Experimental Economics and Financial Market Regulation

In this paper, aimed at policy makers like financial regulators and central bankers, we first provide a concise overview of experimental economics in which we argue that in principle experimental economics provides an excellent foundation for the analysis of policy measures in general and of financial policies in particular. Second, we provide an overview of experimental studies on the functionality of financial markets and discuss to which extent the current literature is informative for financial regulators. Third, we address the external validity of the results generated by experimental economics. Throughout this paper, we focus on the finance aspect of using experiments for the study of financial market regulation. Based on our findings, we conclude that experiments together with empirical research and theoretical reasoning based on solid facts will play an important role in public policy advice in the future