Why are some countries rich while others are poor? While some of the differences in income levels and economic growth can be attributed to differences in resources, geography, and openness to international trade, economists recognize that economic and political institutions play an important role. While macro-and development economists have used field data to learn much about the effects of institutions on growth, identifying the precise impact of a particular institution is typically very difficult.
Institutions, as observed in the field, arise endogenously rather than randomly, so that there is an endogeneity problem in inferring whether an institutional change influences growth. There are also country-specific cultural and historical factors that are difficult to quantify, which interact with institutions and may affect economic performance. Finally, in naturally occurring economies, different institutions tend to co-occur in clusters (for example, democratic voting and freedom of the press), and the resulting multicollinearity makes it difficult to isolate each institution’s individual effect.
In this paper, we illustrate how new data for the study of economic growth can be generated from experimental political economies and how economists can use experimental macroeconomies to study specific institutional questions. We realize that laboratory experiments cannot be used to construct simulations of a national economy and therefore must exclude many important structural and institutional features. Nevertheless, current experimental techniques do allow economists to construct and study specific types of economies of interest.
Given that a particular economy is feasible to construct in the laboratory, it can be studied in depth. In the laboratory, experimenters are able to fully observe and control the environment and institutions, which can be changed exogenously so that their effects on an outcome variable (e.g. national income, capital stock, or welfare) can be clearly identified. Institutions can be mixed and matched to create hybrids that may not occur naturally (e.g. dictatorships with a free press), and new institutions can be designed and implemented.
Results from different institutional configurations can be compared to optima and to equilibria, as well as to each other. Experimental economies can also be replicated. That is, multiple economies can be created under identical conditions. This allows the potential falsification of theoretical propositions at any desired level of significance and the investigation of the variability of possible outcomes under fixed conditions.
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The Impact of Simple Institutions in Experimental Economies with Poverty Traps
