Blog: What is going on in the economics laboratory at the CMD?

By CMD Deputy Director of Policy – Gary Stoneham

At the CMD we are working on a number of projects that apply economic design principles to real policy problems. Following the design phase, we routinely test and refine new policy mechanisms in the economics laboratory to ensure that the mechanisms achieve the outcomes intended and have acceptable performance characteristics.

Used in this way, experimental economics is a technique that allows policy designers to compare outcomes observed from self-interested participants against predictions from theory. Last year we designed an auction to procure fuel for the Victorian Government fleet. Extensive testing in the laboratory identified design options that would have opened the auction up to unwanted strategic behaviour. Using a designed procurement auction, the Victorian Government increased the price discount on fuel returning saving of around $1m per year.

This year two new mechanisms are being refined in the laboratory. A CMD-designed auction and experimental economics techniques are being applied to develop a mechanism that procures expert advice from medical specialists at fair rates of remuneration. In this case, laboratory experiments allow us to test different ways of communicating instructions and rules to participants and to measure outcomes against theoretical expectations. The test-bed process is now ready to move from university students to medical experts themselves, so that we can fine-tune our messaging and engagement processes in preparation for the real procurement auction.

We are also commencing experimental laboratory sessions to refine components of a market for transport services for students with disabilities. For this project, the CMD is working with Professor Charles Plott, one of the co-founders of experimental economics. Professor Plott is testing components of a mechanism intended to give parents more choice over transport options, harness competition and capture some of the benefits of coordination between students. This mechanism is being developed for a pilot in Victoria later this year.