Do homo sapiens know their prices? Insights on dysfunctional price mechanisms from a large field experiment

Nolan Ritter (ritter@mcc-berlin.net) and Julia Anna Bingler (binglerj@ethz.ch)
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Nolan Ritter: Mercator Research Institute on Global Commons and Climate Change (MCC), and Potsdam Institute for Climate Impact Research (PIK), Germany
Julia Anna Bingler: CER–ETH – Center of Economic Research at ETH Zurich, Switzerland

No 21/348, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: We use a large, randomized field experiment that exogenously varies prices to test their effect on consumption. Full information is available at zero costs. However, households state prices that are, on average, ten times larger than actual. But ignorant households cannot react to prices and so the price mechanism becomes dysfunctional. Our results explain small or zero price effects from previous research. We show that researchers must provide evidence for a functional price mechanism before ascribing causal effects or risk biased conclusions. The same applies to price instruments that are often regarded as first best solutions.

Keywords: households; information; price experiment (search for similar items in EconPapers)
JEL-codes: D12 D83 L95 Q41 Q54 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2021-03
New Economics Papers: this item is included in nep-exp
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