Week 1
What is experimental economics?
It is a methodology, a tool to study economic questions. Relying on economic experiments. There
are some key features of economic experiments, it has incentive-compatibility where subjects’
payment depends on choices and is monetary. There is no deception which means everything in the
instructions is true, subjects could come bac.
Place in economics
What do you use experimental economics for? You can use it to test of economic theory, but also
inspiring theory through exploratory approach. It is also used for ‘wind-tunnel testing’ of economic
policies or institutions. Experimental economics could also exploit behavioural anomalies for
paternalistic policies (Nudge).
Types of experiments
There are some major types of experiments which includes lab experiment, Artefactual Field
Experiment (AFE), Framed Field Experiment (FFE), Natural Field Experiment (NFE).
Lab experiment is the conventional type, also the most frequent one, it has abstract frame,
convenient subject pool such as students from own university. The advantage is that it is
under highly controlled environment, the disadvantage is that it is artificial and also
represent unrealistic situation.
AFE (Artificial field experiment): It is same as lab but with non-standard subject pool which
means the game set up is all the same as lab but the subjects. Example: Henrich et al. 2001
& 2005 experiment: This experiment attempted to understand the deviation from canonical
model, test on individuals’ reciprocal behaviours in ultimatum game, public goods game and
dictator game. Choosing an AFE is because it wants to understand how sex, age, or relative
wealth could influence these behaviours. Comparing to a lab experiment did within student
groups, student all have similar background. An AFE allows a cross-cultural study of
behaviour with big differences across groups. Therefore, they conducted the experiments in
12 countries, 15 small societies. As a result, it showed that canonical model is not supported,
variance exists and the behaviour is shaped by cultural values, economic and social
interactions in everyday life.
FFE (Framed Field Experiment): It is largely the same as AFE with non-standard subject pools
are used. However, it has a wide-ranging category, introduced fieldish elements. Instead of
using student, the FFE will use experts in such fields as subjects. The commodities are usually
real commodities rather than imagined abstracts. The framing could be context free or
context framing, but it is better in context framing because it will appear to be more real.
Then the stakes are higher than AFE and lab. Although this one represents realistic situation
more, it is still biased because the experimental nature of the task is not hidden so that the
subjects knows you are doing an experiment.
Natural Field Experiment (NFE): NFE’s setting is the same as FFE with non-standard subject
pool, and also more fieldish elements. Instead, the NFE was often under a more natural
environment where the subjects are unaware of being studied. Example: Pruckner and
Sausgruber (2013) – Newspapers are sold via boxes in the street, honour system: people
throw in the money then take the paper, want to observe whether people will be honest,
will they take the paper without paying. The control group is when there is no enforcement
applied on the box, then treatments groups are when control, legal message and moral
messages were applied. As a result, it shows that more money was collected when moral
messages attached. This type of experiment could best represent realistic situations but one
disadvantage is that it often requires big budget.
Subject pool, information, commodity, task, stakes, environment
, Week 2
History of Experimental Economics
Columbus moment of experimental economics
1. Chambelain (1948)
2. Sauermann and Selten (1959): This is the first experimental work on quantity competition
which marked the beginning of modern experimental economics. In the design, three firms
produce a homogeneous good and compete in quantities over 30 periods. The firms have
different capacities: small firm, middle-size firm and larger firm. The larger the firm, the
higher the fixed cost but the lower the marginal costs. The capacity information is available
but the cost conditions are not, firms could purchase information about other firms’ debt
positions. In each period, firms independently set a quantity and the sum of quantity
determines the price firms receive for all produced units. 5 participants in each firm, the
decision is discussed by the whole group but the entrepreneur has the power to make the
final decision. There are three central results, first, players do not tend to settle any of the
pareto-optimal points as tacit collusion did not emerge. Behaviour is heterogeneous and
unstable towards the end of the experiment. Third, the equilibria where the ordering of
payoffs is consistent with the ordering of the capacity levels of the firms in the market are
more frequent in the data.
3. Smith (1962)
What are the 3 traditions of early experimental economics?
1. Test of theories of individual choices, refers to the choices under uncertainty, choice for
goods, risky choice. Uncertainty is when you do not know the possibility and risk is that you
know the risk but does not know whether the possibility is high or low. This test consists of
the expected utility theory (EUT) which is about how to make optimal decisions under risk.
Optimal decisions will be made if you have a utility function in your hand, where people will
assign each payoff a utility. Risk Averse; diminishing margin of utility (Concave curve). Risk
lover: increasing margin of utility (convex curve0, the higher the risk, the happier they will
get. Example of the tests of EUT, gambling games where subjects participate in games with
opportunities to take or refuse certain gambles or risks entailing use of real money. The
observed result will lead to construction of utility functions and test of EUT and then to
examine future behaviour.
2. Test of game-theoretic hypothesis, Nash equilibrium is a solution concept for non-
cooperative games with at least two players where no player can gain more by changing
their own strategy. In game theory, maximising utility does not mean maximising the
monetary payoff, therefore, NE can account for non-selfish motivations. Example of game
theory game is prisoner’s dilemma, 2 individuals interact by simultaneously deciding
whether to cooperate or defect, it is a social decision making. What are the common
findings in prisoner’s dilemma? There is a mixture between cooperation and defection, often
paring dependent. If it is a one-shot game, then the NE is (def, def), if it is a repeated game,
then there is infinite NE. Folk theorem
3. Investigation in industrial organisations: IO deals with the theory of the firm, investigate
firms’ behaviour in different marketing when making decisions such as setting price, setting
quantity, collusion, signalling, entry or exit and so on. Example of industrial organisations
experiment: Sauermann and Selten (1959): Complext oligopoly model, more like a business
simulation – refer to before. Siegel & Fouraker: investigated in bilateral monopoly
bargaining, players reach agreements over price and quantity of traded goods. The more
information each player had about the other, the more pareto-efficient outcomes were
achieved and the more qeual payoffs were realised.
Experimental Design
What is experimental economics?
It is a methodology, a tool to study economic questions. Relying on economic experiments. There
are some key features of economic experiments, it has incentive-compatibility where subjects’
payment depends on choices and is monetary. There is no deception which means everything in the
instructions is true, subjects could come bac.
Place in economics
What do you use experimental economics for? You can use it to test of economic theory, but also
inspiring theory through exploratory approach. It is also used for ‘wind-tunnel testing’ of economic
policies or institutions. Experimental economics could also exploit behavioural anomalies for
paternalistic policies (Nudge).
Types of experiments
There are some major types of experiments which includes lab experiment, Artefactual Field
Experiment (AFE), Framed Field Experiment (FFE), Natural Field Experiment (NFE).
Lab experiment is the conventional type, also the most frequent one, it has abstract frame,
convenient subject pool such as students from own university. The advantage is that it is
under highly controlled environment, the disadvantage is that it is artificial and also
represent unrealistic situation.
AFE (Artificial field experiment): It is same as lab but with non-standard subject pool which
means the game set up is all the same as lab but the subjects. Example: Henrich et al. 2001
& 2005 experiment: This experiment attempted to understand the deviation from canonical
model, test on individuals’ reciprocal behaviours in ultimatum game, public goods game and
dictator game. Choosing an AFE is because it wants to understand how sex, age, or relative
wealth could influence these behaviours. Comparing to a lab experiment did within student
groups, student all have similar background. An AFE allows a cross-cultural study of
behaviour with big differences across groups. Therefore, they conducted the experiments in
12 countries, 15 small societies. As a result, it showed that canonical model is not supported,
variance exists and the behaviour is shaped by cultural values, economic and social
interactions in everyday life.
FFE (Framed Field Experiment): It is largely the same as AFE with non-standard subject pools
are used. However, it has a wide-ranging category, introduced fieldish elements. Instead of
using student, the FFE will use experts in such fields as subjects. The commodities are usually
real commodities rather than imagined abstracts. The framing could be context free or
context framing, but it is better in context framing because it will appear to be more real.
Then the stakes are higher than AFE and lab. Although this one represents realistic situation
more, it is still biased because the experimental nature of the task is not hidden so that the
subjects knows you are doing an experiment.
Natural Field Experiment (NFE): NFE’s setting is the same as FFE with non-standard subject
pool, and also more fieldish elements. Instead, the NFE was often under a more natural
environment where the subjects are unaware of being studied. Example: Pruckner and
Sausgruber (2013) – Newspapers are sold via boxes in the street, honour system: people
throw in the money then take the paper, want to observe whether people will be honest,
will they take the paper without paying. The control group is when there is no enforcement
applied on the box, then treatments groups are when control, legal message and moral
messages were applied. As a result, it shows that more money was collected when moral
messages attached. This type of experiment could best represent realistic situations but one
disadvantage is that it often requires big budget.
Subject pool, information, commodity, task, stakes, environment
, Week 2
History of Experimental Economics
Columbus moment of experimental economics
1. Chambelain (1948)
2. Sauermann and Selten (1959): This is the first experimental work on quantity competition
which marked the beginning of modern experimental economics. In the design, three firms
produce a homogeneous good and compete in quantities over 30 periods. The firms have
different capacities: small firm, middle-size firm and larger firm. The larger the firm, the
higher the fixed cost but the lower the marginal costs. The capacity information is available
but the cost conditions are not, firms could purchase information about other firms’ debt
positions. In each period, firms independently set a quantity and the sum of quantity
determines the price firms receive for all produced units. 5 participants in each firm, the
decision is discussed by the whole group but the entrepreneur has the power to make the
final decision. There are three central results, first, players do not tend to settle any of the
pareto-optimal points as tacit collusion did not emerge. Behaviour is heterogeneous and
unstable towards the end of the experiment. Third, the equilibria where the ordering of
payoffs is consistent with the ordering of the capacity levels of the firms in the market are
more frequent in the data.
3. Smith (1962)
What are the 3 traditions of early experimental economics?
1. Test of theories of individual choices, refers to the choices under uncertainty, choice for
goods, risky choice. Uncertainty is when you do not know the possibility and risk is that you
know the risk but does not know whether the possibility is high or low. This test consists of
the expected utility theory (EUT) which is about how to make optimal decisions under risk.
Optimal decisions will be made if you have a utility function in your hand, where people will
assign each payoff a utility. Risk Averse; diminishing margin of utility (Concave curve). Risk
lover: increasing margin of utility (convex curve0, the higher the risk, the happier they will
get. Example of the tests of EUT, gambling games where subjects participate in games with
opportunities to take or refuse certain gambles or risks entailing use of real money. The
observed result will lead to construction of utility functions and test of EUT and then to
examine future behaviour.
2. Test of game-theoretic hypothesis, Nash equilibrium is a solution concept for non-
cooperative games with at least two players where no player can gain more by changing
their own strategy. In game theory, maximising utility does not mean maximising the
monetary payoff, therefore, NE can account for non-selfish motivations. Example of game
theory game is prisoner’s dilemma, 2 individuals interact by simultaneously deciding
whether to cooperate or defect, it is a social decision making. What are the common
findings in prisoner’s dilemma? There is a mixture between cooperation and defection, often
paring dependent. If it is a one-shot game, then the NE is (def, def), if it is a repeated game,
then there is infinite NE. Folk theorem
3. Investigation in industrial organisations: IO deals with the theory of the firm, investigate
firms’ behaviour in different marketing when making decisions such as setting price, setting
quantity, collusion, signalling, entry or exit and so on. Example of industrial organisations
experiment: Sauermann and Selten (1959): Complext oligopoly model, more like a business
simulation – refer to before. Siegel & Fouraker: investigated in bilateral monopoly
bargaining, players reach agreements over price and quantity of traded goods. The more
information each player had about the other, the more pareto-efficient outcomes were
achieved and the more qeual payoffs were realised.
Experimental Design
