Experimental methods are used to investigate five separate topics in economics:
Determination of First Movers in Sequential Bargaining Games: An Experimental Study: Experimental research has found that first movers in bargaining games tend to offer their counterparts more than noncooperative game theory predicts. Previous experiments on bargaining games have frequently been designed in such a way that the first mover is determined randomly among the experimental subjects. The threefold purpose of this study was to investigate: first, whether this design in itself could have induced the observed behavior; second, whether different ways of describing the allocations of property rights to the first mover position alter the observed behavior; and third, whether stronger incentives make subjects behave differently. The results showed that first mover mean bids did not vary with different mechanisms of determining first movers and did not differ from observed mean bids in earlier comparable experiments. However, the behavior of subjects was clearly sensitive to the framing of instructions and to the incentive level. Higher rewards shifted observed behavior towards the prediction of the game theoretical model.
An Experimental Examination of Parallelism in Single-Unit Vickrey and English Auctions: In a set of controlled economic experiments, the Vickrey and the English auction mechanisms, which are equivalent in theory, were found to produce different behavioral outcomes. However, the observed behavior is not consistent with the results reported in other studies which indicate that subjects bid above the dominant strategy in Vickrey auctions, whereas bidding in English auctions is consistent with theory. It was found here that bidding under the two institutions does not, on average, deviate from the dominant strategy. However, the variance in deviation from the dominant strategy was shown to be significantly higher under the Vickrey auction than under the English auction. Furthermore, the received evidence demonstrates that this behavioral result, observed in a controlled economic experiment applying the induced value technique, is transferable to an environment with a real consumer good.
Efficient Markets with Few Single-Unit Traders: Theory and Experiments, coauthored with Peter Bohm: Standard theory has it that maximum efficiency cannot be attained in markets with few buyers and/or sellers. In this paper, a market design for single-unit trading is proposed that is theoretically incentive compatible and efficient also when the number of traders is small. The drawback that any such design in this case 'must' have is that there are market implementation costs and, to avoid recreating inefficiency, that these costs cannot be covered by levying a charge per unit bought and/or sold. Yet, given the benefits in terms of efficiency, these implementation costs may in specific cases be acceptable to a third party. This might be true fore a collective of traders or, which is highlighted here, experimentalists who want to elicit true reservation prices on a small experimental market. The market might in that case perform as if it were perfectly competitive. Seller reservation prices elicited in two tests of the proposed market design are found not to differ from those elicited in an incentive compatible auction.
Eliciting Reservation Prices: Becker-DeGroot-Marschak Mechanisms vs Markets, coauthored with Peter Bohm and Johan Lindén: The Becker-DeGroot-Marschak (BDM) mechanism is used in experimental economics as an incentive-compatible procedure for eliciting reservation prices. It is found here, where seller prices are elicited, that the mechanism is sensitive to the choice of upper bound of the randomly generated buyout prices. Hence, the mechanism cannot be generally incentive compatible in practice. Two ways to specify the upper bound are identified which make the BDM mechanism yield mean seller prices that do not differ from those generated in an incentive-compatible market.
Political Stock Markets when Polls Are Known to be Unreliable, coauthored with Peter Bohm: This essay reports a successful attempt to use a political stock market (PSM) to predicting the outcome of a major national referendum, the 1994 Swedish referendum on whether or not Sweden should join the European Union. Not only did the PSM clearly beat the polls as interpreted by the media, it was also the only instrument of the two that could make predictions of an outcome. Media interpretations of the polls were invalidated all through the campaign by the fact that the number of undecided respondents in the polls always far exceeded the observed YES/NO margin. Whenever this is the case, polls can be an alternative to PSMs only by making specific assumptions about the future voting and abstention behavior of those who have not made up their mind when polls are taken.
Stockholm: Department of Economics, Stockholm University , 1996. , 20 p.