IFREE was founded in 1997 with a $1,000,000 endowment for the IFREE Distinguished Scholars Program . At that time two of the most preeminent scholars in experimental economics were named and awarded annual, increasing support over twenty-five years to advance their research agendas.

Dr. Kevin McCabe - a pioneer in the developing field of neuroeconomics - was named the IFREE Distinguished Scholar in Neuroeconomics . This new, cross-disciplinary field of economics is an interdisciplinary research program working to understand the biological underpinnings of human economic decision-making. Dr. McCabe is a professor of economics at George Mason University, the newly elected Chairman of IFREE, and the Director of the George Mason University Center for the Study of Neuroeconomics.

Dr. Stephen Rassenti - an originator of the interdisciplinary field combining economics and engineering - was named the IFREE Distinguished Scholar in Economic Systems Design . This cross-disciplinary field has provided a foundation for a vast portfolio of experimental economic research including combinatorial auctions, energy restructuring, and market design research. Dr. Rassenti is professor of economics at George Mason University and Director of the Interdisciplinary Center for Economic Science (ICES).

A Tribute to IFREE by Distinguished Scholars

Kevin McCabe
Professor of Economics, Law, and Neuroscience, George Mason University
Director of the Center for the Study of Neuroeconomics
Adjunct Investigator at the National Institute of Health

Looking back over my nine years as a IFREE Distinguished Scholar, three things come to mind: peace of mind in knowing that I wouldn’t have to tailor my work to the demands of others, gratitude in knowing an anonymous investor thought my work in neuroeconomics, then just beginning, was worth investment, and third, encouragement and opportunity that has come during challenging times when difficult roadblocks appeared but I was able to “look for the silver lining.”

Two research projects stand out over this time. Upon receiving the scholarship I turned my attention to understanding how to incorporate brain imaging into experimental economics. I joined the regular meetings of the Cognition and Neuroimaging Laboratories at the University of Arizona and learned how to design and run a neuroimaging experiment. In 2001 I published a paper with IFREE scholars Daniel Houser and Vernon Smith and CNL scholars Lee Ryan and Ted Trouard, in the Proceedings of the National Academy of Sciences with the title “A Functional Imaging Study of Cooperation in Two-person Reciprocal Exchange.” This was the first paper to use functional Magnetic Resonance Imaging to test with functional brain activation data the hypothesis that people use theory-of-mind in order to cooperate in trust and ultimatum settings; it has been cited over two hundred times.

This research project has continued with another highly cited joint publication by Mary Rigdon, Vernon Smith and I in 2003 with the title, “Positive Reciprocity and Intentions in Trust Games”. This paper provides a clear behavioral demonstration of the role of theory-of mind in promoting trust relationships by studying reciprocity behavior in voluntary and involuntary trust games. After moving to George Mason University I’ve continued our research on the neuroeconomics of trust with Jordan Grafman at the NIH and Luan Phan at the University of Chicago. Jordan Grafman, Frank Kruger (a postdoctoral student at NIH) and I are in the process of finishing a paper with the working title “Neural correlates of conditional and unconditional trust in two person reciprocal exchange,” which we plan to submit with co-authors to Science within the next few weeks. This paper suggests that there may be two approaches to maintaining a trust relationship over time (Conditional and Unconditional) that use different neuronal systems and have different performance characteristics for partnerships. Joint work with Luan Phan and others has resulted so far in the abstract presented to be presented to the Society of Biological Psychiatry meeting, May 2007, with the title, “Limbic Reactivity to Partner Reputation in Social Phobia: fMRI of the Trust game.” In this research we find an exaggerated amygdala activation in social phobics which helps identify the key role of the amygdala in evaluating social risk.

My second research project, started at George Mason University, is research in law and experimental economics. This research program was started with a joint research paper with Distinguished Scholar Steven Rassenti, undergraduate Laura Inglis, and other co-authors in examining the incentives for the pretrial settlement of tort cases in a publication in the Florida State University Law Review, 2005, with the title “Experiments on the Effects of Cost-Shifting, Court Costs, and Discovery on the Efficient Settlement of Tort Claims”. In this research we find that individuals are rational with respect to exogenous influences on incentives, but seemingly less rational in their negotiations with each other as they leave the bargaining table to pursue a court award with a lower expected return. Fee shifting rules designed to improve settlement, such as California rule 998, only make matters worse. Follow-up research being written up for publication strengthens these results and makes clear some of the unintended consequences tort-reform may have on the structuring of attorney incentives.

IFREE funding has allowed me to work with many students. Some of those include undergraduate Ming Hsu who worked on the 2001 neuroeconomics paper at the University of Arizona, went on to do his graduate work at Cal-Tech, and is now a fellow at the Beckman Institute and undergraduate Laura Inglis who co-authored the tort paper at George Mason University and is now pursuing her Ph.D. at the University of Oxford. Graduate student Steve Saletta has been working with me in neuroeconomics and has been awarded a NIH post-doctoral fellowship starting next year.

Stephen Rassenti
Professor of Economic Systems Design, George Mason University
Director, Interdisciplinary Center for Economic Science

As an engineering graduate student in 1980 I was inspired by the force and potential of Vernon Smith’s research agenda, and in the years that followed I was attracted by the opportunity to develop the discipline we now call Economic System Design. Simply put, ESD studies how efficient resource allocation can be accomplished in very complex economic environments. During the past 10 years under IFREE’s support, and thanks to an anonymous investor which has provided the yearly stipend for me, I have been encouraged to pursue cutting edge research in the design and testing of smart computer assisted markets while directing the Interdisciplinary Center for Economic Science at George Mason University.
My interests have broadened to include topics in law and economics and antitrust litigation. As part of a team which includes IFREE distinguished scholar Kevin McCabe, we studied incentives to settle damage lawsuits before a court hearing was undertaken. I recently negotiated a contract with a private consortium led by Verizon, then developed and organized the research effort devoted to understanding the costs (or benefits) to consumers of allowing vendors to tie the purchase of various goods or services together under a single price bundle.

I remain active in matters of public resource economics. With ICES Professor Dave Porter I recently studied optimal auctions for pollution credit allocation in sequential years (reported in this year’s Board of Advisors meeting). I have just developed a large contract and am currently engaged in organizing experiments which attempt to understand the value and wisdom of government sponsored capacity auctions that guarantee that an adequate amount of electric power generating capacity lies waiting over the horizon for all possible new uses: this is a complicated matter steeped in regulatory belief.
Through IFREE support I have been privileged to be able to invite and work with many IFREE sponsored visiting scholars over the years, some of them present with us in this 10th anniversary celebration. For example, in the earliest IFREE years I collaborated with Massachusetts Professor James Murphy to examine the efficacy of reorganizing California’s network of water rights under a market based management scheme. More recently, with Grenoble Professor Celine Julien I investigated the possibility of a market (proposed by Australian policy makers) in which the cost savings received by all buyers in the wholesale market are shared with a consumer who agrees to reduce his load: essentially, a buyers’ co-op to mitigate price spikes. Most recently, I have partnered with former IFREE sponsored visitor and Australian consultant Karel Nolles in financing and developing a software platform to examine MBIs (market based instruments) in energy and natural resource economics.

A multitude of interesting projects have passed in the 10 years that IFREE, in carrying out the wishes of an anonymous investor, has made possible my studies. We have discovered many principles that remain uncommon knowledge in building new economic systems. I have often found myself eating my own words when predicting outcomes in even ‘simple’ complex environments: the world of unintended consequences in novel markets is rich and dense. Together with Dave Porter and Vernon Smith, an innovative textbook, funded in part through IFREE, is in the works. It will summarize our endeavors in the world of economic system design.

That is what I appreciate about IFREE support. It affords me the opportunity to work with great people on interesting projects, the opportunity to undertake novel or risky projects or help fund a deserving student, the opportunity to participate as a speaker and mentor in workshops interacting with bright young future stars, the opportunity to benefit from stimulating interactions with visiting international scholars, and the opportunity to create an environment in which I can think freely and then carefully design experiments which can be used to actually change how the world works.

Graduate students I’ve worked with include Dr. Mary Rigdon now at the University of Michigan, Dr. Anna Gunnthorsdottir now at the Australian Graduate School of Management, Dr. Cary Deck now at the University of Arkansas, Dr. Ryan Oprea at the University of California, Santa Cruz, and Dr. Erte Xiao at the University of Pennsylvania.

It is clear to me that my IFREE scholarship has provided me with greater recognition in the academic community, and good reputation has enabled me to venture forward with reputable scholars elsewhere. I’ve helped start a number of joint research projects with scholars at the Baylor Medical Center, the University of Chicago, Harvard University, and the National Institute of Health. More recently I’ve been asked to play an organizing role in a number of conferences in neuroeconomics, and I am frequently asked to write summary articles in neuroeconomics for encyclopedias, reference books, and such journals as the Philosophical Journal of the Royal Academy of Science. With the formation of the Neuroeconomics Society in 2003, and a growing membership of over 150 academics, I think there is no question that my outreach effort to build the new field of neuroeconomics has paid off. More important to me is the founding of the Center for the Study of Neuroeconomics at GMU together with the opening of a state of the art imaging center at the Krasnow Institute.