Field Experiments in Economics

1. Field Experiments in Economics David Reiley, University of Arizona

2. Is Economics Like Astronomy? • “If I hadn’t become an astronomer, I would have wanted to be an economist.” • No controlled experiments like in other “hard sciences.” • Herschel’s Garden: billions of different stars to observe, at different stages of development

3. How do we answer scientific questions? • Astronomy questions: • How do we know what the Sun is made of? • Can we predict the fate of a star like the Sun? • Economics questions: • How do we know what price a monopolist will set? • Can we predict what will happen when a monopolist’s unit cost increases?

4. How do economists learn from empirical observation? • My claim: almost everything we learn from data can be considered to be an experiment of some kind. • Laboratory experiments • Natural experiments • Field experiments • Are there any non-experimental modes of observation in economics?

5. Examples of laboratory experiments • Double-auction market institution yields prices predicted by intersection of supply and demand. • Ultimatum game yields behavior different than predicted by subgame perfection. • First-price sealed-bid auction yields higher revenues than English auction, with independent private values drawn from a uniform distribution. • Increasing the number of bidders in a sealed-bid auction causes the average bid to increase.

6. Examples of natural experiments • How does labor demand vary with wages? (Use state variation in minimum-wage laws). • How does time in line (temptation) affect purchase of grocery impulse items? • Do orchestra audition committees discriminate against women? (Use variation in whether the orchestra uses a screen to audition blindly.)

7. Examples of field experiments • Does one auction yield higher revenues than another? • Does one fundraising mechanism yield higher revenues than another? • Do employers discriminate against job applicants with African-American names? • How effective are computer techniques at promoting reading in American public schools? • How does the demand for a mail-order retail good change as we change the price from $49 to $54 to $59?

8. How do field experiments compare to lab experiments? • Benefits: • Real goods instead of induced values • People making decisions very similar to those they would normally make. • Better dialogue with mainstream empirical economists. • Costs: • Can’t control as much (demand & supply curves) • Can’t even observe as much (welfare & efficiency)

9. How do field experiments compare to natural experiments/empirical economics? • Benefits: • Generate exactly the variation you want in your data, when the real world might not have cooperated. • Random assignment eliminates sample-selection and omitted-variable bias. • Costs: • Field experiments might be too expensive. • Field experiments might be ethically infeasible.

10. Problems with Traditional Empirical Economics • Usually can’t test theory (with rare exceptions). • Instead, assumes theory to be true, and makes measurements based on these assumptions: • What’s the elasticity of labor supply? What does this imply for the optimal income tax structure? • What is the discount rate? What does this imply for optimal design of Social Security and 401(k) rules? • What’s the distribution of values in a timber auction? How do we determine the optimal minimum bid? • How much did social welfare increase with the introduction of the minivan?

11. Dangers of Traditional Experimental Economics • By defining “experimental economics” as a self-contained field, we can lose touch with the rest of the profession. • No field of “experimental physics,” instead have both experimental & theoretical “nuclear physics” • By taking theoretical models too literally, we can lose touch with the real world: • Does a real threshold-public-good fundraiser burn the money if it fails to reach the threshold? • Do we want to know whether one auction format raises more revenue under laboratory conditions, or under real-world conditions?