Laboratory experiment reveals mixed time- and state-dependent adjustment rules in economic decision-makers, indicating that subjective observation costs drive deviations from optimal inaction regions.
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. On average, subjects adjust at states remarkably close to optimal threshold levels but, as in the field, do not establish true “state dependent” inaction regions, suggesting significant “time dependent” components in adjustment rules. Structural estimates of subjective observation cost qualitatively account for variation in time dependence observed across treatments. (JEL C91, D21, D80)
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Magnani et al. (2015) studied this question.
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