Experimental Study of Firm Bounded Rationality and the Pattern of Trade

This paper describes an experiment and simulation with features of a spatially explicit trading environment. Decision makers repeatedly make decisions about firm headquarters, input demands, and export patterns. A goal of this research is to determine if subjects’ management decisions reflect profit maximization, learning, or heuristic decision making. It also considers what impact decision makers’ bounded rationality has on the aggregate pattern of trade. Results indicate that bounded rationality in the form of learning and heuristic decision making are ubiquitous features of subjects’ decisions. This manifests as under‐reaction to trade‐driver stimuli and produces Trefler's missing trade, suggesting a behavioral basis for this anomaly.