(PHD, 2011)

Abstract:

I study the dynamics by which populations with heterogeneous preferences for local public good provision, or for other local policies, sort themselves into communities. I conduct a series of laboratory experiments to consider whether the ability to “vote with one’s feet,” by moving between communities, is sufficient for a population to reach optimal public good allocations and community compositions, and to assess which institutions may best facilitate efficient self-organization when residents are able to move freely between locations.

I find that communities allowing residents to make voluntary contributions toward the provision of a public good are characterized by instability, cyclical fluctuations in local provision, and a dynamic in which low demanders continually chase high demanders through locations. Institutions requiring all residents of a community to pay equal taxes enable subjects to sort by type into stable communities. However, populations can find themselves stuck at one of two types of local, inefficient equilibria. First, though sorted, residents may fail to attain the level of public good provision best suited for them, and, in that case, the system dynamics are crucial for determining whether subjects reach the communities that offer optimally designed expenditure bundles. When residents are able to vote for local tax policies with their ballots as well as with their feet, the inefficient local equilibria are eliminated, and I find that each community converges to the most efficient outcome for its population. Second, populations may sort into an inefficient equilibrium partition of residents across communities. I find that subjects moving between locations with fixed local policies segregate by type, even when pooling their resources with similar types is more efficient. When subjects are able to vote on local policies, they typically succeed in forming communities of the optimal size and membership composition.

These experimental results suggest that the ability to vote with one’s feet may not be sufficient for achieving optimal outcomes and that voting, or another mechanism by which residents may influence local policy internally, may also be necessary.

]]>

(PHD, 2009)

Abstract:

Chapter One focuses on the movement of quote prices and the role of asymmetric information. Standard methods of estimating the impact of order flow shocks are made inappropriate by the existence of runs in trade initiation, which are theoretically impossible. We find runs that exist in trade initiation persist even after accounting for standard explanations. The chapter modifies the methodology of (Huang and Stoll, 1997) to use runs in trade initiation to account for the phenomena and estimates effects using ASX data.

Chapter Two introduces a new experimental environment in which the market is continuously shocked by new traders’ incentives. The new environment joins two branches of theory. Classical economic theory has prices determined by the preferences of agents, but says little about the price formation process. The second theory is derived from finance in which prices are determined by the order flow coming to the market, but there is no connection between order flow and preferences.

We show that in such markets, two competing generalizations of the Walrasian equilibria exist corresponding to these competing literatures, each with an independent pull on market prices. Prices and efficiencies reveal a strong roll of expectations in price discovery and reject the idea that convergence is due to random or zero-intelligence trading strategies alone.

Chapter Three continues the analysis of Chapter Two by asking how the process of equilibration occurs in random arrival markets. We find that prices move proportional to the distance to the temporal equilibrium and show that this model’s predictive power is due to Marshallian features of the trading process as opposed the classical Walrasian adjustment model.

Chapter Four studies an RA environment in which some traders have asymmetric information regarding the distribution of latent incentives and arrival rates. We find that much of insiders’ information is diffused as theory suggests and that much of the information is incorporated in outsiders’ market actions. This diffusion of information is not a result of cumulative signed order flow, but is instead related to the observable rate of aggregate speculation. The ultimate implications of this phenomenon remain unknown.

]]>

(PHD, 2009)

Abstract:

We investigate behaviors in organizational and financial economics by utilizing and developing the latest techniques from game theory, experimental economics, computational testbed, and decision-making under risk and uncertainty.

In the first chapter, we use game theory and experimental economics approaches to analyze the relationships between corporate culture and the persistent performance differences among seemingly similar enterprises. First, we show that competition leads to higher minimum effort levels in the minimum effort coordination game. Furthermore, we show that organizations with better coordination also lead to higher rates of cooperation in the prisoner’s dilemma game. This supports the theory that the high-efficiency culture developed in coordination games act as a focal point for the outcome of subsequent prisoner’s dilemma game. In turn, we argue that these endogenous features of culture developed from coordination and cooperation can help explain the persistent performance differences.

In the second chapter, using a computational testbed, we theoretically predict and experimentally show that in the minimum effort coordination game, as the cost of effort increases: 1. the game converges to lower effort levels, 2. convergence speed increases, and 3. average payoff is not monotonically decreasing. In fact, the average profit is an U-shaped curve as a function of cost. Therefore, contrary to the intuition, one can obtain a higher average profit by increasing the cost of effort.

In the last chapter, we investigate a well-known paradox in finance. The equity market home bias occurs when the investors over-invest in their home country assets. The equity market home bias is a paradox because the investors are not hedging their risk optimally. Even with unrealistic levels of risk aversion, the equity market home bias cannot be explained using the standard mean-variance model. We propose ambiguity aversion to be the behavioral explanation. We design six experiments using real-world assets and derivatives to show the relationship between ambiguity aversion and home bias. We tested for ambiguity aversion by showing that the investor’s subjective probability is sub-additive. The result from the experiment provides support for the assertion that ambiguity aversion is related to the equity market home bias paradox.

]]>

(PHD, 2008)

Abstract:

This thesis demonstrates the effectiveness of novel, psychology-influenced models of economics on traditional economic structures through the lab, field, and theory.

Chapter 2 observes how subjects are able to solve the computationally difficult buffer stock savings model first for monetary earnings and then in terms of cola when thirsty. The first experiments suggested that subjects saved too little initially, but learned to save optimally within four repeated lifecycles, or 1–2 lifecycles when examining the behavior of others. The second experiment, the first of its kind to combine savings models with visceral temptation in a laboratory, found evidence that subjects when receiving rewards immediately did worse than with a ten-minute delay, consistent with the quasi-hyperbolic discounting models and several other studies.

Chapter 3 examines the decision of film distributors to deliberately withhold from critics lowquality movies. In equilibrium, through iterative reasoning, moviegoers should correctly infer quality and a cold opening should not be profitable. Therefore, cold openings provide a natural field setting to test models of limited strategic thinking as well as the rational-actor, quantal response equilibrium model. In a data set of 856 widely released movies, cold opening produces a significant, 14–17%, increase in domestic box office revenue. Parameter estimates of moviegoers behavior fit those observed in experiments. However, distributor parameters imply they overestimate their consumers and could earn more by increasing the frequency of cold openings.

Chapter 4 examines two types of “personal rules” through a model where immediacy preference changes with decisions. That is, choosing (or not choosing) a tempting alternative makes it more (less) tempting in the future. “Descriptive” rules are the backward-induction solution to the problem. With finite periods, agents may avoid the tempting alternative if their choice is going to be repeated, exhibiting the precedent effect, but they also may exhibit procrastination knowing that in the future, they will avoid temptation anyway. “Prescriptive” rules, involving an agent changing his belief structure in order to bring about a more preferred outcome, can eliminate this procrastination effect, but lose their power under an infinite time horizon.

]]>

(PHD, 1995)

Abstract:

The thesis addresses problems that surfaced as part of the proposal to deregulate access to railroads in Sweden. Skepticism exists about the feasibility and efficiency of competitive processes for access to the publicly owned track network. The skepticism is related to the capacity of any competitive process to solve certain technical problems that stem from performance criteria (efficiency, safety), informational requirements (values of track access are initially known only to the operators) and computational requirements. In the thesis, auction-like processes are developed for allocating the rights to operate trains on the track and for procuring the necessary computational effort to solve a related optimization problem inherent in the track auction process. The processes are tested in a series of human subject laboratory experiments. The data are examined to determine the degree to which the evaluative criteria are met and the degree to which the performance of the processes are consistent with the behavioral principles on which they are based.

]]>

(PHD, 1994)

Abstract:

There is a growing amount of experimental evidence that suggests people often deviate from the predictions of game theory. Some scholars attempt to explain the observations by introducing errors into behavioral models. However, most of these modifications are situation dependent and do not generalize. A new theory, called the rational novice model, is introduced as an attempt to provide a general theory that takes account of erroneous behavior. The rational novice model is based on two central principals. The first is that people systematically make inaccurate guesses when they are evaluating their options in a game-like situation. The second is that people treat their decisions similar to a portfolio problem. As a result, non optimal actions in a game theoretic sense may be included in the rational novice strategy profile with positive weights.

The rational novice model can be divided into two parts: the behavioral model and the equilibrium concept. In a theoretical chapter, the mathematics of the behavioral model and the equilibrium concept are introduced. The existence of the equilibrium is established. In addition, the Nash equilibrium is shown to be a special case of the rational novice equilibrium. In another chapter, the rational novice model is applied to a voluntary contribution game. Numerical methods were used to obtain the solution. The model is estimated with data obtained from the Palfrey and Prisbrey experimental study of the voluntary contribution game. It is found that the rational novice model explains the data better than the Nash model. Although a formal statistical test was not used, pseudo R^2 analysis indicates that the rational novice model is better than a Probit model similar to the one used in the Palfrey and Prisbrey study.

The rational novice model is also applied to a first price sealed bid auction. Again, computing techniques were used to obtain a numerical solution. The data obtained from the Chen and Plott study were used to estimate the model. The rational novice model outperforms the CRRAM, the primary Nash model studied in the Chen and Plott study. However, the rational novice model is not the best amongst all models. A sophisticated rule-of-thumb, called the SOPAM, offers the best explanation of the data.

]]>

(PHD, 1978)

Abstract:

This thesis proposes a model of social decision processes that is applicable to situations in which social change must be incremental. In the limit, only the direction and not the speed of a shift in the status quo can be decided at each point in time. Individual preferences over directions are induced myopically via the inner product of direction (unit) vectors with the gradients of utility functions. Then the direction of shift at each instant is taken to be an equilibrium of a game that has directional outcomes.

Both two-person non-cooperative games in which two candidates adopt directional strategies to maximize their shares of cast votes, and n-person simple games of which absolute majority rule is a special case, are studied. Directional equilibria for the former and directional cores for the latter are characterized. Results include the following: (1) directions “pointing” towards point equilibria are directional equilibria; (2) a mobile candidate will diverge from a rigid, extremist opponent; (3) a status quo x simultaneously approaches each winning coalition’s preferred-to-x set if and only if it shifts in an undominated direction; (4) given Euclidean preferences, a status quo that shifts in undominated directions will converge to the point core or to the set of points with empty directional cores; (5) an empty directional core at a point implies local cycling occurs in a neighborhood of the point; (6) stringent pairwise symmetry conditions must be satisfied by utility gradients at a point that has a nonempty directional core in a majority rule game; and (7) undominated directions exist at boundary points of a global cycling set and “point back into” the cycling set. Results (6) and (7) indicate that for majority games in spaces of dimension greater than three, directional cores are usually empty and global cycling sets are usually the entire space.

The disseration appendix is a self-contained paper in its own right. In a behaviorally-intuitive fashion, it establishes pairwise symmetry conditions for a point contained in the interior or boundary of a convex feasible set to be quasi-undominated in an anonymous simple game.

]]>