A large majority of economic phenomenon are based on the behaviour of individuals: the laws of demand and supply are based on individuals' valuation of a good and therefore their willingness to pay or willingness to supply at different prices. Knowledge about how individuals act and react to different kinds of economic stimuli forms the basis of a significant amount of research in economic theory and policymaking. For example, how do different taxation regimes influence individual willingness to pay or willingness to supply? An important new tool that helps in examining the actions of individuals and in analysing their implications, is provided by rapidly developing laboratory experimental techniques....

An important part of laboratory experiments are the substantial financial incentives that are actually paid to subjects. Subjects actually earn money and must repay any losses incurred during the experiment. There is no role playing in the experiment. The value that people place on the outcomes of policy is replaced in the laboratory by the possible financial payment (loss) that an individual will get (incur) in an experiment depending upon the outcome of the process. With the control provided by incentives, conflicts across the objectives of different individuals can be induced; and, simple mechanisms for resolving the conflicts can be implemented in a laboratory environment and in a manner that is theoretically understandable.

The most important advantages of laboratory methods are replicability and control. Replicability refers to the capacity of other researchers to reproduce the experiment and hence results in independent verification of the outcomes. Data from naturally occurring processes (like field data) suffers from the disadvantage that there are often unobserved factors which have an impact on the variables of interest, and these factors are constantly changing, so comparing field data at different points of time would be difficult as there are many factors to control for. Control is the capacity to manipulate laboratory conditions so that the observed behaviour can be used to analyse different theories. In some cases, it is impossible to find natural field data that match the assumptions of the theory (for example, it might be difficult to find economic situations where individuals face questions that directly test the axioms of expected utility theory). In other cases, the data collected could be too messy to be able to distinguish between alternative theories.

Subjects in an experiment could be university students, bureaucrats who can participate in a policy that they have designed or actual participants such as farmers, water authorities or councils who would be influenced if the policy was implemented in the field.

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Griffith University

Monash Laboratory for Experimental Economics (MonLEE)