To save content items to your account,
please confirm that you agree to abide by our usage policies.
If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account.
Find out more about saving content to .
To save content items to your Kindle, first ensure firstname.lastname@example.org
is added to your Approved Personal Document E-mail List under your Personal Document Settings
on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part
of your Kindle email address below.
Find out more about saving to your Kindle.
Note you can select to save to either the @free.kindle.com or @kindle.com variations.
‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi.
‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.
We examine the net benefits of social distancing to slow the spread of COVID-19 in USA. Social distancing saves lives but imposes large costs on society due to reduced economic activity. We use epidemiological and economic forecasting to perform a rapid benefit–cost analysis of controlling the COVID-19 outbreak. Assuming that social distancing measures can substantially reduce contacts among individuals, we find net benefits of about $5.2 trillion in our benchmark case. We examine the magnitude of the critical parameters that might imply negative net benefits, including the value of statistical life and the discount rate. A key unknown factor is the speed of economic recovery with and without social distancing measures in place. A series of robustness checks also highlight the key role of the value of mortality risk reductions and discounting in the analysis and point to a need for effective economic stimulus when the outbreak has passed.
Widespread testing is key to controlling the spread of COVID-19. But should we worry about self-selection bias in the testing? The recent literature on willful ignorance says we should – people often avoid health information. In the context of COVID-19, such willful ignorance can bias testing data. Furthermore, willful ignorance often arises when selfish wants conflict with social benefits, which might be particularly likely for potential ‘super-spreaders’ – people with many social interactions – given people who test positive are urged to self-isolate for two weeks. We design a survey in which participants (n = 897) choose whether to take a costless COVID-19 test. We find that 70% would take a test. Surprisingly, the people most likely to widely spread COVID-19 – the extraverts, others who meet more people in their daily lives and younger people – are the most willing to take a test. People's ability to financially or emotionally sustain self-isolation does not matter to their decision. We conclude that people are selfless in their decision to test for COVID-19. Our results are encouraging – they imply that COVOD-19 testing may succeed in targeting those who generate the largest social benefits from self-isolation if infected, which strengthens the case for widespread testing.
We examine the causes and policy implications of strategic (willful) ignorance of risk as an excuse to over-engage in risky health behavior. In an experiment on Copenhagen adults, we allow subjects to choose whether to learn the calorie content of a meal before consuming it and then measure their subsequent calorie intake. Consistent with previous studies, we find strong evidence of strategic ignorance: 46% of subjects choose to ignore calorie information, and these subjects subsequently consume more calories on average than they would have had they been informed. While previous studies have focused on self-control as the motivating factor for strategic ignorance of calorie information, we find that ignorance in our study is instead motivated by optimal expectations – subjects choose ignorance so that they can downplay the probability of their preferred meal being high-calorie. We discuss how the motivation matters to policy. Further, we find that the prevalence of strategic ignorance largely negates the effects of calorie information provision: on average, subjects who have the option to ignore calorie information consume the same number of calories as subjects who are provided no information.
In our opinion, the challenges of ongoing measurement, the ever-moving behavioral baseline, and strategic self-ignorance return us full-circle to a sensible point made by Peter Bohm–Benefit-Cost Analysis for environmental goods should use an interval method.
We illustrate the experimental method by examining bidding behavior for controversial goods, i.e., goods in which bidders have positive and negative values. Our results suggest that bidding behavior differs across auction type. Bidders with positive induced values bid sincerely in a WTP auction. Bidders bid conservatively, however, in the WTA auction, foregoing profitable opportunities. Informing bidders of their optimal strategy serves to attenuate bidding discrepancies but does not eliminate them. Treating the WTP and WTA auctions as equivalent given positive and negative values could lead one to overstate the costs relative to the benefits of the controversial good.
Many poor countries remain trapped in a cycle of poverty and environmental degradation. Understanding how people react to existing and proposed solutions most likely can be improved using the methods of experimental economics. Experiments provide researchers a method to test theory, look for patterns of behavior, testbed economic institutions and incentives, and to educate people. Herein we explore how experimental economics has been used and could be used to help guide decision making to increase prosperity without overexploiting the resource base and environmental assets needed for basic survival.
We develop a bioeconomic model to gain insight into the challenges of Payments for Environmental Services (PES) as applied to protect endangered species given wildlife-livestock disease risks and habitat fragmentation. We show how greater connectivity of habitat creates an endogenous trade-off. More connectedness both (i) ups the chance that populations of endangered species will grow more rapidly, while (ii) simultaneously increasing the likelihood diseases will spread more quickly. We examine subsidies for habitat connectedness, livestock vaccination, and reduced movement of infected livestock. We find the cost-effective policy is to first subsidize habitat connectivity rather than vaccinations – this serves to increase habitat contiguousness. Once habitat is sufficiently connected, disease risks increase to a level to make disease-related subsidies worthwhile. Highly connected habitat requires nearly all the government budget be devoted to disease prevention and control. The result of the conservation payments is significantly increased wildlife abundance, increased livestock health and abundance, and increased development opportunities.
David Finnoff, Assistant Professor, Department of Economics and Finance University of Wyoming, USA,
Jason F. Shogren, Stroock Distinguished Professor of Natural Resource Conservation & Management Department of Economics and Finance, University of Wyoming, USA,
Brian Leung, Department of Biology & School of Environment McGill University, Montreal, Canada,
David Lodge, Professor in Conservation Biology Department of Biological Sciences, University of Notre Dame, Notre Dame, USA
As a leading cause of biodiversity loss and environmental damage, non-indigenous species can pose significant risks to society (see Mack et al. 2000, Lodge 2001). Managing these risks cost-effectively requires a consistent framework for bio-economic risk assessment. The economic theory of endogenous risk – merged with applied population ecology – provides such a framework (Shogren 2000; Leung et al. 2002). Endogenous risk captures the risk-benefit tradeoffs created by jointly determined ecosystem conditions, species characteristics and economic circumstances (Crocker and Tschirhart 1992; Settle et al. 2002). Endogenous risk theory stresses that management priorities depend crucially on both the tastes of the manager – his preferences over time and for risk bearing – and the technology of risk reduction – prevention, control and adaptation matter for optimal reduction strategies. Holding initial biological circumstances constant, managers with different preferences will likely make different choices on the mix of prevention and control. How different tastes affect technology choice, however, remains an open question in invasive species management.
This chapter investigates how manager types differentiated by preferences over time and over risk affect the optimal mix of prevention and control. The chapter advances our understanding on the behavioural underpinnings of risk-reduction strategies to control invasive species. Endogenous risk theory is a flexible tool that allows one to better understand the tradeoffs involved in changing the odds that good events are realised or in decreasing the severity of bad events if they are realised (Ehrlich and Becker 1972).
Today researchers use experimental auctions to examine incentive and contextual questions that arise in eliciting values through stated preferences methods. The initial work developing the experimental valuation method was pioneered decades ago by researchers interested in estimating the demand for public goods, e.g., Bohm (1972), Bennett (1983), Knetsch and Sinden (1984), and Cummings et al. (1986). Most experimental auctions follow a process similar to that described by physicist James Conant (1951; p. 56): “[a]bout three centuries ago the trial-and-error experimentation of the artisan was wedded to the deductive method of reasoning of the mathematician; the progeny of this union have returned after many generations to assist the ‘sooty empiric’ in his labors.” By combining pattern recognition with theoretical insight, the “sooty empiric” uses experimental auctions to help clarify how incentives and context affect how people state their preferences for real and hypothetical goods and services.
This book has assimilated the current state of knowledge on the use of experimental auctions to elicit values for goods. Our goal is to provide a resource to practitioners interesting in designing and using experimental auctions in applied economic, psychology, and marketing research. We have covered the basics on value and auction theory to provide the analytical background for the experiments. We then addressed specific issues related to design and implementation of experimental auctions. In many cases, we offered specific advice.
We now present nine case studies to illustrate experimental auctions at work in practical applications. This chapter presents case studies showing how we have used experimental auction methods to estimate the value of new or non-market goods and how those values are used in welfare analysis and to estimate the success of new products. These case studies are grouped into three broad categories: informing policy, marketing, and valuing controversial goods. In the policy case studies, we consider experimental auctions designed to address a grading system for beef tenderness, behavior toward food safety, and the acceptable tolerance levels for genetically modified food. For the marketing case studies, we present auctions designed to evaluate the market share for branded beef products, value characteristics of pork, and value financial records. The last set of case studies focus on controversial goods, where we estimated demand for genetically modified food, the impact of information on preferences for irradiated foods, and the demand for products of ambiguous quality like fresh meat produced with growth hormones.
Informing Policy I: beef tenderness grading system
Since the 1900s, the United States federal government has set and maintained grades and standards for many agricultural products. In theory, grades and standards improve market efficiency by reducing problems associated with information asymmetry, that is, consumers and producers know the type/quality of the goods they are buying and selling. Federal grading of agricultural products was authorized by the US Congress through the Agricultural Marketing Act of 1946.
Results from experimental auctions frequently generate as many questions as answers about bidding behavior and auction design. Creating an auction that balances experimental control and real-world context can raise fundamental questions about how experience with a good and the market affects bidding, whether preferences are fixed or fungible with different market interaction, how incentive structures can affect bidding behavior, and how hypothetical payments affect bidding behavior. This chapter reports on some of our own work to explore questions of auction design; queries triggered by attempts to value new food products and other basic goods. We focus on eight case studies related to auction design: preference learning, auction institution and the willingness to pay/willingness to accept gap, second price auction tournaments, fixed or fungible preference, gift exchange, calibration of real and hypothetical bidding, and bidding behavior in consequential auctions.
Evidence from experimental auctions suggests the average person will pay a price premium for many new products. But some observers have pointed out that this premium frequently exceeds expectations of what they think people would actually pay in a real retail market. In the case of food safety, for instance, the average person was willing to pay a one-time $0.70 per meal price premium to reduce the health risk from food-borne pathogens – a premium that some observers familiar with the market for safer food believe to be unduly high (Hayes et al., 1995).
Auctions have been used for centuries as a price-discovery mechanism (Lucking-Reiley, 2000). The theoretical study of auctions, however, is a relatively recent phenomenon. Starting with the pioneering work of William Vickrey in 1961, economists have developed a rich literature devoted to auction theory which is astounding in its results such as the revenue equivalence theorem and in its growing complexity. In addition to inventing and studying the properties of alternative auction mechanisms, theorists have addressed issues related to how bidding behavior is affected by numbers of bidders, information, value uncertainty, risk preferences, violations of expected utility theory, value interdependence, asymmetry, and multiple-unit demand. Good reference books and papers include: Klemperer (1999, 2004), Krishna (2002), Milgrom (2004), and McAfee and McMillan (1987). Such texts focus primarily on developing and espousing particular theoretical properties of auctions, with attention devoted to designing auctions for generating maximum possible revenue or efficiency (e.g., the ability of an auction to allocate units to the person or people with the highest value(s) for the auctioned good(s)). Students of experimental auctions should not by-pass this literature as it is important to understand such topics as revenue equivalence and efficiency.
Our book purposefully restricts the theoretical treatment of auctions to the question of incentive compatibility. An auction is said to be incentive compatible when it induces each bidder to submit a bid that sincerely reflects his or her value for the good.
In this chapter, we address some broad issues worth considering before starting off on the path of choosing specific auction parameters. Perhaps the most important initial step in any project is to define the study objectives. What are the goals of the analysis? What are the testable hypotheses? Who is the intended audience? Answering these questions will necessarily dictate many of the resulting design choices. A study that aims to test a particular behavioral or economic theory might require a significantly different design than one that aims to estimate the welfare effects of a new technology or to inform new product design. For example, a common complaint of experimental studies is that students are frequently used as subjects. The veracity of this criticism, however, depends on the nature and type of study. A theory is a generalization that should hold for everyone, including students. As stated by Noussair, Plott, and Riezman (1995, p. 462):
Since the world's international economies are vastly more complicated than the economies created for this study, of what relevance are laboratory-generated data? The answer is that laboratory experiments are not attempts to simulate field situations, as the question of the skeptic seems to presume. Laboratory research deals with the general theories and the general principles that are supposed to apply to all economies, the economies found in the field as well as those created in the laboratory. The laboratory economies are very simple and are special cases of the broad class of (often complex) economies to which the general theories are supposed to be of relevance.[…]
Researchers have explored and debated many issues on the proper design and conduct of experimental auctions used to elicit values for lotteries, new goods, services, and technologies. This chapter examines six essential design issues in detail – training and practice; endowment of a good versus full bidding; choosing an auction mechanism; multiple good valuation, demand reduction and field substitutes; learning and affiliation in repeated bidding rounds and negative values. For each issue, we discuss the choices available to the practitioner, outlining the pros and cons that have emerged from theoretical and empirical literature. The goal of this chapter is to make readers aware of the relevant issues so that informed and justifiable choices can be made when designing an experimental auction.
Some obvious “best practices” have emerged that should be followed in conducting auctions. For example, practitioners should initially conduct a qualitative study prior to designing an experiment such that they can learn about individuals' decision-making processes and explore how people think about the good and experimental procedures in question. Focus groups in conjunction with pre-tests of the experiment will help ensure that the study's objectives are properly met. Once a design has been settled on, it is critical that subjects properly understand the auction in which they participate and that every effort is made to ensure against misperceptions. Aside from these issues, the practitioner has some judgment calls to make.