Dept. of Economics

UNIVERSITY of ALASKA

ANCHORAGE

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

4 players

20 cups available

Pick one.Cost is 8 “scoops”.

Gear (measuring cups)

Pick one.Cost is 8 “scoops”.

Cup Size Cost (cups) Cost (g)1/8 1.0 2001/4 2.0 4001/3 2.7 5331/2 4.0 8002/3 5.3 10673/4 6.0 12001 8.0 1600

Beans per person 5 cups 1000 gramsTotal Beans 20 cups 4000 grams

Number of players 4

Cost of your "gear" is:8 scoops

Supply of beans

Dept. of Economics

UNIVERSITY of ALASKA

ANCHORAGE

What is experimental economics?

Jim Murphy

Rasmuson Chair of Economics

UAA Economics Dept.

Overview

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

Results from classroom demo

Game Player Cup Size Catch (g) Cost (g) Profits (g)1 1 1 1364 1600 (236)

2 1/2 755 800 (45)3 2/3 790 1067 (277)

2 1 1/3 941 533 4082 1/3 750 533 2173 2/3 1198 1067 131

3 1 1/2 810 800 102 1/8 752 200 5523 1 994 1600 (606)

Cups vs catch

0

200

400

600

800

1000

1200

1400

1600

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Cup size

Cat

ch

Cup vs. Profits

(800)

(600)

(400)

(200)

0

200

400

600

800

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Cup Size

Pro

fits

Dept. of Economics

UNIVERSITY of ALASKA

ANCHORAGE

The rent dissipation problem in limited entry fisheries

(e.g. Alaska’s salmon fisheries)

Gunnar Knapp & Jim Murphy

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.

Distribution of Bristol Bay Boats by Vessel Horsepower

0%

20%

40%

60%

80%

100%

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Per

cent

age

of v

esse

ls 500+

400-499

300-399

200-299

100-199

0-99

Boats are getting bigger

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.

Old 32’ boat (1970s)New 32’ boat (1990s)

Photograph by Norm Van Vactor

Dept. of Economics

UNIVERSITY of ALASKA

ANCHORAGE

What is experimental economics?

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

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)

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

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

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