Experiments

Classroom Experiments

  1. Double Marginalization - This experiment illustrates the double marginalization problem and how vertical integration solves it. Instructions Protocol Discussion Questions Slides
  2. Right of First Refusal Experiment - This experiment illustrates how the presence of a "meet or release clause" in a contract affects bargaining outcomes.
  3. Lobbying Congress - Based on the McCain-Schumer legislation, this experiment illustrates rent-seeking games as well as how the timing and publicity of rent-seeking expenditures can foreclose opportunities for certain interest groups to compete.
  4. How to Sell a Company - This experiment illustrates how differences in the form of the "auction" for a company affect shareholder returns. Specifically, the difference between selling a company in exchange for cash as opposed to shares is highlighted.
  5. The Value of Education - This experiment illustrates how signaling works. Even though there are two equilibria in the model (pooling and separating), students end up converging to the separating equilibrium. They're typically surprised in retrospect at the possibility of pooling and about the fact that (under these parameters), signaling has left all worse off.
  6. Venture Capital Financing - This experiment illustrates screening contracts. A variation, which will be included in a revision of the experiment, is to let entrepreneurs and banks bid solely in interest rates. This variation illustrates credit rationing.

Competitive Equilibrium among Children

Do nine-year-olds converge to competitive equilibrium outcomes in a continuous double auction (CDA)? To find out, we conducted a CDA with 37 nine-year-olds from the New York metro area who were visiting Princeton in the Community of Scholars program. Specifically, we divided the children into two groups, one group of 20 kids (Group 1), and one with 17 kids and one counselor (Group 2) and held simultaneous CDAs.

Using standard induced supply and demand curves with each child either demanding or supplying one unit of the commodity, we used a modification of the CDA design contained in Davis and Holt (1993) designed (by an elementary school teacher) to be understandable by nine year olds. We then ran a practice game to make clear the rules of the game.

Following this, we ran three real games with the last game shifting the supply and demand curves up by equal amounts. At the end of the session, children were paid in cash according to their trading profits (in the event that they made zero or losses, we paid $1.)

Trading Results

We now present a summary of the trading results:

Groups 1 & 2 Pooled
Game Average Price Predicted Price Quantity Traded Predicted Quantity
1 $6.89 $7-$8 11 10-12
2 $6.79 $7-$8 13 10-12
3 $11.88 $12-$13 10 10-12

As is apparent, prices tended to be lower than competitive equilibrium predictions; however quantities were quite close. Examining the play of the groups separately is revealing:

Group 1
Game Average Price Predicted Price Quantity Traded Predicted Quantity
1 $7.00 $7-$8 4 5-6
2 $7.25 $7-$8 5 5-6
3 $12.20 $12-$13 5 5-6
Group 2
Game Average Price Predicted Price Quantity Traded Predicted Quantity
1 $6.82 $7-$8 7 5-6
2 $6.39 $7-$8 7 5-6
3 $11.55 $12-$13 5 5-6

Group 2 behaved significantly differently (according to a Wilcoxon Rank-Sum test) than Group 1. Group 2 tended to trade higher quantities at lower prices than Group 1. Relative to theoretical predictions, Group 1 is quite close. This is perhaps not too surprising in light of Gode and Sunder's (1989) work on convergence of boundedly rational traders in CDAs. Nonetheless, the convergence of Group 1 to equilibrium predictions in so few rounds and despite demand and supply shifts is still interesting and perhaps not entirely expected.

Comments

If you have any comments, have run any other experiments with children or are interested in additional details including the protocol for this experiment, send me an email: John Morgan

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