Rationality and Competition: The Economic Performance of Individuals and Firms

The Collaborative Research Center Transregio “Rationality and Competition” combines the research programs of behavioral and neoclassical economists to study applied economic questions that are of high policy relevance. The focus CRC TRR 190 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 (due to bubbles and crashes)? Thus, the CRC “Rationality and Competition” will analyze the allocative consequences and the economic policy implications of different aspects of rationality and deviations from rationality in competitive environments.
An important empirical question is in what environments behavioral biases have a quantitatively large effect and under what circumstances the standard, neoclassical model is sufficient to explain observed behavior. Answering this question requires the close collaboration of behavioral and neoclassical economists that the CRC is set up to promote. We will 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.