Department of Economics

Credit default swaps (CDS) played an important role in the financial crisis of 2008 leading to calls for regulation. Here, we seek to understand the impact of a CDS regulation that restricts the possibility to hold naked CDS. We use a controlled laboratory experiment analyzing CDS pricing in a bond market subject to default risk. Our results show that the regulation achieves the goal of increasing the use of CDS for hedging purposes while reducing the use of CDS for speculation. This success does not come at the expense of lower initial public offering (IPO) prices for the bonds or worse pricing of bonds or CDS in the secondary market.

We report on a laboratory experiment testing the predictions of the Diamond–Mortensen–Pissarides (DMP) search-and-matching model, which is a workhorse, decentralized model of unemployment and the labor market. We focus on the job vacancy posting problem that firms face in the DMP model. We explore the model's comparative statics predictions concerning variations in the separation rate, the vacancy posting cost, and the firm's surplus earned per employee. Across all treatments, we find strong evidence for an inverse relationship between vacancies and unemployment, consistent with the Beveridge curve. We also find that the results of our various comparative statics exercises are in-line with the predictions of the theory.

The overall objective for HyperXite 9 was to design and build a more robust, and reliable pod, capable of proving the feasibility of a high-speed transportation system. We are working to improve a linear induction motor as the pod's propulsion system. We are also designing and implementing a thermal cooling system to actively dissipate the heat generated by this propulsion system. Our team is comprised of the following 7 subteams: Static Structures, Braking & Pneumatics, Dynamic Structures, Propulsion, Power Systems, Control Systems, and Outreach.

We provide some theory and experimental evidence on contests with entry fees. In our setup, players must simultaneously decide whether or not to pay a fee to enter a contest and the amount they wish to bid should they choose to enter the contest. In a general n-bidder game, we show that the addition of contest entry fees increases the contest designer’s expected revenue and that there is a unique revenue maximizing entry fee. In an experimental test of this theory we vary both the entry fee and the number of bidders. We find over-bidding for all entry fees and bidder group sizes, n. We also find under-participation in the contest for low entry fees and over-participation for higher entry fees. In the case of 3 bidders, the revenue maximizing entry fee for the contest designer is found to be significantly greater than the theoretically optimal entry fee. We offer some possible explanations for these departures from theoretical predictions.

Stock splits and reverse splits often result in short-term abnormal returns even though such split events do not change any fundamental factors affecting the valuation of a firm's stock. In this paper we report an experiment designed to better understand market reactions to stock splits and reverse splits. In one treatment, two assets have increasing fundamental values, and one asset is subject to a 2-for-1 share split while the other asset is not. In a second treatment, the fundamental values of both assets are decreasing, and one asset is subject to a 1-for-2 reverse split while the other asset is not. We find that in both cases, share prices do not fully adjust to changes in fundamental values per share following a split announcement. We provide evidence that the incomplete adjustment of share prices to splits or reverse splits can be attributed to heterogeneity in traders' cognitive abilities.