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What happens when economics steps into the lab? Can you test it? Touch it? Poke it?

Of course.

The result is experimental economics, a growing discipline that reaches into nearly every aspect of life, from the best auditing standards to how much candy an 8-year-old might share with a classmate. Researchers use reproducible, scientifically rigorous experiments to test fundamental economic questions.

Steven Schwartz, associate professor of accounting in Binghamton’s School of Management, is gaining notice from top academic journals for his work in the field, including a recent investigation into the interplay between authority and honesty in the budgeting process.

Steven Schwartz

And his work comes at a good time for economics, if also a bad time for the economy.

The financial crisis has left many 401(k)- watchers wishing they could go back to school to learn more about terms such as credit default swaps and “naked” short selling, or understand better the accounting wizardry at work behind the massive federal bailout of Wall Street.

It also has served to bring into sharp relief the role of self-interest in financial transactions.

Self-interest takes center stage in “The Effect of Honesty and Superior Authority on Budget Proposals,” a paper Schwartz researched with colleagues Frederick W. Rankin of Colorado State University and Richard A. Young of The Ohio State University. Their findings were recently published by The Accounting Review, a top-three journal in the field.

Here, they take previous research that shows subordinates have differing degrees of honesty in the budgeting process and move it several steps further — manipulating interactions to see what produces incremental differences in honesty.

Does it matter if the subordinate or superior has final say over the budget approval? Will employees be more or less honest when they have to state the true cost of the budget versus something more akin to an offer? All of these, Schwartz and his colleagues discovered, affect honesty. And often the smallest difference in control has the biggest impact — a more finely tuned understanding than can be gleaned from mountains of data.

Schwartz, like all experimental economists, must find creative ways to simulate the real world — he has also researched the best way to teach experiments in the accounting management classroom — so an incredible amount of attention goes into the design of the experiments. The idea is to strike a balance between the relative simplicity of a controlled laboratory setting and all the messy motivations that make up human nature.


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