Behavioral economists have challenged the neoclassical paradigm by providing ample evidence that individual decisions are often systematically biased and do not confirm neoclassical predictions. Neoclassical economists argue that behavioral biases cannot survive in competitive markets and question the relevance of behavioral insights for economic policy. The Collaborative Research Center (CRC) will explore the relevance and implications of behavioral insights for neoclassical economics.
The CRC combines the research programs of behavioral and neoclassical economists to study applied economic questions that are of high policy relevance. The CRC’s focus is on the economic behavior and performance of individuals and firms: How do systematic biases in expectations, decision processes, and preferences affect the most important economic decisions of households – about education, health, labor supply, financial investments and the purchase of durable consumption goods? How do firms respond to behavioral biases of their customers and their employees, for example by adjusting their marketing strategies, their organizational design, their incentive schemes and their innovation activities? Does competition reduce or amplify the effects of behavioral biases of individuals and firms? What economic policy interventions are effective to protect consumers and employees from exploitation and how can they prevent the destabilization of markets that may arise, e.g., due to the emergence of bubbles and crashes? Thus, the CRC will analyze the allocative consequences and the economic policy implications of different aspects of rationality and deviations from rationality in competitive environments.
We do not presuppose the quantitative importance of behavioral biases. Rather, we will identify in which environments behavioral biases have a significant effect, how important the effect is, und under what circumstances the standard, neoclassical model is sufficient to explain observed behavior. We address many of our research questions within the context of market analyses. In many cases this gives rise to novel theoretical as well as empirical questions but we also revisit several classic questions in economics, e.g. about the informational efficiency of markets or about the equilibrium effects of taxation or other government interventions.
Answering these questions requires the close collaboration of behavioral and neoclassical economists that the CRC is set up to promote. The CRC’s individual projects bring together teams of researchers from both backgrounds. We organize the projects in two research areas, on individuals (A) and firms (B), but with a high degree of connectivity between the areas such that many research questions are investigated from multiple perspectives. Regarding methods, we employ modern microeconomic theory (including behavioral economic theory) to generate testable hypotheses as well as a wide set of empirical methods using field data, survey data, administrative data and economic experiments. Several teams of economic theorists, empirical labor economists and experimental researchers focus on problems of human capital accumulation, labor supply, and the interaction with the labor market. Towards an encompassing analysis of household decisions, the collaboration of experts on survey design, experimental design and microeconometrics will lead to purpose-built household survey data sets and to the development of suitable econometric tools for their analysis. Several projects focus on the constraints on optimal decision-making that may arise from different kinds of competitive pressures and that may affect purchase decisions, behavior in auctions, and investments in financial markets. Teams consisting of economists and management scholars study how the organizational structure at the workplace shapes incentives, e.g. for firm-specific innovation. Two projects focus on the evolution of preferences under competitive pressure.
An important overarching goal of the CRC is to inform the design of regulation and policy interventions. In many cases, policy implications are derived from counterfactual analyses of econometric models and, increasingly in later stages of the research, from intervention studies. Through its joint activities, the CRC also emphasizes the formation of strong networks for our early career researchers and students, mainly within the academic community but also in the realm of economic policy.