Research Projects: Theoretical and Historical Projects

• Theoretical Project 1 - Hypothesis Testing: Historical Research on Individual and Group Decision Making in Grasslands
  (Full description: doc, pdf; Presentation: pdf, ppt)
  (Roberta Balstad Miller, 2007-2009)

  This project will complement laboratory and field research by testing hypotheses of individual and group decision processes and the use of scientific and technological information in a historical study of agricultural development in the grasslands of two continents, North America and Africa, in the 19th and early 20th centuries. Specifically, this project will examine the decisions and decision processes of European-origin farmers and farm communities in the Great Plains of the United States and the Orange Free State in South Africa to see the extent to which contemporary decision processes identified and tested in Center research projects are replicated in earlier time periods. Hypotheses for testing will be selected in consultation with researchers in other Center projects. The study will be conducted in years four and five of the Center in order to build on and test the findings of contemporary laboratory and field studies. In addition to hypothesis testing, historical case studies will provide longer time horizons for observing (a) the impacts of new information and technological innovation on the framing of individual and group decision processes; (b) the consequences of individual and group decisions under both constant and variable weather patterns and responses to them; and (c) individual and group adaptation or reformulation of decisions and decision frameworks as weather and socio-technical conditions changed. The advantage of studying the settlement of these major continental grasslands is that there was high seasonal to interannual climate variability during the studied time period which affected water supplies and agricultural productivity (El-Ashry Gibbons 1988; Beinart Coates 1995). In the Great Plains, these years encompass the initial period of settlement through the Dust Bowl conditions during the Great Depression. In South Africa, they include transitions from various types of stock grazing to market-based agriculture. In both areas, agricultural land uses were extended during periods of ample rainfall and contracted, particularly in marginal areas, during periods of little rainfall (Drought 1923). This was also a period in which a number of scientific and technological applications and changes in agricultural methods were introduced, such as barbed wire, mechanization of agriculture, access to information over radios, raising new types of animals, plowing practices, and others. These innovations provided farmers with new tools and information they could use to moderate the impacts of uncertain weather conditions and by altering some of the impacts of climate, change the decision context (Archer 2000; Beinart 1997; Webb 1931).

  In the period under study, both North Dakota and the Orange Free State had been recently settled by European-origin farmers who had neither traditional knowledge nor experience with the climate in the new region. Both areas also experienced significant and well documented climate variability in the period from 1880 to 1940 (Gutmann et al 1998 1999). (Climate variability will serve as a surrogate for climate change during this period.) This was felt keenly by farmers because they were dependent upon rainfall, length of growing season, freedom from pests, and conditions of roads and transportation networks, all of which could be directly influenced by climate variability. We know that the decision to settle in new areas is generally influenced by multiple factors, including social networks, transportation routes, public land policy, and perceptions of economic opportunity (Miller 1979). But we know far less about the decision making that took place once the settlers found themselves in situations characterized by of rapid and unexpected climate variability. In this study, we will examine the ways that farmers framed their options in the face of these uncertainties and made decisions both individually for their own farming activities and as a group for the establishment of collective resources to facilitate marketing and sales of their products. Research will examine individual decisions related to land use, crop selection, farming vs. livestock grazing, "overstocking" and soil exhaustion, and production for changing commercial markets. It will also study group decisions (and individual involvement in group decision processes) related to legal and policy issues of access to water and land (riparian rights and fencing land), the construction of local storage facilities, and framing of economic and policy issues related to transportation and access to markets in each locality. Public records and legal documents related to land sales, regulation, and use; private correspondence and diaries; agricultural, trade, and demographic statistics; and contemporary accounts in newspapers, public speeches, published articles, sermons, and other sources will be examined. In both areas, the historical record is well preserved and available for research, although many of the written records of individual actions and perceptions are only available in archives in the region itself. This research will be used to develop on-line educational courses.

• Theoretical Project 2 - Climate, Investment, and Economic Growth
  (Arthur Small, David Krantz, 2004-2006)
  
  The goal of this project is to advance understanding of climate-economy interactions, by building and analyzing models of a coupled climate-economy system. Formal analytic models and computer simulation tools will be used to examine how climate risks affect regulatory regimes, government and private investment choices and returns, and performance and valuation of natural and built capital. Existing climate-economy growth models (Nordhaus Boyer 2000, Dasgupta Mäler Barrett 1999) provide the starting point. We will refine this established structure in ways designed to allow analysis of the relationships between climate risks, investment, and regulation. Interest rates will be endogenized, reflecting the effect of climate change on investment returns. Capital stocks will be differentiated to reflect both the greenhouse emissions intensity of capital in use, and the vulnerability of installed capital to climate-induced shocks; Mechanisms by which climate shocks alter regulatory regimes and patterns of public-sector investment, will be treated explicitly. In sharp contrast with previous scholarship, we avoid extreme assumptions about government behavior: Rather than see government either as a benevolent optimizer or negligent absentee, we will instead incorporate simple political-economic models that describe how governments respond through regulation to climate-induced shocks and perceived climate risks. Investors in turn incorporate expectations and beliefs about future climate and regulatory scenarios when planning long-lived investments. At the center of the analysis is the interaction between centralized government and decentralized investors and consumers, in an uncertain world.

  Results from our second project, on context-dependent choice, will be incorporated into our integrated climate-economic model. Cognitive errors, endogenous belief formation, and adaptive expectations influence private and public decisions related to climate, and thus affect long-run climate-economy outcomes. The model will deliver computer simulation tools for analyzing climate-economy scenarios under a range of alternative assumptions about individual decision-making processes, the evolution of the climate system, and the process by which government regulations are formed. Insights from formal modeling and computer simulations will extend understanding of how behavioral responses shape the effectiveness and wisdom of alternative climate policies.

• Theoretical Project 3 - Behavioral Microeconomics: Equilibria Under Context-Sensitive Choice
  (David Krantz, Arthur Small, 2005-2007)

  There is very strong evidence that choices are context-sensitive. In general, context-sensitive choices cannot be accommodated by utility theory, because transitivity can be violated: in the context determined by (X,Y), choose X; in (Y,Z), choose Y; yet in (X,Z), choose Z. Such choice propensities cannot be dismissed as irrational, any more than social choice based on (intransitive) majority voting can be. We believe it is possible to develop microeconomics, including market equilibria with reasonable supply and demand functions, even while assuming that both production and consumption choices are context-sensitive and non-transitive. Moreover, we see advantages to doing so. For example, absent context-free intertemporal tradeoffs, there is no reason to assume fixed rates of "pure time preference." Some goals may exhibit zero or negative "time preference." Moreover, eschewing overall maximization of utility makes it easier to incorporate "noneconomic" goals into policy analyses. Some of the key work done by maximization can be accomplished instead through the much weaker principle of Transparent Dominance: if plan B is at least as likely as A to accomplish all goals explicitly considered in a given context, and more likely to accomplish one such goal, then B will be chosen rather than A. There is no evidence that this principle is ever violated in human decisions. (The key caveat is "explictly considered;" if the comparison between plans A and B is more opaque, it is easy to find violations of the dominance principle; but these can be viewed as computation errors and their effects may be modelled as random error.)

  We will adopt a mathematical structure within which Transparent Dominance can be formalized and used (with "technical" auxiliary assumptions) to prove theorems concerning existence, uniqueness, and characteristics of market equilibria in economies populated by context-sensitive agents. We will then use this structure to analyze puzzling economic phenomena, including ones involving intertemporal tradeoffs and noneconomic goals. A starting point is the analysis of a one-agent (Robinson Crusoe) economy, making decisions (e.g., about crop choice) that incorporate elements of delayed gratification, chance, and climate sensitivity, with at least one noneconomic goal. Model development will build to incorporate trade, specialization, and group coordination toward shared, endogenous climate risk. The axiomatic approach and the emphasis on both economic and noneconomic goals allows this project to play an integrating role for the laboratory and field studies undertaken by other groups in our proposed center, showing the how their findings lead to a broader set of issues addressed by economic analyses.

• Theoretical Project 4 - Interdependent security: Toward realistic behavioral models
  (Full description: doc, pdf)
  (Howard Kunreuther, Geoffrey Heal, David Krantz, 2007-2009)

  Recent work (Kunreuther Heal 2003) focuses on the decision on how much to invest in protection in situations where there are interdependencies between different individuals, groups or individuals. i.e., where there is the possibility of being contaminated by another agent. To take a climate-related example: protection against insect pests (that may proliferate with unusually high rainfall) may be highly effective if neighbors also invest in such protection, but less effective if done alone. Current theoretical work by the same authors (Heal and Kunreuther 2003) extends the analysis of interdependent security problems to more complex asymmetric situations.

  Very recent unpublished findings from controlled laboratory experiment (by Kunreuther, Onculer, and Schade) show how problem context impacts on decisions to engage in protective investment in an interdependent situation, suggesting that the nominal economic payoffs do not accurately represent the strategic situation: altruistic, affective and social goals are also likely to be active. The proposed theoretical project will take the empirical results obtained in Laboratory Project 4 to analyzing how game-theoretic equilibria change as a function of the strength of social motives. We will consider both traditional Nash equilibria (where the underlying choice theory involves a maximization criterion and social goals are included in utility functions) and also novel equilibrium concepts based on multiple goals and conjunctive choice criteria.