UC Santa Barbara

This dissertation consists of two essays in experimental economics and one in applied microeconomics. The first chapter, Preferences over Exploration: Simple Bandits in the Lab, presents an experimental study about how people view the trade-off between exploration (trying a new option) and exploitation (taking a familiar option). This study documents a large and persistent tendency of people to under-explore, even in the simplest possible bandit setting. By simplifying the environment, the study can directly control for risk preferences, abstract from other issues such as ambiguity, Bayesian updating, or failures to reduce compound lotteries. The second chapter, Complexity and Procedural Choice: Evidence from Experimental Bandits, presents an experiment about how subjects select procedural rules to make decisions in a simple bandit task. The optimal strategy involves a relatively sophisticated 4-state decision rule. When complexity costs are low, subjects conform to the optimal behavior; when complexity costs are higher, holding other aspects of the problem constant, subjects systematically employ lower-complexity rules. This suggests that aversion to complexity causes subjects to play simpler strategies and earn lower payoffs. The final chapter, The Economics of the Montana Liquor License System, is an applied microeconomics paper about the the liquor license system in the state of Montana. The state has a complicated system of quotas for liquor licenses, involving multiple license types, which are tradable within quota area (and occasionally between quota areas). The study offers a simple model of the system, providing testable hypotheses. Empirical results support these hypotheses, indicating that gambling revenue, non-permanent population, and income all positively affect prices, while the emergence of small-scale producers (e.g., craft breweries) negatively affect license prices.