The Logit Equilibrium: A Perspective on Intuitive Behavioral Anomalies

This paper considers a class of models in which rank-based payoffs are sensitive to “noise” in decision making. Examples include auctions, price competition, coordination, and location games. Observed laboratory behavior in these games is often responsive to the asymmetric costs associated with deviations from the Nash equilibrium. These payoff-asymmetry effects are incorporated in an approach that introduces noisy behavior via a logit probabilistic choice function. In the resulting logit equilibrium, behavior is characterized by a probability distribution that satisfies a “rational expectations” consistency condition: The beliefs that determine players' expected payoffs match the decision distributions that arise from applying the logit rule to those expected payoffs. We prove existence of a unique, symmetric logit equilibrium and derive comparative statics results. The paper provides a unified perspective on many recent laboratory studies of games in which Nash equilibrium predictions are inconsistent with both intuition and experimental evidence.     

Economic Science: An Experimental Approach for Teaching and Research

Economics experiments have been used to study theories and policies that are often difficult to evaluate with data from naturally occurring markets. This article is a selective summary of my work in the main areas of experimental economics: markets, individual decisions, games, and public choice. The discussion pertains both to scientific discoveries and teaching innovations.     

A test of the auditor reliability framework using lenders’ judgments

Taylor et al. (2003) challenged the longstanding notion that independence is the capstone of the audit profession by proposing a conceptual framework that emphasizes reliability, rather than independence, as the professional endgame for auditors. Although the reliability framework has attracted attention from policymakers, it has not been tested empirically in an audit context to assess its validity from a user’s perspective. The objective of this study is to test the auditor reliability framework and its formative ethical constructs (i.e., integrity, expertise, independence, objectivity, and reliability) with a sample of 168 commercial lenders. We also extend the reliability framework to examine the extent that perceived auditor reliability affects lenders’ judgments of financial reporting reliability and default risk in a hypothetical lending scenario. Finally, we evaluate the extent that lenders’ judgments are affected by auditor provision of nonaudit bookkeeping and payroll services to a prospective borrower in violation of current independence rules. The results provide strong empirical support for the relations predicted in the reliability framework. Structural equation model results indicate that auditor integrity is the foundation of the framework, directly affecting lenders’ assessments of auditor expertise, independence, objectivity, and reliability. Further, although integrity and objectivity directly affect perceived auditor reliability, independence and expertise only affects reliability indirectly through its impact on objectivity. Finally, we find that lenders perceive no decrease in auditor objectivity or reliability when existing independence rules are violated by combining audit services with nonaudit services for prospective borrowers.     

Toward A Theory on the Reproduction of Social Innovations in Subsistence Marketplaces

Social innovations and their diffusion are critical in bridging the multiplicity of deprivations experienced by those in subsistence contexts. Yet they often do not diffuse as expected. To better understand this prevalent problem, this article develops a theory of diffusion that explains the reproduction (duplication) of social innovations in subsistence contexts. The theory utilizes a bottom‐up perspective that considers what attributes of innovations and capacities of actors matter to reproduction, particularly for subsistence user‐producers. Adopting an inductive, case‐based approach, the authors draw on examples of social innovations in sub‐Saharan Africa. Based on the authors' research and extant literature, this article builds a typology that captures different modes of reproduction. The typology delineates three archetypes of reproduced social innovations: mimetic, facilitated, and complex, and notes how frugal innovations can emerge from these archetypes. These archetypes are based on the interactions of: (1) a product's resource and knowledge complexities, and (2) the knowledge capabilities or resources of various actors, including subsistence user‐producers and bridging agents. The typology thus illuminates the conditions under which subsistence user‐producers might independently reproduce a social innovation (mimetic innovations), when they need assistance from bridging agents (facilitated innovations), and when the mix of resources and knowledge are beyond their capacity (complex innovations). Moreover, by exploring reproduction experiences of subsistence users, this article recognizes the implications of low literary, close social networks, and physical limitations. By examining who controls the knowledge and resources imperative to reproduction, the authors go beyond a focus on the social benefits of innovations to consider how intellectual property and profits matter to different actors. This article pulls together these various insights and identifies key implications that social innovators and intermediaries should consider when working to reproduce social innovations in subsistence contexts and with subsistence user‐producers.     

A heuristic method for aggregate planning: Production decision framework

This paper presents an understandable and straight-forward method for making work force level and inventory planning decisions, i.e., dynamic aggregate planning decisions.The development phase utilizes a ratio, named RPCC, which represents the relative value of the cost of changing the production level to the cost of carrying inventory. This ratio is used to determine the length of an effective planning horizon. Two indicators are calculated to reflect the demand to current production rate over different time periods. Based on the joint values of these indicators, the planning problem is subdivided into one of nine mutually exclusive and exhaustive states. A set of action statements, representing logical responses to each of the sub-problems, is formulated.After completion of the development phase, the performance of the Production Decision Framework model is tested in several real case environments. Suggestions are made for further improvement.     

Ethiopia: Food for work or food for relief

This article examines the aims, context and experience of food aid projects in Ethiopia. The major focus is a case study of an Ethiopian food-for-work project — the largest in sub-Saharan Africa — and favourable conclusions are drawn. Factors are identified which have made for this apparent success. Since one factor is local food shortage, consideration is also given to the proposition that the concept of ‘relief aid’ needs a wider definition than heretofore.     

Parametric and Semiparametric Modeling of the Off-Farm Labor Supply of Agrarian Households in Transition Bulgaria

The reaction of labor markets to economic reforms is an important indicator of the progress of transition. Because of diminished government support and the breakup of state and collective enterprises, labor market adjustments in the transition economies have been particularly severe in the agricultural sector. This article evaluates the off-farm labor market for a sample of agrarian households in transition Bulgaria. We give particular attention to the distributional assumptions that underlie standard approaches to the evaluation of labor supply. A variety of specification tests are considered and support for standard maximum likelihood estimates which rely on normality as a maintained hypothesis is mixed. Alternative semiparametric (distribution-free) estimators are also considered. The empirical results indicate that, five years after the initiation of the transition, off-farm labor supply patterns for Bulgarian agricultural households are similar to what is commonly observed in developed market economies. Labor supply is positively affected by factors such as education and work experience which are hypothesized to increase off-farm wages. Social benefit programs providing monetary or in-kind support payments are shown to significantly decrease off-farm work.     

Risk Aversion and the Winner's Curse

This article analyzes an auction in which bidders see independent components of a common prize value. The Nash equilibrium for two rational bidders is shown to be independent of risk attitudes. The information structure allows explicit calculation of an alternative equilibrium in which naive bidders do not correctly discount the value of the prize, contingent on winning, and thus they suffer the winner's curse. Subjects in a laboratory experiment clearly fall prey to the winner's curse; the data conform most closely to the predictions of the naive model. Moreover, the level of risk aversion implied by fitting the naive model is similar to an independent risk aversion measure obtained in a separate (private value) bidding exercise.     

Teaching Economics with Classroom Experiments: A Symposium

Classroom experiments are effective because students are placed directly into the economic environments being studied. The papers in this special section span diverse applications, for example, speculation and multiple markets, coordination and voting games, and a simple macroeconomy. All experiments can be run with simple props, such as ordinary playing cards. After participating, students bring firsthand experience to the discussion to enhance the effectiveness of the Socratic method. In small classes, these exercises also enable bright undergraduates to run the experiments on their own classmates and to lead the ensuing discussions, creating a special teaching/learning environment.