Experimental economics for market design

1 Abstract This study reports of an experimental economics analysis of the new proposed SwedishNorwegian tradable green certificate market (TGC). The green certificate market is a financial instrument to stimulate renewables within the context of liberalized, transnational electricity markets (a kind of market-oriented subsidy scheme). Green certificates are financial assets issued to green producers that can be traded freely. Previous system dynamics studies showed that tradingand investment behaviour were critical factors in analyzing the market dynamics. As a follow-up, this experimental economics study conducted 14 laboratory experiments with about 10 to 20 students per session. A particular feature is that participants handle both short-term trading and long-term investments, which allow us to analyse the interplay between these types of decisions without imposing behavioural assumptions on the two types of decisions. The laboratory experiment shows that the market is likely to crash, due to the long time delays of supply side adjustment. The study provided new insights concerning agents trading and investment strategies, and the performance of various market designs. The mix of trading strategies employed in response to the experiments, are difficult to capture in an SD model.