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PART 1: MARKETS Markets1

1.1. Institutional Environments3

1.2. Imperfect Competition8

1.3. Dynamics of Market Adjustments11

References13

PART 1.1: INSTITUTIONAL ENVIRONMENTS14

PART 1.1.1: PROPERTIES OF THE DOUBLE AUCTION15

Chapter 1 Properties of Disequilibrium Adjustment in Double Auction Markets&CHARLES R. PLOTT16

References20

Chapter 2 From Market Jaws to the Newton Method: The Geometry of How a Market Can Solve Systems of Equations&PETER BOSSAERTS AND CHARLES R. PLOTT22

References24

Chapter 3 Exogenous Uncertainty Increases the Bid-Ask Spread in the Continuous Double Auction&VERNON L. SMITH AND MARK VAN BOENING25

1. Experimental Design25

2. Exogenous Uncertainty and the Bid/Ask Spread27

3. Conclusion30

References30

Chapter 4 Zero-Intelligence Robots and the Double Auction Market: A Graphical Tour&PAUL J. BREWER31

1. Environment32

1.1. Values and Costs32

1.2. Profits32

1.3. Limitations on Trading32

1.4. Market Rules32

1.5. Budget Constraints33

1.6. Trades Involve Arbitrage: No Speculative Trades33

2. Robot Agents34

2.1. Zero Intelligence Robots-Trading Algorithm34

2.2. UNIT Robots-Trading Algorithm34

2.3. Kaplan's Parasitic Robots' - Trading Algorithm35

3. Literature - Robots and the Double Auction35

3.1. Types of Questions35

3.2. Major Results from the Literature - A Chronology37

References44

Chapter 5 Effect of Non-binding Price Controls in Double Auction Trading&VERNON L. SMITH AND ARLINGTON W. WILLIAMS46

1. Introduction46

2. Experimental Design46

3. Experimental Results48

4. Why Do Non-binding Price Controls Interfere with the DA Market Process?53

5. Conclusions53

References53

PART 1.1.2: PROPERTIES OF POSTED OFFER PROCESSES54

Chapter 6 Fairness and Short Run Price Adjustment in Posted Offer Markets&PRAVEEN KUJAL AND VERNON L. SMITH55

1. Introduction55

2. Market Experiments55

2.1. Extension: Posted Bid vs Posted Offer56

2.2. Our Experiments57

3. Hypothesis and Experimental Results57

4. Discussion58

4.1. What is Fairness?60

References61

Chapter 7 Mixed Strategy Nash Equilibrium Predictions as a Means of Organizing Behavior in Posted-Offer Market Experiments&DOUGLAS D. DAVIS AND BART J. WILSON62

1. Introduction62

2. Equilibrium Mixed Strategy Pricing Distributions63

3. Pricing Performance with Market Power64

4. Pricing Densities Relative to Static Nash Equilibrium Predictions67

5. Performance of Alternative Theories68

6. Summary69

References69

Chapter 8 Simulated and Real Buyers in Posted Offer Markets&JAMIE BROWN KRUSE71

1. Introduction71

2. Summary of the Experimental Design71

3. Results72

Acknowledgements76

References76

Chapter 9 The Performance of Double-Auction and Posted-Offer Markets with Advance Production&STUART MESTELMAN77

References82

PART 1.1.3: CALL MARKETS AND SEALED BIDS83

Chapter 10 Strategy-Proof Equilibrium Behavior in Two-Sided Auctions&VERNON L. SMITH84

1. Strategy-Proof Equilibria in the Sealed Bid-Offer Auction85

2. Strategy-Proof Equilibria in the Uniform Price Double Auction (UPDA)88

3. Summary89

References91

Chapter 11 First Price Independent Private Values Auctions&JAMES C. COX92

1. Tests of the RNM with Market Prices92

2. Tests of the RNM with Subject Payoff Data94

3. Tests of the CRRAM and the RNM with Individual Bid Data95

4. Tests of the LCM with Individual Bid Data96

5. Summary of the Test Results98

Acknowledgement98

References98

PART 1.1.4: ALTERNATIVE MARKET INSTITUTIONS99

Chapter 12 The Walrasian Auction&CORINNE BRONFMAN, KEVIN MCCABE, DAVID PORTER, STEPHEN RASSENTI AND VERNON SMITH100

1. Introduction100

2. Experimental Environments100

2.1. Baseline100

2.2. Multi-unit Non-stationary Supply and Demand Environment101

3. Walrasian Auction Design and Computerized Implementation102

4. Experimental Results104

4.1. The El Environment Replication104

4.2. Baseline and Treatment Effects104

4.3. Individual Behavior105

References108

Chapter 13 The Matching Market Institution&DANIEL FRIEDMAN AND CHANGHUA RICH109

1. Experimental Procedures109

2. Results111

3. Discussion114 References114

Chapter 14 Tatonnement&CHARLES R. PLOTT115

Reference117

PART 1.2: IMPERFECT COMPETITION118

PART 1.2.1: MARKET POWER119

Chapter 15 Wage Differentials in Experimental Efficiency Wage Markets&ERNST FEHR AND SIMON GACHTER120

1. Wage Differentials: Experiments Help to Test Explanations120

2. The Fair Wage-Effort Version of Efficiency Wage Theory121

2.1. Experimental Design121

2.2. Results121

3. The Shirking Version of Efficiency Wage Theory123

3.1. Design123

3.2. Results124

4. Summary125

References126

Chapter 16 The Paradox of Power&YVONNE DURHAM, JACK HIRSHLEIFER AND VERNON L. SMITH127

1. The Model128

2. Implementing the Model132

3. Experimental Procedures and Design132

4. Results133

4.1. Nash vs Cooperative Comparisons133

4.2. Predictions of the Model135

4.3. Charting the Observations136

References136

Chapter 17 The Exercise of Market Power in Laboratory Experiments&DOUGLAS D. DAVIS AND CHARLES A. HOLT138

1. Introduction138

2. Market Power139

3. Applications of Market Power143

References145

Chapter 18 The Classical Experiments on Cournot Oligopoly&ANTONI BOSCH-DOMENECH AND NICOLAAS J. VRIEND146

1. Sauermann and Selten's Results146

2. Hoggatt's Results148

3. Fouraker and Siegel's Results149

References152

Chapter 19 Experiments in Decentralized Monopoly Restraint&JAMES C. COX AND R. MARK ISAAC153

1. Market Institutions for Monopoly Restraint153

2. Contestable Markets155

3. The Loeb—Magat Mechanism156

4. The Finsinger-Vogelsang Mechanism157

5. The Cox—Isaac Mechanism159

Acknowledgement161

References161

PART 1.2.2: COLLUSION163

Chapter 20 Price Signaling and "Cheap Talk" in Laboratory Posted Offer Markets&TIMOTHY N. CASON164

1. Multi-Market versus Single-Market Competition165

2. The Importance of the Signaling Language167

3. Summary168

References168

Chapter 21 The Effects of Collusion in Laboratory Experiments&DOUGLAS D. DAVIS AND CHARLES A. HOLT170

1. Introduction170

2. Collusion with and without Secret Discounts171

3. Recent Work175

References176

Chapter 22 Predatory Pricing: Rare Like a Unicorn?&ROSARIO GOMEZ, JACOB K. GOEREE AND CHARLES A. HOLT178

1. Introduction178

2. Single Market Designs178

3. Multiple Market Designs180

4. Summary183

References184

Chapter 23 Some Results on Anti-Competitive Behavior in Multi-Unit Ascending Price Auctions&KATERINA SHERSTYUK185

1. Experiments on Demand Reduction186

2. Experiments on Bidder Collusion192

Acknowledgement197

References197

PART 1.2.3: NON-CONVEXITIES199

Chapter 24 Non-Convexities, Economies of Scale, Natural Monopoly and Monopolistic Competition&CHARLES R. PLOTT200

References205

Chapter 25 Avoidable Cost Structures and Competitive Market Institutions&MARK V. BOENING AND NATHANIEL T. WILCOX206

1. A Simple Avoidable Cost Structure206

2. Three Market Institutions208

3. The Results209

4. A Next Step: Cooperative Arrangements?211

References211

PART 1.3: DYNAMICS OF MARKET ADJUSTMENTS213

Chapter 26 Principles of Market Adjustment and Stability&CHARLES R. PLOTT214

1. Theory214

1.1. Cobweb Dynamics215

1.2. The Walrasian (Hicks. Samuelson) Dynamics216

1.3. Marshallian Dynamics216

2. Experiments217

2.1. Instability does not Occur under Conditions Predicted by the Cobweb Model217

2.2. Walrasian Dynamics and not Marshallian Dynamics Capture the Backward-Bending Case219

2.3. The Marshallian Model and not the Walrasian Model Best Describes Market Behavior in the Case of a Marshallian Externality or a "Fad"223

3. Summary226

References227

Chapter 27 Off-floor Trading, Market Disintegration and Price Volatility in Bid/Ask Markets&VERNON L. SMITH AND MARK VAN BOENING228

1. The Problem228

2. The Environment228

3. Results229

4. Discussion: Implications for, and Barriers to, Institutional Redesign232

References232

Chapter 28 Quantitative Restrictions in Experimental Posted-offer Markets&PRAVEEN KUJAL234

1. Introduction234

1.1. Quotas234

2. Quota Experiments235

3. Experimental Design236

3.1. Market equilibrium237

4. Experimental Results238

5. Conclusion240

References241

Chapter 29 Price Bubbles in Large Financial Asset Markets&ARLINGTON W. WILLIAMS242

References246

Chapter 30 Price Bubbles&DAVID PORTER AND VERNON L. SMITH247

1. Introduction247

2. Empirical Results from Laboratory Asset Markets247

References255

Chapter 31 Experiments with Arbitrage Across Assets&ERIC O'N. FISHER256

References259

Chapter 32 Bubbles and Crashes in Experimental Asset Markets: Common Knowledge Failure?&CHARLES NOUSSAIR AND CHARLES PLOTT260

References263

Chapter 33 A Comparison of Market Institutions&TIMOTHY N. CASON AND DANIEL FRIEDMAN264

1. Market Institutions264

2. Market Environment266

3. Related Work266

4. Results267

4.1. Market Efficiency267

4.2. Transaction Prices269

4.3. Transaction Volume271

5. Discussion271

References271

Chapter 34 Coordination Success in Non-cooperative Large Group Market Entry Games&AMNON RAPOPORT AND DARRYL A. SEALE273

1. The Market Entry Game273

2. Results274

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

2.2. Rapoport et al. (1998)281

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

3. Adaptive Learning293

Acknowledgement294

References294

PART 2: MARKET ECONOMICS OF UNCERTAINTY AND INFORMATION Market Economics of Uncertainty and Information299

Chapter 35 Learning to Forecast Rationally&HUGH KELLEY AND DANIEL FRIEDMAN303

1. Introduction303

2. The Tasks303

2.1. Orange Juice Forecasting (OJ)303

2.2. The Medical Diagnosis Task (MD)305

3. Results305

3.1. Rolling Regressions305

3.2. OJ Learning Curves306

3.3. MD Learning Curves308

4. Discussion308

References310

Chapter 36 Laboratory Tests of Job Search Models&JAMES C. COX AND RONALD L. OAXACA311

1. Basic Search Experiments311

2. Precommitment/No Precommitment Experiments313

3. Recall Experiments316

4. Extensions of the Standard Search Model318

Acknowledgements318

References318

Chapter 37 Reciprocity and Contract Enforcement&SIMON GACHTER AND ERNST FEHR319

1. The Contract Enforcement Problem319

2. Experimental Design and Results of Fehr and Gachter (1998a)320

2.1. Design320

2.2. Results320

3. Contract Enforcement with an Imperfect Verification Technology323

4. Summary324

References324

Chapter 38 Reciprocity in Experimental Markets&ERNST FEHR AND ARMIN FALK325

1. Introduction325

2. Experimental Design326

2.1. Common Features of All Treatments326

2.2. The One-sided Auction-treatment327

2.3. The Double Auction-treatment327

2.4. The Bilateral Bargaining-treatment328

2.5. Standard Predictions328

3. Results328

4. Reciprocity Under Conditions of High Stakes329

5. Related Experiments330

Acknowledgement333

References334

Chapter 39 Information Cascade Experiments&LISA R. ANDERSON AND CHARLES A. HOLT335

1. Cascades335

2. Market Applications and Alternative Institutions340

References342

Further reading343

Chapter 40 Markets and Information Aggregation Mechanisms&KAY-YUT CHEN AND CHARLES R. PLOTT344

1. Are The Lessons From The Simple Cases Useful?348

References352

PART 3: GENERAL EQUILIBRIUM AND THE ECONOMICS OF MULTIPLE MARKET SYSTEMS General Equilibrium and Multiple Market Systems355

Chapter 41 Comparative Advantage and International Trade&CHARLES R. PLOTT358

Reference363

Chapter 42 Asset Pricing&PETER BOSSAERTS364

1. What the Theory Predicts364

2. The Empirical Question365

3. What the Field Data Teach Us365

4. What the Experiments Teach Us366

References369

Chapter 43 Price Discovery and Allocation in Chains and Networks of Markets&CHARLES R. PLOTT AND JACKIE YEUNG370

Reference375

Chapter 44 Multiple Market Systems and the Classical Principles of Price Dynamics in General Equilibrium&CHARLES R. PLOTT376

References382

Further reading383

PART 4: GAMES385

Games387

4.1. Accuracy of the Nash Model387

4.2. Learning in Games389

PART 4.1: ACCURACY OF THE NASH MODEL390

Chapter 45 Experimental Beauty Contest Games: Levels of Reasoning and Convergence to Equilibrium&ROSEMARIE NAGEL391

1. Introduction391

2. Variations on the Beauty Contest Game392

3. Bounded Rational Behavior401

3.1. Iterated Best Reply Model401

3.2. Learning404

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

A.1. General407

A.2. The Rules407

A.3. What is the Median408

A.4. Payoffs408

A.5. Explanation Sheet408

Appendix B:408

References409

Chapter 46 Reciprocity in Ultimatum and Dictator Games: An Introduction&ELIZABETH HOFFMAN, KEVIN MCCABE AND VERNON SMITH411

1. Motivation411

2. Ultimatum and Dictator Games Described412

3. Experimental Designs and Summary Results412

4. Interpretations and Discussion414

References415

Chapter 47 Preferences and Property Rights in Ultimatum and Dictator Games&ELIZABETH HOFFMAN, KEVIN MCCABE AND VERNON SMITH417

1. Property Rights Defined417

2. Experimental Design417

3. Ultimatum Results419

4. Dictator Games and Results420

5. Discussion421

References422

Chapter 48 Prompting Strategic Reasoning Increases Other-regarding Behavior&ELIZABETH HOFFMAN, KEVIN MCCABE AND VERNON SMITH423

1. Introduction423

1.1. Previous Results423

1.2. The Current Experiment425

2. Experimental Design and Subject Recruitment425

3. Experimental Results426

4. Discussion426

References428

Chapter 49 Social Distance and Reciprocity in Dictator Games&ELIZABETH HOFFMAN, KEVIN MCCABE AND VERNON SMITH429

1. Defining Variations on Perceived Social Distance in Dictator Games429

2. Experimental Design429

2.1. Replicating Forsythe et al. (1994)430

2.2. FHSS-V431

2.3. Double Blind 2 (DB2)433

2.4. Single Blind 1 (SB1)433

2.5. Single Blind 2 (SB2)433

3. Experimental Design and Research Hypothesis434

4. Results435

References435

Chapter 50 Fairness in Ultimatum Bargaining&J. KEITH MURNIGHAN436

1. Defining and Investigating the Impact of Fairness Concerns437

2. "My Offer is Fair"440

3. Fairness, Anger, and Spite445

4. Ultimatum Bargaining by Children449

5. Ultimatums Dividing Money and M＆Ms449

6. Conclusions451

Acknowledgements452

References452

Further reading453

Chapter 51 Coordination Failure in Market Statistic Games&JOHN VAN HUYCK AND RAYMOND BATTALIO454

1. Introduction454

2. Strategic Uncertainty and Coordination Failure455

3. The Influence of Out-of-Equilibrium Payoffs457

4. The Influence of Group Size, Grid Size, and Order Statistic458

5. The Separatrix459

Acknowledgements461

References461

Chapter 52 The Problem of Common Choice in Symmetric N-person Coordination Games&CARL M. RHODES AND RICK K. WILSON463

1. The Problem463

2. Experimental Design464

3. Single Stage Results466

4. Repeated Play Results467

5. Conclusion470

Acknowledgements471

References471

Chapter 53 Equilibrium Convergence in Normal Form Games&NICOLE BOUCHEZ AND DANIEL FRIEDMAN472

1. Laboratory Procedures and Treatments472

2. Results475

3. Discussion479

References479

Chapter 54 Analyzing Choice with Revealed Preference: Is Altruism Rational?&JAMES ANDREONI AND JOHN H. MILLER481

1. Introduction481

2. The Choice Task483

3. Checking GARP483

4. Conclusion486

References487

Chapter 55 Testing Theories of Other-regarding Behavior: A Sequence of Four Laboratory Studies&GARY E. BOLTON, JORDI BRANDTS, ELENA KATOK, AXEL OCKENFELS AND RAMI ZWICK488

1. Introduction488

2. Bolton and Zwick (1995): Reputation Building versus Self-centered Fairness in an Ultimatum Game489

3. Bolton, Katok and Zwick (1998): The Nature of Giving Behavior in Dictator Games492

4. Selten and Ockenfels (1998) and Ockenfels and Weimann (1999): The Fixed Total Sacrifice Effect in the Solidarity Game494

5. Bolton, Brandts, and Ockenfels (1998): Distribution versus Intentions in a 2-person Dilemma Game495

6. Summary: Regularities for Theory Building498

References498

Further reading499

Chapter 56 Focal Points and Bargaining&KEN BINMORE AND JOSEPH SWIERZBINSKI500

References507

PART 4.2: ALTERNATIVES TO NASH508

Chapter 57 Differences in the Economic Decisions of Men and Women: Experimental Evidence&CATHERINE C. ECKEL AND PHILIP J. GROSSMAN509

Abstract509

1. Public Goods Experiments510

2. Ultimatum Experiments513

3. Dictator Experiments515

4. Conclusions518

References518

Chapter 58 Emergent Conventions in Evolutionary Games&JOHN VAN HUYCK520

1. Introduction520

2. Inefficient Conventions521

3. Coordination Conventions: Labels and Populations522

4. Unequal Division Bargaining Conventions527

Acknowledgements529

References529

Further reading530

Chapter 59 Self-centered Fairness in Games with More Than Two Players&GARY E. BOLTON AND AXEL OCKENFELS531

1. Introduction531

2. Sketch of ERC Preferences532

3. Evidence in Games with More Than Two Players534

3.1. The Guth-van Damme Bargaining Game534

3.2. Market Game537

3.3. The Fixed Total Sacrifice Effect538

4. Summary539

References540

Chapter 60 Quantal Response Equilibria: A Brief Synopsis&RICHARD D. MCKELVEY AND THOMAS R. PALFREY541

1. Introduction541

2. The Model541

3. Properties of the QRE542

4. Fit to Experimental Data543

4.1. Learning to Play Nash Over Time543

4.2. Systematic Bias Away from the Nash Equilibrium543

4.3. Nash Equilibrium Selection544

Acknowledgement547

References548

Chapter 61 Logit Equilibrium Models of Anomalous Behavior: What to do when the Nash Equilibrium Says One Thing and the Data Say Something Else&SIMON P. ANDERSON, JACOB K. GOEREE AND CHARLES A. HOLT549

1. Background: The Logit Approach551

2. How to Find a Logit Equilibrium552

3. Comparative Static Properties554

Acknowledgement557

References557

PART 4.3: LEARNING IN GAMES559

Chapter 62 Asymmetric Two-person Bargaining Under Incomplete Information: Strategic Play and Adaptive Learning&AMNON RAPOPORT, TERRY E. DANIEL AND DARRYL A. SEALE560

1. Most Participants Behave Strategically in General Accordance with the Linear Equilibrium Strategy561

2. There is an Information Advantage Exceeding the Predictions of the LES563

3. Repeated Play with a Fixed Partner Enhances Strategic Advantages565

4. Explanation of the Findings in Terms of Adaptive Learning565

References571

Chapter 63 The Effect of Message Space Size on Learning and Outcomes in Sender-Receiver Games&ANDREAS BLUME, DOUGLAS V. DEJONG AND GEOFFREY B. SPRINKLE572

1. Introduction572

2. The Games572

3. Results574

3.1. Game 1574

3.2. Game 2575

4. Summary584

References584

Chapter 64 Learning in Entry Limit Pricing Games&DAVID J. COOPER585

1. Introduction585

2. The Limit-pricing Game585

3. Experimental Procedures588

4. Adaptive Learning588

5. Experimental Results592

6. Conclusions592

References597

Chapter 65 Payoff Uncertainty and Cooperation in Finitely-repeated Prisoner's Dilemma Games&LAWRENCE M. KAHN AND J. KEITH MURNIGHAN598

1. Methods599

2. The Experimental Design599

3. Results602

4. Discussion and Conclusions604

Acknowledgements605

References605

Chapter 66 Learning and Equilibrium in Games&COLIN F. CAMERER, TECK H. HO AND JUIN-KUAN CHONG607

1. Introduction607

2. Adaptive EWA and Other Learning Models607

3. Sophisticated EWA and Equilibrium Models611

References615

PART 5: MECHANISM DESIGN AND POLICY APPLICATIONS617

Mechanism Design and Policy Applications619

5.1. Abstract, Theory Driven619

5.2. Applied, Problem Driven620

5.3. From the Lab to the Field622

References623

PART 5.1: ABSTRACT, THEORY DRIVEN624

Chapter 67 Incentive-compatible Mechanisms for Pure Public Goods: A Survey of Experimental Research&YAN CHEN625

1. Introduction625

1.1. Theoretical Results and Unresolved Issues625

1.2. Economic Environments in Experiments627

2. Dominant Strategy Mechanisms628

3. Nash-efficient Mechanisms630

4. Mechanisms Using Refinements of Nash as Implementation Concepts635

4.1. Perfect Nash Mechanisms635

4.2. Subgame Perfect Mechanisms637

5. Other Mechanisms638

6. Concluding Remarks639

Acknowledgements640

References640

Chapter 68 The Combinatorial Auction&STEPHEN J. RASSENTI AND VERNON L. SMITH644

1. The Environment645

1.1. Two Market Mechanisms: The Independent Auction and the Combinatorial Auction646

2. The After Market649

3. Results649

References653

PART 5.2: APPLIED, PROBLEM DRIVEN654

Chapter 69 Share Trading and Coupon Banking Interact to Improve Performance in Emission Trading Markets&STUART MESTELMAN AND R. ANDREW MULLER655

References659

Chapter 70 Trading Institutions and Emission Allowances&TIMOTHY N. CASON661

1. The Federal Sulfur Dioxide Allowance Program and the EPA Emissions Trading Auction661

2. Other Emission Allowance Trading Assessments: China, Ontario and Los Angeles665

3. Summary667

References667

Chapter 71 Procurement Contracting&JAMES C. COX AND R. MARK ISAAC669

1. A Model of Cost Information Asymmetry669

2. Linear Contracts670

3. Testable Hypotheses670

4. Experimental Results671

Acknowledgements674

References675

Chapter 72 Electric Power Market Design Issues and Laboratory Experiments&STEPHEN RASSENTI AND VERNON SMITH676

1. Nodal Price Theory for Lossy Lines677

Acknowledgements679

References679

Chapter 73 Energy, Reserve and Adjustment Market Behavior With Industry Network, Demand and Generator Parameters&MARK A. OLSON, STEPHEN RASSENTI AND VERNON L. SMITH681

1. Modeling Generators681

2. Modeling Demand685

3. Market Design687

4. Sealed Bid Day-Ahead Energy Market687

5. Reserve Market688

6. Load Adjustment Market689

7. Continuous Double Auction Energy Market690

8. The Network690

9. Optimization691

10.Subjects691

11.Data Analysis: Questions and Answers692

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

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

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

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

Reference699

Chapter 74 Transmission Constraints, Incentive Auction Rules and Trader Experience in an Electric Power Market&STEVEN BACKERMAN, STEPHEN RASSENTI AND VERNON L. SMITH700

1. Experimental Network Environment700

2. Experimental Design703

3. The Mechanism: A Continuously Updated Nodal Uniform Price Auction703

4. Hypotheses and Tests705

5. Regression Results707

6. Further Results707

7. Conclusions708

References709

Chapter 75 A Smart Market for the Spot Pricing and Pricing of Transmission Through a Power Grid&HUNG-PO CHAO AND CHARLES R. PLOTT710

1. Kirchoff's Law and Resource Constraints710

2. The Mechanism711

2.1. Notation712

2.2. Notation713

2.3. Dual Linear Program for Continuous-time Double Auction713

3. Parameter and the Testbed714

4. Performance715

Reference718

Further reading718

PART 5.3: FROM THE LAB TO THE FIELD719

Chapter 76 Asset Market Manipulation: A Field Experiment with Racetrack Betting&COLIN F. CAMERER720

1. Experimental Design720

2. Experimental Results722

3. Conclusion723

References724

Chapter 77 Pre-testing International Climate Change Policies: Methods and Results&PETER BOHM725

1. Testing Gains from Emissions Quota Trade among a Few Countries (Bohm, 1997)726

1.1. Test Design726

1.2. Test Results727

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

References732

Chapter 78 Quasi-experimental Evaluation of Regional Employment Subsidies&PETER BOHM733

1. Experimental Design733

2. Results734

Further reading735

Chapter 79 Field-test Elicitations of Demand for Public Goods&PETER BOHM736

References740

Chapter 80 Results from a Dozen Years of Election Futures Markets Research&JOYCE BERG, ROBERT FORSYTHE, FORREST NELSON AND THOMAS RIETZ742

1. Introduction and Description of Election Futures Markets742

2. Market Mechanism743

3. Results from Share Markets744

3.1. Absolute Market Accuracy744

3.2. Accuracy Relative to Polls746

4. How and why do Election Futures Markets "Work?"748

5. Other Issues Studied and Future Research Potential749

Acknowledgements750

References751

Chapter 81 Experimental Evidence on the Existence of Hypothetical Bias in Value Elicitation Methods&GLENN W. HARRISON AND E. ELISABET RUTSTROM752

1. The CVM Literature and Tests with Private Goods753

2. The CVM Literature and Tests with Public Goods755

3. Open-ended Elicitation in the Lab758

4. Dichotomous Choice Elicitation in the Lab760

5. Social Elicitation in the Lab761

6. Constructive Solutions762

6.1. Instrument Calibration762

6.2. Statistical Calibration763

7. Conclusions765

References766

PART 6: NON-MARKET AND ORGANIZATIONAL RESEARCH769

Non-market and Organizational Research771

Introduction771

6.1. Public Goods and Externalities771

6.2. Committees and Voting Groups773

Reference774

PART 6.1: PUBLIC GOODS, EXTERNALITIES AND COMMON POOLS775

Chapter 82 Partners versus Strangers: Random Rematching in Public Goods Experiments&JAMES ANDREONI AND RACHEL CROSON776

1. Introduction776

2. Partners versus Strangers777

3. A Closer Look777

4. Partners, Strangers, Warm-glow and Confusion781

5. What is Next?781

References782

Chapter 83 Differentiating Altruism and Reciprocity&RACHEL T.A. CROSON784

1. Introduction784

2. Hypotheses785

3. The Experiments and Results785

4. Types of Reciprocity788

5. Discussion and Conclusion789

References791

Chapter 84 Voluntary Provision of Public Goods: Experimental Results with Interior Nash Equilibria&SUSAN K. LAURY AND CHARLES A. HOLT792

1. Introduction792

2. Dominant Strategy Designs793

3. Non-dominant Strategy Designs795

4. Treatment Effects799

5. Final Observations800

Acknowledgements800

References800

Chapter 85 Spiteful Behavior in Voluntary Contribution Mechanism Experiments&TATSUYOSHI SAIJO802

1. Saijo-Nakamura Experiments803

2. Non-excludable Public Good Experiments810

Acknowledgement816

References816

Chapter 86 Explaining the Comparative Statics in Step-Level Public Good Games&ARTHUR SCHRAM, THEO OFFERMAN AND JOEP SONNEMANS817

1. Introduction817

2. Basic Experimental Tools818

3. Treatments818

4. Interpreting the Results821

References824

Chapter 87 Cooperation in VCM Experiments: Results Using the Contribution Function Approach&JORDI BRANDTS AND ARTHUR SCHRAM825

1. Introduction825

2. Description of the Design825

3. Results826

4. Some Insights829

References829

Chapter 88 Voluntary Provision of Public Goods&KENNETH S. CHAN, STUART MESTELMAN AND R. ANDREW MULLER831

References835

Chapter 89 Intrinsic Motivation in a Public Good Environment&FRANS VAN WINDEN, FRANS VAN DIJK AND JOEP SONNEMANS836

1. Introduction836

2. Experimental Design837

3. Main Observations841

3.1. Different Intrinsic Motivation for Contributing841

3.2. Intrinsic Motivation Changes with Social Interaction841

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

3.4. Group Formation844

4. Conclusions844

References844

Chapter 90 Theoretical Explanations of Treatment Effects in Voluntary Contributions Experiments&CHARLES A. HOLT AND SUSAN K. LAURY846

1. Introduction846

2. Generalized Preferences848

3. Noisy Decision Making850

4. Evolution and Adaptation851

4.1. Cooperation and Signaling852

5. Final Observations854

Acknowledgement854

References854

PART 6.2: COMMITTEES AND VOTING GROUPS856

Chapter 91 Institutional Modifications of Majority Rule&WILLIAM P. BOTTOM, RONALD A. KING, LARRY HANDLIN AND GARY J. MILLER857

1. General Introduction857

2. Agenda Control858

2.1. One-dimensional Agenda Control858

2.2. Decentralized Agenda Control861

3. Extraordinary Majorities and the Veto864

4. Bicameralism867

Acknowledgements870

References870

Chapter 92 Endogenous Properties of Equilibrium and Disequilibrium in Spatial Committee Games&RICK K. WILSON872

1. Theoretical Background872

2. Experimental Design873

3. Endogenous Preferences874

3.1. The Core874

3.2. Star Preferences875

3.3. Skew Star Preferences877

4. Discussion878

Acknowledgements878

References879

Chapter 93 Structure Induced Equilibrium in Spatial Committee Games&RICK K. WILSON880

1. Theoretical Basics880

2. Experimental Design881

3. Monopoly Agenda Setting882

4. Backward Voting Agenda884

5. Conclusion887

Acknowledgements888

References888

Chapter 94 Three-way Experimental Election Results: Strategic Voting, Coordinated Outcomes and Duverger's Law&THOMAS RIETZ889

1. Introduction889

2. The Experiments891

2.1. Common Procedures891

2.2. Equilibria891

2.3. Specific Treatments892

3. Results893

3.1. Candidate Winning Frequencies893

3.2. Other Results895

4. Conclusions and Other Issues Studied with Similar Experiments895

Acknowledgements896

References896

Chapter 95 Participation Game Experiments: Explaining Voter Turnout&JOEP SONNEMANS AND ARTHUR SCHRAM898

References901

PART 6.3: BEHAVIOR AND ORGANIZATIONS902

Chapter 96 Growing Organizational Culture in the Laboratory&COLIN F. CAMERER AND ROBERTO WEBER903

References907

PART 7: INDIVIDUAL CHOICE, BELIEFS AND BEHAVIOR911

Individual Choice, Beliefs and Behavior911

Risk: Effect of Stakes and Sex911

Endowment effects912

References913

Chapter 97 Motivation Theory and Experimental Behavior under the Decision Cost Hypothesis&VERNON L. SMITH AND JAMES M. WALKER914

1. Payoffs and Behavior914

1.1. Decision Making and Decision Cost Under Uncertainty915

1.2. Two-person Interactive Model of Decision Cost917

References920

Chapter 98 Intertemporal Choice under Habit Formation&ERNST FEHR AND PETER K. ZYCH923

1. Introduction923

2. Experimental Design923

3. Results924

4. Conclusions927

References928

Chapter 99 Preference Reversal: Now You See it, Now You Do Not!&PETER BOHM929

Concluding remarks937

References938

Chapter 100 The Endowment Effect: Evidence of Losses Valued More than Gains&DANIEL KAHNEMAN, JACK L. KNETSCH AND RICHARD H. THALER939

1. Experimental Verification940

2. Exchanges941

3. Repeated Trials943

4. Buy, Sell, and Choose943

5. Market Transactions946

6. Summary946

References947

Chapter 101 The Endowment Effect&PRAVEEN KUJAL AND VERNON L. SMITH949

1. The Background949

2. The Experiments950

2.1. Kahneman-Knetsch-Thaler Choice Experiments950

2.2. Franciosi et al. Choice Experiments950

2.3. Kahneman, Knetsch and Thaler (1991) Exchange Experiments952

2.4. Mug Exchange Experiments using Uniform Price Double Auction953

References955

Chapter 102 The Becker-DeGroot-Marschak Mechanism is not Generally Incentive-Compatible in Practice&PETER BOHM956

1. Experimental design956

2. Conclusions957

References957

Chapter 103 Utility Maximization&JAMES C. COX958

1. The Utility Hypothesis958

2. A Complete, Disaggregated Data Set960

3. Test Results and Power961

4. Are the Inconsistencies with Utility Maximization Significant?963

Acknowledgement965

References965

Chapter 104 Preference Reversals&JAMES C. COX967

1. Seminal Experiments968

2. Independence Axiom Treatments969

3. Incentive Treatment971

4. Transitivity Treatments972

5. Risk Neutrality Treatment973

6. Market Treatment974

Acknowledgement975

References975

Chapter 105 Rationality the Fast and Frugal Way: Introduction&GERD GIGERENZER AND PETER M. TODD976

1. Heuristics977

2. A Fast and Frugal Heuristic977

3. The Adaptive Toolbox979

3.1. Heuristic Principles for Guiding Search979

3.2. Heuristic Principles for Stopping Search980

3.3. Heuristic Principles for Decision Making980

4. Emergency Room Decisions981

5. Ecological Rationality983

6. What is to Come984

References985

Chapter 106 The Recognition Heuristic and the Less-Is-More Effect&DANIEL G. GOLDSTEIN AND GERD GIGERENZER987

1. Accuracy of the Recognition Heuristic988

2. The Less-is-More Effect988

3. Do People Use the Recognition Heuristic?990

4. Does the Less-is-More Effect Occur in Human Reasoning?991

5. The Underpinnings of the Recognition Heuristic992

References992

Chapter 107 The Recognition Heuristic: A Fast and Frugal Way to Investment Choice?&ANDREAS ORTMANN, GERD GIGERENZER, BERNHARD BORGES AND DANIEL G. GOLDSTEIN993

1. Investment Theory and Practice993

2. Recognition-based Investment Decisions994

2.1.When Choosing a Subset from a Larger Set, Choose Those Objects in the Larger Set That are Highly Recognized994

3.Study 1994

3.1. Study Design994

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

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

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

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

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

4. From Recognition to Riches?1000

5. Study 21000

5.1. Study Design1001

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

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

5.4. What About Gender Effects?1002

5.5. From Recognition to Riches?1002

6. Conclusion1003

References1003

Chapter 108 One-Reason Decision Making&GERD GIGERENZER, LAURA MARTIGNON, ULRICH HOFFRAGE,JORG RIESKAMP, JEAN CZERLINSKI AND DANIEL G. GOLDSTEIN1004

1. "Take The Best" and Minimalist1004

2. Simple Rules for Search1006

3. Predicting Homelessness1008

4. Fast and Frugal Heuristics Versus Linear Models: A Competition1008

5. Fast and Frugal Heuristics Versus Bayesian Methods1009

6. Why is Take The Best so Robust?1010

7. Ecological Rationality: Which Environmental Structures Can Take The Best Exploit1011

8. Non-compensatory Information1011

9. Scarce Information1012

10. Abundant Information1013

11.Do People Intuitively Adapt Heuristics to Environmental Structures?1013

12.Does the Use of Lexicographic Strategies Depend on Time Pressure?1014

13.An Intelligent System Must Ignore Information1015

References1016

Chapter 109 Cognitive Illusions Reconsidered&GERD GIGERENZER, RALPH HERTWIG, ULRICH HOFFRAGE AND PETER SEDLMEIER1018

1. Base Rate Fallacy Reconsidered1018

2. The Ecological Argument1019

3. Helping John Q. Public1020

4. Helping Physicians1021

5. Helping AIDS Counselors1023

6. Helping Lawyers and Judges1023

7. How to Teach Bayesian Reasoning1024

8. Overconfidence Bias Reconsidered1025

9. Conjunction Fallacy Reconsidered1027

10.Availability Reconsidered1030

11.Conclusion1033

References1033

Chapter 110 Social Heuristics&PETER M. TODD, JORG RIESKAMP AND GERD GIGERENZER1035

1. Social Heuristics for Cooperation1035

2. Detecting Cheaters1037

3. Cheater Detection Versus Social Contracts1040

4. Cheater Detection Versus Logical Reasoning1041

5. Searching for Mates1042

6. Conclusion1045

References1045

Chapter 111 Payoff Scale Effects and Risk Preference Under Real and Hypothetical Conditions&SUSAN K. LAURY AND CHARLES A. HOLT1047

1. Introduction1047

2. Incentive Effects for Choices Involving Gains1048

3. Choices in the Loss Domain, and the Reflection Effect1050

4. Conclusion1052

References1053

Chapter 112 Rewards and Behavior in First Price Auctions&VERNON L. SMITH AND JAMES M. WALKER1054

1. The First Price Auction1054

2. The Experimental Environment1055

3. Behavior1056

References1060

Chapter 113 Men, Women and Risk Aversion: Experimental Evidence&CATHERINE C. ECKEL AND PHILIP J. GROSSMAN1061

1. Abstract Gamble Experiments1062

2. Contextual Environment Experiments1066

3. Evidence From Field Studies1069

4. Discussion1071

References1072

PART 8: METHODS1077

8. Methods1077

Chapter 114 Experimetrics: The Use of Market Experiments to Evaluate the Performance of Econometric Estimators&JAMES C. COX AND RONALD L. OAXACA1078

1. Designing Experiments to Study the Properties of Estimators1079

2. Performance of the Estimators1080

3. Explanation of the Posted Offer Results1083

Acknowledgement1085

References1086

Chapter 115 On the Performance of the Lottery Procedure for Controlling Risk Preferences&JOYCE E. BERG, THOMAS A. RIETZ AND JOHN W. DICKHAUT1087

1. Introduction1087

2. Inducing Risk Preferences in Theory1087

3. Evidence1090

3.1. Inducing Risk Neutrality: Evidence from Sealed Bid Auctions1090

3.2. Inducing Risk Aversion and Risk Seeking: Evidence from Paired Choice Tasks1092

3.3. Inducing Risk Aversion and Risk Seeking: Evidence from the Becker-DeGroot-Marshak Procedure1093

4. Summary1094

Acknowledgements1096

References1096