Research in Experimental Economics

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Evidence shows that real-effort investments can affect bilateral bargaining outcomes. This paper investigates whether similar investments can inhibit equilibrium convergence of experimental markets. In one treatment, sellers’ relative effort affects the allocation of production costs, but a random productivity shock ensures that the allocation is not necessarily equitable. In another treatment, sellers’ effort increases the buyers’ valuation of a good. We find that effort investments have a short-lived impact on trading behavior when sellers’ effort benefits buyers, but no effect when effort determines cost allocation. Efficiency rates are high and do not differ across treatments.
 
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
 
Recent attempts to measure altruism toward other players or charities suffer from a potential confound: the act of giving is typically correlated with the size of the pie left on the experimenter's table. Altruistic acts could thus be more generous if subjects prefer that monies go toward other players, or charities, than be left on the table. On the other hand, revealed altruism could be lower if subjects are more altruistic toward the residual claimant than they are toward the agent to whom they are being asked to give. We demonstrate this point with simple laboratory experiments that derive from popular recent designs. We find a significant effect from the hypothesized confound, with revealed altruism dependent upon who is specified as the residual claimant.
 
Purpose – Land assembly can mitigate the negative environmental impacts of land fragmentation on urban areas, agriculture, and wildlife. However, the assembler faces several obstacles including transactions costs and the strategic bargaining behavior of landowners. The purpose of this chapter is to examine how the order of bargaining and the nature of contracts may impact the land assembler's problem. Methodology – We develop theoretical predictions of subjects' behavior and compare these to behavior in a laboratory land-assembly game with monetary incentives. Findings – Sellers bargain more aggressively when bargaining is sequential compared to simultaneous. Noncontingent contracts increase bargaining delay and the likelihood of failed agreements. Buyers and sellers act more aggressively when there are multiple bargaining periods, leading to significant bargaining delay. When a seller has an earnings advantage in the laboratory, it is the first seller to bargain in noncontingent contract treatments. In sequential bargaining treatments, most sellers preferred to be the first seller to bargain. Research limitations – Our laboratory experiments involved only two sellers, complete information, and costless delay. Land assembly in the field may involve many sellers, incomplete information, and costly delay. Practical implications – Some of our results contradict conventional wisdom and a common result from the land-assembly literature that it is advantageous to be the last seller to bargain, a so-called “holdout.” Our results also imply that fully overcoming the holdout problem may require subsidies or compulsory acquisition. Originality – This chapter is one of the first to experimentally investigate the land-assembly problem, and the first to specifically examine the role of bargaining order and contract type.
 
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
 
Predicted Revenue Comparisons: English Auction and Lottery (in cents) 
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We report an experiment conducted to gain insight into factors that may affect revenues in English auctions and lotteries, two commonly used charity fund-raising formats. In particular, we examine how changes in the marginal per capita return (MPCR) from the public component of bidding, and how changes in the distribution of values affect the revenue properties of each format. Although we observe some predicted comparative static effects, the dominant result is that lottery revenues uniformly exceed English auction revenues. The similarity of lottery and English auction bids across sales formats appears to drive the excess lottery revenues.
 
Measuring risk aversion is sensitive to assumptions about the wealth in subjects’ utility functions. Data from the same subjects in low- and high-stake lottery decisions allow estimating the wealth in a pre-specified one-parameter utility function simultaneously with risk aversion. This paper first shows how wealth estimates can be identified assuming constant relative risk aversion (CRRA). Using the data from a recent experiment by Holt and Laury (2002), it is shown that most subjects’ behavior is consistent with CRRA at some wealth level. However, for realistic wealth levels most subjects’ behavior implies a decreasing relative risk aversion. An alternative explanation is that subjects do not fully integrate their wealth with income from the experiment. Within-subject data do not allow discriminating between the two hypotheses. Using between-subject data, maximum-likelihood estimates of a hybrid utility function indicate that aggregate behavior can be described by expected utility from income rather than expected utility from final wealth and partial relative risk aversion is increasing in the scale of payoffs.
 
This paper estimates the risk preferences of cotton farmers in Southern Peru, using the results from a multiple-price-list lottery game. Assuming that preferences conform to two of the leading models of decision under risk--Expected Utility Theory (EUT) and Cumulative Prospect Theory (CPT)--we find strong evidence of moderate risk aversion. Once we include individual characteristics in the estimation of risk parameters, we observe that farmers use subjective nonlinear probability weighting, a behavior consistent with CPT. Interestingly, when we allow for preference heterogeneity via the estimation of mixture models--where the proportion of subjects who behave according to EUT or to CPT is endogenously determined--we find that the majority of farmers' choices are best explained by CPT. We further hypothesize that the multiple switching behavior observed in our sample can be explained by nonlinear probability weighting made in a context of large random calculation mistakes; the evidence found on this regard is mixed. Finally, we find that attaining higher education is the single most important individual characteristic correlated with risk preferences, a result that suggests a connection between cognitive abilities and behavior towards risk.
 
Much of the literature on theories of decision making under risk has emphasized differences between theories. One enduring theme has been the attempt to develop a distinction between “normative” and “descriptive” theories of choice. Bernoulli (1738) introduced log utility because expected value theory was alleged to have descriptively incorrect predictions for behavior in St. Petersburg games. Much later, Kahneman and Tversky (1979) introduced prospect theory because of the alleged descriptive failure of expected utility (EU) theory (von Neumann & Morgenstern, 1947).
 
We explore the predictive capacity of short-horizon time preference decisions for long-horizon investment decisions. We use experimental evidence from a sample of Canadian working poor. Each subject made a set of decisions trading off present and future amounts of money. Decisions involved both short and long time horizons, with stakes ranging up to six hundred dollars. Short horizon preference decisions do well in predicting the long-horizon investment decisions. These short horizon questions are much less expensive to administer but yield much higher estimated discount rates. We find no evidence that the present-biased preference measures generated from the short-horizon time preference decisions indicate any bias in long-term investment decisions. We also show that individuals are heterogeneous with respect to discount rates generated by short-horizon time preference decisions and long-horizon time preference decisions. Dans cet article, nous évaluons si les préférences exprimées pour le présent peuvent prédire les décisions d’investissement dans le long terme. L’article mobilise l’approche de l’économie expérimentale avec comme participants des travailleurs canadiens à faibles revenus. Chaque participant est invité à choisir entre une somme qu’il peut toucher à très court terme et un montant plus élevé, mais qui ne lui sera versé que plus tard dans le temps. Pour certains choix, les montants ne seront disponibles que dans 7 ans et peuvent atteindre jusqu’à 600 $. Nous trouvons que les décisions entre le présent et un horizon de court terme permettent de prédire les arbitrages réalisés par les participants entre le présent et des décisions à plus long terme. Ce résultat est important dans la mesure où il est plus difficile et coûteux d’étudier les décisions de long terme que celles de court terme. Nous observons également une forte hétérogénéité entre les participants relativement à leurs taux d’escompte de court et de long terme.
 
There are several ways to define words. One is to ascertain the formal definition by looking it up in the dictionary. Another is to identify what it is that you want the word-label to differentiate.
 
We design experiments to jointly elicit risk and time preferences for the adult Danish population. The experimental procedures build on laboratory experiments that have been evaluated using traditional subject pools. The field experiments utilize field sampling designs that we developed, and procedures that were chosen to be relatively transparent in the field with non-standard subject pools. Our overall design was also intended to be a general template for such field experiments in other countries. We examine the characterization of risk over a wider domain for each subject than previous experiments, allowing more precise estimates of risk attitudes. We also examine individual discount rates over six time horizons, as the first stage in a panel experiment in which we revisit subjects to test consistency and stability of responses over time. Risk and time preferences are heterogeneous, varying by observable individual characteristics. On a methodological level, we implement a refinement of existing procedures which elicits much more precise estimates, and also mitigates framing effects.
 
In observational data, access to information is associated with lower levels of corruption. This article reviews a small but growing body of work that uses field experiments to explore the mechanisms behind this relationship. We present a typology for understanding this research based on the type of corruption being addressed (political vs. bureaucratic), the mechanism for accountability (retrospective vs. prospective) and the nature of the information provided (factual vs. prescriptive). We describe some of the tradeoffs involved in design decisions for such experiments and suggest directions for future research.
 
Auctions are increasingly being used to allocate emissions allowances (“permits”) for cap and trade and common-pool resource management programs. These auctions create thick markets that can provide important information about changes in current market conditions. This paper reports a laboratory experiment in which half of the bidders experienced unannounced increases in their willingness to pay for permits. The focus is on the extent to which the predicted price increase due to the demand shift is reflected in sales prices under alternative auction formats. Price tracking is good for uniform-price, sealed-bid auctions and for multiround clock auctions, with or without end-of-round information about excess demand. Price inertia is observed for “pay as bid” (discriminatory) auctions, especially for a continuous discriminatory format in which bids could be changed at will during a prespecified time window, in part because “sniping” in the final moments blocked the full effect of the demand shock.
 
This paper investigates the relationship between heterogeneous social preferences and charitable giving under alternative prices of giving and types of subsidies (matching and rebates). We compare within-person decision-making in alternative contexts to determine whether there is carry over in behavior from one economic situation to another. Participants' social preferences are categorized as self-interested, inequity averse, or social surplus maximizing through a set of ten allocation decisions. In charitable giving treatments, we find evidence supporting several predictions consistent with the social preference types: social surplus maximizers are more likely than others to give to a charity that increases production, inequity averters and compassionate social surplus maximizers give more to charity than do other groups; all preference types give more when the price of giving declines, and social surplus maximizers and self-interested are more responsive to the price of giving than are inequity averters. We also find that all categories give more under matching than rebate subsidies and that rebates at lowsubsidy rates crowd-out private giving of inequity averters and compassionate social surplus maximizers. Price responsiveness is smaller under rebates than matching for all types and inequity averters do not respond to the price of giving under rebates. Our findings that people with different social preferences respond differently to incentives and to the type of charity have important implications for designing charitable fundraising campaigns.
 
The purpose of this chapter is to serve as an introduction and motivation for Volume 13 of Research in Experimental Economics. In many cases, these introductory chapters are prefaces, limited to giving a roadmap of the volume and brief discussions of the chapters and why they were included. However, in some cases a more extensive discussion of the state of the literature and discipline can be useful. For example, the Introduction to REE Volume 10, Field Experiments in Economics, has proven useful as a methodological overview in its own right. We have the same goal for this chapter.
 
Purpose – The purpose of this chapter is to provide a discussion of the importance of social science research in areas of energy, economics, and the environment from the point of view of the director of a major interdisciplinary institute, Institute for Energy Systems Economics and Sustainability (IESES), at Florida State University (FSU). The author is himself a mechanical engineer who has steered the new institute into an explicit mission of linking engineering and social science research. Design and methodology – The chapter is a viewpoint paper. It begins with a brief history of the IESES institute and then addresses three specific policy areas: electrical grid improvements, transportation, and land use. Implications – At this time, our society needs exceptional energy policy as much or more than it needs direct technology investment. Originality – It is a tradition at Research in Experimental Economics to include an overview from scholars outside the field but with practical experience in the policy issues being addressed. This is the first time that the overview has been provided by an author whose primary training is as an engineer.
 
Purpose - This chapter examines the debt aversion of a group of college students who have the opportunity to take out a sizable, low-interest, non-credit dependent loan. If the loan is simply invested in low-risk assets, it would effectively yield a free lunch in net interest earnings. Methodology - The research uses survey data to examine demographic, socio-economic, personality traits, and other characteristics of those willing and unwilling to accept the loan offer, as well as their intentions of early repayment. Findings - Individuals willing to accept the loan tend to have prior debt, longer planning horizons, come from middle-income families, and may have higher cognitive ability. Anticipated early repayment of the loan is more likely among those with prior investments, no prior debt, from STEM majors, with upper income parents, and those who expect to buy a home soon. Research limitations/ implications - We find no consistent relationships between debt aversion and intellectual ability or gender, but this finding may be hampered by our small sample of female loan-rejecters. Our limited sample size also precludes examining interactions between the dimensions of personality types. Originality- We suggest consideration of policies to encourage "smart" borrowing, focusing on the financially disadvantaged, particularly for education loans. This study examines a uniquely occurring natural experiment regarding the opportunity to accept a non-credit dependent loan. Our results describe the behavior of young adults, an infrequently studied yet important segment of the population, especially in the context of borrowing behavior.
 
This chapter critically surveys recent advances in the methodology of measuring corruption in the field. The issue of measurement is central in the corruption literature, and the choice of method can significantly influence our thinking about the determinants, the mechanics, and the impact of corruption on the economy. We provide a conceptual categorization of different methods of measuring corruption ranging from surveys to direct observation of bribe payments in the field, while discussing the methodological and conceptual advantages and disadvantages of each method. Finally, we highlight areas of complementarity across methods and discuss avenues for future research.
 
Purpose - To provide a selective review of most recent developments in experimental economics of banking and lending and to summarize and synthesize the experiment designs and results in banking under asymmetric information. Methodology - The review includes recently published or working papers (2006-2013) that exclusively employ experimental economics methodology, especially for studying the impact of formal or informal institutions on lending in credit markets. Findings - The results of the reviewed experimental studies provide support for the important role of both informal (e.g., relationship banking and reputation) and formal (e.g., third-party enforcement; collateral) institutions and their impact on credit market performance, as well as the importance of studying the interaction of the two types of institutions. Research limitations/implications - The number of studies reviewed is fairly small but growing, indicating that this is the area of growing significance. Practical implications- Controlled economic experiments are better able to address the questions regarding the direction of causality in empirical relationships. Economic experiments are particularly useful in studying complex markets like credit and capital and in eliciting specific effects of institutions on credit market performance. Such wellestablished empirical relationships will be able to provide guidance for policy making for financial market reform. Originality/value This is the first review of laboratory research in banking and lending under asymmetric information that aims to call attention to this area of research and serves as a starting point for an interested researcher and provide future direction.
 
Purpose -Previous studies showed mixed results as to the cause of myopic loss aversion (MLA). This paper reexamines the main driver of MLA, considering two factors from previous studies and an additional factor. Design/methodology/ approach - Experimentally investigate whether flexibility of investment, frequency of information feedback, or timing of decision cause MLA. Findings - Timing of decision and flexibility of investment explain most differences in subject behavior. Frequency of information feedback makes only a marginal contribution. Originality/value of the paper - The differences in subject behavior can be interpreted by a shift in their reference points depending on the difference in flexibility of investment, frequency of information feedback, or timing of decision.
 
This article describes an experiment in a Kydland/Prescott type of environment with cheap talk. Individual evolutionary learning (IEL) acts as a policy maker that makes inflation announcements and decides on actual inflation rates. IEL evolves a set of strategies based on the evaluation of their counterfactual payoffs measured in terms of disutility of inflation and unemployment. Two types of private agents make inflation forecasts. Type 1 agents are automated and they set their forecast equal to the announced inflation rate. Type 2 agents are human subjects who submit their inflation forecast and are rewarded based on their forecast error. The fraction of each type evolves over time based on their performance. Experimental economies result in outcomes that are better than the Nash equilibrium. This article is the first to use an automated policy maker that changes and adapts its rules over time in response to the environment in which human subjects make choices. © 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved.
 
In this article, we survey experiments that are directly related to monetary policy and central banking. We argue that experiments can also be used as a tool for central bankers for bench testing policy measures or rules. We distinguish experiments that analyze the reasons for non-neutrality of monetary policy, experiments in which subjects play the role of central bankers, experiments that analyze the role of central bank communication and its implications, experiments on the optimal implementation of monetary policy, and experiments relevant for monetary policy responses to financial crises. Finally, we mention open issues and raise new avenues for future research. © 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved.
 
This paper replicates four highly cited, classic lab experimental studies in the provision of public goods. The studies consider the impact of marginal per capita return and group size; framing (as donating to or taking from the public good); the role of confusion in the public goods game; and the effectiveness of peer punishment. Considerable attention has focused recently on the problem of publication bias, selective reporting, and the importance of research transparency in social sciences. Replication is at the core of any scientific process and replication studies offer an opportunity to reevaluate, confirm or falsify previous findings. This paper illustrates the value of replication in experimental economics. The experiments were conducted as class projects for a PhD course in experimental economics, and follow exact instructions from the original studies and current standard protocols for lab experiments in economics. Most results show the same pattern as the original studies, but in all cases with smaller treatment effects and lower statistical significance, sometimes falling below accepted levels of significance. In addition, we document a "Texas effect," with subjects consistently exhibiting higher levels of contributions and lower free-riding than in the original studies. This research offers new evidence on the attenuation effect in replications, well documented in other disciplines and from which experimental economics is not immune. It also opens the discussion over the influence of unobserved heterogeneity in institutional environments and subject pools that can affect lab results.
 
Alchian and Demsetz's (1972) classic paper models team production as a public good. They claim detection of individual effort levels, rather than aggregate effort levels, reduces shirking (free riding). This chapter experimentally tests this claim. Participants are informed either about the individual contributions of others on their team or only about their team's total contribution. Average group contributions in the two treatments are the same. However, group contributions under individual feedback have a significantly higher variance than those under total feedback. Implications of these results for team production are discussed.
 
Purpose - The chapter studies strategic default using an experimental approach. Design/methodology/approach - The experiment considers a stochastic asset process and a loan with no down-payment. The treatments are two asset volatilities (high and low) and the absence and presence of social interactions via a direct effect on the subject's payoff. Findings - I demonstrate that (i) people appear to follow the prediction of the strategic default model quite closely in the high asset volatility treatment, and that (ii) incorporating social interactions delays the strategic default beyond what is considered optimal. Originality/value- The study tests adequately the strategic default using a novel experimental design and analyzes the neighbor's effect on that decision.
 
We design experimental economies based on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. We apply shocks to tastes, productivity, and interest rate policy, and measure the persistence of these shocks. We find that, in a setting where goods are perfect substitutes, there is little persistence of output shocks compared to treatments with monopolistic competition, which perform similarly irrespective of whether or not menu costs are present. Discretionary central banking is associated with greater persistence than automated instrumental rules. © 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved.
 
We study a microfounded search model of exchange in the laboratory. Using a within-subjects design, we consider exchange behavior with and without an intrinsically worthless token object. While these tokens have no redemption value, like fiat money they may foster greater exchange and welfare via the coordinating role of having prices of goods in terms of tokens. We find that welfare is indeed improved by the presence of tokens provided that the economy starts out with a supply of such tokens. In economies that operate for some time without tokens, the later surprise introduction of tokens does not serve to improve welfare. We also explore the impact of announced changes in the economy-wide stock of tokens (fiat money) on prices. Consistent with the quantity theory of money, we find that increases in the stock of money (tokens) have no real effects and mainly result in proportionate changes to prices. However, the same finding does not hold for decreases in the stock of money. © 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved.
 
Price and traders' estimate over time for group 2. Note that traders' estimates p h are for time t + 1 and are used to form the price pt at time t, i.e. pt = 1/H( h p h t+1 + D)/(1 + r). 
Experimental OLG economy in Marimon and Sunder (1993), with a low inflationary stationary state (Low ISS) and a high inflationary stationary state (High ISS). Under RE the time path converges to the High ISS, while adaptive learning converges to the Low ISS. Experimental data are consistent with adaptive learning. Figures 1 and Figure 3, panels A and C, from Marimon and Sunder, Econometrica 1993. Reprinted by permission of the Econometric Society. 
Realized inflation by treatments in Pfajfar and Zakelj (2011). Each line represents one of the 24 experimental economies. 
Expectations play a crucial role in finance, macroeconomics, monetary economics, and fiscal policy. In the last decade a rapidly increasing number of laboratory experiments have been performed to study individual expectation formation, the interactions of individual forecasting rules, and the aggregate macro behavior they co-create. The aim of this article is to provide a comprehensive literature survey on laboratory experiments on expectations in macroeconomics and finance. In particular, we discuss the extent to which expectations are rational or may be described by simple forecasting heuristics, at the individual as well as the aggregate level. © 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved.
 
This article discusses the methodology of using laboratory methods to address macroeconomic questions. It also provides summaries of the articles in this volume. © 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved.
 
Existing experimental and quasi-experimental results have demonstrated that both anticorruption initiatives that provide information and/or authority to the recipients of government programs – so-called “bottom-up” interventions – and initiatives that rely on government agencies for enforcement – “top-down” interventions – can be effective in some settings. Yet, in other instances, both forms of intervention have been found to be ineffective in combating corruption. These contrasting results strongly suggest that the effectiveness of both “top-down” and “bottom-up” anticorruption interventions is conditional on other factors. Unfortunately, the existing literature says little regarding the conditions conducive to the success of either forms of intervention. Assessing the conditional effects of anticorruption treatments poses substantial challenges for researchers – particularly for those employing experimental or quasi-experimental approaches. This chapter (1) discusses factors that may condition the effectiveness of both top-down and bottom-up interventions; (2) illustrates the difficulties in assessing these conditional relationships, with particular reference to experimental and quasi-experimental settings; and (3) suggests approaches that might mitigate these problems.
 
We review the existing laboratory experimental studies on corruption that have generated results with clear policy implications. We present and discuss experimental findings on the role that both monetary incentives and nonmonetary motivations may play in corruption decision-making, and, hence, in the fight against corruption.
 
Antisocial Punishment and Absence of Corruption  
This chapter argues that reciprocity provides a key to understanding corrupt behavior and its limitations. It allows for an understanding why agents not only are guided by explicit incentives but also serve those to whom they owe gratitude. It allows to observe how citizens disregard their narrow-minded interests and engage in altruistic punishment, potentially exercising negative reciprocity toward a corrupt leadership. It shows how reciprocity is at the center of criminal networks and how reform sometimes enhances rather than inhibits this dismal form of reciprocity. It finally reveals how humans are at risk of reciprocating toward their own self-image, which may inhibit them from impartially assessing their misdeeds. A thorough understanding of the power of reciprocity can inspire novel avenues for reform, some of which are presented here.
 
This paper demonstrates how economic field experiments may offer researchers a method to quickly assess policy outcomes that otherwise are difficult to measure. We compare lottery winners to losers of a privately run educational voucher program to measure the program’s effect on confidence. We measure confidence on academic ability using protocols developed to assess the educational program. We find that confidence does not differ robustly between winners and losers. Among non African-Americans, however, winners were significantly less overconfident than losers in predicting their academic achievement test scores. We also find older children are significantly more confident in their abilities.
 
Motivated by both prior experimental work and by field observations, we consider the performance of two different sealed bid versions of the silent auction. These are important institutional alternatives to the more familiar ascending price silent auction. In a new series of laboratory experiments, we investigate the effects of the different institutions both on aggregate efficiency and upon aggregate revenue generation.
 
Purpose – This study constitutes a first attempt to experimentally test the performance of a 100% auction versus a 100% free allocation of CO2 permits under the rules and parameters that mimic the EU ETS (imperfect competition, uncertainty in emissions' control, and allowing banking), with environmental targets more restrictive than the current ones but foreseeable for the near future. Methodology/approach – Two experimental treatments were run to achieve our goal. Both included the rules and the parameters that parallel the EU ETS structure, the only difference being the rule for the primary allocation of permits. Findings – Our experimental results indicate that the EU ETS has the potential to reduce CO2 emissions, achieving targets considerably more restrictive than the current ones at high efficiency levels, both with auctioned and free emission permits. Practical implications – Concerns about undue scarcity, and corresponding high prices, in secondary markets generated by a primary auction market are not warranted under the proposed dynamic auction format. This adds arguments favoring auctioning over grandfathering as the rule for the initial allocation of emission permits in the EU ETS. Originality/value of chapter – This study implements a theoretically appropriate auction format for the primary allocation of emission permits (the Ausubel (2004) auction) and incorporates a first attempt to include in the analysis measures of the risk preferences of subjects participating in emission permits experiments. These characteristics are for the first time implemented under a complex experimental design (including uncertainty of emission abatement, and banking), trying to parallel the EU ETS trading environment.
 
Traditional auction theory assumes that bidders possess values defined solely on the auctioned object. There may, however, be cases in which bidders possess prefer-ences over the revenue achieved by the auctioneer. We present here a comprehensive framework of price preference valuations, unifying several phenomenon ranging from preference for charitable giving to shill bidding. We compare expected efficiency and revenue of first and second price auctions for some specific cases of key interest. We also incorporate heterogeneous bidder preferences and examine the effects of mis-specified beliefs and show that both are crucial for understanding these situations.
 
To transform donations “in kind” into cash, charities of all sizes use auctions and raffles. Despite this, neither the theory nor the practice of efficient fund-raising – and, in particular, charity auctions – has received sufficient attention from economists, especially the fact that participation in fund-raisers is endogenous. We describe, in detail, the design and implementation of an experiment to examine 15 charity auction mechanisms. While some of the mechanisms have already received attention from both theorists and empiricists, ours is the first comprehensive examination of all existing mechanisms and the first to explore the potential of a few new formats. Our analysis focuses on participation differences among the formats and how theory and supplemental survey data can help explain some of these differences.
 
We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the strengths and weaknesses of alternative estimation procedures, and finally the effect of controlling for risk attitudes on inferences in experiments.
 
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