Rationality on the Fringes

Robert August Hardy

Major Professor: Peter T. Leeson, PhD, Department of Economics

Committee Members: Peter J. Boettke, Christopher J. Coyne

Buchanan Hall (formerly Mason Hall), #D135
April 25, 2019, 03:30 PM to 04:30 PM

Abstract:

My dissertation, titled “Rationality on the Fringes”, explores applications of rational choice theory in extra-market contexts.  Together, these papers demonstrate the power of rationality as a predictor for the behavior of economic actors within their context.  Behaviors which may seem strange, such as panhandling or leaving a review after purchasing drugs, are in fact rational responses to incentives.  

The first chapter, titled “Reputation in the Internet black market: an empirical and theoretical analysis of the Deep Web”, is co-authored with Julia R. Norgaard and published in the Journal of Institutional Economics.  It studies the role of reputation on the now-defunct Silk Road, an illegal, digital drug marketplace.  Using a model informed by Houser’s and Wooder’s (2016) analysis of eBay auctions, we find empirical evidence that reputation allows sellers to charge premium prices.  The market was thus far from a digital free-for-all; it created a system incentivizing rational buyers and sellers to good behavior in the absence of third-party enforcement.

The second chapter, “Begging for knowledge”, explores existing literature on panhandlers, and how this literature impacts government policy.  I find that we know what the average panhandler looks like, as well as their precarious housing situation, but our knowledge ends there.  Few (and often conflicting) estimates exist on panhandler mental health, substance abuse, and methods.  Both what we do and do not know about panhandlers suggest that current public policy to deal with the problem of the panhandling will fail to achieve policymakers’ goals.  The paper closes with a new approach to panhandling: assuming rationality.  This has dramatic policy implications and goes counter to the common view that panhandlers are irrational.

The final chapter, “Hobo Economicus”, empirically tests the claim that panhandlers are rational.  Data was collected on panhandlers in Washington D.C. by observing their methods, paying them to take a math quiz to measure human capital, and asking Metro riders for directions to measure their responsiveness to solicitation.  We find strong results supporting the claim that panhandlers act in a rational manner.  Panhandlers exhibit more active panhandling methods when they have more human capital, when passersby are more responsive to solicitation, and when passersby are more numerous, consistent with our unique model of profit-maximizing behavior.  Panhandlers exhibit less active panhandling methods when competing.  In addition, the distribution of panhandlers creates an equalization of profit potential per panhandler at each observed Metro station, as would be expected in a competitive market.