Field Experiments in Economics - Essay Example

The entrepreneur supplies profit-maximizing effort under perfect competition. In perfect completion there is no sunk cost, firms operate at the same technological level and economies of scale are broken down by a small level of output relative to demanded quantity. The entrepreneur maximises profit at the point when the marginal cost has the same value as marginal revenue.

Entrepreneurs make judgmental decisions on coordinating scarce resources. The presence of an entrepreneurial input market affects the amount of effort that should be supplied by the firms therefore; the entrepreneur makes decisions on how much effort they should supply themselves only. As such, the amount of firm effort is determined by the market, not the entrepreneur.

The market determines the level of effort needed in an enterprise and, therefore, the quality and determination of the person operating a business is affected by the effort observed. If the entrepreneur realizes that putting in much effort will result in more output, then they will design a manager contract that requires the manager to be energetic and put in more effort. If the effort is not much needed, then the entrepreneur will design the contract, which puts less pressure on the manager.

Fair insurance has zero net payoff, that is, the total amount of premium, which is paid by the client, is equated to the expected value of compensation that would be received. Full insurance pays compensates the insured with a payment that is equal to the harm which is caused by the risk insured against, that is, it leaves the insured as well off as they would have been if the risk insured against did not occur.

Full and fair insurance is given only if the insured knows the degree of their risk. Both low and high-risk person knows whether the insurance is fair by comparing the level of their risk with the premium charged and the amount of compensation expected.

Equilibrium occurs when the insured person and the insurance companies have the same information regarding the risk to be insured. When an insurance company fully understand the extent to which the client is exposed to the risk and the insured understands the extent to which the insurance company will cover him/her if the risk occurs.

The EUT holds that after satisfaction of certain axioms, the subjected value that is associated with the gamble will be equal to the expected outcome valuation. The independence axiom regards well-defined preferences and assumes that when two gambles are mixed with a third one, they will maintain the same order of preference as the two were without the third one (List, 2008, p.207).

To define the validity of the independence axiom a case of three lotteries is used, that is, assuming that A, B and C are the three lotteries. Then A \succeq  B and letting  t \in (0, 1] therefore  tA+(1-t)C \succeq t B+(1-t)C.

The independence of irreverent alternatives theory (specifically individual choice theory) violates the independence axiom by stating that when one chooses an alternative from a set where the chosen element is part of the subset of the set, and then the element must be chosen from the subset.

The willingness to accept / willingness to pay theory shows convergences between willingness to accept and willingness to pay mostly in a perfect market framework under the assumptions of reversibility and transitivity of preferences defined in consumer theory. The endowment effect and loss aversion effects do not matter and their existence is not accounted for as part of the theory but as an anomaly. Cumulative prospect theory indicates the anomaly graph (List, 2008, p.209).

Classification of field experiments:
- Natural experiment: carried out in the field without the participant's knowledge.
- Framed field the experiment: synthetic experiment with field context in the task, in commodity, information or stakes.
- Art factual field experiment: artificial field experiments.
- Structural modelling: same as instrumental only that it is carried out in an artificial model.
- Instrumental variable experiment: carried out by varying factors.

Harrison’s list is not acceptable because the studies represented are not ‘field’ in any way. Testing the following theory:
- Using field experiment: examining the factors in the field by varying various proportions of the factors involved.
- Using natural experiment: observing the factors in their natural environment without affecting their behaviour.
- Advantages and disadvantages of using games shown on TV for testing theories in decision-making.

TV games represent a clear indication of how people react to their preferences. This is advantageous in testing the theory of decision because it shows how people decide rationally. The major disadvantage of testing decision theory based on gaming is the fact that how people make decisions is affected by the method used in running the game.

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