I am grateful to Yang Zhou for inviting me to talk about a working paper (with Gavin Roberts) on Friday. Yang told me that this audience is not familiar with lab experiments, so I’m going to take a few minutes out of my time to set the stage for my research.
There is a new book out, Causal Inference by Scott Cunningham, that is the talk of #EconTwitter (Cunningham, 2021). The book is 500 pages of dense prose and code. Here is a review saying that Cunningham left out many key things that a practitioner would need to know. Causal inference from naturally occurring data is hard!
Lab experiments bring something important to the research community. Lab experiments give the researcher a lot of control, which is why they are particularly useful for causal inference (Samek, 2019).
Consider a cherished theory: demand curves slope down. I like breakfast burritos. If the price is $3, then I might buy two this week. If the price is $30, then I will buy no breakfast burritos.
If you lower the price of a good, the lower price will cause people to will buy more of it. We can rely on this, right? This has massive policy implications. We assume that people maximize their own consumption within budget constraints.*
What about altruism, though? Sometimes people give money away that they could have spent on themselves. Does altruism break economic theory?
This question is addressed by Andreoni & Miller (2002) with a clever experiment. They allow subjects to give money away to other subjects, which is an altruistic thing to do. For example, imagine you are given $4 and you know there is a counterpart subject who got no money. You can send them half of your endowment, so you both leave the experiment with $2. Experimenters vary price and income, so that they can test for a “well-behaved preference ordering” with regard to the “purchase” of altruism. Price of giving means that, for example, sometimes getting $2 to your counterpart costs you more (less) than $2.
Andreoni & Miller find that giving is a “good”. Altruism is rational, in the sense that demand curves still slope down. People like to give, but they give less if it’s very expensive.
Without the lab experiment, it would have been difficult to show so clearly that giving preferences are rational. Most real-world opportunities to help others are messy. International adoption, for example, has a price tag in dollars for American families, but adoption cases differ in many ways besides price.
My work with Gavin Roberts builds on that experiment to examine preferences for redistribution within a group. We look at how subjects choose between two goods, equality and group efficiency. Our paper is called “Other People’s Money” because there is a difference in the way people spend their own money to purchase equality as opposed to spending other people’s money.
Like Andreoni & Miller, we find that prices can help us predict how much equality subjects will buy. I can’t tell you exactly who will pay to reduce inequality (some subjects only maximize their own income), but if the price goes up then I can predict how that will affect the total quantity of equality purchased.
Observational data on how people reduce income inequality in the real world are very messy. Voting patterns can give us some indication of what policies people prefer with regard to taxes and entitlements. The prices for various policy outcomes will appear different to every voter, and there are so many confounds, such as whether a congressional candidate has great hair. Our laboratory method complements the other important work being done by theorists and economists who study policy.
*For now, I’m ignoring the field of behavioral economics and systematic human foibles (Buchanan, 2020). But lab experiments are good for that, too.
Andreoni, J., & Miller, J. (2002). Giving according to GARP: An experimental test of the consistency of preferences for altruism. Econometrica, 70(2), 737–753.
Buchanan, J. A. (2020). My reference point, not yours. Journal of Economic Behavior & Organization, 171, 297–311.
Cunningham, S. (2021). Causal Inference: The Mixtape. Yale University Press.
Samek, A. (2019). Advantages and disadvantages of field experiments. Handbook of Research Methods and Applications in Experimental Economics.