An experiment on the efficiency of bilateral exchange under incomplete markets

Rud, O, Rabanal, J and Sharifova, M 2019, 'An experiment on the efficiency of bilateral exchange under incomplete markets', Games and Economic Behavior, vol. 114, pp. 253-267.


Document type: Journal Article
Collection: Journal Articles

Title An experiment on the efficiency of bilateral exchange under incomplete markets
Author(s) Rud, O
Rabanal, J
Sharifova, M
Year 2019
Journal name Games and Economic Behavior
Volume number 114
Start page 253
End page 267
Total pages 15
Publisher Elsevier
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.
Subject Experimental Economics
Keyword(s) Experimental market games
General equilibrium
Incomplete markets
Pecuniary externalities
Walrasian equilibrium
DOI - identifier 10.1016/j.geb.2019.02.007
Copyright notice © 2019 Elsevier Inc. All rights reserved.
ISSN 0899-8256
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