When speculators meet suppliers: Positive versus negative feedback in experimental housing markets

Te Bao and Cars Hommes

Journal of Economic Dynamics and Control, 2019, vol. 107, issue C, -

Abstract: Asset markets like stock markets are characterized by positive feedback through speculative demand. But the supply of housing is endogenous, and adds negative feedback to the housing market. We design an experimental housing market and study how the strength of the negative feedback, i.e., the price elasticity of supply, affects market stability. In the absence of endogenous housing supply, the experimental markets exhibit large bubbles and crashes because speculators coordinate on trend-following expectations. When the positive feedback through speculative demand is offset by the negative feedback of elastic housing supply the market stabilizes and prices converge to fundamental value. Individual expectations and aggregate market outcome are well described by the heuristics switching model. Our results suggest that negative feedback policies may stabilize speculative asset bubbles.

Keywords: Rational expectations; Learning; Housing bubble; Experimental economics (search for similar items in EconPapers)
JEL-codes: C91 C92 D83 D84 R30 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:107:y:2019:i:c:9

DOI: 10.1016/j.jedc.2019.103730

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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