Experimental Economics and the Economics of Contracts

David R. Just and Steven Y. Wu discuss the application of experimental economics to the study of contract theory. Testable predictions generated from even the most barebones-contracting model can be highly sensitive to the primitives of the economic environment. Experiments allow for exogenous variations in policy or market structure that can help us gather evidence about how new interventions may affect contracting outcomes in a controlled environment. A unique feature of contract theory is that most contracts are customized to fit a unique trading situation. Experiments allow the researcher to create information asymmetries or institutional failures to examine how contracting outcomes are affected. A common criticism of experiments has to do with whether results can generalize to broader settings. While behavioral anomalies surely exist, many of them cannot withstand simple robustness checks, which gives them an arbitrary flavor. One can always obtain a behavioral anomaly simply by creating a complex design.