Experimental Economics Review

1. Experimental Turn in Economics
Chairman:
Dr. R. Balasubramanian
Professor & Head
Department of Market
Extension
Sreepriya P
2017800405
II PhD Agrl.Economics
Members
Dr.M.Anjugam
Professor of Agricultural
Economics,
Department of Agricultural
Economics,
Dr.K.R. Ashok,
Director, CARDS
Dr. R.Santhi,
Director, Natural Resource
Management (NRM)

2.  “there is a property common to almost all the moral sciences, and by which they
are distinguished from many of the physical; that is, that it is seldom in our
power to make experiments in them”
J.S.Mill (1836)
 “Unfortunately, we can seldom test particular predictions in the social sciences
by experiments explicitly designed to eliminate what are judged to be the most
important disturbing influences. Generally, we must rely on evidence cast up by
the ‘experiments’ that happen occur”
Milton Friedman (1953)
“Economists cannot make use of controlled experiments to settle their differences:
they have to appeal to historical evidence”
Joan Robinson (1977)

3. Why Experimental Economics??
 Economic experiments usually involve controlling the choice sets
(what decision makers can do), the information conditions (what
decision makers know), and the monetary incentive structure (how
decisions translate into payoffs) (Smith 1976, Smith 1982)
 Economic experiments offer a means to explore the influence of
psychological and other factors on decision making in a controlled
environment, with a level of richness rarely afforded to researchers
using observational market data
 redefining the relationship between economic theory and data.-
replicability

4.  Subject
 Institution
 Environment
 Incentive mechanism: monotonicity, salience, and
dominance
 Random assignment
 Control
 Replicability
ESSENCE OF EXPERIMENTAL ECONOMICS
Robin and Staropoli (2008)
Primary motivation of experiment
The experiment creates ‘a small-scale microeconomic
environment in which real economic agents make real
economic decisions’ (Wilde 1981)

5. Interest in laboratory methods in economics arose from three distinct sources
Market cooperation and competition: Trading institutions, pollution permits,
financial markets
Game Theory: oligopoly coordination problem
Individual Decision Theory: expected utility theorem
EXPERIMENTAL STUDIES IN ECONOMICS
Vernon Smith
(Market experiments
&Auction systems)
Reinhard Selten
Oligopoly experiments
Sidney Siegel and Larry
fouraker
Bargaining experiments

6. Brief history
194
8
• Chamberlin : attempted to test neoclassical theory of perfect
competetion by the way of experiments
195
6
• Vernon Smith : introduced double auction into the market exp of
chamberlin
195
6
• Reihnard Salten: early experimental studies on price formation in
oligopoly markets
195
9
• First experimental publication : Behavior of oligopolies (Salten and
Sauermann)
196
0
• Seigal and fouraker : reported experimental results on bargaining
196
3
• James Friedman: First experimental dissertation on oligopoly
competetion
199
9
• First journal dedicated to experimental research

7. Vernon L Smith-father of Experimental Economics
2002 Nobel Memorial Prize in Economic
Sciences
“for having established laboratory
experiments as a tool in empirical
analysis, especially in the study of
alternative market mechanisms.”
Proposed Induced Value Theory (1976)
Auction Systems
Public goods
Founder and President of the International Foundation
for Research in Experimental Economics

8. Smiths market experiment
 “ the mechanics of the invisible
hand became visible for the first
time”
 Insights: a defined set of trading
rules produces an efficient
market price.
 Double auction trading
 Market equilibrium: even under
incomplete information and
small number of participants

9. Confirming Economic theories- Usefulness, applicability, predictability
and domain of a theory
Eg: Vernon Smith’s market experiments: neoclassical price theory
Falsifying economics theories: Can experiments do that in strict sense?-
Duhem Queine problem
Eg: gift exchange game-game theory
They rather show whether a theory and
its auxiliary hypotheses are
able to capture the main forces that
determine the outcome in a certain
class
of situations, or whether other forces
interfere that cannot be ignored
.
Schmid (2009)
Why Experiments??
Development of Economic Theories

10.  for testing institutions, like trading rules, matching
mechanisms, or auction design
 The laboratory serves as a test bed, or wind
tunnel, to check the robustness of different
institutions before they are implemented
 Clearer understanding of potential impact and
causalities
 Replicability
 experimental economics is not a simulation
Why Experiments??

11. Experimental economics in the discipline
 Running experiments is now an established
method to explain and/or describe economic
activity which bring economics into alignment
with many of the natural sciences which rely on
experimental methods
 Over 2000 papers have been published in
economics journals using experimental methods,
most since 1990.

12. Teaching economics through experiments
classroom experiments have become ‘the most exciting new
development in teaching economics’.-Charles Holt (1999)
 abstract conceptualization
 Comprehensibility
 Micro Economics-pit market
 Macro economics
 Finance
 Game Theory and decision making: PD, Cournot Duopoly
 Industrial economics
 Introductory economics

14. Problems/Criticisms
 potential lack of realism-Theory is logically true
and normative
 representativeness of subjects
 lack of clear incentives and experiments may
even rely only on intrinsic motivation
 Internal and external validity
 Clarity and concrete wording
 hypothetical bias
 selection bias

15. Laboratory
experiments
Field experiment Natural experiment
Naturally occurring
(market/field )
RELATIVE EXTERNAL VALIDITY
RELATIVE INTERNAL VALIDITY
REPLICABILITY
Both field and natural experiments can relax the tension between internal and
external validity.
Field experiments have greater realism than the laboratory experiments
Roe and Just (2009)
TAXONOMY
EXTERNAL : the ability to generalize the relationships found in a study to other
persons, times and settings.
INTERNAL: the ability of a researcher to argue that observed correlations are
causal

16. FIELD EXPERIMENTS
CRITERIA
 the nature of the subject pool,
 the nature of the information and
experience that the subjects bring to
the task,
 the nature of the commodity,
 the nature of the task or institutional
rules applied,
 the nature of the environment that
the subject operates in
TAXONOMY-Harrison and List (2004)
a conventional lab experiment standard
subject pool , an abstract framing, and an
imposed set of rules;
artefactual field experiment : non-
standard subject pool (more common)
framed field experiment: field context in
either the commodity, task, or
information set that the subjects can use
natural field experiment: the
environment is one where the subjects
naturally undertake these tasks and
where the subjects do not know that they
are in an experiment
social experiments
natural experiments involve some exogenous change in economic circumstances that mimics a
controlled field or social experiment
thought experiments are simply experiments without the benefit of implementation.
Harrison and List

17. Randomised control trials : New tool for policy impact
evaluation
 takes place in the environment where the participants naturally make their
decisions
 The experimental design consists of the random assignment (control selection
bias)of participants to a treatment group or a control group, where the treatment
consists of the implementation of a policy or program.-actually implements the
policy among a group of randomly selected stakeholders.
 to measure the impact of an intervention, and attribute a causal relationship
between the intervention and its outcome-evidence based policy approach
contrast to policy based evidence
 New gold standard in development and institutional economics
 Used in agricultural technology adoption experiments
Weber and Prouse (2017)

18. Ames and Wilson
(2016)
When to use
a. There is a defined and
observable outcome measure:
b. There are large populations
under treatment:
c. There is a standardised
intervention
When not to use
a. It is not possible to have a
control group:
b. The sample sizes are too small:
Critique
T distribution breaks down for individual treatment effect –outliers eg micro
finance
Extrapolation-population
Transportation problem-context
Deaton and Cartwright (2016)

19. APPLICATION IN AGRICULTURE
 Technology adoption
 Access to finance
 Social learning and networks
 Value chain
 Migration
 Access to insurance and risk aversion
 Price information
Voors et al (2016)

20. Can Field Experiments Return Agricultural
Economics to the Glory Days?
 Agricultural economics stands today at a cross roads.
 Other fields taking over central roles in the profession.
 the time is ripe for theorists to combine with extension specialists to
lend insights into both normative and positive issues of the day.
 Agricultural economists can more easily combine theory and empirical
work, taking advantage of their unique opportunities to execute field
experiments.
 Eg: exploring optimal incentive schemes of farm laborers in Europe,
measuring demand elasticities for Bt cotton in the South, or examining
farmers' risk preferences in the Midwest, there is much to be done.
Herberich et al 2009

21. Games for ground water governance : field
experiments in Andhra Pradesh
 highly subsidized rural electricity, which creates little incentive to conserve water
 Factors affecting ground water use
Experiment
 framed field experiment: choice of crop: explicit inclusion of ecological dynamics
Crop A: one unit of water and gives two units of income
Crop B costs three units of water and gives five units of income
At the beginning of each year, the groundwater supply recharges by 5 units of water
Procedure
 Rounds with and without communication
 Treatment (A), the individual participants will be paid a fee according to their earnings in
the two exercises
 In Treatment (B), the community will be paid a flat fee for participating in the study.
Ruth Meinzen-Dick et al
(2016)

24. Implications
 when the links between crop choice and groundwater
depletion is made explicit, farmers can act
cooperatively to address this problem.
 Communication did not favour water conservation
 participants do consider group interests, not only their
individual interests, in the game
 Longer NGO involvement in the villages was
associated with more cooperative outcomes in the
games.
 Individuals with more education and higher perceived
community social capital played more cooperatively
 neither gender nor method of payment had a
significantly effect on individual behavior.
 When participants could repeat the game with
communication, similar crop choice patterns were
observed.

25. TECHNOLOGY ADOPTION
Emerick et al. (2016) India Risk reducing technology - flood-tolerant rice
in India crowded in the use of fertilizer and
labor-intensive planting techniques
Omotilewa et al (2016) Uganda RCT: subsidizing for technology adoption:
subsidizing an improved grain
storage bag crowds-in commercial
buying of the technology. During
uncertainity of effectiveness, one time
subsidy can increase the demand of
new technology
Carter et al. (2014) Mozambiq
ue
subsidies in not only induce
short-term take-up but that demand
persists in the long-run due to both direct
and social learning
Magnan et al (2015) India investigated how social
learning affects the demand for a
resource-conserving technology (land
levelling) in India. Combination
between an experimental auction and
a randomised control trail (RCT),:
LITERATURE

26. INSURANCE AND RISK AVERSION
Karlan et al. (2014) Ghana index-based insurance induced farmers
to invest more in agriculture and to
select more
risky activities
Cole et al. (2014) Andhra Pradesh (India) free rainfall index insurance policies :
shift of production from subsistence
crops to cash crops that were more
rainfall-sensitive.
Patil and veetil
(2018)
India risk preferences elicitation
experiment with rice-growing
farmers in eastern India-
introduces a minimum entry fee
small and marginal farmers,
elder farmers, minority caste
tend to opt for options
associated with high risk
aversion. Education and
household size of respondents
have also positive effect on
riskier options and negative
effect on risk averse options.

27. Access to INFORMATION
Glennerster and Suri
(2015)
training was instrumental in the profitability of NERICA, a new
rice variety with specific cultivation practices. Farmers who
received both NERICA and training increased yields by 16%,
while those with NERICA and no training experienced a small
decline in yields.
Visaria et al. (2015) provision of price information via sms to the potato farmers in
westbengal; did not affect the traders’ average margins
Natural experiments
Cai (2013) that expanding yield insurance for tobacco in China increased
production
Thunström et al.
(2016)
randomised control trial to study the impact of the
composition of restaurant menus on the demand for meals.
introducing a healthy food label does not increase restaurant
sales.
Nillesen (2016) impacts of exposure to violence on agricultural choices
(planting cash crops)
direct relationship between conflict exposure and cash crop
production

28. Experimental methodologies in New Institutional
Economics
 Experimental economics as a promising method for future development of
the NIE research program
 EE and NIE share the same credo: “institutions do matter.”
 test predictions and refine behavioral hypotheses
 Difficulty in data availability especially in new institutions like electricity
markets
 Bounded rationality : “learning experiments”
 Opportunism and social preference-Ultimatum game
 Incorporates fairness and reciprocity
 Applicable in bargaining procedures, auction systems, contracts, market,
public goods Robin and Staropoli (2008)

29. Ultimatum game

31. Public goods game : experience from Department
of Agrl Eco : TNAU
 Public goods game : contrary results
0
2
4
6
8
10
12
14
16
18
20
0 2 4 6 8 10 12 14 16
Total red cards played (Contribution to
public good)
Total red cards played (Contribution to public good)
Linear (Total red cards played (Contribution to public good))
Limitation
subjects were not
endowed with the
money to start with.

32. Public Goods and the Prisoners Dilemma:
Experimental Evidence (Liam Delany)
 interesting and important contribution of experimental methodology :
rejection of strong free riding hypothesis-
 Results
1. In one-shot trials and in the initial stages of finitely repeated trials,
subjects generally provide contributions halfway between the Pareto-
efficient and the free riding level.
2. Contribution declines with repetition, and
3. Face to face communication improves the rate of contribution
 decay effect in public goods experiments.
 Learning hypothesis
 Strategies hypothesis (nash)
public goods raise questions about the very nature of humans:
Are we cooperative or selfish???

33. Public goods game: Case Study (Le Coent et al
2016)
 Case study: Conditional subsidy- threshold public good
 Voluntary contribution game : strong free riding equilibrium
 Complete information setting
 Treatments:
a. Benchmark treatment with no subsidy(provision point mechanism)
b. unconditional subsidy
c. Conditional subsidy
Result
 Therefore, if the threshold is not reached, subject ’s payoff in CS is
the same as in the PPM treatment and if the threshold is reached,
subject ’s payoff is the same as in the US treatment
 both subsidy mechanisms are more effective and more efficient than
the standard PPM
 the conditional subsidy performs as well as the unconditional subsidy
and even better
Conclusion
 in the case of threshold pollution, subsidy schemes encouraging
polluters to abate could be improved by introducing a collective
conditionality

34. PPM
US
CS

35. Experimental methods in environmental economics
a. Social Dilemmas: public goods and CPR
b. Test bedding of institutional arrangements for the solution of
environmental problems
c. individual evaluation of environmental resources.
 Communication, leadership, punishment/sanction influence the
contribution in public goods
 investments in the CPR are dependent on the initial endowment
and communication
 Test bedding of environmental markets: Tradable emission
permits, markets for environmental resources –water markets
 Plott (1983): internalization of a negative external effect: taxes,
command and control, and emission trading
Sturm et al (2006)

36.  Valuation of environmental goods necessary for efficient allocation
 Critique of CVM studies : difference in WTA/WTP, hypothetical
nature of questions.
 If an improvement in environmental quality is under consideration,
then the WTP should be used, and in the case of a degradation, the
WTA.
 dichotomous choices in CVM studies are unavoidably hypothetical
choices
 In all these experiments with environmental goods: internal &
external validity Sturma et al (2006)
Through the use of experimental methods, environmental economists now
understand better how people learn about and react to incentives,
institutions and information
The future of experimental work will be to design institutions that address
the combination of market failure and behavioural anomalies (Shogren,
2010)

37. Field experiments on irrigation dilemmas (Jansen
et al 2011)
 Both common-pool resources and asymmetries of power are defining
key characteristics of irrigation systems
 Study investigate the conditions that enable groups to overcome
asymmetries of access and derive productive cooperative relationships
 Experiment
 How much to invest in public fund? : x1
 How much to extract from water available?y1: sequential
 provision dilemma in the contributions stage,
 resource appropriation dilemma when they extract from the
generated resource

38. Pay off
Nash equilibrium: no one invest. All
receive 10 units for group earnings of
50 units
Social optimum : amount of the
infrastructure plus tokens not invested
=104 units
Random order rule
Rotation rule
Quota rule
Results
Despite asymmetry in access to common
resources, groups can derive high levels of
efficiency if Individuals with more access to
the commons refuse the temptation to take
very unequal shares
Inequality in the distribution of benefits in
one round triggers lower levels of group
contributions, reducing efficiency and
triggering even more inequality in
contributions
different allocation rules do not increase
efficiency, but they did increase equality of the
earnings.

39. Economic notions challenged
 Preferences are not always stable and consistent
 Agents do not have perfect knowledge of their
preferences
 They do not always use all the information in
decision making
 Self interest is not the only preference that drives
the individual decision
What has been done??

40. In summary some of the main contribution of experiments to economics…
 The analysis of markets under perfect or imperfect information :eg auction,
gift exchange game etc
 Understanding of individual decision making:
loss aversion, endowment effect, ambiguity aversion
 The study of social interaction and preference
 Importance of social capital in natural resource governance
 Contribution to institutional design /policy
 Influenced contemporary behavioural economics, neuro economics
 An innovative teaching tool
 incorporating many methods and facets of human behaviour to the traditional
economic theories
What has been done??

41. References
 Ames, Phil, James Wilson, Mitch Weiss, and John Haigh. "Unleashing the
potential of randomised controlled trials in Australian governments." PhD diss.,
Harvard University, 2016.
 Deaton, Angus, and Nancy Cartwright. "Understanding and misunderstanding
randomized controlled trials." Social Science & Medicine 210 (2018): 2-
21.Harrison, G. W., & List, J. A. (2004). Field experiments. Journal of Eco-
nomic Literature, 42(4), 1009–1055
 Friedman, Milton. "The methodology of positive economics." (1953): 259.
 Herberich, David H., Steven D. Levitt, and John A. List. "Can field
experiments return agricultural economics to the glory days?." American
Journal of Agricultural Economics 91, no. 5 (2009): 1259-1265.
 Holt, Charles A. "Teaching economics with classroom experiments: A
symposium." Southern Economic Journal(1999): 603-610.
 Janssen, Marco A., François Bousquet, Juan-Camilo Cardenas, Daniel Castillo,
and Kobchai Worrapimphong. "Field experiments on irrigation
dilemmas." Agricultural Systems 109 (2012): 65-75.
 .

42.  Shogren, Jason F. "Experimental methods in environmental economics."
In Behavioural and Experimental Economics, pp. 137-145. Palgrave
Macmillan, London, 2010.
 Smith, V. L. (1962). An Experimental Study of Competitive Market Behavior.
Journal of Political Economy, 70(2), 111–137.
 Smith, V. L. (1976). Experimental economics: Induced value theory. American
Economic Review, 66(2), 274–279
 Sophister, Liam Delaney–Junior. "Public goods and the prisoners dilemma:
experimental evidence." (2013
 Sturm, Bodo, and Joachim Weimann. "Experiments in environmental
economics and some close relatives." Journal of Economic Surveys 20, no. 3
(2006): 419-457.
 Voors, Maarten, Matty Demont, and Erwin Bulte. "New experiments in
agriculture." African Journal of Agricultural and Resource Economics 11, no.
311-2016-5646 (2016): 1.
 Webber, Sophie, and Carolyn Prouse. "The new gold standard: The rise of
randomized control trials and experimental development." Economic
Geography 94, no. 2 (2018): 166-187.
 Wilde, Louis L. "On the use of laboratory experiments in economics."
In Philosophy in Economics, pp. 137-148. Springer, Dordrecht, 1981.