UNIVERSITY of ALASKA ANCHORAGE
Demonstration Experiment
Dept. of Economics
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)
Cost of your "gear" is:
8 scoops
Cup Size
Cost (cups)
Cost (g)
1/8
1.0
200
1/4
2.0
400
1/3
2.7
533
1/2
4.0
800
2/3
5.3
1067
3/4
6.0
1200
1
8.0
1600
Supply of beans
Beans per person
5 cups
Total Beans
20 cups
Number of players
4
1000 grams
4000 grams
Pick one.
Cost is 8 “scoops”.
UNIVERSITY of ALASKA ANCHORAGE
What is experimental economics?
Jim Murphy
Rasmuson Chair of Economics
UAA Economics Dept.
Dept. of Economics
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
1
2
3
Player
1
2
3
1
2
3
1
2
3
Cup Size
1
1/2
2/3
1/3
1/3
2/3
1/2
1/8
1
Catch (g)
1364
755
790
941
750
1198
810
752
994
Cost (g)
1600
800
1067
533
533
1067
800
200
1600
Profits (g)
(236)
(45)
(277)
408
217
131
10
552
(606)
Cups vs catch
1600
1400
1200
Catch
1000
800
600
400
200
0
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Cup size
Cup vs. Profits
800
600
400
Profits
200
0
(200)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
(400)
(600)
(800)
Cup Size
0.7
0.8
0.9
1.0
UNIVERSITY of ALASKA ANCHORAGE
The rent dissipation problem in
limited entry fisheries
(e.g. Alaska’s salmon fisheries)
Gunnar Knapp & Jim Murphy
Dept. of Economics
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
Boats are
getting
bigger
100%
500+
400-499
300-399
200-299
100-199
0-99
60%
40%
20%
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0%
1978
Percentage of vessels
80%
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
UNIVERSITY of ALASKA ANCHORAGE
What is experimental economics?
Dept. of 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:  Experiments could not
answer:
• Properties of compensated
reallocation program
• Design of mechanism to buy
out quota shares
• Design of charter IFQ
program
• 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