role of distribution factors in congestion revenue rights applications in the locational marginal price lmp based congestion management scheme transmission customers face uncertainty in the congestion charges they incur in order to bring certainty to customers congestion revenue rights crr such as the fixed transmission rights ftr used in the pjm interconnection and flowgate rights fgr are introduced these crr are financial tools that provide the holder reimbursement of the congestion charges incurred in the day ahead market the implementation of crr requires appropriate modeling of the transmission network in which the distribution factors are extensively used these factors the injection shift factors isfs and the power transfer distribution factors ptdfs are linear approximations of the sensitivities of the active power line flows with respect to various variables the factors are computed for a specified network topology and parameter values in practice the ptdfs used for the crr issuance may be different from those used in the day ahead market due to changes in the forecasted network conditions the ptdf errors may impact the ftr issuance quantities the revenue adequacy of the ftr issuer and the hedging ability of the fgr in this paper we explore analytical characteristics of these distribution factors and investigate their role in crr applications we study the nature of the ptdf errors and examine their impacts in these applications both analytically and experimentally our results indicate that the impacts of the ptdf errors in crr applications stay in an acceptable range under a broad spectrum of conditions including contingencies used to establish n 1 security

on the effects of joint bidding in independent private value auctions an experimental study abstract this article explores the effect of a subset of symmetric bidders joining to bid together possible applications include mergers collusion and joint bidding arrangements the change produces a strong party with a more advantageous value distribution than the remaining weak bidder s the predicted effects include inefficiency a decrease in the seller s revenue and higher bidders payoffs under risk neutrality the members of the strong party benefit less than the weak bidders the prediction is reversed when the bidders are sufficiently risk averse these hypotheses are tested experimentally contrary to the theory joint bidding increases efficiency and the seller s revenue decreases by less than expected strong bidders benefit more than weak bidders indicating that incentives to bid jointly may be greater than hypothesized additionally the experiment assesses the effect of group decision making a nash equilibrium prediction for individual group differences based on differences in risk attitudes is not supported by the data

three minimal market institutions with human and algorithmic agents theory and experimental evidence we define and examine the performance of three minimal strategic market games sell all buy sell and double auction in laboratory relative to the predictions of theory unlike open or partial equilibrium settings of most other experiments these closed exchange economies have limited amounts of cash to facilitate transactions and include feedback general equilibrium theory since it abstracts away from market mechanisms and has no role for money or credit makes no predictions about how the paths of convergence to the competitive equilibrium may differ across alternative mechanisms

multiple round timber auction design and simulation this paper presents a multiple round timber auction simulation developed in order to study various configurations of auction design in this study simultaneous sequential timber auctions are modelled and analysed using agent based simulation technology as there are many individual items in the auction to be sold the auction designer defines several rounds that are sequential at pre defined intervals at each round the auction designer announces several simultaneous auctions since bidders are offered different items at each round a mathematical linear programing model for selecting the best set of items to bid for is presented different bidding patterns are simulated and compared in various setup configurations the most advanced of these strategies are adaptive and use agent learning capability the comparisons include the success rate of winning the auction and the winning price per m3 this study suggests an efficient bidding pattern for bidders to bid in order to achieve to their goal and increase their profit similarly in order to increase profit the auctioneer i e the government needs to control several auction parameters including the number of auctions per year the lot size the auction periodicity and the number of bidders this study also suggests parameters configurations that to maximise revenue for the auctioneer

measuring human capital in the labor market the supply of experience in 8 oecd countries abstract to investigate the evolution of the supply side of the labor market i derive a methodology to measure an important component of the human capital level of the workforce the experience of the labor market based on the perpetual inventory method a stock of experience is estimated for eight oecd countries it appears that during the last three decades the oecd labor markets have faced a decline in the supply of experience by the labor market participants with a minimum in the early 1980s for most countries and a recovery in the 1990s some implications regarding relative wages relative unemployment and schooling are discussed

ants rationality and recruitment this paper offers an explanation of behavior that puzzled entomologists and economists ants faced with two identical food sources were observed to concentrate more on one of these but after a period they would turn their attention to the other the same phenomenon has been observed in humans choosing between restaurants after discussing the nature of foraging and recruitment behavior in ants a simple model of stochastic recruitment is suggested this explains the herding and epidemics described in the literature on financial markets as corresponding to the equilibrium distribution of a stochastic process rather than to switching between multiple equilibria

limited rationality and strategic interaction the impact of the strategic environment on nominal inertia much evidence suggests that people are heterogeneous with regard to their abilities to make rational forward looking decisions this raises the question as to when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results we examine this question in the context of a long standing and important economic problem the adjustment of nominal prices after an anticipated monetary shock our experiments suggest that two types of bounded rationality money illusion and anchoring are important behavioral forces behind nominal inertia however depending on the strategic environment bounded rationality has vastly different effects on aggregate price adjustment if agents actions are strategic substitutes adjustment to the new equilibrium is extremely quick whereas under strategic complementarity adjustment is both very slow and associated with relatively large real effects this adjustment difference is driven by price expectations which are very flexible and forward looking under substitutability but adaptive and sticky under complementarity moreover subjects expectations are also considerably more rational under substitutability

the role of markets in reducing expected utility violations market theorists assume that expected utility predicts preferences at the market level even as evidence mounts that it predicts poorly at the individual level the arguments for better performing markets are grounded in the assumption that individuals respond to the competition of the market the objective of this study is to test empirically the validity of those assumptions using the betweenness property of expected utility i conclude that expected utility does indeed predict better in markets but analyses suggest that improved performance may be due to the statistical role played by markets introduced by market price selection rules

the hayek hypothesis and long run competitive equilibrium an experimental investigation we report on an experiment investigating whether the hayak hypothesis smith 1982 extends to the long run setting we consider two environments one with a common production technology having a u shaped long run average cost curve and a single competitive equilibrium and another with a common constant returns to scale technology having a constant long run average cost curve and multiple competitive equilibria while there is convergence in both environments to the long run equilibrium it takes longer and is less robust than usually observed in the short run setting we show that price formation is adaptive and quickly converges to realized short run equilibrium but long run investment decisions exhibit very limited rationality we present and estimate an investment choice model that shows that only minimal rationality coupled with repeated decisions is enough to achieve high long run allocative eciency when markets use continuous double auctions jel classication c92 d02

co learning patterns as emergent market phenomena an electricity market illustration abstract the definition of emergence remains problematic particularly for systems with purposeful human interactions this study explores the practical import of this concept within a specific market context namely a double auction market for wholesale electric power that operates over a transmission grid with spatially located buyers and sellers each profit seeking seller is a learning agent that attempts to adjust its daily supply offers to its best advantage the sellers are co learners in the sense that their supply offer adjustments are in response to past market outcomes that reflect the past supply offer choices of all sellers attention is focused on the emergence of co learning patterns that is global market patterns that arise and persist over time as a result of seller co learning examples of co learning patterns include correlated seller supply offer behaviors and correlated seller net earnings outcomes heat maps are used to display and interpret co learning pattern findings one key finding is that co learning strongly matters in this auction market environment sellers that behave as gode sunder budget constrained zero intelligence agents randomly selecting their supply offers subject only to a break even constraint tend to realize substantially lower net earnings than sellers that tacitly co learn to correlate their supply offers for market power advantages

fairness price stickiness and history dependence in decentralized trade this chapter investigates the implications that social preferences have for the stationary strategic equilibrium of such a decentralized market agents are supposed to be averse to unfairly unfavorable as well as unfairly favorable deals in the spirit of fehr and schmidt 1999 but we stay rather close to standard individualistic preferences the negative weights on advantageous and disadvantageous deviations from what is considered as the fair benchmark are such that utility remains strictly increasing in own surplus share and in contrast to the original fehr schmidt model the fair split need not automatically be a 50 50 division any price between sellers cost and buyers willingness to pay may be the one which for whatever reasons is agents reference point in a given market this makes it possible to consider a more flexible notion of fairness than is usually done it is in line with cognitive dissonance theory from psychology and the noteworthy experiments of binmore et al 1991 1993 where subjects who were triggered to play different bargaining equilibria ended up considering very different surplus distributions as fair

an interdisciplinary model for macroeconomics macroeconomic modelling has been under intense scrutiny since the great financial crisis when serious shortcomings were exposed in the methodology used to understand the economy as a whole criticism has been levelled at the assumptions employed in the dominant models particularly that economic agents are homogeneous and optimizing and that the economy is equilibrating this paper seeks to explore an interdisciplinary approach to macroeconomic modelling with techniques drawn from other natural and social sciences specifically it discusses agent based modelling which is used across a wide range of disciplines as an example of such a technique agent based models are complementary to existing approaches and are suited to answering macroeconomic questions where complexity heterogeneity networks and heuristics play an important role

changes in the u s wage structure 1963 1987 application of quantile regression the 1980 s witnessed rapid changes in the structure of wages in the united states in this study recently developed techniques for quantile regression are applied to every march current population survey since 1964 and changes in the return to schooling and experience at different points of the wage distribution are examined the quantile regression technique parsimoniously describes the entire conditional wage distribution this conditional distribution is used to examine changes in within group wage inequality as measured by the difference between conditional quantiles two linear models are considered a simple one group model and a 16 group model the results suggest that the returns to schooling and experience differ across quantiles of the wage distribution but their patterns of change are similar significant differences in wage inequality are also found across the various skill groups the paper also presents a new imputation method for cps data

learning to deal with repeated shocks under strategic complementarity an experiment experimental evidence shows that the rational expectations hypothesis fails to characterize the path to equilibrium after an exogenous shock when actions are strategic complements under identical shocks however repetition allows adaptive learning so that inertia in adjustment should fade away with experience if this finding proves to be robust inertia in adjustment may be irrelevant among experienced agents the conjecture in the literature is that inertia would still persist perhaps indefinitely in the presence of real world complications such as nonidentical shocks herein we empirically test the conjecture that the inertia in adjustment is more persistent if the shocks are nonidentical for both identical and nonidentical shocks we find persistent inertia and similar patterns of adjustment that can be explained by backward looking expectation rules a reformulation of naive expectations with similarity based learning approach is found to have a higher predictive power than rational and trend following rules

cognitive ability and earnings performance evidence from double auction market experiments abstract our goal in this paper is to understand how heterogeneity in people s cognitive ability leads to different market behavior and thus different market performance to do this subjects with heterogeneous working memory capacity wmc were placed in a double auction environment to compete against artificial traders we considered two treatments which differ in the artificial traders the artificial traders are truth telling in the first treatment but demonstrate adaptive trading behavior in the second one our results show that working memory capacity has a significantly positive effect on subjects market performance and the performance gap caused by cognitive ability while narrowing over time remains significant by the end of experiment we find that differences in subjects performance resulted from their behavior high wmc subjects were better at exploiting extra profit opportunities and avoiding unprofitable transactions and they tended to underbid more than those with lower wmc among the five constituent abilities of wmc we find that it is distinctive abilities which contribute to the overall significance in these two treatments for the treatment involving truth telling traders the relevant factor is the ability of simultaneous processing and storing information whereas for the treatment involving adaptive traders the only one that matters is subjects ability to coordinate elements into structures

a comprehensive assessment of the evolution of financial transmission rights financial transmission rights ftrs are complementary to the locational marginal pricing of energy the basic aim of the ftr mechanism is to guard forward contracts from uncertain congestion charges ftrs are also useful to individual generators and loads for selling and buying power respectively at the prices of other locations the concept has evolved encompassing many features such as a simultaneous feasibility test various ways to conduct auctions and allocations and secondary trading ftrs also have a close relation to market power and transmission investment this paper reviews most of the landmark research papers on the evolution of the ftr concept it reports a comprehensive assessment of various facets of ftrs and allied issues financial transmission rights and flowgate rights fgrs are compared the concept of long term ftrs is discussed the paper also touches upon future proposals in this area

do institutions promote rationality an experimental study of the three door anomaly the three door problem is an example of a systematic violation of a key rationality postulate that has attracted much attention in this seemingly simple individual decision task most people initially fail to apply correctly bayes law and to make the payoff maximizing choice previous experimental studies have shown that individual learning reduces the incidence of irrational choices somewhat but is far from eliminating it we experimentally study the roles of communication and competition as institutions to mitigate the choice anomaly we show that the three door anomaly can be entirely eliminated by these institutions

network constrained economic dispatch using real coded genetic algorithm a genetic algorithm ga solution to the network constrained economic dispatch problem is presented a real coded ga has been implemented to minimize the dispatch cost while satisfying generating unit and branch power flow limits a binary coded ga was also developed to provide a means of comparison ga solutions do not impose any convexity restrictions on the dispatch problem the proposed method was applied on the electrical grid of crete island with satisfactory results various tests with both convex and nonconvex unit cost functions demonstrate that the proposed ga locates the optimum solution while it is more efficient than the binary coded ga

regional labor markets and the determinants of wage inequality from 1972 to 1990 the united states experienced the largest increase in wage inequality of any developed country the spread in log wages between the 90th and 10th percentiles of the male wage distribution increased by about 60 points and inequality increased within virtually every demographic or skill category of the labor force see chinhui juhn et al 1993 various explanations have been offered including changes in the relative demand for skill intensive goods international trade immigration of less skilled workers and increased labor force participation of women yet attempts to quantify the relative importance of these factors have not met with much success this leaves skill biased technical change as the residual claimant that rationalizes the data this paper uses regional differences in the evolution of wage inequality to provide new evidence on the determinants of relative wages using a model of factor demand in geographic markets i isolate contributions of i changing skill ratios in the labor force ii increased participation of women iii technical change and iv changes in the industrial composition of labor demand the data indicate that changing skill ratios and women s labor supply have affected the wages of low skilled men in the west the data indicate that increased immigration of less skilled hispanic and asian workers has adversely affected the wages of natives causing a greater increase in inequality there than in any other region of the country i modeling wage inequality in regional markets

learning to bid the design of auctions under uncertainty and adaptation we examine auction design in a context where symmetrically informed adaptive agents with common valuations learn to bid for a good despite the absence of private valuations asymmetric information or risk aversion bidder strategies do not converge to the bertrand nash equilibrium strategies even in the long run deviations from equilibrium strategies depend on uncertainty regarding the value of the good auction structure the agents learning model and the number of bidders although individual agents learn nash bidding strategies in isolation the learning of each agent by flattening the best reply correspondence of other agents blocks common learning these negative externalities are more severe in second price auctions auctions with many bidders and auctions where the good has an uncertain value ex post

a rule of one a rule ofone one rational person is enough to make a market one irrational person is enough to break a game let me explain the power of the market as an exchange institution rests in its ability to move resources from lowto highvalued uses the market works if one person is rational enough to look for arbitrage opportunities among the other irrational players he buys low and sells high the market collects and disseminates this information such that others

iso net surplus collection and allocation in wholesale power markets under lmp this study uses five bus and 30 bus test cases to explore iso net surplus congestion rent collections and allocations in wholesale power markets with grid congestion managed by locational marginal prices lmps price sensitivity of demand and generator learning capabilities are taken as experimental treatment factors a key finding is that conditions resulting in greater generator capacity withholding hence higher and more volatile lmps also result in greater iso net surplus collections that can be substantial in size a key conclusion is that iso net surplus collections should be used pro actively to mitigate the conditions encouraging generator capacity withholding and hence high and volatile lmps rather than to provide ex post support for lmp payment offsets and lmp volatility risk hedging as is currently the norm

marshall and walras disequilibrium trades and the dynamics of equilibration in the continuous double auction market prices and quantities converge to the theoretical competitive equilibria in continuous double auction markets the double auction is not a tatonnement mechanism disequilibrium trades take place the absence of any influence of disequilibrium trades which have the capacity to change the theoretical equilibrium appears to be due to a property found in the marshallian model of single market adjustments the marshallian model incorporates a principle of self organizing coordination that mysteriously determines the sequence in which specific pairs of agents trade in an environment in which market identities and agent preferences are not public disequilibrium trades along the marshallian path of trades do not change the theoretical equilibrium the substance of this paper is to demonstrate that the marshallian principle captures a natural tendency of the adjustment in single continuous double auction markets and to suggest how it takes place the marshallian model of quantity adjustment and the walrasian model of market price adjustment can be seen as companion theories that explain the allocation and price processes of a market the marshallian model explains the evolution of the allocation who will meet and trade and the walrasian excess demand explains the evolution of prices when they do

locational marginal price sensitivities within an optimal power flow market clearing framework this paper provides expressions to compute the sensitivities of locational marginal prices with respect to power demands sensitivities with respect to other parameters can also be obtained an example and a case study are used to illustrate the expressions derived

agent based analysis of capacity withholding and tacit collusion in electricity markets this paper employs agent based simulation to study energy market performance and in particular capacity withholding and the emergence of tacit collusion among the market participants the energy market is formulated as a repeated game where each stage game corresponds to an hourly energy auction each hourly energy auction is cleared using locational marginal pricing generators are modeled as adaptive agents capable of learning through the interaction with their environment following a reinforcement learning algorithm the sa q learning algorithm a modified version of the popular q learning is used test results on a two node power system with two and eight competing generator agents demonstrate the development of tacit collusion among generators even under competitive conditions

credit constraints in general equilibrium experimental results our work attempts to investigate the influence of credit tightness orexpansion on activity and relative prices in a multimarket set up we report on somedouble auction two market experiments where subjects had to satisfy an inequalityinvolving the use of credit the experiments display two regimes characterizedby high and low credit availability the critical value of credit at the commonboundary of the two regimes has a compelling interpretation as the maximal credituse at the arrow debreu equilibrium of the abstract economy naturally associatedto our experimental environment our main results are that changes in theavailability of credit a have minor and unsystematic effects on quantitiesand relative prices in the high credit regime b have substantial effects bothon quantities and relative prices in the low credit regime

endogenous leverage and asset pricing in double auctions abstract we propose a double auction mechanism for the exchange of leveraged assets and bonds in an agent based model in this framework we validate recent results in general equilibrium theory about endogenous leverage and its consequences for asset pricing we find that the institutional details of exchange are critical for a good match between the theoretical equilibrium state and the final state of the double auction specifically the outcome of the double auction is sensitive to the details of how markets for debt and collateral are coordinated and how collateral is cleared when trade is restricted to neighbours in a network final prices and allocations are significantly different from unrestricted equilibrium

market simulation and the provision of public goods a non paternalistic response to anomalies in environmental evaluation most normative economics assumes that individuals have coherent preferences this paper responds to growing evidence of failures of this assumption particularly in the context of stated preference methods widely used in environmental policy analysis it proposes a non paternalistic concept of consumer sovereignty that does not assume preference coherence is satisfied by competitive markets and can be applied to the provision of public goods a key implication is that decisions should reflect valuations revealed at the point of consumption such valuations which can be inferred from hedonic prices may be less susceptible to willingness to accept wta willingness to pay wtp disparities than those elicited by stated preference methods

price formation in single call markets this paper reports a laboratory experiment designed to examine the price formation process in a simple market institution the single call market the experiment features random values and costs each period so each period generates a new price formation observation other design features are intended to enhance the predictive power of the bayesian nash equilibrium bne theory developed recently for this trading institution we find that the data support several qualitative implications of the bne but that subjects bid and ask behavior is not as responsive to changes in the pricing rule as the bne predictions bids and asks tend to reveal more of the underlying values and costs than predicted particularly when subjects are experienced nevertheless observed trading efficiency falls below the bne prediction the results offer more support for the bne when subjects compete against nash robot opponents a simple learning model accounts for several of the deviations from bne

convexity of the set of feasible injections and revenue adequacy in ftr markets the feasible set of power injections for the constrained power flow equations is nonconvex when practical transmission capacity and bus voltage limits are imposed the projection onto the space of active power injections may be close to convex but this is not sufficient to guarantee revenue adequacy for the settlement of financial transmission rights

markups in double auction markets abstract we study the continuous double auction cda market with simulated traders using three simple markup rules relative to analytic results obtained for markups in the simpler call market cm we find that uniform cda markups have a more complex and non monotonic impact on cda market outcomes such as price volume and efficiency the symmetric nash equilibrium markup in the cda is remarkably close to the most efficient markup in thick markets which may partially explain the mysterious efficiency for cda market

modelling price pressure in financial markets abstract we present experimental evidence that unlike traditional assumptions in economic theory security prices do not respond to pressure from their own excess demand instead prices respond to excess demand of all securities despite the absence of a direct link between markets we propose a model of price pressure that explains these findings in our model agents set order prices that reflect the marginal valuation of desired future holdings called aspiration levels in the short run as agents encounter difficulties executing their orders they scale back their aspiration levels marginal valuations order prices and hence transaction prices change correspondingly the resulting price adjustment process coincides with the global newton method the assumptions of the model as well as its empirical implications are fully borne out by the data our model thus provides an economic foundation for why markets appear to search for equilibrium according to newton s procedure

double auction dynamics structural effects of non binding price controls in competitive equilibrium non binding price controls that is price floors below and ceilings above the equilibrium should not affect market outcomes but in laboratory experiments they do we build a simple dynamic model of double auction markets with zero intelligence zi computer traders that accounts for many though not all of the discrepancies between the data and the walrasian tatonnement predictions the success of the model in organizing the data and in isolating various consequences of price controls shows that the simple zi model is a powerful tool to gain insights into the dynamics of market institutions

beyond microfoundations towards a not too rational macroeconomics at ucla we are establishing a center for computable economics i have been very much involved in this effort this may surprise you that a non mathematical macro monetary economist should become an enthusiast for this project is one of those things that do not compute but then as i will explain we take a special interest in things that do not compute one may come to computable economics by many intellectual routes i will trace my own not because it makes a particularly edifying story but because it will tell you what kind of problems i hope we can make progress on by developing the field of computable economics but before we get to that i had better explain what i mean by computable economics

field experiments on the anchoring of economic valuations i introduction take the last three digits of your social security number ssn turn those numbers into a dollar value i e if your numbers are 462 then they provide a value of 462 consider whether you would be willing to pay that dollar amount for a first edition of j r r tolkien s the hobbit now how much would you actually pay for a first edition original copy a stylized result from laboratory experiments in economics and psychology is that the answer to the latter valuation question can be strongly influenced by the dollar amount computed at the start 1 critics of neoclassical theory have argued that the influence of uninformative anchors such as the transformed ssn refutes the notion that decision makers preferences are predefined consistent and stable instead they are constructed during the process of choice bettman luce and payne 1998 hoeffler and ariely 1999 slovic 1995 a natural conclusion one might draw from studies of anchoring is that decisions may be influenced by irrelevant circumstances and optimization principles do not apply the laboratory evidence consonant with anchoring effects is considerable tversky and kahneman 1974 make a seminal contribution implementing a protocol similar to the one described above to examine general knowledge questions 2 furnham and boo 2011 provide a recent review of the literature and identify more than 25 studies that report significant anchoring effects substantive areas investigated include general knowledge questions epley and gilovich 2006 tversky and kahneman 1974 probability estimates wright and anderson 1989 legal judgments englich and mussweiler 2001 forecasting switzer and sniezek 1991 and valuation and purchasing decisions ariely loewenstein and prelec 2003 taken together the results suggest strong effects from anchoring protocols even in areas where subjects have significant experience yet the importance of anchoring for economic outcomes remains an open question one reason is that research goals and methods differ across the disciplines of psychology and economics croson 2005 hertwig and ortmann 2001 plott 1996 3 fumham and boo 2011 note that drawing generalizable conclusions from the existing anchoring studies is difficult as many involve undergraduate students engaged with topics they are unlikely to encounter in field settings their observation is consistent with the criticism of the ecological validity of many studies made by gerd gigerenzer and colleauges gigerenzer et al 2008 discussed in our footnote 2 while the results of these studies may help distinguish among competing causal claims about the anchoring process they are less relevant for understanding the potential for anchors to affect market equilibria further many of the studies lack meaningful incentives and we believe that economists are justifiably circumspect about results that may merely reflect mistakes made by unmotivated subjects consistent with this view is the idea that with appropriate incentives and feedback anchoring effects should diminish and behavior more closely match predictions from neoclassical models 4 recent attempts to examine the relevance of anchoring for economic outcomes closely follow ariely loewenstein and prelec 2003 alp hereafter who find statistically and economically significant effects of anchors on willingness to pay wtp for common consumer goods and on willingness to accept wta for unpleasant sounds and tastes bergman et al 2010 and fudenberg levine and maniadis 2012 flm hereafter replicate the consumer goods portion of the alp study with mixed results bergman et al 2010 find significant anchoring results consistent with the earlier work although the magnitude of the effect is smaller implementing an auxiliary protocol they find also that anchoring effects diminish with cognitive ability flm 2012 attempt to anchor both wtp and wta and find no evidence of anchoring in the wtp treatment

price formation in double auctions abstract we develop a model of information processing and strategy choice for participants in a double auction sellers in this model form beliefs that an offer will be accepted by some buyer similarly buyers form beliefs that a bid will be accepted these beliefs are formed on the basis of observed market data including frequencies of asks bids accepted asks and accepted bids then traders choose an action that maximizes their own expected surplus the trading activity resulting from these beliefs and strategies is sufficient to achieve transaction prices at competitive equilibrium and complete market efficiency after several periods of trading journal of economic literatureclassification numbers d41 d44 d8

was hayek an ace in order to address the question whether hayek might have been an agent based computational economist ace avant la lettre we consider an ace model concerning the phenomenon of information contagion alongside increasing returns network externalities and information cascades information contagion has been presented in the literature as an explanation for particular patterns of macrobehavior that may seem at odds with the underlying micromotives but whereas these other explanations have been shown to have a proper microfoundation information contagion has remained a phenomenon that seemed to occur only when certain ad hoc rules of thumb for individual behavior are assumed we show how information contagious behavior can emerge in a coevolutionary process of interacting adaptive agents how this is related to various hayekian themes and how ace research in general is an application of hayek s methodological insights

allocation of track capacity experimental evidence on the use of priority auctioning in the railway industry allocation of track capacity concerns multiple users facing demand indivisibilities running trains over an inelastic supply of railway tracks the paper suggests a vickrey type mechanism to handle incentive aspects of this technically complex optimisation task here the price for operating a train will correspond to the bids foregone by other operators who are pushed off their preferred routes the paper reports the results of 11 experimental markets using variations of this mechanism where each market includes up to 10 trading periods and subjects bid for routes over a highly stylised railway network the experiments generated solutions that capture 90 100 of potential benefits

comovement or safe haven the effect of corruption on the market risk of sovereign bonds of emerging economies during financial crises in this study i explore the role of corruption in the cross market time varying linkage between sovereign bonds of emerging markets and the us stock market it shows that corruption plays a prominent role in the behaviour of capm beta under different market conditions the sensitivity of sovereign bonds issued by countries perceived as more corrupt to systematic shocks increases during financial crises the prices of bonds issued by less corrupt countries are determined more idiosyncratically under extreme market conditions and realize more hedging benefits against s p 500 risk to explain these findings i integrate results from behavioural finance i propose a comovement model built on barberis et al 2005 where investors load more worldwide news on sovereign bonds issued by more corrupt countries when their sentiment deteriorates

economists models of learning abstract economic theorists have intensively studied learning in games and decisions over the last decade this essay puts some of the work in perspective and offers opinions about what still needs to be learned journal of economic literature classification numbers c73 d83

sufficiency of an outside bank and a default penalty to support the value of fiat money experimental evidence we present a model in which an outside bank and a default penalty support the value of fiat money and experimental evidence that the theoretical predictions about the behavior of such economies based on the fisher condition work reasonably well in a laboratory setting the import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money and use of the bank rate to influence inflation or deflation although other institutions could provide alternatives

introduction to loss hedging financial transmission rights in order to guard forward contracts from the locational marginal price lmp volatility financial transmission rights ftrs are issued in the centralized power markets however the current ftr system can provide hedge only against the congestion components of lmp differentials consequently the loss components remain unhedged to bridge the gap a framework is developed in this paper to implement an ftr system that will provide hedge against the loss prices the availability of loss hedging ftrs in addition to the congestion hedging ftrs further reduces the exposure of the forward market participants to the lmp volatility the loss hedging framework developed is carefully designed to fit the practical environment all the primary issues for the implementation of loss hedging ftrs such as the revenue adequacy test auction and auction revenue rights are carefully addressed revenue adequacy of loss hedging ftrs can be ensured by means of a test called as the offset capacity test some efficient policies are also designed for the successful functioning of loss hedging ftrs at the end of the paper a case study is carried out to assess the effectiveness of the methodology developed

market theories evolve and so do markets responding to mirowski s target article this paper discusses some intellectual currents of the 1970s to 1990s and offers suggestions on measuring market performance on including automated agents as market participants on evolving new market formats and on dealing with highly differentiated goods acknowledgments i am grateful to associate editor rosser for inviting me to participate in this symposium and to philip mirowski for writing a timely and engaging target article some of the material comes from a recent nsf proposal co written with james c cox the paper mentions many other intellectual debts of course i retain sole responsibility for lapses of style and substance

the complexity of exchange the computational complexity of two classes of market mechanisms is compared first the walrasian interpretation in which prices are centrally computed by an auctioneer recent results on the computational complexity are reviewed the non polynomial complexity of these algorithms makes walrasian general equilibrium an implausible conception second a decentralised picture of market processes is described involving concurrent exchange within transient coalitions of agents these processes feature price dispersion yield allocations that are not in the core modify the distribution of wealth are always stable but path dependent replacing the walrasian framing of markets requires substantial revision of conventional wisdom concerning markets

on the robustness of non linear personalized price combinatorial auctions abstract though the vcg auction assumes a central place in the mechanism design literature there are a number of reasons for favoring iterative combinatorial auctions icas several promising ica formats were developed based on primal dual and subgradient algorithms prices are interpreted as a feasible dual solution and the provisional allocation is interpreted as a feasible primal solution ibundle 3 dvsv and ascending proxy auction result in vcg payoffs when the coalitional value function satisfies buyer submodularity and bidders bid straightforward which is an ex post nash equilibrium in this case ibea and creditdebit auctions do not even require the buyer submodularity and achieve the same properties for general valuations often however one cannot assume straightforward bidding and it is not clear from the theory how these non linear personalized price auctions nlppas perform in this case robustness of auctions with respect to different bidding behavior is a critical issue for any application we conducted a large number of computational experiments to analyze the performance of nlppas with respect to different bidding strategies and valuation models we compare nlppas with the vcg auction and with icas with linear prices such as alps and the combinatorial clock auction while nlppas performed very well in case of straightforward bidding we observe problems with revenue efficiency and speed of convergence when bidders deviate

examining the effectiveness of price limits in an artificial stock market abstract this paper proposes an agent based framework to examine the effectiveness of price limits in an artificial stock market the market is composed of many boundedly rational and heterogeneous traders whose learning behavior is represented by a genetic programming algorithm we calibrate the model to replicate several stylized facts observed in real financial markets based on this environment the impacts of price limits are analyzed from the perspectives of volatility price distortion volume and welfare we find that the imposition of price limits possesses both positive and negative effects however compared with the market without price limits appropriate price limits help to reduce volatility and price distortion and increase the liquidity and welfare

price dynamics in general equilibrium experiments general equilibrium ge theory faces several related challenges classical theories of out of equilibrium adjustment are intuitive but implausibly centralized further standard restrictions on individual preferences place little structure on aggregate excess demand functions amongst other issues this fact implies that economies can be unstable under classical dynamics and thus instability appears to be an unavoidable feature of ge theory this paper recounts laboratory studies of ge environments which reveal that classical theories of dynamics do in fact organize market activity surprisingly well these experiments suggest that the walrasian auctioneer for example appears to be a constructive abstraction and that instability should be accommodated within theory rather than circumscribed laboratory applications of ge theory focused on issues beyond stability and dynamics are also briefly surveyed

redistribution and market efficiency an experimental study abstract we study the interaction between competitive markets and income redistribution that reallocates unequal pre tax market incomes away from the rich to the poor majority in one setup participants earn their income by trading in a double auction da with exogenous zero or full redistribution in another setup after trading they vote on redistributive tax policies in a majoritarian election with two competing candidates this results in virtually full redistribution even when participants have the opportunity to influence taxes by transferring money to the candidates we find that the high redistribution reduces trading efficiency but not as much as predicted if market participants trade randomly this is because rather than capitulating to the much lower trading incentives many participants respond to redistribution by asking and bidding more conservatively in the da and in this way help to prevent further efficiency losses

implementation of lmp ftr mechanism in an ac dc system this paper analyzes the implementability of locational marginal price lmp and financial transmission right ftr mechanisms in the presence of high voltage dc hvdc lines in the regulated i e under the control of system operator network the established framework of lmp ftr mechanism assumes that the system under regulation is fully ac unregulated or private hvdc lines are taken into account within this framework through proxy transaction bids from the line owners however as the flow over a regulated hvdc line has to be controlled by the system operator himself the existing lmp ftr framework becomes insufficient if the system contains or is expanded with regulated hvdc lines the augmentation that should be made to the existing framework to include regulated hvdc lines is explained in this paper it is shown that the flow over a regulated hvdc line can be modeled as a non chargeable bilateral transaction without causing any threat of negative congestion surplus for this power dispatch model revenue adequacy of ftrs can be still ensured by means of the conventional simultaneous feasibility test sft model by utilizing the capacities of dc lines a more general sft model is further developed the modified auction problem is discussed and tested for the non negativity of net auction collection the process of revenue adequate issuance of auction revenue rights is explained finally the relative merit of a regulated hvdc line over a private hvdc line is discussed through a case study

the competitive market paradox abstract the competitive market model is paradoxical in perfect competition agents cannot influence price they only select an output quantity such passive behavior does not conform to the intuitive notion of competition this paper describes an experiment which demonstrates that near or even at a competitive equilibrium price competition is undiminished a substantial difference between the performance of sellers and buyers frequently results from this vigorous competition even with low price variability and approximate efficiency in double auction experiment sessions conducted with both automated and human agents exogenous variation of the pace of asks and bids of automated agents demonstrates that the performance difference between sellers and buyers results primarily from a difference between the pace of asks and bids if the buyers pace is slower than sellers pace buyers make price concessions less frequently than sellers so that prices move below the equilibrium price then more buyers become active and fewer sellers remain active prices stabilize when changes to the numbers of active buyers and sellers offset the superior bargaining capability of one side or the other in competitive equilibrium to a first approximation agents are price takers but that does not preclude vigorous competition competitive behavior moves to the dimension of bargaining pace

don t let your robots grow up to be traders artificial intelligence human intelligence and asset market bubbles abstract researchers who have examined markets populated by robot traders have claimed that the high level of allocative efficiency observed in experimental markets is driven largely by the intelligence implicit in the rules of the market furthermore they view the ability of agents artificial or human to process information and make rational decisions as unnecessary for the efficient operation of markets this paper presents a new series of market experiments that show that markets populated with standard robot traders are no longer efficient if time is a meaningful element as it is in all asset markets while simple two season markets with human subjects reliably converge to an efficient equilibrium markets with minimally intelligent robot traders fail to attain this equilibrium instead these markets overshoot the equilibrium and then crash below it in addition to firmly establishing the role of trader intelligence in asset market equilibrium these experiments also provide insights into why bubbles and crashes are consistently observed in many asset market laboratory experiments using human subjects

individual expectations limited rationality and aggregate outcomes recent studies suggest that the type of strategic environment or expectation feedback can have a large impact on whether the market can learn the rational fundamental price we present an experiment where the fundamental price experiences large unexpected shocks markets with negative expectation feedback strategic substitutes quickly converge to the new fundamental while markets with positive expectation feedback strategic complements do not converge but show underreaction in the short run and overreaction in the long run a simple evolutionary selection model of individual learning explains these differences in aggregate outcomes

a joint energy and transmission rights auction proposal and properties an auction based process is proposed that allows power market participants to acquire and reconfigure financial transmission rights the process simultaneously accommodates flowgate and point to point options and obligations along with energy production and consumption futures a sequence of auctions is held during which participants can buy and sell rights which are then settled in a day ahead or real time auction at which time all rights are cashed out by allowing flowgate and point to point obligations and options to be reconfigured and exchanged the market can decide what combination of financial rights are most useful to power generators consumers and traders rights can be specified not only for capacity of individual flowgates but also for more complex transmission constraints such as nomograms under certain conditions we prove that the auction is revenue adequate for the market operator in that payments to rights holders cannot exceed congestion revenues we present a linearized dc auction along with a numerical illustration

allocative efficiency of markets with zero intelligence traders market as a partial substitute for individual rationality we report market experiments in which human traders are replaced by zero intelligence programs that submit random bids and offers imposing a budget constraint i e not permitting traders to sell below their costs or buy above their values is sufficient to raise the allocative efficiency of these auctions close to 100 percent allocative efficiency of a double auction derives largely from its structure independent of traders motivation intelligence or learning adam smith s invisible hand may be more powerful than some may have thought it can generate aggregate rationality not only from individual rationality but also from individual irrationality

avoidable cost ride a double auction roller coaster the double auction trading institution has been highly efficient across diverse marginal cost market structures whether human subjects or zero intelligence robots populated those markets accordingly many researchers suspect that double auction performance transcends market structure and agent strategy but the authors show that large avoidable costs undermine the efficiency and stability of human subject double auctions and these low human efficiencies are simultaneously well above zero intelligence efficiencies their results dramatically illustrate the potential havoc wrought by highly competitive institutions when they must cope with nonconvex technologies copyright 1996 by american economic association

the approach of institutional economics this paper assesses the old institutional economics it emphasizes the importance of key old institutionalist themes concerning the necessity of habits and rules and the role of institutions a problem in the alternative theoretical program of the new institutionalism is the untenability of its assumption of an original institution free market or state of nature even optimizing behavior requires the prior existence of habits and rules although it still lacks a complete and systematic theory the evolutionary approach of the old institutionalists tackles the problem of the interactive relationship of actor to structure without analytical reduction to one or the other

consumer inertia choice dependence and learning from experience in a repeated decision problem abstract understanding when and how individuals think about real life problems is a central question in economics this paper studies the role of inertia inattention state dependence and learning the empirical setting is a tariff experiment when optional measured tariffs for local telephone calls were introduced unanticipatedly we find that consumers tend to align their choices of tariff and telephone use levels correctly despite low potential savings mistakes are not permanent as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone service ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results

follies subdued informational efficiency under adaptive expectations and confirmatory bias abstract we study the informational efficiency of a market with a single traded asset the price initially differs from the fundamental value about which the agents have noisy private information which is on average correct a fraction of traders revise their price expectations in each period the price at which the asset is traded is public information the agents expectations have an adaptive component and a social interactions component with confirmatory bias we show that taken separately each of the deviations from rationality worsens the informational efficiency of the market however when the two biases are combined the degree of informational inefficiency of the market measured as the deviation of the long run market price from the fundamental value of the asset can be non monotonic both in the weight of the adaptive component and in the degree of confirmatory bias for some ranges of parameters two biases tend to mitigate each other s effect thus increasing informational efficiency

individual vs aggregate preferences the case of a small fish in a big pond we study the relationship between the risk preferences of individuals and the risk preferences of the aggregate economy to emphasize the vast differences that can occur between individual and market preferences brought about through aggregation we assume an economy consisting entirely of risk seekers we show that such individuals can lead to an aggregate economy that is risk averse the converse is also true an aggregate economy that exhibits risk aversion does not imply an economy of individual risk averters an economy demanding a risk premium can be formed from individuals who do not demand such compensation understanding the relationship between the preferences of individuals and the preferences of the aggregate economy is crucial for understanding the connection between the behavioral finance literature which focuses on individual preferences and the asset pricing literature which focuses on aggregate prices we discuss empirical implications of these results this paper was accepted by wei xiong finance

tradable deficit permits efficient implementation of the stability pact in the european monetary union tradable deficit permits efficient implementation of the stability pact borrowing from the experience of environmental markets this paper proposes a system of tradable deficit permits as an efficient mechanism for implementing fiscal constraints in the european monetary union having chosen an aggregate target for the union and an initial distribution of permits emu countries could be allowed to trade rights to deficit creation the scheme exploits countries incentives to minimize their costs is transparent and flexible in accommodating idiosyncratic shocks and allows for adjustments in case of europe wide recessions in addition it need not treat all countries identically and can be designed to penalize countries with higher debt to gdp ratios finally the scheme rewards countries for reducing their deficit below the initial allowance lending credibility to the stability pact s goal of a balanced budget in the medium run alessandra casella

factor proportions and relative wages the supply side determinants of wage inequality supply side factors may contribute to rising wage inequality first certain changes in the supply of skills allegedly exacerbate wage inequality women s increased labor force participation and increased immigration are the leading candidates both allegedly reduce the wages of less skilled men however immigration s impact on wage inequality has been minor and the effects of women s participation is inconclusive second in evaluating the likelihood that human capital investment will mitigate future inequality evidence suggests that rising returns to education have increased the proportion of young people attending college limiting the growth of inequality among high wage workers

experimental comparisons of auctions under single and multi unit demand i introduction the study of multiple unit auctions is important because of their widespread use and the high value of goods sold examples include auctions of u s treasury debt cut flowers wine foreign exchange and other financial and monetary instruments moreover since auctions are often proposed by economists as a method of sale for other goods as in mcmillan 1994 the use of auctions can be expected to increase in the future many different auction rules are used to sell these diverse commodities and auction rule changes are often suggested usually with the intention of increasing revenue or improving the allocations and thus there is a considerable and increasing number of known auction formats evaluating new or comparing different auction mechanisms using field tests can be very costly and risky however experimental methods can and have been used by economists to study the behavioral characteristics of different auction procedures kagel 1995 provides a recent comprehensive survey most experimental studies consider the behavior of auctions when there is a single unit to be sold a few studies such as cox et al 1984 1985 and mccabe et al 1990 1991 study multiple unit auctions in environments in which each bidder demands at most one object from a set of identical objects being sold the studies of smith 1967 belovicz 1979 miller and plott 1985 and burns 1985 consider multi unit demand environments these are environments in which bidders have demand for multiple identical units and are permitted to purchase multiple units of the commodity sold the extension to multi unit demand is important since the presence of multi unit demand is a characteristic of many auctions in the field including all of the examples above in this study we consider the behavior of two types of multi unit auction under both single unit and multi unit demand we construct a laboratory environment which we use to study an english clock ec which is a special type of english auction and a sealed bid auction with lowest accepted bid pricing sb in the sb each bidder pays a per unit price equal to the lowest accepted bid the ec was chosen because it is known to provide highly efficient allocations in auctions of single unit goods and therefore is likely to be suggested for many field applications the sb was chosen because of its widespread use which makes its outcomes a useful basis of comparison for the outcomes of the english clock auction 1 however we do not attempt to represent a particular field situation here instead since our interest is in understanding the basic properties of the auctions we chose an experimental design that enables us to make simple comparisons across treatments and with previous and possibly future studies the design enables us to perform simple testing of game theoretic models in some of the treatments in our view the difference between single and multi unit demand is critical as we discuss in section ii many of the results of auction theory that are valid in single unit demand environments no longer apply in multi unit demand environments suggesting that the observed behavior of auctions might also differ between the two environments therefore we isolate the effects of multi unit demand by conducting single unit demand experiments under identical market demand and supply conditions as the multi unit demand experiments these and other aspects of the experimental design are described in detail in section iii the results and a discussion are given in sections iv and v respectively ii institutions theory and previous studies the english clock auction this variant of the english auction was modeled by milgrom and weber 1982 and studied by mccabe et al 1990 1991 in our version the auction begins with all bidders publicly and simultaneously announcing their initial quantity demanded at price zero if there is excess demand the price is increased by a small increment and the bidders then announce new quantities demanded

a test of the modigliani miller invariance theorem and arbitrage in experimental asset markets modigliani and miller show that the total market value of a firm is unaffected by a repackaging of asset return streams to equity and debt if pricing is arbitrage free we investigate this invariance theorem in experimental asset markets finding value invariance for assets of identical risks when returns are perfectly correlated however exploiting price discrepancies has risk when returns have the same expected value but are uncorrelated in which case the law of one price is violated discrepancies shrink in consecutive markets but persist even with experienced traders in markets where overall trader acuity is high assets trade closer to parity

voting for pareto optimality a multidimensional analysis we compare unanimity rule and majority rule in their abilities to produce pareto superior and pareto optimal alternatives in fixed number of rounds of voting using a two dimensional spatial voting model with random proposals sincere proposals and strategic proposals our findings show that for random or sincere proposals majority rule is at least as likely to select a pareto optimal outcome as unanimity rule for strategic proposals the subgame perfect equilibrium under unanimity rule is pareto optimal for other k majority rules the outcome is pareto optimal or very close to it for outcomes that are both pareto optimal and pareto superior unanimity rule outperforms majority rule

bounded rationality and the emergence of simplicity amidst complexity abstract the purpose of this essay is to explore the relationship between the simple and the complex in economics by anchoring our analysis on bounded rationality much of the conventional literature focuses on un bounded rationality of the rationality as consistency variety theorizing of bounded rationality tends to assume that the problem to be solved is independent of the nature of bounded rationality following the insights from the works of herbert simon and contributions from outside economics both bounded rationality and the environment are inextricably linked the boundaries between bounded rationality and its environment can shift the form in which bounded rationality is found depends on the complexity of the environment furthermore if local interactions between bounded rational agents result in the formation of hierarchies the complexity of the collective system will change whether this will occur depends on the nature of bounded rationality at the individual level

market clearing and price formation abstract considered here is decentralized exchange of privately owned commodity bundles voluntary transactions take the form of repeated bilateral barters under broad and reasonable hypotheses the resulting process converges to competitive equilibrium price taking behavior is not assumed prices emerge over time they need neither be anticipated nor known at any interim stage

the price of experience we identify a key role of factor supply driven by demographic changes in shaping several empirical regularities that are a focus of active research in macro and labor economics in particular demographic changes alone can account for the large movements of the return to experience over the last four decades for the differential dynamics of the age premium across education groups emphasized by katz and murphy 1992 for the differential dynamics of the college premium across age groups emphasized by card and lemieux 2001 and for the changes in cross sectional and cohort based life cycle profiles emphasized by kambourov and manovskii 2005 jel d91 e24 i23 j11 j24 j31

characterizing effective trading strategies insights from a computerized double auction tournament abstract this paper presents a comparative analysis of 30 computer trading programs that participated in a double auction tournament held at the santa fe institute in 1990 and 1991 our objective is to characterize the form of effective trading strategies in double auction markets we find that a simple rule of thumb is a highly effective and robust performer over a wide range of trading environments significantly outperforming more complex algorithms that use statistically based predictions of future transaction prices explicit optimizing principles and sophisticated learning algorithms