ExperimentalEconomicsMethodologyDanielHouserProfessorinEconomicsDirector,Interdisciplinary Centerfor EconomicsScienceGeorgeMason University,Fairfax,VA
Experimental Economics Methodology Daniel Houser Professor in Economics Director, Interdisciplinary Center for Economics Science George Mason University, Fairfax, VA
peopleearnmoneyineconomicsexperimentsPaying subjects essential for economic experimentsWhat people say they would do in hypotheticalcircumstances does not necessarily correspondto whatthey actually do if actions have monetary consequences(e.g.,Glaeser/Laibson/Scheinkman/ Soutter,C.(20oo).Measuring Trust,TheQuarterlyJournalofEconomics,Vol.115,S.811-841.)Areyouafairperson?Do you help others who are in need?Would you say, that you say what you mean?
people earn money in economics experiments ⚫ Paying subjects essential for economic experiments ⚫ What people say they would do in hypothetical circumstances does not necessarily correspond to what they actually do if actions have monetary consequences (e.g., Glaeser/Laibson/Scheinkman/ Soutter, C. (2000). Measuring Trust, The Quarterly Journal of Economics, Vol. 115, S. 811-841.) ⚫ Are you a fair person? ⚫ Do you help others who are in need? ⚫ Would you say, that you say what you mean?
why financial incentives?Cognitive cost of thinking carefullyMany experiments are to test economic theory(maximizeutility)→comparabilityReveal truepreferencee.g.willingness-to-pay for environmental good.Who come toparticipate?"Incentives"to the experimenter.Whymonetaryincentives?EasytogaugeNosatiation
why financial incentives? ⚫ Cognitive cost of thinking carefully. ⚫ Many experiments are to test economic theory (maximize utility)→ comparability ⚫ Reveal true preference e.g. willingness-to-pay for environmental good. ⚫ Who come to participate? ⚫ “Incentives” to the experimenter. ⚫ Why monetary incentives? ⚫ Easy to gauge ⚫ No satiation
howtodesignrewardstructure?VernonSmith,1976:Ifthefollowingconditions are satisfied,the experimenter hascontrol oversubjects'preferencesMonotonicity:Subjectsmust prefer more of thereward medium to less and not become satiatedSalience: The reward depends on a subject'sactions (note:show upfeeisnotsalient)Dominance: Changes in a subject's utility from theexperiment comepredominantly fromreward andthe influence of other motives is negligible (thisassumptionisthemostcritical)
how to design reward structure? ⚫ Vernon Smith, 1976: If the following conditions are satisfied, the experimenter has control over subjects’ preferences. ⚫ Monotonicity: Subjects must prefer more of the reward medium to less and not become satiated. ⚫ Salience: The reward depends on a subject’s actions (note: show up fee is not salient). ⚫ Dominance: Changes in a subject’s utility from the experiment come predominantly from reward and the influence of other motives is negligible (this assumption is the most critical)
what might8be other motives?Boredom,e.g.,createsgameplayingincentivesIfyouhavepressed22timesthex-buttonyouliketoseewhathappensifyoupressthey-buttonPublic information on all payoffs renders relative comparisonmotivesimportant(envy,fairness)Subjects wantto help orhindertheexperimenter (experimenterdemandeffects)Potential solutionsMakereward sufficientlylargeAvoidpublicinformationaboutpayoffsDo not give hintsabout thepurpose of the experimentUseaneutral language intheinstructions
what might be other motives? ⚫ Boredom, e.g., creates game playing incentives ⚫ If you have pressed 22 times the x-button you like to see what happens if you press the y-button ⚫ Public information on all payoffs renders relative comparison motives important (envy, fairness) ⚫ Subjects want to help or hinder the experimenter (experimenter demand effects) ⚫ Potential solutions ⚫ Make reward sufficiently large ⚫ Avoid public information about payoffs ⚫ Do not give hints about the purpose of the experiment ⚫ Use a neutral language in the instructions