What Is Experimental Economics?

Most applied work in economics is used by collecting 'real world' data from decisions made outside of the economist's control. Suppose we wanted to know how changes in the minimum wage impacts the unemployment rate for young workers. We would look for states, provinces or countries where there was a change in the minimum wage and then examine unemployment data both prior to the minimum wage law and after the minimum wage law. However, there is no possible way to be absolutely certain that any change in the unemployment rate was caused by the change in the minimum wage. We cannot be sure of the causal relationship because there are so many outside factors going on in an economy. Perhaps the unemployment rate rose, not due to the minimum wage cut, but because the Federal Reserve cut interest rates or because of a spike in oil prices.
Experimental economics attempts to eliminate these outside factors by running controlled experiments inside of a laboratory setting. While it is impossible to run a controlled experiment of one million minimum wage workers, experimental economics can give us a better idea of how consumers and firms respond to incentives, which helps economists strengthen their models.
Experimental Economics - Alternative Perspectives
The Economist's "Dictionary of Economics" when it defines "empirical testing" as follows:
"In contrast to the physical sciences, it is rarely possible to conduct controlled experiments in economics, for example to see what would happen to exports if the exchange rate were reduced and all other variables in the international economy remained unchanged. It is possible, however, to test hypotheses with facts, for example to verify historically the extent to which changes in the exchange rate have been associated with changes in exports. In fact, experiments can be and are carried out in economics, for example labratory simulations of market behaviour, and there is a growing interest in experimental economics as an adjunct to historical empiricism and theoretical work."
Experimental Economics - Conducting Economic Experiments
One such group conducting experimental economics is E-Economics. They define what they do as follows: "We conduct online experiments into economic decision making. How do people bid in auctions? What better way than to invite them to participate in a controlled auction with real money and observe their behavior? How do people bargain? We can watch real bargaining to arrive at an answer. Experimental Economics is a field of study that requires economists to confront reality - and that reality is represented by the actual decisions made by our subjects."
Experimental Economics - In Conclusion
While experimental economists study similar phenomena as traditional economists, they differ in methodology. Instead of looking at what has happened in the past, experimental economists take a laboratory approach similar to that used in many of the other social sciences.