Questions: Experimental Economics Methods

Question 1

Experimental economics insists on using real monetary incentives rather than hypothetical payoffs. The primary justification for this practice is...

• A. It makes experiments more expensive and therefore more prestigious
• B. Induced value theory — real payoffs ensure that participants' decisions are motivated by the experimental incentives, allowing the experimenter to control the relevant utility function
• C. Hypothetical payoffs always produce random behavior
• D. Regulatory requirements mandate real payments

Answer: (B)

Induced value theory (Smith, 1976) holds that real monetary payments can induce a controlled utility function over experimental outcomes, ensuring that participants' choices reflect the incentive structure the experimenter designed. Without real payoffs, participants may treat choices as hypothetical and not engage seriously, or they may bring their own uncontrolled preferences into the experiment. Real incentives make the experimental situation economically meaningful and provide the experimenter with greater control over the decision environment.

Question 2

Economics experiments typically prohibit deception of participants, while psychology experiments commonly allow it.

• T. True
• F. False

Answer: True

The economics experimental tradition has a strong norm against deception — experimenters must truthfully describe the experiment's structure and payoffs. The rationale is that if participants know deception is possible, they will not trust the experimental instructions, undermining induced value theory and making future experiments in the same participant pool unreliable. Psychology has a more permissive tradition (with IRB oversight and debriefing). This methodological difference reflects different priorities: economists prioritize incentive control while psychologists prioritize naturalistic responses to manipulations.

Question 3

What are the advantages and limitations of laboratory experiments compared to field experiments in economics?

Model answer: Lab experiments offer high internal validity (tight control over variables, randomization, precise measurement) but limited external validity (artificial setting, student participants, small stakes may not generalize to real markets). Field experiments offer higher external validity (real participants, real stakes, real institutional context) but lower internal validity (less control over confounding variables, harder to precisely measure mechanisms). The best research programs use both, with lab experiments to identify mechanisms and field experiments to test generalizability.

The lab-field trade-off is a central methodological tension. Lab experiments can test precise theoretical predictions about how changes in information, incentives, or institutions affect behavior — but the sterile laboratory setting and typical reliance on university students raise questions about whether findings generalize. Field experiments (like Gneezy and List's work on gift exchange, or Levitt and List's studies of market behavior) sacrifice some control for realism. The emergence of online experiments (MTurk, Prolific) has created a middle ground with larger, more diverse participant pools but less control than physical labs.