The Nature of Excess: Using Randomized Treatments to Investigate Price Dynamics

Omar Al-Ubaydli, John List and Michael Price

No 16319, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This study explores empirically the price dynamics within two distinct market institutions - a double oral auction, which resembles modern asset markets, and a bilateral exchange market, which represents markets that have existed for centuries. To provide a theoretical basis to our investigation, we test and compare the excess supply model (Walras (1874, 1877, 1889, 1896)) and the excess rent model (Smith (1962, 1965)) in both market institutions. Our approach is unique in that we make use of appropriate demand and supply systems coupled with randomization of the main treatment variable to discriminate between the theories. All previous efforts, including Smith's (1965) seminal experiments, use designs that cannot appropriately parse the models. We report several insights, perhaps most importantly, we consistently reject the Walrasian model in favor of the excess rent model, regardless of market institution. This finding has important implications both positively and normatively.

JEL-codes: C9 C91 C92 D01 D02 D03 (search for similar items in EconPapers)
Date: 2010-08
New Economics Papers: this item is included in nep-exp
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