Experimental Economics: Behavioral Lessons for Microeconomic Theory and Policy

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Abstract
It is an honor on this occasion and by this means to pay tribute to the memory of Nancy Schwartz. Although Nancy's work was that of an accomplished theorist, and not of an experimentalist, she had an interest in experimentalism that was born of her natural curiosity about all economic matters. It is also a pleasure, once again, to visit my many friends at Northwestern. Almost everyone wants to know if things work, and experimental economics asks whether and under what circumstances our models work. Over the past 30-odd years, this intellectual effort has developed a methodology for providing experimental answers to this question, integrating them with field observations and, where appropriate, for modifying our models in response to the resulting evidence. In this address I want to talk about what we have learned and the consequences of this learning for how we do theory. I will also have something to say about the potential implications of our learning for microeconomic policy. For economic theory there is both good news and bad news. The good news is that we are on the right track, generally, in modeling the relationship among institutional rules, individual incentives, and market performance. Institutions clearly matter. The lesson here can be said to provide a perspective on the biblical imperative (slightly reinterpreted from Romans): For rules are not a terror to good works, but to bad.

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