How markets function determines not only economic well-being, but also access to education and jobs. The outcome of markets is determined by the interplay of the market rules and institutions on the one hand and the behavior of market participants on the other. Market design is used to deal with the market rules and institutions. Concerning behavior, participants in markets do not always act as homo oeconomicus. A good understanding of individual choices in strategic situations requires more behavioral realism, taking into account psychological givens and social context. The research unit focuses on the study of market outcomes under richer models of human choice. It makes use of game theory, behavioral economics and experimental economics.
Currently, the work of the unit can be grouped into three main areas.
A. School choice, university admissions, and entry-level labor markets
When workers are looking for jobs or students apply for seats at schools and universities, matches between firms and workers or schools and students are formed. These matching markets differ in a number of important ways from markets for consumer goods. For example, supply and demand are often coordinated not by prices, but by other criteria such as academic performance for university admissions. We investigate existing mechanisms that match children to schools and students to universities in Germany. Market design is used to improve upon the existing mechanisms.
See also the project A06 of the CRC TRR 190 Rationality and Competition, as well as the completed projects A 6 in CRC 649 and the bridging project Recruitment Behavior of Companies in Vocational Training and Labor Markets.
B. Privacy, social image, trust, and corruption
Ethical and social concerns play an important role in markets as they can influence everyday decisions and thereby the functioning of markets. For example, consumers who care about maintaining a good image might buy more expensive products or pay taxes even when they could easily avoid this. Similarly, corruption can be reduced by ethical and social concerns. The positive role of social ties for the amount of trust between actors is an important aspect of market integration. On the other hand, too much trust can mean that people provide personal details freely even though it harms them in the end. For the protection of privacy, it is vital to understand how people deal with their personal data.
See also the Leibniz SAW project 'Market Design by Public Authorities' and the completed Project C3 in CRC 1026.
C. Bad decisions in markets
Systematic mistakes in judgments and false expectations affect economic decisions in many contexts. This is not only true for financial markets and markets for consumer goods but also for labor markets. The over- and underconfidence of job searchers can affect their acceptance or rejection of job offers and thus their economic success. A particular form of overconfidence is caused by the hindsight bias which appears when people believe after an event to have known that it would happen, even when they really did not. The hindsight bias can make people overestimate their own abilities, leading them to be overly competitive and to evaluate their subordinates too negatively. Another systematic bias, the endowment effect, hinders efficient trading, and we investigate its pervasiveness in various contexts.
See also the completed bridging project Cultural Framing Effects in Experimental Game Theory.