## Classroom Expernomics

### Volume 1, Number 1 (Spring 1992)

Inside this issue:

### An Experimental Test of Preferences for the Distribution of Income

##### John H. Beck School of Business Administration, Gonzaga University, Spokane, WA 99258. A working paper is available from the author upon request.

This study investigates the question of how much income redistribution individuals desire in society with random differences in individual incomes. The experiments confronted individuals with choices of lotteries determining their own payoffs -- to determine individual risk aversion -- and with choices of lotteries determining payoffs to everyone in the group -- to determine preferences regarding the distribution of income. Comparison of the results reveal whether preferences for income redistribution are based solely on an individual "insurance motive" or involve preferences for a more equal distribution of income within the group than is explained by individual risk aversion. The results show that the subjects were risk averse but they did not display the extreme risk aversion implied by a Rawlsian maximin rule. The experiments produced conflicting evidence regarding the question of whether individuals favor a more equal income distribution than can be explained by individual risk aversion.

##### PART A

This experiment consists of three parts, A, B, C. At the end of the period, there will be a random drawing to determine which part will be used to determine individual payoffs.

If Part A is used, your payoff will be determined by the roll of a die at the end of the period. If the die shows 1, 3 or 5, you will receive the amount in the column headed "odd"; if the die shows 2, 4 or 6, you will receive the amount in the column headed "even." Payoffs will be made privately so you will know only your own payoff. You must choose which row in the table -- A, B, C, etc. -- will be used to determine your payoff.

```         Odd           Even
A       \$25.00         0
B       \$23.05        \$1.15
C       \$21.20        \$2.20
D       \$19.45        \$3.15
E       \$17.80        \$4.00
F       \$16.25        \$4.75
G       \$14.80        \$5.40
H       \$13.45        \$5.95
I       \$12.20        \$6.40
J       \$11.05        \$6.75
K       \$10.00        \$7.00
L       \$9.05         \$7.15
M       \$8.20         \$7.20
N       \$7.45         \$7.15
O       \$7.08         \$7.08

Fill in your name and circle the letter of the row which you want to

Name _______________________________
```

##### PART B

In this part of the experiment your payoff will also be determined by a roll of a die at the end of the period according to the same schedule used in Part A, which is reproduced below. If the die shows 1, 3 or 5, you will receive the amount in the column headed "odd"; if the die shows 2,4 or 6, you will receive the amount in the column headed "even." The die will be rolled separately for each individual in the class. Payoffs will be made publicly so everyone knows how much everyone else receives. Unlike Part A, each individual will not be able to choose a different row to determine the payoff. Each of you must choose which row in the table -- A, B, C, etc. -- you want be used to determine the payoffs for everyone in the class. Before throwing the die to determine individual payoffs, one of these forms will be drawn at random; the row designated on that form will be used to determine individual payoffs for all students in the class. You are not allowed to make any transfers of part of your payoff to other students in the class after the experiment is concluded.

```         Odd           Even
A       \$25.00         0
B       \$23.05        \$1.15
C       \$21.20        \$2.20
D       \$19.45        \$3.15
E       \$17.80        \$4.00
F       \$16.25        \$4.75
G       \$14.80        \$5.40
H       \$13.45        \$5.95
I       \$12.20        \$6.40
J       \$11.05        \$6.75
K       \$10.00        \$7.00
L       \$9.05         \$7.15
M       \$8.20         \$7.20
N       \$7.45         \$7.15
O       \$7.08         \$7.08

Fill in your name and circle the letter of the row which you want to
determine the payoffs for all members of the class.

Name _______________________________
```

##### PART C

In this part of the experiment your payoff will be determined by another roll of a die at the end of the period according to the same schedule used in Part A, which is reproduced below. If the die shows 1, 3 or 5, you will receive the amount in the column headed "odd"; if the die shows 2, 4 or 6, you will receive the amount in the column headed "even." The die will be rolled separately for each individual in the class. Payoffs will be made publicly so everyone knows how much everyone else receives. Unlike Part A, each individual will not be able to choose a different row to determine the payoff. The entire group must unanimously agree on which row in the table -- A, B, C, etc. -- will be used to determine the payoffs for everyone in the class. If the group does not reach unanimous agreement within 15 minutes, the payoffs from Part C will be zero. You are not allowed to make any transfers of part of your payoff to other students in the class after the experiment is concluded.

```         Odd           Even
A       \$25.00         0
B       \$23.05        \$1.15
C       \$21.20        \$2.20
D       \$19.45        \$3.15
E       \$17.80        \$4.00
F       \$16.25        \$4.75
G       \$14.80        \$5.40
H       \$13.45        \$5.95
I       \$12.20        \$6.40
J       \$11.05        \$6.75
K       \$10.00        \$7.00
L       \$9.05         \$7.15
M       \$8.20         \$7.20
N       \$7.45         \$7.15
O       \$7.08         \$7.08
```

### Beans as a Medium of Exchange

##### Purpose of the Experiment

The experiment is designed to simulate an environment where something that is very similar to fiat money (i.e., is homogeneous, durable, portable, storable, divisible, has no intrinsic value of its own, etc.) will be accepted in market transactions and thus will have a "value."

##### Description of the Experiment

The class is divided into groups of 2-4 students and various food items are distributed to them. See the sample menu for an example. The students are told that they can make whatever exchange they wish. Each group is given a Transaction Record Form in which they are asked to record any transaction they make.

The transaction period is divided into two subperiods. The students are not allowed to eat until after the end of the second subperiod. Each subperiod lasts about 3-4 minutes. At the beginning of the first subperiod we announce that at the end of the first subperiod every group will have to pay a certain number of beans as a tax. This makes beans valuable. At the same time we also announce that they will have to pay an additional tax in the second subperiod, but the amount of that tax will be announced at the beginning of the second subperiod.

##### Future Extensions

Currently we are in the process of revising and modelling the beans experiment. Hopefully, we will have a working paper providing more details sometime in the near future. Any comments or ideas about improving the experiment are obviously welcome.

###### Table 1. A Menu and Initial Endowment Allocation for a 25 Student Class
• Group #1
• 3 Ham Sandwiches
• 3 Plastic Spoons
• Group #2
• Haagen-Dazs ice cream, one quart
• 16 oz Organic Nasoya Well Water Tofu
• 3 Plastic Spoons
• Group #3
• 3 Plastic Spoons
• 100 Beans
• Group #4
• Plastic Plates (25)
• Plastic Knives (25), Spoons (3), and
• Forks (25)
• Group #5
• Ice Cubes in a Plastic Bag
• Cream Cheese (6 packs, 8oz each)
• 3 Plastic Spoons
• Group #6
• 8 Bagels (various tastes)
• Plastic Cups (10)
• 3 Plastic Spoons
• 150 Beans
• Group #7
• 3 Two Liter Diet Coca-Cola
• 3 Two Liter Coca-Cola Classic
• 3 Plastic Spoons
• Group #8
• Napkins (pack of 50)
• Domino's Pizza (8 Slice Pie)
• 4 Plastic Spoons

### Teaching Privatization in the Soviet Union: An Experimental Economics Approach

##### David E.R. Gay Department of Economics University of Arkansas Fayetteville, AR 72701-1201. A working paper and instructions are available from the author upon request.

During the spring 1991 semester I developed a discovery approach, or experimental economics approach, to an issue of restructuring the Soviet economy. It was innovative because students discovered the advantages of stock markets and how properly designed incentives encourage better work. This was done in the context of a proposal being considered in the USSR to reform the Soviet economy.

In the fall of 1990, my colleague Tom McKinnon returned from the Soviet Union and reported a Soviet proposal to improve incentives by issuing bonuses in "USSR stock" for the overall economy. Such stock differed crucially from U.S. stock because its value depended on the success of the overall economy, instead of a specific firm, and, once received, the stock could not be resold. Presumably the USSR stock limited ownership could provide an incentive for workers to seek a return on the investment and to have a vested interest in job and firm performance.

Each student received token rubles for the six rounds of investment choices. Part of the salary was paid as an incentive to be divided by the student for savings, an owned asset with a 10% return, or to be used in USSR stock, a non-owned asset which could not be sold. Each player could decide to hold more stock in any given round but once invested in USSR stock it could not be reduced. After their choices were recorded and tabulated, a randomly selected rate of return determined the return paid on the stock. If the return on USSR stock was 12% then each share yielded a return which the student could add to the pool of new investment money. However the USSR stock principal could never be used or decreased but the student could invest the interest. Starting with 100 rubles each student decided how much would be invested in a savings account with a guaranteed 10% return (a claim on the principal) versus USSR stock with an uncertain return (but no claim on the principal). In succeeding rounds everyone received additional rubles which could be invested in the privately owned asset of a savings account or the commonly owned USSR stock. After each round the student computed how many rubles from the savings account, the return from USSR stock, and new rubles would be split between the savings account and the USSR stock in the next round. The highest earnings were made by students who did not invest any rubles in USSR stock. The USSR stock could have a competitive return if its yield was high enough for the entire game. A high yield was unlikely for the entire game. The winners received a modest prize and class recognition.

Both classes participated in the rounds of investment choices. In one class the members chose to put almost 75% of their available funds into private savings while in the other class almost 85% of the funds were put into private savings. In their debriefing essays, students identified why they put some funds into the USSR stock. They included a feeling of patriotism to support "their nation," a hope of building the future, social pressure to help, and an overly optimistic estimate of the returns from USSR stock. Virtually everyone recognized that their total available rubles from private savings were much higher than leaving money in USSR stock. The USSR stock wasn't a powerful incentive. Its return depended on the overall economy instead of a specific firm. Since investors were unable to transfer its ownership they could not claim the principal.