Time and State Dependence in an Ss Decision Experiment

Jacopo Magnani, Aspen Gorry, Ryan Oprea
2016 American Economic Journal: Macroeconomics  
Flow earnings in a laboratory experiment decline the further a Brownian state variable, z, evolves from its optimal level z * . Optimal state dependent models predict subjects will pay a fixed cost to return z to z * only when z strays outside a critical inaction region around the optimum. Subjects' average adjustment points are remarkably close to optimal levels, but as in the field they do not establish true "state dependent" inaction regions, suggesting significant "time dependent"
more » ... in adjustment rules. Structural estimates of the parameters of a bounded rationality model suggest subjects experience substantial cognitive costs from responding to the state, accounting for these patterns. Cross treatment results suggest that these costs -and the resulting degree of state dependence in adjustment -are powerfully influenced by the volatility of the stochastic process, a finding with potentially important policy implications.
doi:10.1257/mac.20130267 fatcat:gfephphlu5ahxbvc7v3xhn2q2e