Monthly Archives: November 2007

Formalization and bounded rationality

Fredrik Hansen* will present his paper “Formalization and Bounded Rationality: From an Ontological Point of View” Monday 3 December, 14-16 in Siltavuorenpeger 20R, Room K 115, Helsinki.

*Swedish National Road and Transport Research Institut

Social comparison and neuroeconomics: a critical view

The Economist’s blog Free Exchange in the post The comparative brain heavily criticizes Fliessbach’s et al (2007) study “Social Comparison Affects Reward-Related Brain Activity in the Human Ventral Striatum” ( abstract) published in Science, 23 November 2007.

Positional consumption and progressive consumption taxes

David R. Henderson criticizes Robert H. Frank’s proposal for a progressive consumption tax as a means to internalize the negative externality related to positional consumption by the rich in Robert Frank’s Strange Case for Taxing “The Rich” .

Part on Henderson’s critique focuses on the importance of social comparisons on driving consumption choices and suggests Frank may have overstated it. In the article Social Comparison Affects Reward-Related Brain Activity in the Human Ventral Striatum, in Science, 23 November 2007, Fliessbach et al “provide neurophysiological evidence for the importance of social comparison on reward processing in the human brain.” Here is the abstract . See also the Washington Post review article on the Fliessback’s et al Science paper.

Pointer by Greg Mankiw.

Ethical differentiation and market behavior

In the article Ethical differentiation and market behavior: An experimental approach (in press in the Journal of Economic Behavior & Organization), Rode, Hogarth and Le Menestrel studied the purchase of ethically differentiated good (e.g. fair trade goods) in a laboratory setting with university students as participants.

Their experiment included three treatments. In the first treatment, consumers knew the extra costs incurred to produce the “higher ethical quality good” while in the second no information on the extra costs incurred was available to consumers. The third treatment acted as a control, without ethical differentiation, but with some products costing more than others due to higher production cost.

While in the third treatment participants generally purchased the product at the lowest price, in the first and second treatment they paid the price premium for the ethical good. The premium was paid even when consumers did not know the extra costs incurred by ethical producers. In fact, somewhat surprisingly, consumers paid higher premia when extra production costs were unknown. The least willing to pay price premiums for ethical goods were participants who studied economics and business.

You can download the paper here .


Ethical differentiation and market behavior: An experimental approach, Journal of Economic Behavior & Organization, Article in Press, Corrected Proof , Available online 22 December 2006
by Julian Rode, Robin M. Hogarth and Marc Le Menestrel


Does ethical differentiation of products affect market behavior? We examined this issue in triopolistic experimental markets where producers set prices. One producer’s costs were higher than the others. In two treatments, the additional costs were attributed to compliance with ethical guidelines. In the third, no justification was provided. Many consumers reduced their experimental gains by purchasing the ethically differentiated products at higher prices. Individual differences were important (business/economics students paid smaller premia). Finally, we speculate about the observed “demand function” for ethics and emphasize using experimental methodology to complement empirical studies in assessing markets for ethically differentiated products.

Coverage of Behavioral and Experimental Economics in Undergraduate Microeconomics Textbooks

Saturday November 17 I’ll be presenting the paper Coverage of Behavioral and Experimental Economics in Undergraduate Microeconomics Textbooks to the The Second Nordic Workshop in Behavioral and Experimental Economics, Göteborg.

The paper is a joint work with my colleague Minna Autio. Here you can download the workshop presentation .ppt (updated 17 November 2007), below is the abstract.

Abstract (Draft 14 November 2007)
Please do not quote without permission of the authors

This paper analyzes to what degree undergraduate microeconomics textbooks incorporate the key contributions from behavioral economics and experimental economics, two branches of economics that have received increasing academic recognition in the last years.

We find great variation in the coverage of both behavioral and experimental economics ranging from detailed presentations to total disregard.

Ten of the 25 textbooks examined make no reference at all to behavioral economics concepts and models; six dedicate less than 1% of total pages to behavioral economics, six between 1% and 2.6 %, and three between 6% and 11%. When behavioral economics is discussed, the focus tends to be on bounded rationality rather than on bounded self-interest or bounded willpower.

Experimental economics is not discussed at all in ten textbooks, twelve textbooks dedicate less than 0.6% of total pages to it, while three dedicate between 2% and 10% of total pages.

We suggest that variation in coverage could be explained by different views on which topics belong to the core of undergraduate microeconomics, on whether behavioral and experimental economics may be too challenging to students fairly new to economics, and on how restricted the scope of applicability of behavioral economics models is felt to be.

Author Keywords: behavioral economics, economics education and teaching of economics, experimental economics, microeconomics, psychology, textbooks.

JEL classification codes: A22, B49, B59, D01.