Mid-Term Report Summary - BESTDECISION (Behavioural Economics and Strategic Decision Making: Theory, Empirics, and Experiments)
In this period I have worked mainly on developing the theory of consumer demand nonparametrically, without making the untested functional form assumptions usually made in econometric analyses of demand. My team members and I have generalized the classic nonparametric analyses of Samuelson, Afriat, et al. from the standard case where consumers care only about levels of consumption, to Kahneman and Tversky’s reference-dependent case, where consumers are rational but over an expanded domain of preferences, including changes in consumption relative to a reference point as well as levels. This allows us better to model phenomena like income-targeting, which play an important role in the literature on labor supply. I have also generalized Myerson and Satterthwaite’s classic analysis of the design of institutions for bilateral trading, replacing the standard Nash equilibrium assumption with a nonequilibrium “level-k” model. The analysis shows how and why the standard techniques for analyzing design fail for level-k models, but also develops methods that allow me to extend most of their analysis to a much wider class of behavioral models, with stronger empirical support.