experimental research in economics

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• Experimental Economics

Experimental Economics

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• Forthcoming
• ISSN: 1386-4157 (Print) , 1573-6938 (Online)
• Editors: Friederike Mengel Department of Economics, University of Essex, UK , Andreas Ortmann UNSW Business School, University of South Wales, Sydney, Australia , Ragan Petrie Department of Economics, Texas A&M University, USA , Arno Riedl Department of Microeconomics and Public Economics, Maastricht University, The Netherlands , and Marta Serra Garcia Rady School of Management, University of California, San Diego, USA
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2023 Journal Citation Reports © Clarivate Analytics

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Annual Review of Economics

Volume 14, 2022, review article, experimental economics: past and future.

• Guillaume R. Fréchette 1 , Kim Sarnoff 2 , and Leeat Yariv 2,3,4
• View Affiliations Hide Affiliations Affiliations: 1 Department of Economics, New York University, New York, NY, USA; email: [email protected] 2 Department of Economics, Princeton University, Princeton, New Jersey, USA; email: [email protected] [email protected] 3 Centre for Economic Policy Research, London, United Kingdom 4 National Bureau of Economic Research, Cambridge, Massachusetts, USA
• Vol. 14:777-794 (Volume publication date August 2022) https://doi.org/10.1146/annurev-economics-081621-124424
• Copyright © 2022 by Annual Reviews. All rights reserved

Over the past several decades, lab experiments have offered economists a rich source of evidence on incentivized behavior. In this article, we use detailed data on experimental papers to describe recent trends in the literature. We also discuss various experimentation platforms and new approaches to the design and analysis of the data they generate.

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• Behavioral Economics

Experimental Economics: What it Means, How it Works

What Is Experimental Economics?

Experimental economics is a branch of economics that studies human behavior in a controlled laboratory setting or out in the field, rather than just as mathematical models. It uses scientific experiments to test what choices people make in specific circumstances, to study alternative market mechanisms and test economic theories.

Key Takeaways

• Experimental economics is concerned with studying the efficacy of economic principles and strategies in a laboratory setting with participants.
• Experimental economics is used to help understand the reasoning and factors that influence the functioning of a market.
• Vernon Smith pioneered the field and developed a methodology that allowed researchers to examine the effect of policy changes before they are implemented.

Understanding Experimental Economics

Experimental economics is used to help understand how and why markets function the way they do. These market experiments, involving real people making real choices, are a way of testing whether theoretical economic models actually describe market behavior, and provide insights into the power of markets and how participants respond to incentives—usually cash.

The field was pioneered by Vernon Smith, who won the Nobel Prize in Economics in 2002 for developing a methodology that allows researchers to examine the effects of policy changes before they are implemented to help policymakers make better decisions.

Experimental economics is mainly concerned with testing in a laboratory setting with appropriate controls to remove the effects of external influences. Participants in an experimental economics study are assigned the roles of buyers and sellers and rewarded with the trading profits they earn during the experiment.

The promise of a reward acts as a natural incentive for participants to make rational decisions in their self-interest. During the experiment, researchers constantly modify rules and incentives in order to record participant behavior in changed circumstances.

Smith’s early experiments focused on theoretical equilibrium prices and how they compared to real-world equilibrium prices. He found that even though humans suffer from cognitive biases , traditional economics can still make accurate predictions about the behavior of groups of people . Groups with biased behavior and limited information still reach the equilibrium price by becoming smarter through their spontaneous interaction.

Along with behavioral economics —which has established that people are a lot less rational than traditional economics had assumed—experimental economics is also being used to investigate how markets fail and to explore anticompetitive behavior.

Examples of Experimental Economics

The applications of experimental economics can be seen in various policy decisions. For example, the design of carbon trading emissions schemes has benefitted from experiments conducted by economists in different regions of the world in a laboratory setting. Different perspectives of political science have also come to the surface through experimentation and exposure to experimental economics.

The Nobel Prize. " Vernon L. Smith ." Accessed April 17, 2021.

Cambridge University Press. " What Can Laboratory Experiments Teach Us About Emissions Permit Market Design? " Accessed Sept. 11, 2021.

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THE HANDBOOK OF EXPERIMENTAL ECONOMICS Edited by John H. Kagel and Alvin E. Roth is published by Princeton University Press and copyrighted, (c) 1995, by Princeton University Press. All rights reserved. This text may be used and shared in accordance with the fair-use provisions of US copyright law, and it may be archived and redistributed in electronic form, provided that this entire notice is carried and provided that Princeton University Press is notified and no fee is charged for access. Archiving, redistribution, or republication of this text on other terms, in any medium, requires the consent of Princeton University Press.

Early reviews (from the bookjacket...) by Ken Binmore, Robert Gibbons, Daniel Kahneman, Richard Thaler, and Ariel Rubinstein.

This Handbook is the work not only of many years, but also of many hands, by no means all of whom are authors of the chapters. In order to invite the maximum amount of feedback to the author of each chapter, a three day conference was convened in Pittsburgh in June of 1990, at which each author presented an extended outline of his proposed chapter. Investigators from every major center of experimental economics at the time were invited to attend, and most of these centers were in fact represented 2 . The discussions were lively, sometimes even heated. Each author subsequently circulated the various versions of his chapter widely to both experimenters and others interested in the particular topic area, and received many comments and suggestions. Indeed, the pace of experimentation was sufficiently rapid during the time that the chapters were being written that revisions were often required to take account of recent developments, sometimes developments that had been initiated by the earlier discussions.

The capstone of this effort came in January of 1994 when the (virtually) final chapters were presented at the annual meeting of the American Economic Association, in Boston.

This Handbook has eight chapters. Every one except the first of these surveys an area of economics in which there has been a concentration of experiments. The first chapter, in contrast, is meant to serve as an introduction to experimental economics as a whole. In our editorial discussions with the chapter authors, they were told that they were free to write each chapter under the assumption that readers would have read the Introduction. Thus each author was free to focus each chapter as sharply as seemed appropriate.

One suggestion that we received more than once during the course of this project was that the Handbook should include a chapter on methodology, which would tell people how to do experiments. We have not done this. Our view is that a better way to learn how to design and conduct experiments is to consider how good experiments grow organically out of the issues they are designed to investigate, and the hypotheses among which they are designed to distinguish. For this reason, we asked each author to address methodological issues that were important for the experiments being discussed 3 .

One of the pleasures of participating in this project has been that it has afforded us the best seats from which to observe one of the most exciting games in town. New centers of experimental economics have sprung up continually while this work was underway, and the interaction between theorists and experimenters has increased apace. Indeed, one of the special pleasures of finally finishing this project is that it is clear that in only a few more years, a single volume will no longer be able to do even the rough justice that we manage here, to such a rapidly growing area of economic research.

March 1994 Pittsburgh, PA.

1. This volume thus has a very different, although complementary purpose to the earlier volume Laboratory experimentation in economics: Six points of view (Alvin E. Roth, editor, Cambridge University Press, 1987). In that volume, six investigators with different approaches to experimentation (John Kagel, Charles Plott, Alvin Roth, Reinhard Selten, Vernon Smith, and Richard Thaler) were each asked to describe work that illustrated their own approach. In this Handbook, in contrast, the authors were asked to describe how series of experiments are mediated by and mediate the different approaches of different investigators.

2. Although we failed to preserve a complete list of attendees, some of whom only attended for a day, the following list is nearly complete: John O'Brien (Carnegie-Mellon University), Colin Camerer (University of Pennsylvania, now at California Institute of Technology), Robin Dawes (Carnegie-Mellon University), Robert Forsythe (University of Iowa), Glenn Harrison (University of South Carolina), John Hey (University of York), Elizabeth Hoffman (University of Arizona, now at Iowa State University), Charles Holt (University of Virginia), John Kennan (University of Iowa, now at Wisconsin), John Ledyard (California Institute of Technology), Dan Levin (University of Houston), Graham Loomes (University of York), Jack Ochs (University of Pittsburgh), Vesna Prasnikar (University of Pittsburgh, now at University of Ljubljana and Northwestern University), Tatsuyoski Saijo (University of Tsukuba), Andrew Schotter (New York University), Leo Simon (UC Berkeley), Vernon Smith (University of Arizona), Sanjay Srivastava (Carnegie-Mellon University), Shyam Sunder (Carnegie-Mellon University), Richard Thaler (Cornell University, now at Chicago), John Van Huyck (Texas A&M University), and James Walker (University of Indiana). Regrettably no one from the active German (then West German) group of experimenters was able to accept our invitation.

3. Readers with a methodological inclination might keep an eye out for the following kinds of issues: the role of monetary incentives on behavior, demand induced effects, subject pool effects, inducing risk preferences (the binary lottery technique), techniques for inducing infinite horizon games, effects of subject experience, within versus between group designs, and abstract versus concrete problem representation (to name some of the issues that appear in more then one chapter).

• 1. Individual Choice, and the Wallis-Friedman Critique
• 2. Game-theoretic Hypotheses
• 3. Industrial Organization
• B. The 1960's to the present
• II. The Uses of Experimentation
• 1. The Prisoner's Dilemma a.Experiments versus simulations: A methodological digression
• 2. The Free Rider Problem in Public Goods Provision
• 1. Coordination and coordination failure
• 2. Learning and adaptation
• 1. Nash's model of bargaining
• 2. Controlling for unobserved risk posture: binary lottery payoffs
• 3. Information in bargaining
• 4. Risk aversion in bargaining
• 1. Repeated double auctions with stationary parameters
• 2. Some policy-oriented comparisons of market rules
• 3. Information aggregation: Markets as forecasters
• 1. The winner's curse
• a. Controlling incentives: A methodological digression
• a. Alternative theoretical directions
• b. Market behavior
• 2. Other choice phenomena
• 3. Why haven't these demonstrated anomalies swept away utility theory?
• a. The BDM procedure for measuring reservation prices
• b. Controlling preferences with monetary payoffs
• (1) Preferences and probabilities: An Historical Digression on Binary Lotteries and Related Experimental Designs
• d. To control or not to control? Costs and benefits

Bibliography

• A. A Simple Public Goods Experiment (LI>B. The Art of Experiment: Sensitivity and Control
• C. The Language of Experiment: Mechanisms and Environments
• D. The Range of Public Goods Environments
• E. What Is and Is Not to Be Surveyed
• A. Bohm: Estimating Demand
• B. Dawes et al.: Social Dilemmas
• C. Marwell et al.: The Free-Rider Problem
• D. Economists Begin to React
• E. Issac et al.: Systematic Study by Economists
• A. Thresholds and Provision Points
• B. Experience, Repetition and Learning
• 1. Marginal Payoffs and Rebates
• 3. Communication
• 1. Environment
• 2. Systematic
• 3. Institutional
• E. Unknown Effects
• IV. Final Thoughts

Appendix Notes Bibliography

• A. Adaptive Learning Processes and Rational Expectations Equilibria
• B. The Path or Prices When the Rate of Growth of the Money Stock Is Zero
• C. Price Inflation with a Growing Money Stock
• D. Sunspots
• A. Payoff Dominance, Security and Historical Precedent
• B. The Relevance of Dominated Strategies
• C. Influencing Equilibrium Selection
• III. Experiments in Decentralized Matching Environments: Games with Multiple Optimal Equilibria
• IV. Concluding Remarks

Notes Bibliography

• A. Unstructured Bargaining Experiments
• 1. An Initial Exchange of Views
• 2. A Larger Experimental Design
• a. Are Players "Trying to Be Fair"?
• a. Distinguishing between Alternative Hypotheses
• b. A Cross-Cultural Experiment
• A. The Frequency of Disagreements and Delays
• a. The Uncontrolled Social Utility Hypothesis
• b. The Communications Hypothesis
• 2. A New Experiment
• 3. Some Further Experiments
• 4. Recapitulation of the Methodological Issues
• 1. Nonstrategic Models
• a. Complete Information Models
• b. Incomplete Information Models
• c. A Digression on the Strategy Method
• D. Deadlines
• I. Overview
• II. Beginnings
• A. Experiments That Evaluate Behavioral Assumptions
• B. Tests for Sensitivity to Violations of Structural Assumptions
• C. Searching for Empirical Regularities
• A. Instructions
• B. Design Considerations
• A. Posted Prices
• B. Uniform Prices
• C. One-Sided Sequential Auctions
• D. Double Auctions
• E. Decentralized Negotiations
• F. Discounting
• G. Other Institutions
• H. Disadvantages of the Cournot Quantity-Choice Institution
• A. Monopoly
• B. Decentralized Regulatory Proposals
• C. Potential Competition as a Regulator: Market Contestability
• D. Predatory Pricing and Antitrust Remedies
• A. Definitions of Market Power
• B. Market Power in Double Auctions
• C. Market Power in Posted-Offer Auctions
• A. Repetition with Different Cohorts: Experience
• B. Multiperiod Repetition with the Same Cohort
• C. Pure-Numbers Effects and the Ability to Punish
• D. Communication
• E. Contractual Provisions
• A. Product Quality, Asymmetric Information, and Market Failures
• B. Spatial Competition
• C. Vertically Related Markets
• A. Field Data from Financial Markets
• B. Designing Experimental Asset Markets
• C. Dissemination of Information
• D. Aggregation of Information
• E. Market for Information
• II. Futures and State-Contingent Claims
• III. Bubbles and False Equilibria
• A. Adjustment Path
• B. Variables That Transmit Information
• C. Learning Sequences
• D. Aggregate Uncertainty
• E. Role of Arbitrage
• F. Generation of Bids and Asks
• A. Variance Bound Tests
• B. Arbitrage Relationships
• A. Trading Suspensions and Price Change Limits
• B. Double Auction versus Call Market
• C. Specialist Privileges and Book Display
• D. Control of Speculative Bubbles
• E. Bid-Ask Spread
• F. Off-Floor and Block Trading
• VII. Laboratory Modeling of Asset Markets

Introduction

• A. Experimental Procedures
• 1. Tests of the Strategic Equivalence of First-Price and Dutch Auctions
• 2. Tests of the Strategic Equivalence of Second-Price and English Auctions
• 1. Effects of Changing Numbers of Bidders
• 2. Uncertainty Regarding the Number of Bidders
• D. Auctions with Affiliated Private Values
• E. Effects of Price Information in Private Value Auctions
• F. Learning, Adjustment Processes, and Cash Balance Effects in First-Price Private Value Auctions
• 1. Risk Aversion and CRRAM As Applied to Single Unit First-Price Auctions
• 2. The Flat Maximum Critique
• 3. Risk Aversion and Overbidding in Related Environments
• 4. Using the Binary Lottery Procedure to Control for Risk Aversion
• 1. First-Place Sealed Bid Auctions
• 2. Limited Liability and "Safe Havens"
• 3. Second-Place Sealed Bid Auctions
• B. More Winner's Curse: English Auctions and First-Price Auctions with Asymmetric Information
• 1. The Winner's Curse in Bilateral Bargaining Games with Asymmetric Information
• 2. The Winner's Curse in "Blind Bid" Auctions
• 3. Lemons and Ripoffs: The Winner's Curse in Markets with Quality Endogenously Determined
• D. Learning and Adjustment Processes in Markets with a Winner's Curse
• A. Collusion
• 1. Direct Comparisons between Laboratory and Field Data
• 2. Differences in Structure between Laboratory and Field Auctions
• C. Two-Sided Auctions
• D. Other Auction Studies

Detailed table of contents of chapter 8:

• 1. Why Study Errors in Decision Making?
• B. Two Controversies: Methods and Implications
• C. A Map and Guidebook
• 1. Scoring Rules
• 2. Confidence Intervals
• B. Perception and Memory Bases
• 1. Underweighting of Base Rates
• 2. Underweighting on Likelihood Information (Conservatism)
• 3. The Law of Small Numbers and Misperceptions of Randomness
• 4. Market Level Tests of Representativeness
• D. Confirmation Bias and Obstacles to Learning
• E. Expectations Formation
• 1. False Consensus and Hindsight Bias
• 2. Market Level Tests of Curse of Knowledge
• G. The Illusion of Control
• H. Judgment: Summary and New Directions
• 1. Notation and a Diagram
• 2. The Axioms
• 1. Three Controversies
• 2. Initial Tests
• 1. The Allais Paradoxes
• 2. Process Violations
• 3. Prospect Theory
• 4. Elicitation Biases
• 1. Predictions of Generalized EU Theories
• 2. Empirical Studies Using Pairwise Choices
• 3. Empirical Studies Measuring Indifference Curves
• 4. Empirical Studies Fitting Functions to Individuals
• 5. Cross-Species Robustness: Experiments with Animals
• 6. Some Conclusions from Recent Studies
• 7. Investments in Risky Assets
• 1. The Ellsberg Paradox
• 2. Conceptions of Ambiguity
• 3. Empirical Tests
• 4. Formal Models
• 5. Applications to Economics
• F. Choice over Time
• G. Process Theories and Tests
• 1. Framing Effects
• 2. Lottery Correlation, Regret, and Display Effects
• 3. Compound Lottery Reduction
• 1. New Evidence of Preference Reversal
• 2. Arbitage and Incentives
• 3. Reversals and Markets
• 4. Social Comparisons and Reversals
• 5. Some Conclusions about Preference Reversals
• 1. Market Experiments
• 2. Explanations Based on Experimental Artifacts
• 3. Endowment Effects: Some Psychology and Implications
• 1. Search for Wages and Prices
• 2. Search for Information
• L. Choice: Summary and New Directions

Short reviews

--from the hardcover bookjacket:

"I wish every economist and economics graduate student would read this book. Those who are considering running experiments should be forced to; this is a bible in how to run good experiments. Every chapter is amazingly comprehensive and has been written by a true expert in the field. But economists who would never dream about running an experiment can benefit from reading this just as much. The beauty of experiments is that they force theorists to think carefully about their theories." Richard Thaler, Cornell University

"This Handbook surveys one of the most important developments in economics in the last decade, the flowering of experimental economics. Led by two of the leaders of current economic theory and experimental economics, an impressive group of researchers provides the reader with an excellent up-to-date overview of one of the most fascinating and promising areas of current economic research." Ariel Rubinstein, Tel Aviv University and Princeton University

"The Handbook is not only a contribution to experimental economics, it is a major contribution to social science. It successfully combines the rigor and clarity of economic analysis with a commitment to open-minded examination of data, and a refreshing willingness to question dogma. Every student of human choice and action will find this text useful." Daniel Kahneman, The Woodrow Wilson School of Public and International Affairs, Princeton University

"Experimental economics comes of age with this volume. At last the dust begins to clear, and it becomes possible to confront theory with coherent and reliable laboratory data." Ken Binmore, University College, London

"This Handbook heralds the emergence of experimental economics as a field within economics. Several chapters emphasize that strong connections are developing to such fields as industrial organization and macroeconomics. Just as important, however, the Handbook may open a dialogue with the legions of researchers in other disciplines, including organizational behavior, political science, psychology, and sociology, who also conduct experiments to improve their understanding of human behavior." Robert Gibbons, Johnson Graduate School of Management, Cornell University

--and from the paperback book jacket:

"This book is impressive for the clarity, depth, and informativeness of its surveys. The focus on series of experiments is very instructive... One can learn a lot from the issues debated, the methodological digressions, and the many suggestions for further research... This is a great book that is whole-heartedly recommended." F. van Winden, The Journal of Economics

"The book provides not only a comprehensive and deep review of major areas of experimental research, but it is also exceptionally intellectually stimulating and insightful for theoretical economists as well as those who are interested in more immediate policy issues." Katerina Sherstyuk, Economic Record

Methods in Experimental Economics

An Introduction

• © 2019
• Joachim Weimann 0 ,
• Jeannette Brosig-Koch 1

Otto-von-Guericke University Magdeburg, Magdeburg, Germany

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University of Duisburg-Essen, Essen, Germany

• Comprehensive and hands-on introduction to experimental economic research
• Also addresses the statistical analysis of experimental data
• One of the first textbooks on experimental economic research
• Written for students and researchers in economics, as well as related fields in which experimental research is relevant

Part of the book series: Springer Texts in Business and Economics (STBE)

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About this book

This textbook provides a hands-on and intuitive overview of the methodological foundations of experimental economics. Experimental economic research has been an integral part of economic science for quite some time and is gaining more and more attention in related disciplines. The book addresses the design and execution of experiments, the evaluation of experimental data and the equipment of an experimental laboratory. It illustrates the challenges involved in designing and conducting experiments and helps the reader to address them in practice. 

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Diversity of Experimental Methods in Economics: An Introduction

Experimental Methods in Economics

Experiments and econometrics.

• Experimental economics
• Behavioral economics
• Game theory
• Experimental data
• Experimental laboratory

Table of contents (4 chapters)

Front matter, the study of behavior.

• Joachim Weimann, Jeannette Brosig-Koch

Methodological Foundations

Experimental practice, the experiment from a statistical perspective, back matter, authors and affiliations.

Joachim Weimann

Jeannette Brosig-Koch

About the authors

Joachim Weimann is a professor at the Otto von Guericke University Magdeburg, executive director of the Magdeburg Laboratory for Experimental Economic Research (MaXLab) and chairman of the Society for Experimental Economic Research, the world's oldest association of experimental economists. In addition to experimental economic research, his scientific interests include labor market research, happiness research and environmental economics. Jeannette Brosig-Koch is a professor at the University of Duisburg-Essen, founding director of the Essen Laboratory for Experimental Economic Research (elfe) and chairwoman of the Social Sciences Committee of the Verein für Socialpolitik. Her research deals with various issues in the field of experimental health economics and market design.

Bibliographic Information

Book Title : Methods in Experimental Economics

Book Subtitle : An Introduction

Authors : Joachim Weimann, Jeannette Brosig-Koch

Series Title : Springer Texts in Business and Economics

DOI : https://doi.org/10.1007/978-3-319-93363-4

Publisher : Springer Cham

eBook Packages : Economics and Finance , Economics and Finance (R0)

Copyright Information : Springer Nature Switzerland AG 2019

Hardcover ISBN : 978-3-319-93362-7 Published: 24 July 2019

eBook ISBN : 978-3-319-93363-4 Published: 12 July 2019

Series ISSN : 2192-4333

Series E-ISSN : 2192-4341

Edition Number : 1

Number of Pages : XIII, 307

Number of Illustrations : 26 b/w illustrations, 34 illustrations in colour

Additional Information : Original German edition published by Springer Fachmedien Wiesbaden GmbH, Wiesbaden, Germany, 2019

Topics : Behavioral/Experimental Economics , Game Theory, Economics, Social and Behav. Sciences , Game Theory

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