Questions will be studied of central microeconomic importance via interwoven theoretical, empirical, and experimental analyses. This will be from a behavioural perspective, combining standard methods with assumptions that better reflect evidence on behaviour and psychological insights. The contributions of behavioural economics have been widely recognized, but the benefits of its insights are far from fully realized. There will be four lines of inquiry that focus on how institutions interact with cognition and behaviour. These will be chosen for their potential to reshape our understanding of important questions and their synergies across lines.

The first line will study nonparametric identification and estimation of reference-dependent versions of the standard microeconomic model of consumer demand or labour supply - the subject of hundreds of empirical studies and perhaps the single most important model in microeconomics. It will allow such studies to consider relevant behavioural factors without imposing structural assumptions as in previous work.

The second line will analyse history-dependent learning in financial crises theoretically and experimentally, with the goal of quantifying how market structure influences the likelihood of a crisis.

The third line will study strategic thinking experimentally, using a powerful new design that links subjects’ searches for hidden payoff information (“eye-movements”) much more directly to thinking.

The fourth line will significantly advance Myerson and Satterthwaite’s analyses of optimal design of bargaining rules and auctions. This went beyond the analysis of given institutions to study what is possible by designing new institutions. It replaced their equilibrium assumption with a non-equilibrium model that is well supported by experiments.

The synergies among these four lines of theoretical analyses, empirical methods, and data analyses will accelerate progress on each line well beyond what would be possible in a piecemeal approach.


Funded by: European Commission

Duration: 5 years