Iterative Reasoning in an Experimental "Lemons" Market

Annette Kirstein and Roland Kirstein

No 7014, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: In this paper we experimentally test a theory of boundedly rational behavior in a "lemons" market. We analyze two different market designs, for which perfect rationality implies complete and partial market collapse, respectively. Our empirical observations deviate substantially from the predictions of rational choice theory: Even after 20 repetitions, the actual outcome is closer to efficiency than expected. We examine to which extent the theory of iterated reasoning contributes to the explanation of these observations. Perfectly rational behavior requires a player to perform an infinite number of iterative reasoning steps. Boundedly rational players, however, carry out only a limited number of such iterations. We have determined the iteration type of the players independently from their market behavior. A significant correlation exists between the iteration types and the observed price offers.

Keywords: bounded rationality; market failure; adverse selection; regulatory failure; paternalistic regulation (search for similar items in EconPapers)
JEL-codes: B4 C7 D8 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2007-04
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-mic, nep-reg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2007_Dateien/2007_14.pdf First version, 2007 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.ww.uni-magdeburg.de:80 (A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.)

Related works:
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: https://EconPapers.repec.org/RePEc:mag:wpaper:07014

Access Statistics for this paper

More papers in FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management Contact information at EDIRC.
Bibliographic data for series maintained by Guido Henkel ().