Experimental economics

 

  • [4]
    Experimental topics
    One can loosely classify economic experiments using the following topics:
    • Markets
    • Games[5][6]
    • Evolutionary game theory
    • Decision making
    • Bargaining
    • Contracts
    • Auctions
    • Coordination
    • Social Preferences
    • Learning
    • Matching
    • Field Experiments, most usually associated with John A.

  • Specifically, economics experiments are often challenged because of concerns about their “internal validity” and “external validity”, for example, that they are not applicable models for many types of economic behavior, so the experiments simply aren’t good enough to produce useful answers.

  • There are two general sets of questions that experimental economists typically ask when examining such games: (1) Can laboratory subjects coordinate, or learn to coordinate, on one of multiple equilibria, and if so are there general principles that can help predict which equilibrium is likely to be chosen?

  • [8]
    Learning experiments
    Economic theories often assume that economic incentives can shape behavior even when individual agents have limited understanding of the environment.

  • Within economics education, one application involves experiments used in the teaching of economics.

  • Learning experiments can be classified as individual choice tasks or games, where games typically refer to strategic interactions of two or more players.

  • Finance
    Experimental finance studies financial markets with the goals of establishing different market settings and environments to observe experimentally and analyze agents’ behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanism and returns processes.

  • Experiments on social preferences generally study economic games including the dictator game, the ultimatum game, the trust game, the gift-exchange game, the public goods game, and modifications to these canonical settings.

  • Smith found that in some forms of centralized trading, prices and quantities traded in such markets converge on the values that would be predicted by the economic theory of perfect competition, despite the conditions not meeting many of the assumptions of perfect competition (large numbers, perfect information).

  • As one example of results, ultimatum game experiments have shown that people are generally willing to sacrifice monetary rewards when offered low allocations, thus behaving inconsistently with simple models of self-interest.

  • “[11] Vernon Smith, drawing on Chamberlin’s work, but also modifying it in key respects, conducted pioneering economics experiments on the convergence of prices and quantities to their theoretical competitive equilibrium values in experimental markets.

  • Oftentimes, the general patterns of learning behavior can be best illustrated with individual choice tasks.

  • Experiments are used to help understand how and why markets and other exchange systems function as they do.

  • Economic experiments usually use cash to motivate subjects, in order to mimic real-world incentives.

  • [10] In 1999, Colin Camerer and Teck-Hua Ho introduced Experience Weighted Attraction (EWA), a general model that incorporated reinforcement and belief learning, and shows that fictitious play is mathematically equivalent to generalized reinforcement, provided weights are placed on past history.

  • [22] Issues include those common to experimental economics in general[23] and by comparison[24] as well as development of a common framework for empirical validation and resolving open questions in agent-based modeling.

  • Hence, contract theory is difficult to test in the field: If the researcher could verify the relevant variables, then the contractual parties could contract on these variables, hence any interesting contract-theoretic problem would disappear.

  • Under some conditions at least groups of experimental subjects can coordinate even complex non-obvious asymmetric Pareto-best equilibria.

  • Critiques
    The above guidelines have developed in large part to address two central critiques.

  • In 2002, Smith was awarded (jointly with Daniel Kahneman) the Bank of Sweden Prize in Economic Sciences “for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms”.

  • Generality in games is addressed by replacing fixed parameters with “self-tuning” functions of experience, allowing pseudo-parameters to change over the course of a game and to also vary systematically across games.

  • Over the years, Smith pioneered – along with other collaborators – the use of controlled laboratory experiments in economics, and established it as a legitimate tool in economics and other related fields.

  • [20] Here the focus is on economic processes, including whole economies, as dynamic systems of interacting agents, an application of the complex adaptive systems paradigm.

 

Works Cited

[‘1. Including statistical, econometric, and computational. On the latter see Alvin E. Roth, 2002. “The Economist as Engineer: Game Theory, Experimentation, and Computation as Tools for Design Economics,” Econometrica, 70(4), pp. 1341–1378 Archived 2004-04-14 at the Wayback Machine.
2. ^ See, e.g., Grechenig, K., Nicklisch, A., & Thöni, C. (2010). Punishment despite reasonable doubt—a public goods experiment with sanctions under uncertainty. Journal of Empirical Legal Studies, 7(4), 847–867 (link).
3. ^ • Vernon L. Smith, 2008a. “experimental methods in economics,” The New Palgrave Dictionary of Economics, 2nd Edition, Abstract.
• _____, 2008b. “experimental economics,” The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
• Relevant subcategories are found at the Journal of Economic Literature classification codes at JEL: C9.
4. ^ J. DiNardo, 2008. “natural experiments and quasi-natural experiments,” The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
5. ^ • Vernon L. Smith, 1992. “Game Theory and Experimental Economics: Beginnings and Early Influences,” in E. R. Weintraub, ed., Towards a History of Game Theory, pp. 241– 282.
• _____, 2001. “Experimental Economics,” International Encyclopedia of the Social & Behavioral Sciences, pp. 5100–5108. Abstract per sect. 1.1 & 2.1.
• Charles R. Plott and Vernon L. Smith, ed., 2008. Handbook of Experimental Economics Results, v. 1, Elsevier, Part 4, Games, ch. 45–66 preview links.
• Vincent P. Crawford, 1997. “Theory and Experiment in the Analysis of Strategic Interaction,” in Advances in Economics and Econometrics: Theory and Applications, pp. 206–242. Cambridge. Reprinted in Colin F. Camerer et al., ed. (2003). Advances in Behavioral Economics, Princeton. 1986–2003 papers. Description, contents, and preview., Princeton, ch. 12.
6. ^ Martin Shubik, 2002. “Game Theory and Experimental Gaming,” in Robert Aumann and Sergiu Hart, ed., Handbook of Game Theory with Economic Applications, Elsevier, v. 3, pp. 2327–2351. Abstract.
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18. ^ Fehr, Ernst; Hart, Oliver; Zehnder, Christian (2014). “How do Informal Agreements and Revision Shape Contractual Reference Points” (PDF). Journal of the European Economic Association. 13 (1): 1–28. doi:10.1111/jeea.12098. ISSN 1542-4766. S2CID 39821177.
19. ^ Hoppe, Eva I.; Schmitz, Patrick W. (2013). “Contracting under Incomplete Information and Social Preferences: An Experimental Study” (PDF). The Review of Economic Studies. 80 (4): 1516–1544. doi:10.1093/restud/rdt010. ISSN 0034-6527.
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