Experimental Economics: Methods, Problems, and Promise

Abstract

Although economics is not commonly thought to be an experimental science, laboratory methods are being increasingly used as economic theories become more sophisticated. It is often possible to structure payoffs and procedures so that a theory is tested on its domain, with all structural assumptions satisfied. If the theory fails, individual components can be tested; if the theory works, it can be stressed with procedures that violate the structural assumptions in carefully chosen directions. Applications of this experimental method have been motivated by three distinct sets of issues: the relative efficiencies of alternative market institutions, the predictions and applications of game theory, and the behavioral validity of expected utility theory. This paper presents specific examples from each of these areas to highlight the usefulness of experimentation. Common objections to this methodology are also discussed, as are some of the principal lessons that have been learned, both about economic behavior, and about how to evaluate theoretic propositions in the laboratory.