Dynamics of Output Growth, Consumption and Physical Capital in Two-Sector Models of Endogenous Growth

Abstract

Abstract We report the results of an experimental investigation of a key axiom of economic theories of dynamic decision making – namely, that agents plan. Inferences from previous investigations have been confounded with issues concerning the preference functionals of the agents. Here, we present an innovative experimental design which is driven purely by dominance: if preferences satisfy dominance, we can infer whether subjects are planning or not. We implement three sets of experiments: the first two (the Individual Treatments) in which the same player takes decisions both in the present and the future; and the third (the Pairs Treatment) in which different players take decisions at different times. The two Individual treatments differed in that, in one, the subjects played sequentially, while, in the other, the subjects had to pre-commit to their future move. In all contexts, according to economic theory, the players in the present should anticipate the decision of the player in the future. We find that over half the participants in all three experimental treatments do not appear to be planning ahead; moreover, their ability to plan ahead does not improve with experience, except possibly when we force subjects to pre-commit to their future decision. These findings identify an important lacuna in economic theories, both for individual behaviour and for behaviour in games. Address for correspondence: John D Hey, Department of Economics and Related Studies, University of York, Heslington, York YO10 5DD, UK. Tel: 0044 1904 433 786 Fax: 0044 1904 433 759. E-mail: jdh1@york.ac.uk Bone: University of York, UK, jdb1@york.ac.uk Hey: LUISS, Italy and University of York, UK, jdh1@york.ac.uk Suckling: University of York, UK, jrs1@york.ac.uk