Some Market Experiments with Policy Implications

Virginia Commonwealth University, Richmond VA

Investigators

Abstract

This award funds three different projects involving market experiments. All three projects address the behavioral relevance of standard assumptions underlying models used in formulating economic policy. The first project generalizes the conventional price setting oligopoly game by considering the effects of having sellers make production decisions in advance rather than to demand, and also by giving products some limited durability. The second project considers an important issue in the micro-foundations of macroeconomics: price and information frictions as a source of real effects caused by nominal disturbances. The third project is an application involving the regulation of financial markets. When regulators? corrective actions affect a firm?s fundamental value, the very possibility of corrective action may undermine the informative value of security prices. The experiment evaluates the importance of this interaction between security prices and regulator?s decisions, and it evaluates the corrective power of some potential remedies such as prediction markets. Broader Impacts: Each of these experiments sheds light on a context where the predictions of a model conventionally used as a basis for policy actions depends importantly on underlying assumptions that are difficult to evaluate in natural contexts. Decision making experiments are a useful way to can insight into the behavioral consequences of deviations from these conventional assumptions. In addition, the research team is building new collaborations between an open access urban public university and the Federal Reserve system. Undergraduate research assistants will get a broad exposure to how research informs policy.