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An experimental comparison of two market institutions (with Enrica Carbone & Tibor Neugebauer)

Thursday 19 October 2017, 1.00PM to 2.00pm

Speaker(s): John Hey (York)


We study the Lucas-tree indefinite horizon model in an experimental market setting comparing two market institutions; an asset market and a forward market. In the asset market, subjects trade tokens for a long lived asset that pays dividends at the beginning of each period. In the forward market, subjects trade tokens for future tokens. Tokens are consumed at the end of the period. We derive the equilibrium consumption and market prices in both institutions. In equilibrium, prices are constant and consumption is stable and identical across institutions.

Our research questions are therefore if subjects under laboratory conditions smooth consumption across periods, and if asset and forward markets are equally efficient in pricing trades. Our main result is that subjects smooth consumption across periods in both institutions; price bubbles exist in the asset market whereas prices are close to equilibrium in the forward market.

We apply and extend the experimental design of Crockett and Duffy (2013). Similar to Crockett and Duffy subjects‘ endowments are asymmetric to make trading beneficial. Intertemporal utility maximization requires consumption smoothing through trading in the market. In contrast to Crockett and Duffy we consider three subject types and consider two market institutions. The predictions on allocations are the same across the asset market and the forward market.


Crockett, S., & Duffy, J. (2013). An experimental test of the Lucas asset pricing model. Working Paper No. 504. Department of Economics, University of Pittsburgh

Location: A/EC202 Economics Staff Room

Admission: Staff and PhD Students