Part 2: Experimental Economics

Sakshi Upadhyay is a fourth year Ph.D. student in the Department of Economics and a summer research fellow at the Kellogg Center for Philosophy, Politics, and Economics at Virginia Tech.

Sakshi’s area of interest lies in understanding human behavior in the sphere of public goods provision in a society. Additionally, her research sheds light on how coalitions are formed among agents in a society.

This is a series of articles about Sakshi’s research interests, economics as a discipline, the methods and importance of experimental economics, and Sakshi’s most recent work. Please feel free to contact Sakshi if you are interested to learn more about her work.

Part 2

Empirical economic analysis. In economics, incentivized experiments have been used to investigate human behavior under various controlled scenarios. These experiments vary the treatment and incentive structures by mimicking actual economic scenarios. Vernon Smith received the Nobel Prize in Economics in 2002 for establishing laboratory experiments as a tool in empirical economic analysis.

Experimental versus behavioral economics. Experimental Economics and Behavioral Economics are distinct fields but are often discussed together. Experimental Economics is a “tool” or a method used by Economist to empirically test their theories, whereas Behavioral Economics is a filed which relies on assumption of human behavior to formulate theories.  Many of the theories from behavioral economics have been tested in laboratory for their robustness and have helped experimenters in predicting human behavior in lab. Also, findings from the laboratory experiments have motivated behavioral economists to formulate models which can incorporate these irregularities.

Testing individual choices. The very first experiments were used to test theories of individual choice, for instance there were various attempts to estimate demand function. Experimenters try to mimic the ‘real world’ in their experiment, for instance the participants are assigned the roles of buyers and sellers who trade to consume/sell at the best possible rate. The experiments have multiple rounds along which experimenters change the scenarios and incentives for the participants. This is done to examine the behavior due to change in the parameters of experiment. In some of the experiments the participants are also divided into random groups and then are made to play the game. The groups in some of the games are interchanged every round to observe the behavior in a changed environmental setting. The experiments are incentivized since participants earn money through their decisions. In some experiments, experimenters use one round to decide the payment and in others all the rounds are used to decide the payment.

Experimental design. There are two designs in experimental economics, which are used to achieve the desired environmental setting.  In a “within-subject design” all the participants are exposed to more than one treatment while in a “between subjects” design, participants are exposed to only one treatment. “The treatment can be testing different parameters of a game, performing task under more than one external stimulus or being treated and untreated.” (Charness et al, 2012). In a “within-subject design”, given there is independence in the treatments, one can estimate the impact of changed individual behavior over the course of experiment. In a “between-subjects” design, given the group assignment is random, estimate is obtained by comparing behavior of participants in two different treatment. Both designs have their advantage and disadvantage and the choice pins down to the question being studied by the experimenters.

Randomized control trials. Economists also use Field Experiments or Randomized Control Trials (RCT) to test the impact of a government policy or to draw insights for policy implications. “Field experiments provide a bridge between laboratory and naturally-occurring data in that they represent a mixture of control and realism usually not achieved in the lab or with uncontrolled data, permitting the analyst to address questions that heretofore were quite difficult to answer “(Levvitt et al, 2009). Field experiments use randomization to capture features of the real world and thereby allowing researcher to create exogeneous variation. The 2019 Nobel Memorial Prize in Economics Sciences was awarded to Abhijit Banerjee, Esther Duflo, and Michael Kremer “for their experimental approach to alleviating global poverty.” (See here for the PPE Distinguished Public Lecture with Professor Duflo).

Public policy implications. RCT gained popularity in Economics in 1990s. In an RCT, certain individuals in the population receive the treatment while others don’t. Individuals who receive the treatment are referred to as the “treatment group” and the other group which does not receive the treatment is referred to as the “control group”. The individuals who receive the treatment are selected randomly thereby avoiding selection bias. This segregation into ‘treatment’ and ‘control’ allows to predict the actual effect on subjects from an intervention strategy like vaccination, free meals at school or free circulation of face masks. Such predictions stand quintessential in developing better policies to augment development.

Please click here for Part 1 and Part 3 of this series.

References
Charness, Gary, Uri Gneezy, and Michael A. Kuhn. “Experimental methods: Between-subject and within-subject design.” Journal of Economic Behavior & Organization 81.1 (2012): 1-8.

Levitt, Steven D., and John A. List. “Field experiments in economics: The past, the present, and the future.” European Economic Review 53.1 (2009): 1-18.