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An experimental study of decisions in dynamic optimization problems

Author

Listed:
  • Kenneth Matheny

    (Macroeconomic Advisers LLC., St Louis, MO 63105, USA)

  • Charles Noussair

    (Department of Economics, Krannert School of Management, Purdue University, West Lafayette, IN 47907, USA)

Abstract

We study decisions of subjects who are given an incentive to solve dynamic optimization problems with the structure of a single-agent, one-sector, closed economy macroeconomic model. The decision task involves a sequence of choices of consumption and investment levels. Treatment variables consist of the initial endowment of capital stock, the production technology available to the economy, and the method of creating the structure of an infinite-horizon model. The study includes and contrasts data from both American and Japanese participants. We find that whether over- or underinvestment relative to the optimum occurs depends on the production technology, but not on the initial endowment of capital stock, nor the subject pool used, nor the method of implementing the infinite horizon. Sudden episodes of maximal consumption called binges, which are always suboptimal, are widely observed.

Suggested Citation

  • Kenneth Matheny & Charles Noussair, 2000. "An experimental study of decisions in dynamic optimization problems," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 15(2), pages 389-419.
    • Handle: RePEc:spr:joecth:v:15:y:2000:i:2:p:389-419
    Note: Received: December 7, 1998; revised version: March 12, 1999
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    References listed on IDEAS

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    1. Uri Benzion & Amnon Rapoport & Joseph Yagil, 1989. "Discount Rates Inferred from Decisions: An Experimental Study," Management Science, INFORMS, vol. 35(3), pages 270-284, March.
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    More about this item

    Keywords

    Dynamic optimization; Consumption; Investment; Experiment.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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