Applying Experimental Economics to Policy Design is Not About Duplicating Real World Conditions

Michael Giberson

At Economist’s View, Mark Thoma has had a pair of recent postings on experimental economics. A few days ago he quoted extensively from a posting at VoxEu by Steffen Huck and Jean-Robert Tyran. In brief, Huck and Tyran said, “Experimental economics opens the door to better policy design. Laboratory experiments should be used to try out proposed policy changes on a small scale before causing upheaval in the large national economy – like wind tunnels are used in car and plane design.”

While I appreciate Thoma’s bringing attention to the Huck and Tyran posting (and their related essay: Can Markets Be Trusted?), I would pick some nits with respect to the language Thoma uses in introducing their piece. Thoma writes:

Can experimental economics be used to improve policy design? This is an interesting idea but one question, and it’s one the authors acknowledge, is if in general the experiments can be made complex enough to duplicate real-world conditions and capture all of the essential aspects of the market under examination.

It is a seemingly unobjectionable intro, but consider a simple generalizing of the initial question to “Can economics be used to improve policy design?” How would economists respond? In particular, would economists in general feel a burden to make sure the economic theory or econometric tests they use are “complex enough to duplicate real-world conditions” or “capture all of the essential aspects of the market”?

A good deal of the work in his sentence in being done by the words “enough” and “essential”. Whether engaging in theory or hypothesis testing or laboratory testing, the need is to develop a framework which is “complex enough” to be interesting while also simple enough to give clear answers. Whether working with field data, in the laboratory, or from the theorist’s armchair the goal is always to “capture all of the essential aspects” and none of the inessential aspects of whatever is the object of study. The tensions between too complex and too simple, between the essential and the inessential, exist throughout economics and are not particular to experimental approaches.

The value of experimental economics is not that you can kind of, sort of duplicate a part of the real world in the laboratory. Rather, the value is that experimentalists can test the effects of carefully controlled changes in relatively easy-to-understand laboratory markets. Huck and Tyran make this point well.

About two weeks ago, Thoma posted responses from Al Roth and from Charlie Plott to a piece on experimental economics in the Economist magazine. Both the Economist piece and the responses to it are about eight years old, but the responses are both good short defenses of the value of experimental economics in policy applications.

Huck and Tyran apparently still feel the need to defend the value proposition of experimental economics for policy work. I’m not sure whether to interpret their effort as implying that Roth and Plott (and many others, including recent Nobel Prize winners!) have not been successful so far in persuading interested parties, or to interpret it as suggesting not everyone has had a chance to consider the topic. Generally speaking, I think the wind tunnel analogy, so often used by experimentalists in economics (as here by Huck and Tyran), is an apt one. Much better to experiment in a relatively small and cheap laboratory market, first, before experimenting in the bigger, more complex, and many-orders-of-magnitude-more-expensive broader economy.

NOTE: Lynne posted here at KP about the use of experimental economics in energy policy back in October 2002, and later developed the topic at further length for an article appearing in the Electricity JournalUsing Economic Experiments to Test Electricity Policy“, (November 2005).