This interesting project examines the basic behavioral foundations of economic analysis. The fundamental concept underpinning economic theory regarding the purchase of consumer goods and services, participation in the labor market, and the establishment of contracts between people or institutions is the maximization of utility. That is to say, people make choices which they perceive will bring them the most satisfaction, and in doing so they forgo other choices. This seeming truism is both self-evident and profound at the same time. The approach has provided insights into many important questions. For instance, faced with a given wage rate, how much will people work? What fraction of their incomes will they save? What effect will a tax on gasoline have on the purchase of automobiles or on the number of miles driven. Clearly these are important questions to policy makers, producers, consumers, and other economic agents. The approach of utility maximization is, however, sometimes not readily applicable to observed human behavior. Many times people continue in behavior which to an observer appears irrational. Economists and psychologists who study such behavior often explain it as the result of human beings' inability to process effectively the ocean of information available to them. Thus they implicitly derive rules of thumb, or other shortcuts which allow for reasonably rapid decision making, but might not result in the choice which truly gives the most satisfaction over the long run. Economic agents enter into long term contracts with each other, even though in the short term each agent might be able to do better by acting independently. That is to say, each party to a contract might have the incentive to cheat, particularly if the cheating cannot be detected. This very innovative project explores the incentives to cheat on contracts, the types of information conveyed by individuals entering into contracts, and mechanisms which might diminish the incentive to cheat. Professor Frank uses a game theoretic framework to analyze the so- called prisoner's dilemma in a variety of interesting settings. In this manner he gains a great deal of insight into the information processing mechanisms of human behavior, and ultimately into the ability of economic agents to act in a rational manner.
