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Answers to the reading questions on Experimental Economics - Week 7
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The answers to the reading questions on the article: 'Theory, experiments and economics' by Smith.
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READING QUESTIONS WEEK 77 Experimental economics
Smith - Theory, experiments and economics
1. Describe what, according to Smith, the main phenomenon is that is studied in
experimental economics. You can also use Figure 1 in your description.
There are three ingredients of a theory: environment, institution and behaviour. These are
all studied in experimental economics.
"The environment consists of the collection of all agents' characteristics" (Smith, 1989).
These characteristics can be seen as the tastes and technology, which in reduced form
include the individuals demand and supply.
The institution defines the messages or actions of both buyers and sellers, as well as the
characteristics of the commodity being sold. On top of that "the institution specifies the
rules, terms or conditions under which components of market demand make contact with
components of market supply to produce binding allocations" (Smith, 1989).
The "behaviour is concerned with agent choices of messages or actions given the agent's
characteristics and the practices relating such choices to allocations" (Smith, 1989). The
agent's characteristics can be seen as the environment, the practices as the institutional
rules.
Theories introduce assumptions about agent behaviour. It is impossible to test a theory
without specifying an institution. Agent incentives and choices are affected by the
institutional rules. What can be seen in Figure 1 is that the outcome of a interaction
depends on all three ingredients of a theory. The environments effects the agents choice
behaviour, which is also affected by institutions. Similarly, agents choice behaviour
affects institutions. Finally, both agent choice behaviour and institutions directs effect the
outcome of a theory.
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