Experimental Study of Forward and Spot Markets: Contract Failure as a Contributing Factor of Vertical Integration

Esipov Victor, Menkhaus Dale J. () and Yakunina Alla ()

EERC Working Paper Series from EERC Research Network, Russia and CIS

Abstract: A probability of a partner not fulfilling his forward contract obligations (contract failure) increases in a transition economy. This project investigates the process of price and quantity discovery in a laboratory setting when there is (1) an endogenous choice between forward and spot market institutions and vertical integration; and (2) a certain probability of forward contract failure. The results suggest that in some cases a contract failure creates incentives to integration. To develop a system, which efficiently allocates resources, the state policy should be oriented toward strengthening the legal system and developing of the spot market, which may act like an insurance mechanism for the failed forward trades

Keywords: forward contract; spot market; vertical integration; contract failure; experiment. (search for similar items in EconPapers)
JEL-codes: C91 C92 D8 L14 L22 (search for similar items in EconPapers)
Pages: 86 pages
Date: 1999-05-13
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