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Rational and Irrational Bubbles: an Experiment

Sophie Moinas and Sébastien Pouget

No 09-045, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This paper proposes a theory of rational bubbles in an economy with finite trading opportunities. Bubbles arise because agents are never sure to be last in the market sequence. This theory is used to design an experimental setting in which bubbles can be made rational or irrational by varying one parameter. This complements the experimental literature on irrational bubbles initiated by Smith, Suchanek and Williams (1988). Our experimental results suggest that it is pretty difficult to coordinate on rational bubbles even in an environment where irrational bubbles flourish. Maximum likelihood estimations show that these results can be reconciled within the context of Camerer, Ho, and Chong (2004)'s cognitive hierarchy model, and Mc Kelvey and Palfrey (1995)'s quantal response equilibrium.

New Economics Papers: this item is included in nep-cbe, nep-exp and nep-hpe
Date: 2009-05
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