Blazing New Trails
Bill Harbaugh Takes a New Approach
to Studying Economic Behavior

Bill Harbaugh remembers a time back in graduate school when he and friend Kate Krause -- the only students in their graduate classes who had young children -- would jokingly tell their friends that they were working on a paper called "Economic Experiments that You Can Perform at Home on Your Children." But, after they graduated, the economists they met at conferences kept telling them it was a good idea, and so they decided to take it seriously. Today, with the help of grants from the National Science Foundation (NSF) and the MacArthur Foundation, Harbaugh, a UO assistant professor of economics, and Krause, who teaches at the University of New Mexico, are breaking new ground with their studies on the economic behavior of children.

Parents who pay their children an allowance or who worry about whether their children are learning to save money or just spend it, might think that studying children's economic behavior is an obvious idea. But Harbaugh says he and Krause are the first economists to try to systematically study children. "One reason we're interested in children is because economists often don't really know why adults act the way they do," Harbaugh says. "Economists believe that adults act rationally, in ways that they hope will satisfy their desires, but we really have very little idea how they got those particular tastes and preferences. We think that by studying children, we can help fill in part of that gap."

Already Harbaugh and Krause's studies have yielded some interesting results. Their studies show that children, when faced with economic choices, generally behave like adults. This became evident during some of their first experiments, which were tried on their children and their children's friends. One experiment started as a game. Instead of playing "Pin the Tail on the Donkey" at birthday parties, kids would play the "Sharing Game." Krause would put the children in groups, then each child would receive tokens that he or she could either keep for themselves or give to the group. Every token donated to the group would result in every person in the group getting one-third of a token. So, sharing a token would mean less for them personally, but more for the group.

Harbaugh says the results from the birthday parties (replicated later in the lab!) showed that by age six, in terms of altruism, kids are already behaving like adults. Adults are surprisingly generous in these sorts of experiments -- they usually share about one-third of their tokens with the group. "It's fascinating. Adults have a pretty sophisticated taste for altruism. For example, when it becomes cheaper to give, they will give more. We found six-year-old kids doing exactly the same thing."

In another set of experiments, Harbaugh and Krause study children's risk behavior. Others have found that adult women are less willing to take risks than men are. This leads to male/female differences in economic outcomes. Harbaugh and Krause are interested in what causes this difference and are currently running experiments on entire families to see at what age it develops and whether it runs in families. "We bring them [families] into the lab, split them up, and then give each family member a set of possible financial risks to consider. When they've made their choices, we spin a wheel, and pay the parents in cash and the children in toys."

While children exhibit similar preferences to adults in many of their economic behaviors, one area that changes dramatically as children grow older is their saving behavior. While adults are usually willing to save money for the future at a 10 percent rate of return, Harbaugh and Krause's studies show that for kids the return has to be astronomically bigger -- well over 1000 percent. So, somewhere between the age of six and the age of twenty-six, the willingness to save changes dramatically. This is important because the more willing we are to save, the more capital we will have and the richer a society we will be. Even just a slight increase in the willingness to save more can produce a lot more capital, and eventually a much richer society, Harbaugh says. Yet economists have absolutely no idea what determines this willingness to save -- and he thinks the answer is probably going to be found by studying children.

Harbaugh says he and Krause learned early on that you can't conduct experiments on children in the same way that you do with adults. "If you read instructions to kids, like you do to adults, they quickly lose interest," he says. So to encourage kids to participate, they first show them a big box filled with stuff that kids like; incentives to be offered as rewards depending on how well kids "play the game" and give them their undivided attention. Harbaugh says kids love the experiments. "They are totally into it because they are used to playing games and the rewards are appealing."

Tim Berry, an undergraduate economics major who assists Harbaugh with his research, has observed that children are much more willing subjects than adults. "Adults are usually more reluctant subjects given the time involved and require payment for their participation," he says. "Children are excited to be involved in the experiment. They also seem to be very interested in the results of the experiment and the implications of these results."

Berry's paid position as one of Harbaugh's assistants is the result of the NSF grant Harbaugh received last year, which includes funds to provide research experiences for undergraduates. Each year, Harbaugh is able to hire three to four undergraduates to help conduct experiments in area schools. Students study the concepts that interest them the most, and work with Harbaugh to design an experiment focused on their interest. This hands-on participation gives students unique opportunities to contribute to the field of economics.

Berry says his interest was in observing how socialization affects behavior and comparing the analytical and decision-making skills of children and adults. "The highlight of my research was observing a correlation between math ability and decision-making ability in sixth graders."

"My students can pick a topic, study it in children, and it's new knowledge. This is very rare for economics because so many topics have already been very thoroughly explored," Harbaugh says. "With this project, I find myself learning new and interesting things from a 21-year-old undergraduate." This same opportunity to contribute to this new, unexplored area definitely appeals to Harbaugh, too.