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Randomization, Endogeneity and Laboratory Experiments

  • John C. Ham

    (Ohio State University)

  • John H. Kagel

    (Ohio State University)

  • Steven F. Lehrer

    (University of Pittsburgh)

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.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1524.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1524
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  1. Kagel, John H & Levin, Dan, 1991. "The Winner's Curse and Public Information in Common Value Auctions: Reply," American Economic Review, American Economic Association, vol. 81(1), pages 362-69, March.
  2. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  3. Kagel, John H & Harstad, Ronald M & Levin, Dan, 1987. "Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study," Econometrica, Econometric Society, vol. 55(6), pages 1275-1304, November.
  4. Joseph G. Altonji & Lewis M. Segal, 1994. "Small Sample Bias in GMM Estimation of Covariance Structures," NBER Technical Working Papers 0156, National Bureau of Economic Research, Inc.
  5. Brundy, James M & Jorgenson, Dale W, 1971. "Efficient Estimation of Simultaneous Equations by Instrumental Variables," The Review of Economics and Statistics, MIT Press, vol. 53(3), pages 207-24, August.
  6. Friedman, Daniel, 1992. "Theory and Misbehavior of First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1374-78, December.
  7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  8. Kagel, John H & Roth, Alvin E, 1992. "Theory and Misbehavior in First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1379-91, December.
  9. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
  10. Cox, James C & Smith, Vernon L & Walker, James M, 1992. "Theory and Misbehavior of First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1392-412, December.
  11. James M. Brundy & Dale W. Jorgenson, 1971. "Efficient estimation of simultaneous equations by instrumental variables," Working Papers in Applied Economic Theory 3, Federal Reserve Bank of San Francisco.
  12. Buse, A, 1992. "The Bias of Instrumental Variable Estimators," Econometrica, Econometric Society, vol. 60(1), pages 173-80, January.
  13. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Hansen, Robert G & Lott, John R, Jr, 1991. "The Winner's Curse and Public Information in Common Value Auctions: Comment," American Economic Review, American Economic Association, vol. 81(1), pages 347-61, March.
  15. Merlo, Antonio & Schotter, Andrew, 1992. "Theory and Misbehavior of First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1413-25, December.
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