On rational forward-looking behavior in economic geography: An experimental analysis

Abstract

This paper adapts the canonical New Economic Geography model for experimental testing of the model's behavioral assumptions by developing a finite-player, finite-horizon dynamic game of migration. Our analysis gives distinctive predictions when migration is consistent with myopic behavior (MB) and when it is consistent with sequentially rational or perfect forward-looking behavior (FB). These alternatives are tested in an economic laboratory experiment with increasing number of agents in different treatments. Results show that perfect FB loses ground against MB as the number of agents and periods increases, and this number may be surprisingly small.