Friday, April 16, 2010
Posted by D. Daniel Sokol
Mark Armstrong & Steffen Huck (University College London) provide the usefulBehavioral Economics as Applied to Firms: A Primer.
ABSTRACT: We discuss the literatures on behavioral economics, bounded rationality, and experimental economics as they apply to firm behavior in markets. Topics discussed include the impact of imitative and satisficing behavior by firms, outcomes when managers care about their position relative to peers, the benefits of employing managers whose objective diverges from profit-maximization (including managers who are overconfident or base pricing decisions on sunk costs), the impact of social preferences on the ability to collude, and the incentive for profit-maximizing firms to mimic irrational behavior.