Abstract
We test in a controlled laboratory environment whether traders in a bilateral exchange internalize the impact of their actions on market prices better than in a large market. In this model, traders choose asset holdings, constrained by a technology frontier. Next, each trader experiences a random shock which makes only one type of asset profitable. In a general equilibrium environment with incomplete markets, this leads to pecuniary externalities because traders increase scarce asset holdings beyond what is socially optimal. This behavior is especially exacerbated in large experimental markets as traders fail to internalize the impact of their actions on prices. We find that when markets are incomplete, a bilateral exchange can slightly mitigate the extent of pecuniary externalities, and weakly increase welfare.
| Original language | English |
|---|---|
| Pages (from-to) | 253-267 |
| Number of pages | 15 |
| Journal | Games and Economic Behavior |
| Volume | 114 |
| DOIs | |
| Publication status | Published - Mar 2019 |
Keywords
- Experimental market games
- General equilibrium
- Incomplete markets
- Pecuniary externalities
- Walrasian equilibrium
Cite this
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An experiment on the efficiency of bilateral exchange under incomplete markets. / Rud, Olga A.; Rabanal, Jean Paul; Sharifova, Manizha.
In: Games and Economic Behavior, Vol. 114, 03.2019, p. 253-267.Research output: Contribution to journal › Article › Research › peer-review
TY - JOUR
T1 - An experiment on the efficiency of bilateral exchange under incomplete markets
AU - Rud, Olga A.
AU - Rabanal, Jean Paul
AU - Sharifova, Manizha
PY - 2019/3
Y1 - 2019/3
N2 - We test in a controlled laboratory environment whether traders in a bilateral exchange internalize the impact of their actions on market prices better than in a large market. In this model, traders choose asset holdings, constrained by a technology frontier. Next, each trader experiences a random shock which makes only one type of asset profitable. In a general equilibrium environment with incomplete markets, this leads to pecuniary externalities because traders increase scarce asset holdings beyond what is socially optimal. This behavior is especially exacerbated in large experimental markets as traders fail to internalize the impact of their actions on prices. We find that when markets are incomplete, a bilateral exchange can slightly mitigate the extent of pecuniary externalities, and weakly increase welfare.
AB - We test in a controlled laboratory environment whether traders in a bilateral exchange internalize the impact of their actions on market prices better than in a large market. In this model, traders choose asset holdings, constrained by a technology frontier. Next, each trader experiences a random shock which makes only one type of asset profitable. In a general equilibrium environment with incomplete markets, this leads to pecuniary externalities because traders increase scarce asset holdings beyond what is socially optimal. This behavior is especially exacerbated in large experimental markets as traders fail to internalize the impact of their actions on prices. We find that when markets are incomplete, a bilateral exchange can slightly mitigate the extent of pecuniary externalities, and weakly increase welfare.
KW - Experimental market games
KW - General equilibrium
KW - Incomplete markets
KW - Pecuniary externalities
KW - Walrasian equilibrium
UR - http://www.scopus.com/inward/record.url?scp=85061571063&partnerID=8YFLogxK
U2 - 10.1016/j.geb.2019.02.007
DO - 10.1016/j.geb.2019.02.007
M3 - Article
VL - 114
SP - 253
EP - 267
JO - Games and Economic Behavior
JF - Games and Economic Behavior
SN - 0899-8256
ER -