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An experimental study of decisions in dynamic optimization problems

  • 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)

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.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 15 (2000)
Issue (Month): 2 ()
Pages: 389-419

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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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  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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