FOR 1371: Design and Behaviour - Economic Engineering of Firms and Markets

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Economic engineering is the science of designing real-world institutions and mechanisms that align individual incentives and behaviour with the underlying goals. Mechanisms matter because they affect incentives, and decision makers respond to incentives. They do not always do so in a rational or selfish way, though; yet behaviour often responds in a systematic way. This is the starting point of the Research Unit, which aims at designing mechanisms in firms and markets based on sound behavioural research. Standard economic theory deepens our understanding of economic interaction of perfectly rational and narrowly self-interested individuals in abstract environments. There is, however, a lack of understanding about the robustness of economic results when behaviour becomes 'human' and the context becomes 'realistic': A mechanism that works fine under simplifying assumptions may fail under descriptively more relevant assumptions. The goal of the Research Unit is to identify and to investigate behavioural complexities that are relevant for a broader range of 'real-world' contexts - in particular social preferences -, and to develop mechanisms for specific contexts that can be proven to be robust against such behavioural complexities. There are significant similarities across projects as well as synergies from cooperation between the participating researchers: For one, the focus is on the role of social behaviours in economic engineering. Second, all projects follow a common methodological approach, tightly connecting complementary results from theory, experimental and field research. Also, together the researchers constitute the balanced mix of complementary and interdisciplinary expertise and experiences that is necessary when dealing with real-world complexities. The Research Unit is composed of five projects dealing with a broad range of topics like economic cognition, trust in large consumer markets and the design of incentive schemes within and between firms.