In this paper we provide a brief introduction to the methods and the results of experimental research on markets. The laboratory shows that for goods with a life of one period market rules can be specified that yield the prices and quantities predicted by competitive theory with a high degree of reliability. However, markets for long-lived assets tend to display price bubbles, trading at prices much higher than their fundamental values. We conjecture that the differences in the behavior of markets for the two types of goods are due to two factors. The first is the tendency for agents to speculate in asset markets, which creates additional demand for the asset The second is that the market rules encourage participants to behave as price takers. In non-financial markets, this leads to competitive outcomes, but in asset markets it leads to the illusion that assets can always be liquidated at any time, even when prices are much higher than fundamentals.
|Translated title of the contribution||A major lesson from the experimental study of markets: The contrast in efficiency between service and asset markets|
|Number of pages||24|
|State||Published - Sep 2002|
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)