Experimental tests of fundamental economic theories
Chapter one of this dissertation provides an experimental test of a joint hypothesis implied by the constant relative risk averse model of first price sealed bid auction theory and standard risk preference theory. This test will be used to determine whether observed risk attitude is solely a characteristic of the individual (as conventional economic theory has it) or jointly a characteristic of the individual and the environment (as some cognitive psychologists maintain). It also presents a simple adjustment to first price auction experiments which causes "throw away" bidding behavior to be dramatically decreased and makes empirical estimation more precise. Standard theoretical search models assume that agents behave as if they search optimally. The second chapter of this dissertation reports the experimental results of a test of whether agents maximize their payouts by optimally searching for the best of n candidates in what has been called the "Secretary Problem." The novelty of this design is that the optimal search rule is invariant to agents' risk attitudes. This is made possible by implementing a binary payout schedule in which stopping at the best candidate pays a positive amount and stopping at any other candidate pays nothing. On average, subjects chose the best candidate slightly less often than an optimal searcher, while the El-Gamal and Grether (1995) estimation procedure suggests that subjects were either using a sub-optimal rule or just randomly guessing.
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