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Economic Theories on Experimental Economics - Dictionary of Arguments

Parisi I 78
Experimental economics/Economic theories/Sullivan/Holt: [there is an] increasingly frequent interaction between two literatures: experimental economics and law and economics. In many ways, these literatures developed as siblings during the heady period of economic research spanning the 1960s and early 1970s. At about the same time that Ronald Coase (1960)(1), Guido Calabresi (1961)(2), and Gary Becker (1968)(3) were authoring seminal papers in the modern law-and-economics movement, acceleration of the experimental economics literature was under way with Vernon Smith’s (1962)(13) experimental challenge to the established notion that theories of efficient, perfect competition were only relevant in idealized settings with large numbers of well-informed traders.
Vernon Smith: Smith’s approach to studying market equilibrium was to create a market for an artificial commodity. Adaptations of the experimental approach to other settings quickly followed, eventually bleeding into the also-expanding literature of law and economics. >Experimental economics/Vernon Smith, >Law and Economics/Sullivan/Holt.
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Methodology: (... )the design and implementation of controlled experiments is about as fundamental to scientific inquiry as anything could be.
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Another intuitive use of experiments is as part of a more open-ended search for practical solutions to a novel problem. This is often the case in experiments designed for engineering applications. Economists use experiments in much the same ways as physicists or engineers.
Preconditions/hypotheses: Economic theories are typically based on strong assumptions about rationality and foresight, and evaluated on the basis of elegance, sharpness of prediction, and consistency with basic intuition.
Idealization/context: features of context, interpersonal frictions, and institutional detail are frequently omitted to achieve greater tractability and generality.
Experiments: The resulting theories cry out for experimental tests, where differences in individual personality traits and propensities, limitations in attention and foresight, and other details too intricate to measure or model formally can be accounted for using random assignment and other experimental controls.
Example: consider the question whether a cap on damages reduces the frequency of tort suits.*
Randomization: randomization or careful selection algorithms could be used to partition the members of society into two identical (or at least nearly identical) groups: one group would remain under the status quo liability rules, while the other would be subject to a cap on damages. With absolutely nothing else changed, the researcher
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could collect data for a few months, and then compare the rates of tort suits in the two groups to see what causal effect the cap on damages had on the outcome of interest.
Comparison/control: the researcher exploits control over the experimental environment to apply some treatment to only one of two otherwise identical groups of subjects. Subjects in the experiment then interact according to their normal self-interests, but those in the treatment group act under a slightly different set of rules than those in the control group. The experimenter measures observed behavior in both the treatment and control groups, and any difference in behavior reflects the causal treatment effect of interest.**
Experiments without control group: (...) economic experiments are sometimes designed simply to measure and document how subjects behave in a given market structure or incentive environment without reference to any control group. Examples include experiments that test the efficiency of an auction structure, such as an innovative proposal to allow bidding for combinations of spectrum licenses in a way that protects firms from overpaying for pieces of a fragmented network.***
Variations: (...) economic experiments can also be structured to consider a range of treatment effects. An example is an experimental study of equilibrium price formation in a homogenous-good oligopoly as the number of producers drops from five, to four, to three, to two (e.g. Huck, Normann, and Oechssler, 2004(11); Dufwenberg and Gneezy, 2000(12)). In every case, the conceptual framework of the economics experiment is the same as that of experiments in any other field of science.
Induced value theory: >Induced value theory/Economic theories.
Experiments/methods: See >Experiments/Experimental economics, >Settlement Bargaining/Experimental conomics.

* For economic experiments on the effect of damages caps on the rate of settlement, see Babcock and Pogarsky (1999)(4) and Pogarsky and Babcock (2001)(5).

** For broad surveys of various experimental designs in economics, see Davis and Holt (1993)(6), Kagel and Roth (1995)(7), and Holt (2007)(7). For a practical approach to experimental design for economists, see Friedman and Sunder (1994)(8).

*** See Goeree and Holt (2010)(10) for a set of experiments used by the U.S. Federal Communications Commission to design and implement a major auction for spectrum licenses for the provision of wireless communications services in a geographic network. Even this paper, however, had a control treatment without package bidding opportunities, which showed problems that could arise if bidders were not permitted to submit "all or nothing" bids for combinations of

1. Coase, R. H. (1960). “The Problem of Social Cost.” Journal of Law and Economics 3: 1–44.
2. Calabresi, G. (1961). “Some Thoughts on Risk Distributions and the Law of Torts.” Yale Law Journal 70(4): 499–553.
3. Becker, G. S. (1968). “Crime and Punishment: An Economic Approach.” Journal of Political Economy 76(2): 169–217.
4. Babcock, L. and G. Pogarsky (1999). “Damage Caps and Settlement: a Behavioral Approach.” Journal of Legal Studies 28(2): 341–370.
5. Pogarsky, G. and L. Babcock (2001). “Damage Caps, Motivated Anchoring, and Bargaining Impasse.” Journal of Legal Studies 30(1): 143–159.
6. Davis, D. D. and C. A. Holt (1993). Experimental Economics. Princeton, NJ: Princeton University Press.
7. Kagel, J. H. and A. E. Roth, eds. (1995). Handbook of Experimental Economics. Princeton, NJ: Princeton University Press.
8. Holt, C. A. (2007). Markets, Games, & Strategic Behavior. Boston, MA: Pearson Education, Inc.
9. Friedman, D. and S. Sunder (1994). Experimental Methods: A Primer for Economists. New York: Cambridge University Press.
10. Goeree, J. K. and C. A. Holt (2010). “Hierarchical Package Bidding: A Paper & Pencil Combinatorial Auction.” Games and Economic Behavior 70: 146–169.
11. Huck, S., H.-T. Normann, and J. Oechssler (2004). “Two Are Few and Four Are Many: Number Effects in Experimental Oligopolies.” Journal of Economic Behavior & Organization 53(4): 435–446.
12.Dufwenberg, M. and U. Gneezy (2000). “Price Competition and Market Concentration: An Experimental Study.” International Journal of Industrial Organization 18: 7–22.
13. Smith, V. L. (1962). “An Experimental Study of Competitive Market Behavior.” Journal of Political Economy 70(2): 111–137.

Sullivan, Sean P. and Charles A. Holt. „Experimental Economics and the Law“ In: Parisi, Francesco (ed) (2017). The Oxford Handbook of Law and Economics. Vol 1: Methodology and Concepts. NY: Oxford University Press.

Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments
The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.
Economic Theories
Parisi I
Francesco Parisi (Ed)
The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts New York 2017

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