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Conducting Law and Economics Experiments in a Virtual World

August 25, 2009

Some people build houses and attend college classes in Second Life, an online virtual world. Others go dancing, fly planes and shop. Penn Law Professor David Abrams conducts law and economics experiments. It is an ideal laboratory for conducting experiments that economists can only dream about doing in the real world, he says.    

Empirical research on macroeconomic and experimental legal systems is currently difficult because as Abrams noted, researchers can’t take drastic actions like manipulating a country’s money supply or tweaking its tax policies. “You can’t ask Ben Bernanke to raise the interest rate by two percent,” he said. This is possible in Second Life, however, which has a population of over 200,000 active users, according to a CNET article. 
For Abrams, virtual worlds “are an important new venue for learning about law and economics” because individuals who inhabit these worlds behave in an economically similar way to the real world. 
Other benefits include the ability to build experimental laboratories that offer greater control and more observation opportunities than real life labs. They are also easier to set up, cheaper to operate and more accessible to participants. One of the greatest benefits of virtual laboratories is that participants behave much more naturally than they would in a real life lab because they are used to spending a lot of time in a virtual world, said Abrams.
While there are several popular virtual worlds online, Abrams chose Second Life because it most resembles real economies. To test the extent to which individual behavior in Second Life corresponds to real world behavior, he performed the ultimatum game, a classic economics experiment that has been conducted extensively in countries around the world. 
In the ultimatum game, a researcher asks two players to divide a sum of money. The first player decides how to split the money and the second player can either accept or reject the offer. If the second player accepts, both players keep the money and if the second player rejects it, then neither player gets the money.   Real life experiments have yielded results that contradict the theory that individuals will always act to maximize economic gain even if that means accepting an offer as low as 1 percent of the total. Instead, players tend to make relatively fair offers and usually reject offers that go below 20 percent.
Abrams’ Second Life experiment yielded results similar to those observed in real world labs: the median split was 47-53 and players accepted 94 percent of the offers. 
While Abrams concedes that virtual worlds have major differences that could impact behavior— players lack access to well-developed financial systems, can exit the world at any time and engage in a limited range of economic activities - they also resemble the real world in important ways.   Individuals form communities, engage in transactions, produce goods and perform services. Perhaps most important of all is that Abrams has access to information on buyers, sellers, prices and locations for every transaction that has occurred in Second Life. 
Some of the areas Abrams plans to research in the future include contracts, public goods games, discrimination tests, and labor economics. For Abrams, “the virtual sky’s the limit.”