Overview

Simplifying somewhat, we can say that there are four kinds of experiments in economics.
There are, first, thought experiments in both macroeconomics (see Chapter 6 on Hume’s monetary
thought experiment) and microeconomics (see Chapter 7 on Galilean thought experiments and
models). Thought experiments abstract a situation from the real world, simplify it to a greater or lesser
degree, manipulate a variable and contemplate what would happen in the idealized situation. There
are, second, natural experiments. In a natural experiment there is no manipulation by the
experimenter. Rather, the experimenter finds a natural situation that resembles an experiment and uses
statistical methods to analyze it. In the previous chapter we have seen that the econometricians’
instrumental variables technique is often employed to that effect. There are, third, randomized field
evaluations that have become popular in development economics in very recent years. In a
randomized field evaluation, experimental subjects are divided into two groups, an experimental
treatment is applied to one and a control treatment to the other. The treatment is judged to be effective
if there is a difference in outcome between the two groups. These experiments we will examine in the
following chapter.
The final category is that of the laboratory experiment. When there is talk of experiments in
economics or experimental economics, it is usually laboratory experiments that are referred to. These
started in about the 1950 and thus are a relatively recent phenomenon. Only randomized field evalua
tions are younger. That this book treats the different types of experiments their historical order of
appearance is pure chance.
Laboratory experiments in economics test hypotheses drawn from economi theory in the
“lab,” which usually means a specially prepared classroom other university environment. That is, real
people (unlike the idealized agents of economic models and thought experiments) are brought into an
artificial environment (unlike in randomized field evaluations, where agents are observe in their
natural habitat) and subjected to interventions controlled by the expermenter (unlike in natural
experiments, where variation is not under expermental control). When I say “experiment” or
“economic experiment” in the chapter, I mean this kind of experiment: a controlled, laboratory
experiment.
I said that experiments test hypotheses from economic theory. This is to narrow a focus.
According to one practitioner, economists pursue at leas three purposes with experiments, which he
describes metaphorically a follows (Roth 1986):
- speaking to theorists (“testing and modifying formal economic theories”)
- searching for facts (“collect data on interesting phenomena and importan
institutions”); and
- whispering into the ears of princes (“providing input into the policy-mak
ing process”).
In what follows I will give one or a few examples of each category an describe some of the
things economists have learned from performing the type of experiment. I will then take a step back
and examine some of the methodological issues involved in economic experimentation in general.