Behavioral economics as applied to firms: a primer

We discuss the literatures on behavioral economics, bounded rationality and experimental economics as they apply to firm behavior in markets. Topics discussed include the impact of imitative and satisficing behavior by firms, outcomes when managers care about their position relative to peers, the benefits of employing managers whose objective diverges from profit-maximization (including managers who are overconfident or base pricing decisions on sunk costs), the impact of social preferences on the ability to collude, and the incentive for profit-maximizing firms to mimic irrational behavior.Behavioral economics, bounded rationality, experimental economics, oligopoly, antitrust

Inducing Peer Pressure to Promote Cooperation

Cooperation in a large society of self-interested individuals is notoriously difficult to achieve when the externality of one individual's action is spread thin and wide on the whole society. This leads to the ‘tragedy of the commons’ in which rational action will ultimately make everyone worse-off. Traditional policies to promote cooperation involve Pigouvian taxation or subsidies that make individuals internalize the externality they incur. We introduce a new approach to achieving global cooperation by localizing externalities to one's peers in a social network, thus leveraging the power of peer-pressure to regulate behavior. The mechanism relies on a joint model of externalities and peer-pressure. Surprisingly, this mechanism can require a lower budget to operate than the Pigouvian mechanism, even when accounting for the social cost of peer pressure. Even when the available budget is very low, the social mechanisms achieve greater improvement in the outcome.Martin Family Fellowship for SustainabilityU.S. Army Research Laboratory (Cooperative Agreement W911NF-09-2-0053)United States. Air Force Office of Scientific Research (Award FA9550-10-1-0122

Behavioral Economics as Applied to Firms: A Primer

We discuss the literatures on behavioral economics, bounded rationality and experimental economics as they apply to firm behaviour in markets. Topics discussed include the impact of imitative and satisficing behavior by firms, outcomes when managers care about their position relative to peers, the benefits of employing managers whose objective diverges from profit-maximization (including managers who are overconfident or base pricing decisions on sunk costs), the impact of social preferences on the ability to collude, and the incentive for profit-maximizing firms to mimic irrational behavior.behavioral economics, firms, oligopoly, bounded rationality, collusion

Identity, Dignity and Taboos: Beliefs as Assets

We analyze social and economic phenomena involving beliefs which people value and invest in, for affective or functional reasons. Individuals are at times uncertain about their own deep values and infer them from their past choices, which then come to define who they are. Identity investments increase when information is scarce or when a greater endowment of some asset (wealth, career, family, culture) raises the stakes on viewing it as valuable (escalating commitments). Taboos against transactions or the mere contemplation of tradeoffs arise to protect fragile beliefs about the priceless value of certain assets (life, freedom, love, faith) or things one would never do. Whether such behaviors are welfare-enhancing or reducing depends on whether beliefs are sought for a functional value (sense of direction, self-discipline) or for mental consumption motives (self-esteem, anticipatory feelings). Escalating commitments can thus lead to a hedonic treadmill, and competing identities cause dysfunctional failures to invest in high-return activities (education, adapting to globalization, assimilation), or even the destruction of productive assets. In social interactions, norm violations elicit a forceful response (exclusion, harassment) when they threaten a strongly held identity, but further erode morale when it was initially weak. Concerns for pride, dignity or wishful thinking lead to the inefficient breakdown of Coasian bargaining even under symmetric information, as partners seek to self-enhance and shift blame by turning down insultingly low offers.identity, self-serving beliefs, self-image, memory, wishful thinking, anticipatory utility, self control, hedonic treadmill, inefficient bargaining, taboos, religion.

The Role of Behavioural Economics in Energy and Climate Policy

This article explores how behavioural economics can be applied to energy and climate policy. We present an overview of main concepts of behavioural economics and discuss how they differ from the assumptions of neoclassical economics. Next, we discuss how behavioural economics applies to three areas of energy policy: (1) consumption and habits, (2) investment in energy efficiency, and (3) provision of public goods and support for pro-environmental behaviour. We conclude that behavioural economics seems unlikely to provide the magic bullet to reduce energy consumption by the magnitude required by the International Energy Agency's “450” climate policy scenario. However it offers new suggestions as to where to start looking for potentially sustainable changes in energy consumption. We believe that the most useful role within climate policy is in addressing issues of public perception of the affordability of climate policy and in facilitating the creation of a more responsive energy demand, better capable of responding to weather-induced changes in renewable electricity supply

The dominant Law and Economics paradigm regarding “Intellectual Property" – a vehicle or an obstacle for innovation, growth and progress?

The term "intellectual property" is a relatively a modern term, first used in its current meaning when the UN established the World Intellectual Property Organization (WIPO) in 1967. Beforehand laws around the world protected various aspects of informational goods - inventions and creations - using separate legal concepts, such as copyright, patents and trademarks, which were not perceived as property rights. This linguistic aspect is by no means anecdotal or marginal as it can be argued that the term "intellectual property" constituted its contemporary meaning including the economic analysis of informational goods and services, as can be demonstrated by the recent call to treat trade secrets not as a contractual agreement but as intellectual property (Epstein, 2005). This paper focuses on the normative analysis of IP rights and criticizes the implicit shift in economic analysis of IP from the incentives paradigm, which is founded upon the public good analysis of neo-classical micro-economic theory, to the new propriety paradigm, which is intellectually founded upon the tragedy of the commons literature. It further criticizes the dominant contemporary Law and Economics writings in this field as pre-assuming information to be an object of property, overlooking its fundamental differences from physical property and thus focusing on its management and maximization of value for its "owners" rather than on its initial justifications and its social value and contribution to innovation, growth and progress.Law; intellectual property; growth; incentives