An Experimental Comparison of Two Exchange Economies: Long-Lived Asset vs. Short-Lived Asset

Enrica Carbone (), John Hey and Tibor Neugebauer ()
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Enrica Carbone: Dipartimento di Scienze Politiche “Jean Monnet,” Università della Campania, “Luigi Vanvitelli,” 81100 Caserta, Italy
Tibor Neugebauer: Department of Finance, Faculty of Law, Economics and Finance, Campus Kirchberg, Université du Luxembourg, L-1359 Luxembourg

Management Science, 2021, vol. 67, issue 11, 6946-6962

Abstract: The Lucas tree model [Lucas RE Jr (1978) Asset prices in an exchange economy. Econometrica 46(6):1429–1445.] lies at the heart of modern macrofinance. At its core, it provides an analysis of the equilibrium price of a long-lived asset in an exchange economy where consumption is the objective and the sole purpose of the asset is to smooth consumption through time. Experimental tests of the model use a particular instantiation of the Lucas model. Here we adopt a different instantiation to the first two, extending their analyses from a two-period oscillating world to a three-period cyclical world; this is partly to test the robustness of their results. We also go one step further and compare this solution (to a consumption-smoothing problem), in which consumption claims are traded via the long-lived asset, with the alternative solution provided by a market, in which agents can directly trade (short-lived) consumption claims between periods. We find that the latter exchange economy is more efficient in encouraging consumption smoothing than the economy with the long-lived asset. We find evidence of uncompetitive trading in both markets.

Keywords: asset market experiment; Lucas tree model; Bewley incomplete markets; intertemporal choice; exchange economy; general equilibrium; consumption smoothing; credit market; Herfindahl index; term structure of Sharpe ratios (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (7)

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