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There is a close tie between my experimental
economics research and my teaching philosophy. Learning is too often
passive in economics, with a vast difference between abstract (but powerful)
theoretical models and the busy nature of everyday economic activity.
Claims about the efficiency of decentralized market-based economic activity
fall flat when justified by mathematical proofs based on strong assumptions,
like infinite numbers of traders. Putting students into the roles
of market traders and strategic decision makers lets them see market efficiencies
for themselves, alongside other experiments that reveal the large potential
inefficiencies of non-market allocations (e.g., "rent-seeking") and market
failures. These experiments increase the confidence of both students
their instructors in what is being taught and learned.
The papers referenced below and in the teaching
articles section of my vita are written for an instructor who is trying
these classroom games for the first time. At Virginia, we take this
a step farther. We regularly offer classes which pairs of students are
assigned one of these papers and are given an entire class session to run
the experiment (on their fellow classmates) and lead the subsequent class
discussion (with their own transparencies, etc.). Having just participated
in the economic situation being studied, students bring first-hand knowledge
to the discussion, which together with a Socratic approach, lets them discover
the main concepts for themselves. This unique combination of active,
student-run teaching and learning can produce a dramatic increase in excitement,
interest, and understanding at a deep intuitive level.
An introduction to using economics experiments
as teaching exercises, written for a broad economics audience can be found
Economics with Classroom Experiments" from the January 1999 Southern
If I only
had one lecture to give, it would be on the remarkable efficiency of a
decentralized market, which can usually discover the trading combinations
of buyers and sellers that maximizes the gains from trade, or come very
close, even with relatively small numbers of buyers and sellers.
If you want students to understand and believe in market efficiency, try
a Pit Market," the lead article in the Journal of Economic Perspectives
column on Classroom Games that I edit. "Multi-Market
Equilibrium and the Law of One Price" (with Susan Laury) shows how
traders arbitraging on price differences in separate markets can reduce
price spreads and increase efficiency. These exercises can also be
used to set up situations where markets fail, e.g. due to asymmetric information
Market for Lemons" (written with Roger Sherman), or externalities "Voluntary
Provision of a Public Good" (with Susan Laury).
I think many Deans and other academics
have an intuitive understanding for how markets work. But if I had
a captive audience of university administrators for an hour, I would introduce
them to the idea of "rent seeking" that was developed at Virginia in Rouss
Hall by Gordon Tullock. The setup is such that those competing for a "prize"
or rent (read: extra graduate fellowship money) engage in a type of lobbying
or rent seeking (read: collecting data, writing reports, rubbing elbows)
which requires real resources. If a lot of people are competing for
the rent (read: 43 academic departments), then the total value of resources
used up in this nonproductive lobbying may come close to equaling the value
of the prize. Non-market allocations are often susceptable to considerable
rentseeking, unless procedures are carefully designed. To teach students
about rent seeking in the context of a competition for a communications
license, try A
Classroom Experiment Involving Rentseeking Behavior (written
with Jacob Goeree).
Many people think of the political process
as some kind of mysterious mechanism that somehow generates a unique, good
outcome that represents the voters' wishes. Buy anyone who has been
on a committee knows that the voting outcome may depend on the agenda.
If you really must try to manipulate a voting outcome, try the setup in
Political Institutions" (with Lisa Anderson). This exercise also
leads to a discussion of whether voters are naive or strategic.
Economists have long been interested
in whether a group of people or even a whole economy might get stuck in
a low-production equilibrium, even though there is another equilibrium
that is better for all concerned. A class discussion of such coordination
problems can be implemented using ordinary playing cards; see: "Coordination"
(with Monica Capra). For a card-based version of another classic
paradigm, see "A
Prisoner's Dilemma" (with Monica Capra). Alternatively, these games
and others can run using a moderator program that routes decisions and
payoff information over the internet: "Strategic
Interaction on the Internet" (with M. Grobelnik and V. Prasnikar).
It is even possible to use ordinary playing
cards to set up a self-contained "macro-economy," with students playing
the roles of workers and firms. The red playing cards (Hearts or
Diamonds) are fiat money, and the black playing cards (Clubs or Spades)
represent goods or leisure time that can be enjoyed. The wages, prices,
and production decisions made by students promote a discussion of involuntary
unemployment, real versus nominal wages, the effect of the money supply
on inflation, etc. See "Employment
and Prices in a Simple Macroeconomy" (with J. Goeree). The role
of banks and depositors in money creation is illustrated in the classroom
Money" (with Susan Laury) I always wanted to write something
with a title like this!
Perhaps there is nothing quite as dull as a
classroom discussion of present value, but putting students in a market
situation where they must buy and sell assets can make animate discussion
of fundamental value and trading strategies, as described in "Speculation
an Bubbles in an Asset Market." (with Sheryl Ball). Herd behavior
can arise from people making inferences from others' decisions that may
outweigh the effects of their own private information, as described in
Cascades" (with Lisa Anderson). The exercise described in "Understanding
Bayes' Rule" puts students in situations where they must use sample
information to infer something about the world, which leads to a simple
"ball counting" heuristic for teaching the tricky math behind Bayes' Rule
in a very intuitive manner.
My colleague Kenneth Elzinga once remarked
that the issue with "predatory pricing" is whether it is rare like an old
stamp or rare like a unicorn. Well, see for yourself what some students
do when they can adjust price in response to rivals' entry and exit decisions,
Asymmetric Information, and Strategic Behavior in the Classroom."