Revision
ECON30022: EXPERIMENTAL ECONOMICS
2020-SEMESTER 2
Logistics (more information here)
• Exam is on November 24th and starts at 3pm Melbourne time
• Make sure to check your corresponding local time
• The exam lasts for 3.5 hours (including 30 minutes reading time)
• If you have been granted extra time Canvas will account for that
• The exam will be published here on Canvas and you have to upload your
solution on the same page in a single file
• To make sure that you have sufficient time to submit the file there will be a time
window of 30 minutes after the end of the exam where you can still submit the exam
Open book exam
• This will be an open book exam as you obviously have access to your lecture
notes
• Nevertheless, you should study as you will not have time to look up everything
during the exam and there will be questions that ask you to transfer knowledge
to new situations
• Your answers in the exam should be in your own words and citing the lecture
notes is only allowed for definitions (and then has to be marked as a direct
citation)
• For more on information on Open Book exams, see here
Structure for today
• Your questions are the focus
• I propose that we go through the content week by week highlighting
the learning outcomes and then you can ask your questions
Week I: Market Experiments
•What is meant by “gains from trade” and “efficiency”
•Be able to draw supply and demand curves from individual values
and costs and illustrate the impact of tax/subsidies on the market
equilibrium.
•The difference between “structural characteristics” and
“institutions”
•The difference between trading rules in Double-Auction and Posted-
Offer institutions, the standard results in each, and the reason for
higher efficiency in the former
Week II: Bargaining
•Be able to describe the Ultimatum, Dictator and Two-stage
Alternating Offer Games
•Be able to explain how the results from the UG led to DG
•The behavioral regularities arising from UG, DG, 2-Stage AOG
•The meaning of negative reciprocity, altruism, and inequity aversion.
•Discuss which of the three motivations seems to be supported more
in the data from UGs, DGs, and 2-Stage AOG
Question on backward induction
• Consider a two-stage alternating offer game with two selfish players, = 0.5
and an endowment of 10AUD
• We use backward induction (i.e. solving the game starting from the last
decision) to find the equilibrium
• Given that P1 and P2 are selfish, P2’s counter-offer will be 1c which P1 will
accept
• Since P2 has 5AUD to split, their payoff from rejecting the initial offer and
making a counter-offer is 4.99AUD and therefore P2 will not accept any offer
below 4.99AUD
• Anticipating this, P1 will offer 5AUD to P2 which will be accepted
Week III: Trust and Reciprocity
•What the Trust Game, Gift Exchange, and Principal Agent Game are
•What can explain 1st and 2nd mover behaviour in the Trust Game
•What the stylized facts in the Principal Agent Game are
•What all these games and experimental results tell us about
reciprocity
Week IV: Methodology
•the different purposes of running experiments
•the operation of the scientific engine and the role of experimental
methods in the process
•the different types of data and the advantages/disadvantages of
experimental-laboratory data.
•the difference between experiments in economics and psychology
•some of the objections to experimental economics and the
responses of experimental economists
Scientific Engine
Theory Data
Predicts
Inspires
Scientific Engine
Theory Data
Predicts
Suggests collection of
Inspires
Scientific Engine
Theory Data
Predicts
Suggests collection of
Tests
Refines
Inspires
Internal validity (or Experimental control)
Controlling the data-generating process means controlling a number of factors
1. Environment
- Preferences
- Parameters
- Endowments
- Frame
2. Institution
- Possible actions
- Sequence of actions
- Information conditions
Week IV: Methods
•Discuss informally the assumptions of the Induced Value Theory
(Smith,1976) and the practical implications for experimental design
•Explain the advantages and disadvantages of one-shot and repeated
trials experiments
•Explain the advantages and disadvantages of the different matching
protocols and apply them critically in different situations
•Discuss the between- and within-subject design as well as the
advantages and disadvantages of each
•What are some of the confounds regarding external validity?
Strategy method
• Strategy method: ask for decisions contingent on different events
occurring
• Good for observing off-equilibrium behaviour
• Has the problem of hot vs. cold decisions
• Decisions in the strategy method are abstract and hypothetical
• Emotions will play less of a role in the strategy method (i.e., cold decision
making)
• Whether the absence of emotions is an issue depends on the
specific research question
Matching protocol
If you choose to repeat a task many times you have to decide on a matching
protocol
The matching protocol is dictated by your research question and your budget.
Three options
1. Fixed matching (a.k.a. Partners): Group composition remains unchanged in the
treatment
2. Random matching (a.k.a. Strangers): Group composition changes over time (usually in
every period)
3. Perfect-Random matching (a.k.a. Perfect Strangers): Group composition changes in
every period and any two individuals are guaranteed never to meet again
Matching protocol
Remember: Repetition leads to contamination as individuals influence each
other
Contamination implies fewer statistically independent observations per subject
which increases the costs to achieve a certain level of statistical power
◦ Thus, the greater contamination the more money is required to have enough
independent observations.
However, the more the same set of subjects interact with each other the larger
are the concerns for strategic behaviour
◦ Therefore, partner matching leads to stronger contamination among a smaller set of
subjects
Whether statistical power or strategic considerations are of bigger concern
depends on the research question studied
Week V: Public Goods
•Be able to explain what are public goods and how they are different
from private goods
•Be able to describe the VCM, discuss the main results and the
different explanations behind contributions and their decay
•Be able to explain the experiments of Fehr and Gaechter (2000,
2002) and their findings
•Be able to explain the findings of the follow-up work exploring the
effect of punishment in more detail
Week VI: Behavioural Game Theory
•Define Behavioural Game Theory
•What are the differences between Behavioural Game Theory and
standard Game Theory
•Describe the Beauty Contest Game and find the Nash Equilibrium
through iterated elimination of dominated strategies
•Discuss behavioral regularities in the BCG
•Explain the St. Petersburg and Allais Paradox
•Discuss loss-aversion and probability weighting as possible
explanations for Allais paradox
Week VII: Bounded Rationality
•Define full rationality
•Describe level-k and quantitative hierarchies and how they deviate
from full rationality
•Describe the 11-20 game, the findings in the standard game, and the
findings in the variation
•Discuss what the differences across treatments tell us about level-k
•Describe the Traveller’s Dilemma and find the Nash Equilibrium
•Discuss behavioral regularities in the Traveller’s Dilemma
•Explain the intuition behind QRE and why it is useful
Week VIII: Coordination Games
•Describe the intuition behind payoff dominance and risk dominance
as tools for equilibrium selection
•Describe the basic Coordination Game and the three Nash equilibria
•Describe the intuition of the mixed strategy equilibrium and be able
to compute it
•Discuss the effect of matching, communication, and outside options
on the results in coordination games
•Describe the Minimum Effort Game and its variations
•Discuss the stylized results from the Minimum Effort Game regarding
effort costs, group size and matching protocol
QRE in the Minimum Effort Game
• Since this is a coordination Game, the set of pure-strategy Nash equilibria is not
affected by the costs of effort
• The mixed strategy equilibrium even has the unintuitive feature that higher costs
should increase effort levels
• In contrast, QRE takes the payoff differences across actions into account and
can therefore explain the common finding that higher effort costs depress effort
levels
Week X: Private Value Auctions
•Discuss the rules of the first-price and the second-price auction
•Derive the optimal bidding strategy in each auction for the 2-player
case
•Discuss the difference in strategies and revenues across the two
auction rules
•Discuss the equivalence of dynamic and static auctions
•Describe the standard experimental results and their potential
causes
Week XI: Common Value Auctions
•Explain the difference between Private Value and Common Value
Auctions
•Derive the equilibrium bid for the Common Value auction with two
risk-neutral bidders and uniform values
•Discuss the experimental results for Common Value auctions
•Describe the Takeover Game and derive equilibrium bids
•Discuss how the Takeover Game can shed light on the findings for
Common Value auctions
Week XII: Asset Markets
•describe what a bubble is with examples
•explain and calculate the present value of an asset
•explain key findings of experiments that study bubbles in the lab
•discuss key limitations of experiments that study bubbles in the lab
•discuss implications of experiments to the design of financial
markets

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