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Randomization, Endogeneity and Laboratory Experiments

Author

Listed:
  • John C. Ham

    (Ohio State University)

  • John H. Kagel

    (Ohio State University)

  • Steven F. Lehrer

    (University of Pittsburgh)

Abstract

In conducting experiments with multiple trials, outcomes from previous trials can impact on current behavior. One of the most obvious cases in which this can happen, and the case considered in this paper, is in an auction market experiment, where earnings from previous auction trials alter cash balances which, in turn, can affect bidding behavior. (The most obvious mechanism for such a result, within standard theory, is if bidders are risk averse and do not have constant absolute risk aversion. One can imagine a number of non-standard reasons for such effects as well.) Use of OLS regressions with cash balances included as a right hand side variable are likely to lead to a biased estimate of the cash balance effect since the variation in cash balances is largely related to differences in bidding strategies across individuals. Fixed effect regressions can commonly control for these endogeniety problems at the potential cost of obtaining inefficient estimates, since this estimator does not exploit between-individual variation. This paper addresses this problem in two ways. First we consider an experimental design that reduces the potential bias of OLS estimates while increasing the precision of fixed effect estimates. Second, we consider instrumental variables estimation of the cash balance effect where the instruments are produced by the experimental design. To the best of our knowledge, neither of these approaches has been explored in the experimental literature.

Suggested Citation

  • John C. Ham & John H. Kagel & Steven F. Lehrer, 2000. "Randomization, Endogeneity and Laboratory Experiments," Econometric Society World Congress 2000 Contributed Papers 1524, Econometric Society.
    • Handle: RePEc:ecm:wc2000:1524
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    References listed on IDEAS

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    Cited by:

    1. Gary Charness, 2004. "Attribution and Reciprocity in an Experimental Labor Market," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 665-688, July.
    2. Ronald Bosman & Arno Riedl, 2003. "Emotions and Economic Shocks in a First-Price Auction," Tinbergen Institute Discussion Papers 03-056/1, Tinbergen Institute.
    3. Mario Biggeri & Domenico Colucci & Nicola Doni & Vincenzo Valori, 2021. "Good deeds, business, and social responsibility in a market experiment," Working Papers - Economics wp2021_14.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    4. Olivier Armantier, 2006. "Do Wealth Differences Affect Fairness Considerations?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 391-429, May.
    5. John C. Ham & Steven F. Lehrer, 2020. "Instrumental variables estimation of a simple dynamic model of bidding behavior in private value auctions," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 6(2), pages 139-155, December.
    6. John Kagel & Katherine Wolfe, 2001. "Tests of Fairness Models Based on Equity Considerations in a Three-Person Ultimatum Game," Experimental Economics, Springer;Economic Science Association, vol. 4(3), pages 203-219, December.
    7. Trauten, Andreas & Langer, Thomas, 2007. "Information production and bidding in IPOs: An experimental analysis of auctions and fixed-price offerings," Working Papers 50, University of Münster, Competence Center Internet Economy and Hybrid Systems, European Research Center for Information Systems (ERCIS).

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