Experimental Economics is a relatively new branch of Economics. It started during the 60’s with the work of Reinhard Selten and got extensive recognition in 2002 when Vernon Smith and Daniel Kahneman received the Nobel Prize for “establishing laboratory experiments as a tool of empirical economic analysis […]”. Experimental Economics provide laboratory tools to simulate an economic environment and study the behavior of economic agents and the properties of various economic mechanisms and institutions. Based on precise protocols, Experimental Economics also contribute to research that has to do with the issue of “reproducability and repeatability” that haunts behavioral science.
The main goal of Experimental Economics is to design experiments that test the results and doctrines of economic theory. The experimental economist creates an (artificial) economic environment which is guided by precise rules. The participants in this environment are called to take a number of decisions which determine their monetary rewards. A basic ingedient of any experiment are the incentives of the agents. The incentives, which are usually monetary, are designed so as to be compatible with “rational” behaviors. For example, the experimentalist “builds” a market where the agents are rewarded according their decisions and market choices, which gives them incentive to act “rationally”. The experimentalist may design a number of variations of the market, changing each time one of the parameters of the model (e.g., technology, policy regime), so as to test the response of the agents.
Another basic feature of the experimental methodology is the existence of a control group, which participates in the initial version of the experiment under the basic parameters, and of at least one treatment group, which participates in the experiment created when one of the parameters changes. The researcher studies the behavior of the two groups and may reach to conclusions regarding causality relations. This is the basic advantage of the experimental methodology vis-a-vis other research methods.