Economics at your fingertips  

An experiment on the efficiency of bilateral exchange under incomplete markets

Olga Rud (), Jean Paul Rabanal and Manizha Sharifova

Games and Economic Behavior, 2019, vol. 114, issue C, 253-267

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.

Keywords: Pecuniary externalities; Incomplete markets; General equilibrium; Experimental market games; Walrasian equilibrium (search for similar items in EconPapers)
JEL-codes: D51 D82 G10 C72 C92 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
Working Paper: An experiment on the efficiency of bilateral exchange under incomplete markets (2018) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.geb.2019.02.007

Access Statistics for this article

Games and Economic Behavior is currently edited by E. Kalai

More articles in Games and Economic Behavior from Elsevier
Bibliographic data for series maintained by Haili He ().

Page updated 2020-12-15
Handle: RePEc:eee:gamebe:v:114:y:2019:i:c:p:253-267