This paper applies experimental methods to evaluate the completeness of arbitrage and rate-of-return parity in simultaneous asset markets in which the assets are denominated in different currencies. Two assets, which return uncertain, but known, dividends in each trading period, are traded over 20 periods, after which the asset has no value. Results indicate that risk-neutral rate-of-return parity is a strong predictor of relative asset prices when assets have common expected dividends and the expected dividends have common variances. The predictive power of risk-neutral rate-of-return parity is reduced as the assets become differentiated.The third factor is friction in capital and goods markets (Obstfeld and Rogoff, 2000). Trades in these markets often involve substantial risk, uncertainty, and significant transaction costs. These must be taken into consideration before rate-of-return parity can be accepted or rejected.Different authors have taken different approaches to addressing the confounding factors ex post in international financial market data. These different approaches have led to different conclusions depending on the method employed and the data used. Previous methods apply variations of the underlying premise that confounding factors must be dealt with ex post. This assumes that there is no source of data in which these confounding factors do not arise. This is not the case. It is possible to generate data that avoid these confounding factors.An attempt to generate data that avoid confounding factors was undertaken by Benzion et al. (1994), who use survey data to capture the expectations and discount rates of individuals with respect to real assets. Their results do not support rate-ofreturn parity. Frankel and Froot (1987) and Froot and Frankel (1989b) use survey data to explore exchange rate predictions, a closely related topic.The weakness of using surveys to collect data on expectations is that the questions are hypothetical. The participant does not have to suffer (or enjoy) the consequences of whatever action she says she would take in response to the scenario described in the survey. A laboratory environment in which participants receive experimenterinduced rewards related to actions and in which changes in the participants' rewards come primarily from experimenter-induced rewards avoids the weakness of surveys. 1 A laboratory environment can be created to reduce confounding factors and control unavoidable ones. Exchange rates can be fixed with certainty, asset dividends can be well-defined, and the information to which traders have access can be known by the experimenter. If rate-of-return parity is observed in an environment free of confounding issues, and in which participants' actions are motivated by salient and dominant rewards, support can be lent to the basic principle behind uncovered interest rate parity as a real phenomenon.Smith, Suchanek and Williams (1988, SSW hereafter) report a double-auction experiment designed to examine the price behavior of an asset which provided an unce...
In many situations, it is advantageous for heterogeneous groups to be coordinated by a single individual. This individual will bear private costs for acting as the leader while enabling each member of the group to achieve maximum potential gains. This environment is modeled as a war of attrition in which everyone is tempted to wait for someone else to volunteer. The hypothesis that individuals use backward induction to determine their actions identifies the volunteer as the individual who has the largest benefit-cost ratio of volunteering. Two alternative hypotheses are introduced which focus on the beginning of the game. The focal point hypothesis, like the backward induction hypothesis, implies that the volunteer will act immediately. The play-against-nature hypothesis has predictions identical to the focal point hypothesis; however, it does not imply immediate action. Laboratory results provide more support for the play-against-nature hypothesis than the others.1 See Ledyard (1995) for a comprehensive, but now dated, survey. 2 An early example of this can be found in Buchanan (1967). 3 The classic reference for this approach is Bergstrom, Blume and Varian (1986). 4 See Hirshleifer (1983).5 The dragon-slaying example is from Bliss and Nalebuff (1984). As further examples, Bilodeau and Slivinski (1996) also mention cleaning shared toilets and chairing an academic department.
Since the financial crisis, the malfeasance of business leaders has been a recurring theme in the news, along with calls for increased regulation and oversight. This focus on the ethics of the business community raises a concern about the ethics of those in business or going into business. The ethics of business people and business students has been explored by a number of researchers using survey techniques. We propose and report the results of an alternative method for investigating unethical behavior by students. In a motivated economic experiment with introductory level students, we find that business students were almost twice as likely to lie for a monetary reward as students in other disciplines, demonstrating the need for effective business ethics.
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