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Demonstration Experiment. A simple game. There are 4 players in a group There are 15 cups of beans. You will earn revenue by harvesting beans But…You need to rent “gear” to harvest the beans. Larger gear costs more. Paid earnings in cash at end of the experiment. $$ = Revenue – cost.

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a simple game
A simple game
  • There are 4 players in a group
  • There are 15 cups of beans.
  • You will earn revenue by harvesting beans
  • But…You need to rent “gear” to harvest the beans.
    • Larger gear costs more.
  • Paid earnings in cash at end of the experiment.
    • $$ = Revenue – cost

Pick one.Cost is 8 “scoops”.

4 players

20 cups available

gear measuring cups
Gear (measuring cups)

Pick one.Cost is 8 “scoops”.

what is experimental economics

What is experimental economics?

Jim Murphy

Rasmuson Chair of Economics

UAA Economics Dept.

  • Simple demonstration experiment
  • What is experimental economics?
  • Experimental economics is a great tool for:
    • understanding existing institutions
    • developing new markets or policies
    • understanding human behavior
  • Keywords: rules, markets, auctions, regulations, institutions
the rent dissipation problem in limited entry fisheries e g alaska s salmon fisheries

The rent dissipation problem in limited entry fisheries (e.g. Alaska’s salmon fisheries)

Gunnar Knapp & Jim Murphy

rent dissipation 101
Rent dissipation 101
  • The total catch is limited to an aggregate quota.
  • Participation limited to a fixed number of vessels
  • Individual vessels compete with each other for the aggregate quota
  • Theory says that all rents (profits) will be dissipated in a derby-style race to fish
    • Safety risks
    • Excessive investment in inputs
      • e.g., vessels, gear, crew
An example of rent dissipation:The horsepower of boats in Alaska’s Bristol Bay salmon fishery has increased dramatically over time.

Boats are getting bigger


New 32’ boat (1990s)

Old 32’ boat (1970s)

In Bristol Bay, although boats are restricted to 32’ in length, over time fishermen have built wider and taller boats in an effort to catch a larger share of the available fish. Boat costs have increased without any corresponding increase in catches.

Photograph by Norm Van Vactor

what is experimental economics2
What is experimental economics?
  • Pioneered by Vernon Smith and Charlie Plott
  • Observe behavior of human subjects in a controlled setting
  • Setting captures essential elements of an economic problem
  • Subjects paid cash based on their performance
experiments are a research tool
Experiments are a research tool
  • Econometric/statistical analysis of existing data
  • Surveys
  • Experimental methods
    • Lab and/or field
  • Each has its relative strengths/weaknesses
    • Complements, not substitutes
when are experiments useful partial list
When are experiments useful?(partial list)
  • If the data don’t exist, then create the data you need
    • Testbed new economic designs
      • New markets, policies, regulations
    • If it’s never been done, how do you know what works?
      • Crab rationalization (processor and harvester shares)
      • Charter halibut
      • New vessel buy-back programs
  • Understanding economic institutions
    • Local rules/norms for managing subsistence harvests
ak example charter halibut
AK Example: Charter halibut
  • Issue:
    • Halibut harvests from the charter sector exceed guidelines and are increasing
    • This year’s charter overage comes out of next year’s commercial allocation
charter halibut
Experiments could answer:

Properties of compensated reallocation program

Design of mechanism to buy out quota shares

Design of charter IFQ program

Experiments could not answer:

Magnitude of demand reduction from one-fish bag limit

Price of quota in market

Magnitude of charter overage

Charter halibut
the spectrum of experiment types
The spectrum of experiment types
  • Lab experiments
    • Students
      • Computer or a hand-run game
      • Neutral frame
    • Non-students
  • Field experiments
    • Move lab games into the field
      • Usually non-students with a field context
    • “Natural” experiments
      • Normal task, don’t know in an experiment