Preferences" with Félix Muñoz-García, Theory and Decision 78 (2015), 45-75.

This paper investigates behavior in finitely repeated simultaneous and sequential-move prisoner's dilemma games when there is one-sided incomplete information and signaling about players' concerns for fairness, specifically, their preferences regarding "inequity aversion." In this environment, we show that only a pooling equilibrium can be sustained, in which a player type who is unconcerned about fairness initially cooperates in order to disguise himself as a player type who is concerned about fairness. This disguising strategy induces the uninformed player to cooperate in all periods of the repeated game, including the final period, at which point the player type who is unconcerned about fairness takes the opportunity to defect, i.e., he "backstabs" the uninformed player. Despite such last-minute defection, our results show that the introduction of incomplete information can actually result in a Pareto improvement under certain conditions. We connect the predictions of this "backstabbing" equilibrium with the frequently observed decline in cooperative behavior in the final period of finitely-repeated experimental games.

"Lifecycle Consumption Plans, Social Learning and External Habits: Experimental Evidence" with Enrica Carbone, Journal of Economic Behavior and Organization 106 (2014), 413-427.

We report results from a laboratory experiment exploring the extent to which individuals 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 consumption results in a greater deviation of consumption from both the unconditional and the conditionally optimal paths. We find some improvement in consumption planning relative to the conditional optimum when social concerns (external habits) are explicitly incorporated into subject's period utility functions as in external habit formation preference specifications. Our results on the effects of social information on consumption behavior may help to explain the phenomenon of over-consumption and under-saving that has been observed in many developed countries in recent decades as social information on the behavior of others has become more readily available.

"Experimental Evidence on the Essentiality and Neutrality of Money in a Search Model" with Daniela Puzzello, in J. Duffy, Ed., Experiments in Macroeconomics (Research in Experimental Economics Volume 17), Bingley, UK: Emerald Group Publishing, 2014, pp. 259-311.

We study a micro-founded search model of exchange in the laboratory. Using a within subjects design, we consider exchange behavior with and without an intrinsically worthless token object. While these tokens have no redemption value, like fiat money they may foster greater exchange and welfare via the coordinating role of having prices of goods in terms of tokens. We find that welfare is indeed improved by the presence of tokens provided that the economy starts with a supply of such tokens. In economies that operate for some time without tokens, the later surprise introduction of tokens does not serve to improve welfare. We also explore the impact of announced changes in the economy-wide stock of tokens (fiat money) on prices. Consistent with the quantity theory of money, we find that increases in the stock of money (tokens) have no real effects and mainly result in proportionate changes to prices. However, the same finding does not hold for decreases in the stock of money.

"Gift Exchange versus Monetary Exchange: Theory and Evidence" with Daniela Puzzello, American Economic Review 104 (2014), 1735-1776.

We study the Lagos and Wright (2005) model of monetary exchange in the laboratory. With a finite population of sufficiently patient agents, this model has a unique monetary equilibrium and a continuum of non-monetary gift exchange equilibria, some of which Pareto dominate the monetary equilibrium. We find that subjects avoid the gift-exchange equilibria in favor of the monetary equilibrium. We also study versions of the model without money where all equilibria involve non-monetary gift-exchange. We find that welfare is higher in the model with money than without money, suggesting that money plays a role as an efficiency enhancing coordination device.

"Compulsory versus Voluntary Voting: An Experimental Study" with Sourav Bhattacharya and SunTak Kim, Games and Economic Behavior 84 (2014), 111-131.

We report on an experiment comparing compulsory and voluntary voting institutions in a voting game with common preferences. Rational choice theory predicts sharp differences in voter behavior between these two institutions. If voting is compulsory, then voters may find it rational to vote insincerely, i.e., against their private information. If voting is voluntary so that abstention is allowed, then sincere voting in accordance with a voter's private information is always rational while participation may become strategic. We find strong support for these theoretical predictions in our experimental data. Moreover, voters adapt their decisions to the voting institution in place in such a way as to make the group decision accuracy differences between the two voting institutions negligible. The latter finding may serve to rationalize the co-existence of compulsory and voluntary voting institutions in nature.

"On the Use of Fines and Lottery Prizes to Increase Voter Turnout" with Alexander Matros, Economics Bulletin 34 (2014), 966-975.

We consider implementation issues regarding two mechanisms that have been used to increase voter turnout in elections: fines and lotteries. We focus on the amount of the fine or lottery prize needed to achieve full participation. We then propose a combined, self-financing mechanism by which the fines imposed on non-participants are used to finance the prize that is awarded by lottery to one of the individuals choosing to participate in voting. We argue that this combined mechanism has some advantages over the other two mechanisms and merits consideration.

"Learning, Forecasting and Optimizing: an Experimental Study" with Te Bao and Cars Hommes, European Economic Review 61 (2013), 186-204.

Rational Expectations (RE) models have two crucial dimensions: (i) agents on average correctly forecast future prices given all available information, and (ii) given expectations, agents solve optimization problems and these solutions in turn determine actual price realizations. Experimental tests of such models typically focus on only one of these two dimensions. In this paper we consider both forecasting and optimization decisions in an experimental cobweb economy. We report results from four experimental treatments: (1) subjects form forecasts only, (2) subjects determine quantity only (solve an optimization problem), (3) they do both and (4) they are paired in teams and one member is assigned the forecasting role while the other is assigned the optimization task. All treatments converge to Rational Expectation Equilibrium (REE), but at different speeds. We observe that performance is the best in treatment 1 and worst in the treatment 3. We further find that most subjects use adaptive rules to forecast prices. Given a price forecast, subjects are less likely to make conditionally optimal production decisions in treatment 3 where the forecast is made by themselves, than in treatment 4 where the forecast is made by the other member of their team, which suggests that "two heads are better than one" in finding REE.

"Social Norms, Information and Trust among Strangers: Theory and Evidence" with Huan Xie and Yong-Ju Lee, Economic Theory 52 (2013), 669-708.

Can a social norm of trust and reciprocity emerge among strangers? We investigate this question by examining behavior in an experiment where subjects repeatedly play a two-player binary "trust" game. Players are randomly and anonymously paired with one another in each period. The main questions addressed are whether a social norm of trust and reciprocity emerges under the most extreme information restriction (anonymous community-wide enforcement) or whether trust and reciprocity require additional, individual-specific information about a player's past history of play and whether that information must be provided freely or at some cost. In the absence of such reputational information, we find that a social norm of trust and reciprocity is difficult to sustain. The provision of reputational information on past individual decisions significantly increases trust and reciprocity, with longer histories yielding the best outcomes. Importantly, we find that making reputational information available at a small cost may also lead to a significant improvement in trust and reciprocity, despite the fact that most subjects do not choose to purchase this information.

"Equilibrium Selection in Static and Dynamic Entry Games" with Jack Ochs, Games and Economic Behavior 76 (2012), 97-116. Instructions used in the experiment.

We experimentally examine equilibrium refinements in static and dynamic binary choice games of complete information with strategic complementarities known as "entry" games. Our aim is to assess the predictive power of two different equilibrium selection principles. In static entry games, we test the theory of global games as an equilibrium selection device. This theory posits that players play games of complete information as if they were playing a related global game of incomplete information. In dynamic entry games, individuals decide not only whether to enter but also when to enter. Once entry occurs it is irreversible. The number of people who have already entered is part of the state description, and individuals can condition their decisions on that information. If the state variable does not indicate that entry is dominated, the efficient subgame perfect equilibrium prediction calls for all players to enter. Further, if there is a cost of delay, entry should occur immediately, thereby eliminating the coordination problem. This subgame perfect entry threshold in the dynamic game will generally differ from the global game threshold in static versions of the same entry game. Nevertheless, our experimental findings suggest that observed entry thresholds in both static and dynamic versions of the same entry game are surprisingly similar. The mean entry threshold in the static game lies below the global game equilibrium threshold while the mean entry threshold in the dynamic game lies above the efficient subgame perfect equilibrium threshold. An important implication of this finding is that if one were to observe only the value of the state variable and the number of people who enter by the end of the game one could not determine whether the static or the dynamic game had been played.

"Patience or Fairness? Analyzing Social Preferences in Repeated Games" with Félix Muñoz-García, Games 3 (2012), 56-77.

This paper investigates how the introduction of social preferences affects players' equilibrium behavior in both the one-shot and the infinitely repeated version of the Prisoner's Dilemma game. We show that fairness concerns operate as a "substitute" for time discounting in the infinitely repeated game, as fairness helps sustain cooperation for lower discount factors. In addition, such cooperation can be supported under larger parameter values if players are informed about each others' social preferences than if they are uninformed. Finally, our results help to identify conditions under which cooperative behavior observed in recent experimental repeated games can be rationalized using time preferences alone (patience) or a combination of time and social preferences (fairness).

"Differences in Risk Aversion Between Young and Older Adults" with Steven M. Albert, Neuroscience and Neuroeconomics 1 (2012), 3-9.

Research on decision-making strategies among younger and older adults suggests that older adults may be more risk averse than younger people in the case of potential losses. These results mostly come from experimental studies involving gambling paradigms. Since these paradigms involve substantial demands on memory and learning, differences in risk aversion or other features of decision making attributed to age may in fact reflect age-related declines in cognitive abilities. In the current study, older and younger adults completed a simpler, paired lottery choice task used in the experimental economics literature to elicit risk aversion. A similar approach was used to elicit participants' discount rates. The older adult group was more risk averse than the younger (p<0.05) and had a higher discount rate (15.6-21.0 percent versus 10.3-15.5 percent, p<0.01), indicating lower expected utility from future income. Risk aversion and implied discount rates were weakly correlated. It may be valuable to investigate developmental changes in neural correlates of decision making across the lifespan.

"Competitive Behavior in Market Games: Evidence and Theory" with Alexander Matros and Ted Temzelides, Journal of Economic Theory 146 (2011), 1437-1463.

We explore whether competitive outcomes arise in an experimental implementation of a market game, introduced by Shubik (1972). Market games obtain Pareto inferior (strict) Nash equilibria, in which some or possibly all markets are closed. We find that subjects do not coordinate on autarkic Nash equilibria, but favor more efficient Nash equilibria in which all markets are open. As the number of subjects participating in the market game increases, the Nash equilibrium they achieve approximates the associated competitive equilibrium of the underlying economy. Motivated by these findings, we provide a theoretical argument for why evolutionary forces can lead to competitive outcomes in market games.

"Investment and Monetary Policy: Learning and Determinacy of Equilibrium" with Wei Xiao, Journal of Money, Credit and Banking 43 (2011), 959-992.

We explore determinacy and expectational stability (learnability) of rational expectations equilibrium (REE) in "New Keynesian" (NK) models that include capital. Using a consistent calibration across three different models--labor only, firm-specific capital, or an economy-wide rental market for capital, we provide a clear picture of when REE is determinate and learnable and when it is not under a variety of monetary policy rules. Our findings make a case for greater optimism concerning the use of such rules in NK models with capital. While Bullard and Mitra's (2002, 2007) findings for the labor-only NK model do not always extend to models with capital, we show that determinate and learnable REE can be achieved in NK models with capital if there is (i) plausible capital adjustment costs, (ii) some weight given to output in the policy rule and/or iii) a policy of interest rate smoothing.

"Trust in Second Life" Southern Economic Journal 78 (2011), 53-62.

Some issues are raised with regard to conducting economic decision-making experiments in virtual worlds. The issues are illustrated via a visit to an experimental laboratory on Second Life. Some suggestions for addressing these issues are proposed.

"Correlated Equilibria, Good and Bad: An Experimental Study" with Nick Feltovich, International Economic Review 51 (2010), 701-721.

We report results from an experiment that explores the empirical validity of correlated equilibrium, an important generalization of Nash equilibrium. Specifically, we examine the conditions under which subjects playing the game of Chicken will condition their behavior on private third-party recommendations drawn from publicly announced distributions. We find that when recommendations are given, behavior differs from both a mixed-strategy Nash equilibrium and behavior without recommendations. In particular, subjects typically follow recommendations if and only if (1) those recommendations derive from a correlated equilibrium and (2) that correlated equilibrium is payoff-enhancing relative to the available Nash equilibria.

"Self-Organized Criticality in a Dynamic Game" with Andreas Blume and Ted Temzelides, Journal of Economic Dynamics and Control 34 (2010), 1380-1391.

We investigate conditions under which self-organized criticality (SOC) arises in a version of a dynamic entry game. In the simplest version of the game, there is a single location -- a pool -- and one agent is exogenously dropped into the pool every period. Payoffs to entrants are positive as long as the number of agents in the pool is below a critical level. If an agent chooses to exit, he cannot re-enter, resulting in a future payoff of zero. Agents in the pool decide simultaneously each period whether to stay in or not. We characterize the symmetric mixed strategy equilibrium of the resulting dynamic game. We then introduce local interactions between agents that occupy neighboring pools and demonstrate that, under our payoff structure, local interaction effects are necessary and sufficient for SOC and for an associated power law to emerge. Thus, we provide an explicit game-theoretic model of the mechanism through which SOC can arise in a social context with forward looking agents.

"Does Competition Affect Giving?" with Tatiana Kornienko, Journal of Economic Behavior and Organization 74 (2010), 82-103. Experimental instructions.

Charities often devise fund-raising strategies that exploit natural human competitiveness in combination with the desire for public recognition. We explore whether institutions promoting competition can affect altruistic giving - even when possibilities for public acclaim are minimal. In a controlled laboratory experiment based on a sequential "dictator game," we find that subjects tend to give more when placed in a generosity tournament, and tend to give less when placed in an earnings tournament - even if there is no award whatsoever for winning the tournament. Further we find that subjects' experimental behavior correlates with their responses to a post-experiment questionnaire, particularly questions addressing altruistic and rivalrous behavior. Based on this evidence, we argue that behavior in our experiment is driven, in part, by innate competitive motives.

"Decentralized Organizational Learning: An Experimental Investigation" with Andreas Blume and April Franco, American Economic Review 99 (2009), 1178-1205.

We experimentally study decentralized organizational learning. Our objective is to understand how learning members of an organization cope with the confounding effects of the simultaneous learning of others. Rather than inferring or postulating some heuristic organizational learning behavior, we experimentally test the optimal learning predictions of a stylized, rational agent model of organizational learning due to Blume and Franco (2007). This model provides sharp testable predictions as to how learning members of an organization might cope with the simultaneous learning of others as a function of fundamental variables that characterize an organization, e.g., the firm size and the discounting of future payoffs. While the problem of learning while others are learning is quite difficult, we find support for the comparative static predictions of the unique symmetric equilibrium of the model.

"Cooperative Behavior and the Frequency of Social Interaction" with Jack Ochs, Games and Economic Behavior 66 (2009), 785-812. Download the dataset.

We report results from an experiment that examines play in an indefinitely repeated, two-player Prisoner's Dilemma game. Each experimental session involves N subjects and a sequence of indefinitely repeated games. The main treatment consists of whether agents are matched in fixed pairings or matched randomly in each indefinitely repeated game. Within the random matching treatment, we elicit player's strategies and beliefs or vary the information that players have about their opponents. Contrary to a theoretical possibility suggested by Kandori (1992), a cooperative norm does not emerge in the treatments where players are matched randomly. On the other hand, in the fixed pairings treatment, the evidence suggests that a cooperative norm does emerge as players gain more experience.

"Experiments with Network Formation" with Dean Corbae, Games and Economic Behavior 64 (2008), 81-120. There is also a Technical and Data Appendix for this paper. Instructions are here.

We examine how groups of agents form trading networks in the presence of idiosyncratic risk and the possibility of contagion. Specifically, four agents play a two-stage finite repeated game. In the first stage, the network structure is endogenously determined through a noncooperative proposal game. In the second stage, agents play multiple rounds of a coordination game against all of their chosen `neighbors' after the realization of a payoff relevant shock. While parsimonious, our four agent environment is rich enough to capture all of the important interaction structures in the networks literature: bilateral (marriage), local interaction, star, and uniform matching. Consistent with our theory, marriage networks are the most frequent and stable network structures in our experiments. We find that payoff efficiency is around 90 percent of the ex-ante, payoff dominant strategies and the distribution of network structures is significantly different from that which would result from random play.

"Beliefs and Voting Decisions: A Test of the Pivotal Voter Model" with Margit Tavits, American Journal of Political Science 52 (2008), 603-618. Instructions are here.

We report results from a laboratory experiment testing the basic hypothesis imbedded in various rational voter models that there is a direct correlation between the strength of an individual's belief that his/her vote will be pivotal and the likelihood that individual incurs the cost to vote. This belief is typically unobservable. In one of our experimental treatments we elicit these subjective beliefs using a proper scoring rule that induces truthful revelation of beliefs. This allows us to directly test the pivotal voter model. We find that a higher subjective probability of being pivotal increases the likelihood that an individual votes, but the probability thresholds used by subjects are not as crisp as the theory would predict. There is some evidence that individuals learn over time to adjust their beliefs to be more consistent with the historical frequency of pivotality. However, many subjects keep substantially overestimating their probability of being pivotal.

"Internet Auctions with Artificial Adaptive Agents: A Study on Market Design" with Utku Ünver, Journal of Economic Behavior and Organization 67 (2008), 394-417.

Many internet auction sites implement ascending-bid, second-price auctions. Empirically, last-minute or "late" bidding is frequently observed in "hard-close" but not in "soft-close" versions of these auctions. In this paper, we introduce an independent private-value repeated internet auction model to explain this observed difference in bidding behavior. We use finite automata to model the repeated auction strategies. We report results from simulations involving populations of artificial bidders who update their strategies via a genetic algorithm. We show that our model can deliver late or early bidding behavior, depending on the auction closing rule in accordance with the empirical evidence. Among other findings, we observe that hard-close auctions raise less revenue than soft-close auctions. We also investigate interesting properties of the evolving strategies and arrive at some conclusions regarding both auction designs from a market design point of view.

"Experimental Macroeconomics"

in: S. Durlauf and L. Blume, eds., New Palgrave Dictionary of Economics, 2nd Ed., New York: Palgrave Macmillan, 2008.

"Giving Little By Little: Dynamic Public Good Games" with Jack Ochs and Lise Vesterlund, Journal of Public Economics 91 (2007), 1708-1730.

Charitable contributions are frequently made over time. Donors are free to contribute whenever they wish and as often as they want, and are frequently updated on the level of contributions by others. A dynamic structure enables donors to condition their contribution on that of others, and, as Schelling (1960) suggested, it may establish trust thereby increasing charitable giving. Marx and Matthews (2000) build on Schelling's insight and show that multiple contribution rounds may secure a provision level that cannot be achieved in the static, one-shot setting, but only if there is a discrete, positive payoff jump upon completion of the project. We examine these two hypotheses experimentally using static and dynamic public good games. We find that contributions are indeed higher in the dynamic than in the static game. However, in contrast to the predictions, the increase in contributions in the dynamic game does not depend critically on the existence of a completion benefit jump or on whether players can condition their decisions on the behavior of other members of their group.

"Instability of Sunspot Equilibria in Real Business Cycle Models Under Adaptive Learning" with Wei Xiao, Journal of Monetary Economics 54 (2007), 879-903.

We examine the stability of equilibrium in sunspot-driven real business cycle (RBC) models under adaptive learning. We show that a general, reduced form of this class of models can admit rational expectations equilibria that are both indeterminate and stable under adaptive learning. Indeterminacy of equilibrium allows for the possibility that non-fundamental "sunspot" variable realizations can serve as the main driving force of the model, and several researchers have put forward calibrated structural models where sunspot shocks play such a role. We show analytically how the structural restrictions that researchers have imposed on this type of model lead to reduced form systems where equilibrium is indeterminate but always unstable under adaptive learning. Our findings provide a possible resolution of the "stability puzzle" identified by Evans and McGough (2002).

"The Value of Interest Rate Stabilization Policies When Agents are Learning" with Wei Xiao, Journal of Money, Credit, and Banking, 39 (2007), 2041-2056.

We examine the expectational stability (E--stability) of rational expectations equilibrium in the "New Keynesian" model where monetary policy is optimally derived and interest rate stabilization is added to the central bank's traditional objectives of inflation and output stabilization. We consider both the case where the central bank lacks a commitment technology and the case of full commitment. We show that for both cases, optimal policy rules yield rational expectations equilibria that are E-stable for a wide range of empirically plausible parameter values. These findings stand in contrast to Evans and Honkapohja's (2003ab, 2006) findings for optimal monetary policy rules in environments where interest rate stabilization is not a central bank objective.

"The Value of Central Bank Transparency When Agents are Learning" with Michele Berardi, European Journal of Political Economy 23 (2007), 9-29.

We examine the role of central bank transparency when the private sector is modeled as adaptive learners. In our model, transparent policies enable the private sector to adopt correctly specified models of inflation and output while intransparent policies do not. In the former case, the private sector learns the rational expectations equilibrium while in the latter case it learns a restricted perceptions equilibrium. These possibilities arise regardless of whether the central bank operates under commitment or discretion. We provide conditions under which the policy loss from transparency is lower (higher) than under intransparency, allowing us to assess the value of transparency when agents are learning.

"Words, Deeds and Lies: Strategic Behaviour in Games with Multiple Signals" with Nick Feltovich, Review of Economic Studies 73 (2006), 669-688.

We report the results of an experiment in which subjects play games against changing opponents. In one treatment, "senders" send "receivers" messages indicating intended actions in that round, and receivers observe senders' previous-round actions (when matched with another receiver). In another treatment, the receiver additionally observes the sender's previous-round message to the previous opponent, enabling him to determine whether the sender had lied. We find that allowing multiple signals leads to better outcomes when signals are aligned (all pointing to the same action), but worse outcomes when signals are crossed. Also, senders' signals tend to be truthful, though the degree of truthfulness depends on the game and treatment, and receivers' behavior combines elements of pay-off maximization and reciprocity.

"Dollarization Traps" with Maxim Nikitin and R. Todd Smith, Journal of Money, Credit, and Banking 38 (2006), 2073-2098.

The paper analyzes dollarization in the sense of asset substitution, where a foreign currency competes with local assets, especially domestic capital, as a store of value, the impact of dollarization on capital accumulation and output, and why economies remain dollarized long after a successful inflation stabilization. We relate this dollarization hysteresis to a financial intermediation failure that happens during high inflation. We show that in dollarized countries, inflation stabilization policies may not have any effect on domestic capital accumulation, thus preventing such policies from stimulating growth, i.e., dollarized economies are vulnerable to "dollarization traps."

"Multiple Regimes in U.S. Monetary Policy? A Nonparametric Approach" with Jim Engle-Warnick, Journal of Money, Credit, and Banking 38 (2006), 1363-1377.

We use two different nonparametric methods to determine whether there were multiple regimes in U.S. monetary policy over the period 1955--2003. We model monetary policy using two different versions of Taylor's rule for the nominal interest rate target. By contrast with parametric tests for regime changes, the nonparametric methods we use allow the data to determine the dimensions on which to split the sample for purposes of estimating the coefficients of the Taylor rule. We find evidence for a few structural breaks and consistent agreement between our two nonparametric methods on the dating of those breaks.

"Agent-Based Models and Human Subject Experiments," in: L. Tesfatsion and K.L. Judd, eds., Handbook of Computational Economics Vol. 2 Handbooks in Economics Series, (Amsterdam: Elsevier, 2006), 949-1011.

This chapter examines the relationship between agent-based modeling and economic decision-making experiments with paid human subjects. Both approaches exploit controlled "laboratory" conditions as a means of isolating the sources of aggregate phenomena. Research findings from laboratory studies of human subject behavior have inspired studies using artificial agents in "computational laboratories" and vice versa. In certain cases, both methods have been used to examine the same phenomenon. The focus of this chapter is on the use of agent-based models to explain experimental findings. We point out synergies between the two methodologies that have been exploited as well as promising new possibilities.

"Asset Price Bubbles and Crashes with Near-Zero-Intelligence Traders" with Utku Ünver, Economic Theory 27 (2006), 537-563.

We examine whether a simple agent--based model can generate asset price bubbles and crashes of the type observed in a series of laboratory asset market experiments beginning with the work of Smith, Suchanek and Williams (1988). We follow the methodology of Gode and Sunder (1993, 1997) and examine the outcomes that obtain when populations of zero--intelligence (ZI) budget constrained, artificial agents are placed in the various laboratory market environments that have given rise to price bubbles. We have to put more structure on the behavior of the ZI-agents in order to address features of the laboratory asset bubble environment. We show that our model of "near--zero--intelligence" traders, operating in the same double auction environments used in several different laboratory studies, generates asset price bubbles and crashes comparable to those observed in laboratory experiments and can also match other, more subtle features of the experimental data.

"Sunspots in the Laboratory" with Eric O'N. Fisher, American Economic Review 95 (2005), 510-529.

We show that extrinsic or non-fundamental uncertainty influences markets in a controlled environment. This work provides the first direct evidence of sunspot equilibria. These equilibria require a common understanding of the semantics of the sunspot variable, and they appear to be sensitive to the flow of information. Sunspots always occur in a closed-book call market, but they happen only occasionally in a double auction, where infra-marginal bids and offers are observable.

"Anarchy in the Laboratory (and the Role of the State)" with Minseong Kim, Journal of Economic Behavior and Organization 56 (2005), 297-329.

A recent literature on the economics of conflict has provided conditions under which an "anarchic" outcome may come to serve as an equilibrium for an economy, as well as conditions under which a "dictator" or "government agent" is empowered to make collective action choices that enable the economy to achieve a Pareto superior equilibrium. This paper reports results from a laboratory experiment designed to test the predictions of this theory. We find that in the absence of any government, groups of subjects choose forecasts and actions that lie within a neighborhood of the predicted anarchic equilibrium, where some players choose to be producers, while others choose to be predators. The introduction of the government agent, charged with maximizing the consumption of producers, enables the subject groups to achieve nearly perfect coordination on a Pareto superior Nash equilibrium, where the fraction of time devoted to defense is high, but predation is eliminated.

"Learning, Information and Sorting in Market Entry Games: Theory and Evidence" with Ed Hopkins, Games and Economic Behavior 51 (2005), 31-62. (Download instructions.)

Previous data from experiments on market entry games, N-player games where each player faces a choice between entering a market and staying out, appear inconsistent with either mixed or pure Nash equilibria. Here we show that, in this class of game, learning theory predicts sorting, that is, in the long run, agents play a pure strategy equilibrium with some agents permanently in the market, and some permanently out. We conduct experiments with a larger number of repetitions than in previous work in order to test this prediction. We find that when subjects are given minimal information, only after close to 100 periods do subjects begin to approach equilibrium. In contrast, with full information, subjects learn to play a pure strategy equilibrium relatively quickly. However, the information which permits rapid convergence, revelation of the individual play of all opponents, is not predicted to have any effect by existing models of learning.

"Equilibrium Selection via Adaptation: Using Genetic Programming to Model Learning in a Coordination Game" with Shu-Heng Chen and Chia-Hsuan Yeh, in Advances in Dynamic Games (Annals of the International Society of Dynamic Games Volume 7), 2005, 571-598.

This paper studies adaptive behavior in a simple coordination game that Van Huyck, Cook and Battalio (1994) have investigated in a controlled laboratory setting with human subjects. We consider how populations of artificially intelligent agents play the same game. The computational approach that we adopt provides us with much greater flexibility in the experimental design than is possible with experiments involving human subjects. We use genetic programming techniques developed by Koza (1992, 1994) to model how players might learn over time. These genetic programming techniques have certain advantages over other artificial intelligence techniques that have been applied to economic models, for example, genetic algorithms. We find that the pattern of behavior generated by our population of artificially intelligent players is remarkably similar to that followed by human subjects who played the same game. In particular, we find that a steady state that is theoretically unstable under a myopic best-response learning dynamic turns out to be stable under our genetic-programming-based learning system, in accordance with Van Huyck et al.'s finding using human subjects. We conclude that genetic programming techniques may serve as a plausible and inexpensive selection criterion in environments with multiple equilibria.

" Trust Among Strangers" with Cristina Bicchieri and Gil Tolle, Philosophy of Science 71 (2004), 286-319.

The paper presents a simulation of the dynamics of impersonal trust. It shows how a "trust and reciprocate" norm can emerge and stabilize in populations of conditional cooperators. The norm, or behavioral regularity, is not to be identified with a single strategy. It is instead supported by several conditional strategies that vary in the frequency and intensity of sanctions.

"Capital-Skill Complementarity? Evidence from a Panel of Countries," with Chris Papageorgiou and Fidel Perez-Sebastian, Review of Economics and Statistics 86 (2004), 327-344.

Since Griliches (1969), researchers have been intrigued by the idea that physical capital and skilled labor are relatively more complementary than physical capital and unskilled labor. In this paper we consider the cross-country evidence for capital-skill complementarity using a time-series, cross-section panel of 73 developed and less developed countries over a 25 year period. We focus on three empirical issues. First, what is the best specification of the aggregate production technology to address the capital-skill complementarity hypothesis. Second, how should we measure skilled labor? Finally, is there any cross-country evidence in support of the capital-skill complementarity hypothesis? Our main finding is that we find some support for the capital-skill complementarity hypothesis in our macro panel dataset.

"Comment on Adaptive Learning and Monetary Policy Design," Journal of Money, Credit, and Banking 35 (2003), 1073-1080.

This is a comment on the paper "Adaptive Learning and Monetary Policy Design" by George W. Evans and Seppo Honkapohja that was prepared for the FRB-Cleveland/JMCB conference, "Recent Developments in Monetary Macroeconomics" hosted by the Federal Reserve Bank of Cleveland in November 2002.

"Intrinsically Worthless Objects as Media of Exchange: Experimental Evidence" with Jack Ochs, International Economic Review 43 (2002), 637-673. (This paper was formerly titled "Fiat Money as a Medium of Exchange: Experimental Evidence")

This paper reports results from an experiment that examines whether an intrinsically worthless, `token' object serves as a medium of exchange in a laboratory implementation of Kiyotaki and Wright's search model of money. The theory admits Nash equilibria in which the token object is or is not used as a medium of exchange. We find that subjects nearly always offer to trade for the token object when such a trade lowers their storage costs. However, subjects frequently refuse to offer to trade the token object for more costly-to-store goods when the theory predicts they should make such trades. View the raw data from this experiment.

"Do Actions Speak Louder than Words? Observation vs. Cheap Talk as Coordination Devices" with Nick Feltovich, Games and Economic Behavior 39 (2002), 1-27.

This paper reports results from an experiment designed to compare cheap talk and observation of past actions. We consider three games and explain why cheap talk or observation is likely to be more effective for achieving good outcomes in each game. We find that both cheap talk and observation make cooperation and coordination more likely and increase payoffs, relative to our control treatment. The relative success of cheap talk versus observation depends on the game, in accordance with our predictions. We also find that players' signals are informative, and that signal receivers condition their actions on the signal they receive.

"Using Symbolic Regression to Infer Strategies from Experimental Data" with Jim Engle-Warnick, in S-H. Chen, Ed., Evolutionary Computation in Economics and Finance, New York: Physica-Verlag, 2002, pp. 61-82.

We propose the use of a new technique--symbolic regression--as a method for inferring the strategies that are being played by subjects in economic decision making experiments. We begin by describing symbolic regression and our implementation of this technique using genetic programming. We provide a brief overview of how our algorithm works and how it can be used to uncover simple data generating functions that have the flavor of strategic rules. We then apply symbolic regression using genetic programming to experimental data from the ultimatum game. We discuss and analyze the strategies that we uncover using symbolic regression and we conclude by arguing that symbolic regression techniques should at least complement standard regression analyses of experimental data.

"Learning and Excess Volatility" with James Bullard, Macroeconomic Dynamics 5 (2001), 272-302.

We introduce adaptive learning behavior into a general equilibrium lifecycle economy with capital accumulation. Agents form forecasts of the rate of return to capital assets using least squares autoregressions on past data. We show that, in contrast to the perfect foresight dynamics, the dynamical system under learning possesses equilibria that are characterized by persistent excess volatility in returns to capital. We explore a quantitative case for these learning equilibria. We use an evolutionary search algorithm to calibrate a version of the system under learning and show that this system can generate data that matches some features of the time series data for U.S. stock returns and per capita consumption. We argue that this finding provides support for the hypothesis that the observed excess volatility of asset returns can be explained by changes in investor expectations against a background of relatively small changes in fundamental factors.

" Approximating and Simulating the Stochastic Growth Model: Parameterized Expectations, Neural Networks, and the Genetic Algorithm" with Paul D. McNelis, Journal of Economic Dynamics and Control 25 (2001), 1273-1303.

This paper suggests a new approach to solving the one-sector stochastic growth model using the method of parameterized expectations. The approach is to employ a "global" genetic algorithm search for the parameters of the expectation function followed by a "local" gradient-descent optimization method to ensure fine-tuning of the approximated solution. We use this search procedure in combination with either polynomial or neural network specifications for the expectation function. We find that our approach yields highly accurate solutions in the case where an exact analytic solution exists as well as in cases where no closed-form solution exists. Our results further suggest that neural network specifications for the expectation function may be preferred to the more commonly used polynomial specification.

"Learning to Speculate: Experiments with Artificial and Real Agents," Journal of Economic Dynamics and Control 25 (2001), 295-319.

This paper employs an artificial agent-based, computational approach to understanding and designing laboratory environments in which to study and test Kiyotaki and Wright's (1989) search model of money. The behavioral rules of the artificial agents are modeled on the basis of prior evidence from human subject experiments. Simulations of the artificial agent-based model are conducted in two new versions of the Kiyotaki-Wright environment and yield some testable predictions. These predictions are examined using data from new human subject experiments. The results are encouraging and suggest that artificial agent-based modeling may be a useful device for both understanding and designing human subject experiments.

"A Cross-Country Empirical Investigation of the Aggregate Production Function Specification" with Chris Papageorgiou, Journal of Economic Growth 5 (2000), 87-120.

Many growth models assume that aggregate output is generated by a Cobb-Douglas production function. In this article we question the empirical relevance of this specification. We use a panel of 82 countries over a 28-year period to estimate a general constant-elasticity-of-substitution (CES) production function specification. We find that for the entire sample of countries we can reject the Cobb-Douglas specification. When we divide our sample of countries up into several subsamples, we find that physical capital and human capital adjusted labor are more substitutable in the richest group of countries and are less substitutable in the poorest group of countries than would be implied by a Cobb-Douglas specification.

"Does Observation of Others Affect Learning in Strategic Environments?: An Experimental Study" with Nick Feltovich, International Journal of Game Theory 28 (1999), 131-152.

This paper presents experimental results from an analysis of two similar games, the repeated ultimatum bargaining game and the repeated best-shot game. The experiments examine how the amount and content of information given to players affects the evolution of play in the two games. In one experimental treatment, subjects in both games observe not only their own actions and payoffs, but also those of one randomly chosen pair of players in the just-completed round of play. In the other treatment, subjects in both games observe only their own actions and payoffs. We present evidence suggesting that observation of other players' actions and payoffs affects the evolution of play in both games relative to the case of no observation. Moreover, the effect of observation on learning is different in the two games. In the ultimatum game, players who observe the actions and payoffs of others tend to deviate further from the subgame perfect equilibrium strategy over time than players who observe only their own actions and payoffs. In contrast, in the best-shot game, players who observe the actions and payoffs of others tend to play closer to the subgame perfect equilibrium strategy over time than players who observe only their own actions and payoffs. We conclude that providing players with additional information need not hasten the rate at which they learn to play subgame perfect equilibrium strategies. Rather, our findings support the conclusion of Prasnikar and Roth (1992) that the incentives players face off the equilibrium path strongly influence how behavior evolves over time.

"Emergence of Money as a Medium of Exchange: An Experimental Study" with Jack Ochs, American Economic Review 89 (1999), 847--877.

Kiyotaki and Wright (1989) developed a simple dynamic model of an exchange economy in which one or more commodities are used as media of exchange. In this paper, we report findings from an experiment that implements the Kiyotaki-Wright model. We consider whether the equilibrium predictions of the Kiyotaki-Wright model are robust to the dynamics created by out-of-equilibrium play. In particular, we examine whether individuals placed in the Kiyotaki-Wright environment learn over time to adopt the same commodities as media of exchange as the model implies will be used in equilibrium. We find that subjects have a strong tendency to play "fundamental" rather than "speculative strategies even in environments where speculative strategies would lead to higher payoffs. We examine some possible motivations for subjects' trading behavior and we find that subjects are mainly motivated by their own past payoff experience as opposed to being motivated by the marketability concerns that the theory suggests are important.

"Using Genetic Algorithms to Model the Evolution of Heterogeneous Beliefs," with James Bullard, Computational Economics 13 (1999), 41-60.

We study a general equilibrium system where agents have heterogeneous beliefs concerning realizations of possible outcomes. The actual outcomes feed back into beliefs thus creating a complicated nonlinear system. Beliefs are updated via a genetic algorithm learning process which we interpret as representing communication among agents in the economy. We are able to illustrate a simple principle: genetic algorithms can be implemented so that they represent pure learning effects (i.e. beliefs updating based on realizations of endogenous variables in an environment with heterogeneous beliefs). Agents optimally solve their maximization problem at each date given their beliefs at each date. We report the results of a set of computational experiments in which we find that our population of artificial adaptive agents is usually able to coordinate their beliefs so as to achieve the Pareto superior rational expectations equilibrium of the model.

"Monetary Theory in the Laboratory" Federal Reserve Bank of St. Louis Review 80 (September/October 1998), 9-26.

Empirical tests of macroeconomic and monetary theories are typically conducted using non-experimental field data provided by government agencies. Modern theories, however, have increasingly imposed restrictions on individual behavior that are not embodied in any available field data. An alternative method for testing such theories is to conduct controlled laboratory experiments with paid human subjects. This article provides a critical survey of recent papers that have used laboratory methods to test modern monetary-theory predictions. While the survey focuses on the results obtained from these laboratory studies, I also provide some justification for the experimental methodology and discuss experimental design issues.

"Learning and the Stability of Cycles," with James Bullard, Macroeconomic Dynamics 2 (1998), 22-48.

We study a general equilibrium model where the multiplicity of stationary periodic perfect foresight equilibria is pervasive. We investigate the extent to which agents can learn to coordinate on stationary perfect foresight cycles. The example economy, taken from J.M. Grandmont (1985), is a two period, endowment overlapping generations model with fiat money, where consumption in the first and second periods of life are not necessarily gross substitutes. Depending on the value of a preference parameter, the limiting backward (direction of time reversed) perfect foresight dynamics are characterized by steady state, periodic or chaotic trajectories for real money balances. We relax the perfect foresight assumption and examine how a population of artificial, heterogeneous adaptive agents might learn in such an environment. These artificial agents optimize given their forecast of future prices, and they use forecast rules that are consistent with steady state or periodic trajectories for prices. The agents' forecast rules are updated by a genetic algorithm. We find that the population of artificial adaptive agents is able to eventually coordinate on steady state and low-order cycles, but not on the higher-order periodic equilibria that exist under the perfect foresight assumption.

"A Model of Learning and Emulation with Artificial Adaptive Agents," with James Bullard, Journal of Economic Dynamics and Control 22 (1998), 179-207.

We study adaptive learning behavior in a sequence of n-period endowment overlapping generations economies, where n refers to the number of periods in agents' lifetimes. Agents initially have heterogeneous beliefs and seek to form multi-step ahead consumption plans based on forecasts of future prices. Agents learn in every period by forming new consumption plans and by emulating the consumption plans of other agents. Computational experiments with artificial adaptive agents are conducted. In these experiments, the heterogeneous population of artificial agents nearly always learns over time to form consumption plans that are consistent with perfect foresight knowledge of future prices. The model of learning and emulation that we develop is also used to study transition dynamics from one stationary perfect foresight equilibrium to another.

"On the Robustness of Behavior in Experimental 'Beauty Contest' Games," with Rosemarie Nagel, Economic Journal 107 (1997), 1684-1700.

We report and compare results from several different versions of an experimental interactive guessing game first studied by Nagel (1995), which we refer to as the 'beauty contest' game following Keynes (1936). In these games, groups of subjects are repeatedly asked to simultaneously guess a real number in the interval [0,100] that they believe will be closest to 1/2 times either the median, mean, or maximum of all numbers chosen. In all three versions of the beauty contest game, the unique Nash equilibrium is for all subjects to announce zero. We find that convergence to this equilibrium is fastest in the 1/2-median game and slowest in the 1/2-maximum game and we offer an explanation for the findings. We also use our experimental data to test a simple model of adaptive learning behavior.

"The Transition from Stagnation to Growth: An Adaptive Learning Approach," with Jasmina Arifovic and James Bullard, Journal of Economic Growth 2 (1997), 185-209.

This paper develops the first model in which, consistent with the empirical evidence, the transition from stagnation to economic growth is a very long endogenous process. The model has one steady state with a low and stagnant level of income per capita and another steady state with a high level of income per capita. Both of these steady states are locally stable under the perfect foresight assumption. We relax the perfect foresight assumption and introduce learning into this environment. Learning acts as an equilibrium selection criterion and provides an interesting transition dynamic between steady states. We find that for sufficiently low initial values of human capital--values that would tend to characterize pre-industrial countries--the system under learning spends a long period of time (an epoch ) in the neighborhood of the low income steady state before finally transitioning to a neighborhood of the high income steady state. We argue that this kind of transition dynamic provides a good characterization of the economic growth and development patterns that have been observed across countries.

"Corruption Cycles," with Cristina Bicchieri, Political Studies 45 (1997), 477-498.

We provide a model of political corruption as a cyclical phenomenon.

"On Learning and the Nonuniqueness of Equilibrium in an Overlapping Generations Model with Fiat Money," Journal of Economic Theory, 64 (1994), 541-553.

This paper examines disequilibrium adaptive learning behavior in an overlapping generations model with fiat money. Agents are concerned with forming correct forecasts of future inflation. If they use a disequilibrium, adaptive forecast rule, it is shown that they will eventually learn to believe in a nonstationary, nonunique perfect foresight equilibrium. The nonstationary equilibrium isolated by the adaptive learning process can be used to explain the sluggish adjustment of the price level to monetary disturbances as documented in the work of C.A. Sims (1989).