Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87393
Authors: 
Bao, Te
Duffy, John
Hommes, Cars
Year of Publication: 
2012
Series/Report no.: 
Tinbergen Institute Discussion Paper 12-015/1
Abstract: 
Rational Expectations (RE) models have two crucial dimensions: 1) agents correctly forecast future prices given all available information, and 2) given expectations, agents solve optimization problems and these solutions in turn determine actual price realizations. Experimental testing of such models typically focuses on only one of these two dimensions. In this paper we consider both forecasting and optimization decisions in an experimental cobweb economy. We report results from four experimental treatments: 1) subjects form forecasts only, 2) subjects determine quantity only (solve an optimization problem), 3) they do both and 4) they are paired in teams and one member is assigned the forecasting role while the other is assigned the optimization task. All treatments converge to Rational Expectation Equilibrium (REE), but at very different speeds. We observe that performance is the best in treatment 1) and worst in the treatment 3). Most forecasters use a n adaptive expectations rule. Subjects are less likely to make conditionally optimal production decision for given forecasts in treatment 3) where the forecast is made by themselves, than in treatment 4) where the forecast is made by the other member of their team, which suggests that two heads are better than one in finding REE.
Subjects: 
Learning
Rational Expectations
Optimization
Experimental Economics
Bounded Rationality
JEL: 
C91
C92
D83
D84
Document Type: 
Working Paper

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