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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 and 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 in "Teaching Economics with Classroom Experiments" from the January 1999 Southern Economics Journal.
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 "Trading in 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 "A 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 "Voting and 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 exercise: "Making 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 "Information 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, in "Predation, Asymmetric Information, and Strategic Behavior in the Classroom."