James Stodder

Experimental Moralities: Ethics in Classroom Experiments

Despite their limited return to currency, phrases like business ethics or economic morality are difficult for many economists to pronounce without a smile. In everyday economic life, however, judgments about the ethics of team members, rivals, and even oneself are hard to avoid. An ethical dimension is also present, although rarely acknowledged, when a teacher creates an economy in a classroom. Classroom experiments often lead students to question their own ethics and sometimes even those of their teachers.

Price discrimination and resale: A classroom experiment

The authors present a classroom experiment designed to illustrate key concepts of third-degree price discrimination. By participating as buyers and sellers, students actively learn (1) how group pricing differs from uniform pricing, (2) how resale between buyers limits a sellers ability to price discriminate, and (3) how preventing price discrimination might reduce welfare. The exercise challenges sellers to set optimal prices against unknown demand curves by using a concrete story of pharmaceutical pricing to American and Mexican consumers. By working through profit calculations, students arrive at the optimal seller prices in three different settings: uniform pricing, price discrimination to two groups, and price discrimination to two groups who can resell to each other. The experimental design encourages students to converge reliably to the theoretical predictions. Classroom discussion can focus on real-world examples of price discrimination and on regulatory policy questions in industrial organization and international trade.

The strange persistence of consumer surplus

Despite its abandonment in theoretical work, a literature search shows that variation in consumer surplus (VCS) is the overwhelming choice in applied work – not compensating variation (CV) or equivalent variation (EV). How can this be explained? Besides the obvious ease of computation, there are three good reasons for the persistence of VCS. (1) The Willig bounds on VCS usually give close upper and lower bounds on CV and EV, respectively, and are thus conservative in the estimation of EV. (2) Without integrability, all three measures are inaccurate. Common quasi-linear utility assumptions for VCS, however, imply integrability. (3) Even with integrability, the expected values of highly nonlinear CV and EV measures cannot be determined by substituting prices or quantities into the estimated equations; simulations are required. Thus, VCS is not only simpler, it may also be more accurate.

Consumer Confidence and Income Inequality

Although the Atkinson Inequality Index is widely used, this paper is the first attempt to empirically estimate the parameter on which that index is based. Forty-five years US income distribution and consumer confidence surveys allow one to estimate this Atkinson parameter of inequality aversion. Consumer confidence appears to have become more sensitive to inequality since 1968. About this time, inequality became somewhat less correlated with unemployment, and more correlated with the US stock market. Because consumer confidence indexes are widely-used in spotting business cycle trends, any added ability to predict changes in confidence is of practical importance.

The evolution of externality rights: Flexibility versus ambiguity

Coase argued that externality rights should sometimes be flexible, but warned that ambiguity can also hinder market transactions. Flexible liability is not uncommon and can be shown to provide useful information under nonconvexity. At a global optimum, each side must be able to compensate the other. There are also limited incentive gains from flexible liability for private externalities. For public externalities, however, claims will be exaggerated when agents are risk seeking and understated when they are risk averse. Efficient specifications of right are thus unlikely to emerge from self-interested litigation alone.