Dept. of Economics U NIVERSITY of A LASKA A NCHORAGE Demonstration Experiment

A simple game  There are 4 players in a group  There are 15 cups of beans.  You will earn revenue by harvesting beans  But…You need to rent “gear” to harvest the beans. Larger gear costs more.  Paid earnings in cash at end of the experiment. $$ = Revenue – cost

4 players 20 cups available Pick one. Cost is 8 “scoops”.

Gear (measuring cups) Pick one. Cost is 8 “scoops”.

Dept. of Economics U NIVERSITY of A LASKA A NCHORAGE What is experimental economics? Jim Murphy Rasmuson Chair of Economics UAA Economics Dept.

Overview  Simple demonstration experiment  What is experimental economics?  Experimental economics is a great tool for: understanding existing institutions developing new markets or policies understanding human behavior  Keywords: rules, markets, auctions, regulations, institutions

Results from classroom demo

Dept. of Economics U NIVERSITY of A LASKA A NCHORAGE The rent dissipation problem in limited entry fisheries (e.g. Alaska’s salmon fisheries) Gunnar Knapp & Jim Murphy

Rent dissipation 101  The total catch is limited to an aggregate quota.  Participation limited to a fixed number of vessels  Individual vessels compete with each other for the aggregate quota  Theory says that all rents (profits) will be dissipated in a derby-style race to fish Safety risks Excessive investment in inputs e.g., vessels, gear, crew

An example of rent dissipation: The horsepower of boats in Alaska’s Bristol Bay salmon fishery has increased dramatically over time. Boats are getting bigger

In Bristol Bay, although boats are restricted to 32’ in length, over time fishermen have built wider and taller boats in an effort to catch a larger share of the available fish. Boat costs have increased without any corresponding increase in catches. Old 32’ boat (1970s)New 32’ boat (1990s) Photograph by Norm Van Vactor

Dept. of Economics U NIVERSITY of A LASKA A NCHORAGE What is experimental economics?

 Pioneered by Vernon Smith and Charlie Plott  Observe behavior of human subjects in a controlled setting  Setting captures essential elements of an economic problem  Subjects paid cash based on their performance

Experiments are a research tool  Econometric/statistical analysis of existing data  Surveys  Experimental methods Lab and/or field  Each has its relative strengths/weaknesses Complements, not substitutes

When are experiments useful? (partial list)  If the data don’t exist, then create the data you need Testbed new economic designs New markets, policies, regulations If it’s never been done, how do you know what works? Crab rationalization (processor and harvester shares) Charter halibut New vessel buy-back programs  Understanding economic institutions Local rules/norms for managing subsistence harvests

AK Example: Charter halibut  Issue: Halibut harvests from the charter sector exceed guidelines and are increasing This year’s charter overage comes out of next year’s commercial allocation

Charter halibut  Experiments could answer: Properties of compensated reallocation program Design of mechanism to buy out quota shares Design of charter IFQ program  Experiments could not answer: Magnitude of demand reduction from one-fish bag limit Price of quota in market Magnitude of charter overage

The spectrum of experiment types  Lab experiments Students Computer or a hand-run game Neutral frame Non-students  Field experiments Move lab games into the field Usually non-students with a field context “Natural” experiments Normal task, don’t know in an experiment