Leverage and asset prices: An experiment

Marco Cipriani, Ana Fostel and Daniel Houser

Journal of Economic Behavior & Organization, 2021, vol. 183, issue C, 700-717

Abstract: We develop a model of leverage that is amenable to laboratory implementation and gather experimental data. We compare two economies that only differ in one dimension: in one economy, agents cannot borrow; in the other, they can leverage a risky asset to issue debt. Leverage increases asset prices in the laboratory. This increase is significant and quantitatively close to what theory predicts. Moreover, also as theory suggests, leverage allows gains from trade to be realized in the laboratory. Finally, the mechanism generating the price increase in the lab is due to the asset role as collateral, and different from what we would observe with a simple credit line or bigger cash endowments.

Keywords: Leverage; Asset pricing; Experimental economics; Elicitation method; Incomplete markets (search for similar items in EconPapers)
JEL-codes: A10 C90 D52 D53 G10 (search for similar items in EconPapers)
Date: 2021
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Related works:
Working Paper: Leverage and Asset Prices: An Experiment (2020)
Working Paper: Leverage and asset prices: an experiment (2012)
Working Paper: Leverage and Asset Prices: An Experiment (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:183:y:2021:i:c:p:700-717

DOI: 10.1016/j.jebo.2021.01.005

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