Studies on behavioral decision making: theory and experimental evidence

Abstract

My dissertation on behavioral decision making contains two independent chapters, both adopting the methodology of developing theoretical model, running parameterized simulations, and testing equilibrium predictions or hypotheses through experimental evidence. Through the independent applications of microeconomics theories in behavioral industrial organization and environmental economics, these two chapters have reached conclusions that inspire policy implications to mitigate real-world problems like holdup and climate change dilemma. Chapter 1 studies the effects of cancellation payment on the hold-up problem through parameterized modelling and lab experiment. Our experiment results conform to equilibrium predictions: setting the cancellation payment too low can lead to agents being held-up, resulting in inefficiently low investment; setting it sufficiently high can enhance the agent’s incentive and solve hold-up problem, but setting it too high could lead to the agent to invest inefficiently high, i.e. the reverse hold-up problem. Our study has policy implications that carefully designed cancellation clauses could be harnessed by policymakers and mechanism designers to achieve outcomes that maximize social welfare; Another takeaway from our experiment is learning effect, implying policymakers could expect a contract regime to become increasingly effective over time. Chapter 2 develops a novel framework and runs parameterized simulations to show how individual decisions, not unlike nations in climate policy-making and international negotiations, are determined in a scenario where the probability of climate catastrophe is ambiguous. Our calibration finds that: when players vary in their effectiveness of contribution and degree of ambiguity aversion, free-riding is predicted to happen. Our study has policy implications that strategic decision-makers need to be better educated about environmental uncertainty to elicit better cooperation, and the gaps between different players’ effectiveness of contributions also need to be closed towards that end. This paper also designs a lab experiment imitating international bargaining scenarios to test our theoretical predictions. The aim of our study is to develop and then test a model on individual’s decision making in their contribution to reduce the degree of ambiguity over a shared loss, just as in the scenario for nations to cut down carbon footprint to reduce the likelihood of catastrophic climate change on global scale.