Collaborative Research in Experimental Studies of Choice Behavior in the Presence of Incomplete Information

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This project continues a series of fascinating experiments in four important areas of economic behavior: 1) consumer choice between alternatives in which risk is inherent, 2) the output decisions of firms when the number of competing firms is very small, 3) welfare and income distribution, and 4) labor supply decisions made by individuals choosing between work time and leisure. The first is a topic which has occupied the attention of economists and other social scientists for a long time. Of particular interest is the observation that human beings seem to be risk averse in some situations and risk loving in others. For instance, people avoid risk in some economic situations and even pay insurance premiums so as not to incur losses in income. In other situations people gamble and take risks. This seeming paradox is very difficult to explain with existing theories of utility maximization. This project examines two possible unifying theories, namely prospect theory and expected utility theory, which can incorporate both types of behavior. Many industries consist of a very small number of firms. The automobile industry is an example, and some industries can be realistically modeled by assuming only two competing firms. They are clearly not monopolists, but through their output decisions they each can affect the final price of their products. The second part of this research analyzes the fundamental nature of supply decisions and profit making in the context of a duopoly. The focus of the third topic is the effects of guaranteed income programs on labor supply. Past work has indicated that a high level of unearned income does provide a disincentive to participate in the labor force. However, the dynamics of that decision process have yet to be explored. This project analyzes the so called "welfare trap" hypothesis by examining the relationship of systematic shifts in preferences to varying levels of unearned income in previous periods. Also studied is the distribution of earnings and inequality of incomes across individuals in an economy. Finally, this project continues past work on the choice between time spent earning income and time spent in leisure. The experimental subjects face varying wage levels, time constraints, and desired income levels, and respond with labor force participation decisions. Of particular focus are labor supply decisions when the income level is high. This project continues the investigators' experiments using both humans and animals as subjects. For nearly a decade they have shown that in correctly designed experiments, animals (typically rats and pigeons) will respond to incentives as predicted by economic theory. They have also replicated many experiments by other researchers using humans as subjects, and have amassed an astonishing amount of evidence wherein the results of work based on the behavior of humans can be duplicated by animals in the laboratory This research is done in collaboration with Professor Raymond Battalio of Texas A&M University.