Search

To explore how speculative trading influences prices in financial markets, we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) and dividend-collecting investors. Moreover, we operate markets at two different levels of money supply. We find that in phases with only speculating investors present (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) mispricing increases with the number of transfers until maturity; and (iv) speculative trading pushes prices upward (downward) when the supply of money is high (low). These results suggest that controlling the money supply can help to stabilize asset prices.

Background: The Research Excellence Framework (REF) in the United Kingdom is a system to assess the quality of research, requiring higher education institutions to select a sample of research outputs to submit for assessment. We tested whether prediction markets, in a novel application, could help institutions decide which research outputs to submit to the REF. Methods: Prediction markets are tools used to aggregate knowledge from a group who trade on the outcomes of future events. We ran six different prediction markets across three institutions in four different academic fields, asking participants to predict which papers in their department would score above a certain threshold in the REF.Results: Despite low participation in some markets, overall the prediction markets predicted mock REF outcomes with greater than 70% accuracy. We also compared the results of one market to random forests and logistic regression models trained to predict REF scores using bibliometrics, and found they had similar accuracy with prediction markets and high correlation with final market price, suggesting trades were partly informed by publication metrics. Conclusions: Our study provides a proof of concept that prediction markets can be used to forecast REF ratings, and that they capture similar information to other methods. Due to their pragmatic limitations, prediction markets are unlikely to entirely replace other methods of REF selection or research assessment, but they may offer a useful addition to REF selection and may be valuable in training contexts.

We investigate how competition between fund managers and disclosure of other managers’ fees and performance influence fees, risk taken, earnings, and investor concentration, with a controlled lab experiment. We find that more competition and disclosure lead to a reduction in fees: The relative decrease is larger for management fees than for performance fees. Although, the decrease in fees does not affect managers’ investment strategies, it increases investors’ readiness to entrust their funds to a manager. This leads to higher overall earnings, with the benefits going to investors and to fund managers able to attract more or new investors. The empirical literature provides a mixed picture of the consequences of competition in delegated portfolio management, but our results suggest that more competition is mostly beneficial for the development of capital markets.

With a novel experimental design we investigate whether risk perception, return expectations, and investment propensity are influenced by the scale of the vertical axis in charts. We explore this for two presentation formats, namely return charts and price charts, where we depict low- and high-volatility assets with distinct trends. We find that varying the scale strongly affects people’s risk perception, as a narrower scale of the vertical axis leads to significantly higher perceived riskiness of an asset even if the underlying volatility is the same. Furthermore, past returns predict future return expectations almost perfectly. In our setting perceived profitability was considered more important than perceived riskiness when making investment choices. Overall we show that adapting the scale of a chart makes it easier to recognize yearly return variations within a single security, but at the same time makes it harder to identify differences between dissimilar securities. This is something regulators should be aware of and take into account in the rules they set. Electronic supplementary material The online version of this article (10.1007/s10683-018-09598-4) contains supplementary material, which is available to authorized users.

We conducted two large-scale, highly powered randomized controlled trials intended to encourage consumer debt repayments. In Study 1, we implemented five treatments varying the design of envelopes sent to debtors. We did not find any treatment effects on response and repayment rates compared to the control condition. In Study 2, we varied the letters' contents in nine treatments, implementing factorial combinations of social norm and (non-)deterrence nudges, which were either framed emotively or non-emotively. We find that all nudges are ineffective compared to the control condition and even tend to induce backfiring effects compared to the agency's original letter. Since comparable nudges have been shown to be highly effective in other studies, our study supports the literature, emphasizing that the success of nudging interventions crucially depends on the domain of application.

As it has now been over eight years since the introduction of the Belt and Road initiative, analysts and scholars continue to debate the impact of the initiative on host countries. Recent academic studies reported a mostly positive relationship between China’s Belt and Road investments and host countries, including the governance of the latter. However, these studies mainly utilised data compiled by Chinese institutions, and questions have often been raised as to the quality of the data. This paper conceptually replicated one such investigation but utilised datasets compiled by non-China sources. The empirical methodology followed a novel sequential model selection approach, removing criticisms on the flexibility of generalised method of moments (GMM) panel estimations for researchers. Robust results were obtained: China’s Belt and Road investments had a significant positive impact on some measures of governance from the World Bank, and no significant negative effects were found.

The efficiency of financial markets and their potential to produce bubbles are central topics in academic and professional debates. Yet, little is known about the contribution of financial professionals to price efficiency. We run 116 experimental markets with 412 professionals and 502 students. We find that professional markets with bubble drivers – capital inflows or high initial capital supply – are susceptible to bubbles, although they are more efficient than student markets. In mixed markets with students, bubbles also occur, but professionals act as price stabilizers. We show that heterogeneous price beliefs drive overpricing, especially in bubble-prone market environments. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

To explore how speculative trading influences prices in financial markets, we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) and dividend-collecting investors. Moreover, we operate markets at two different levels of money supply. We find that in phases with only speculating investors present (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) mispricing increases with the number of transfers until maturity; and (iv) speculative trading pushes prices upward (downward) when the supply of money is high (low). These results suggest that controlling the money supply can help to stabilize asset prices.

Rankings are prevalent information and incentive tools in labor markets with strong competition for talent. In a dynamic model of multi-tasking and an accompanying experiment with financial professionals, we identify hidden ranking costs when performance in one task is incentivized and ranked while another prosocial task is not: (i) a ranking influences behavior if individuals lag behind: they spend more total effort and substitute effort in the prosocial task with effort in the ranked task; (ii) those ahead in the ranking spend less total effort and lower relative effort in the ranked task. Implications for incentive schemes are discussed.

We use a laboratory experiment to compare general equilibrium economies in which agents individually allocate their private goods among consumption, investment in production, and replenishing or refurbishing a depreciating public facility in a dynamic game with long-term investment opportunities. The public facility is financed either by voluntary anonymous contributions (VAC) or taxes. We find that rates of taxation chosen by majority vote remain at an intermediate level close to the finite-horizon optimum, and the experimental economies sustain public goods at levels between the finite- and infinite-horizon optima. This contrasts with a rapid decline of public goods under VAC. Both the payoff efficiency and production of private goods are higher when taxes are set endogenously instead of being fixed at the infinite-horizon optimum level externally. When taxes are adjusted to the respective finite-horizon optimum each period, production levels and efficiency remain as high as in the voting treatments at least in the latter half of the sessions. When subjects choose between VAC and taxation, 23 out of 24 majority votes favor taxation, demonstrating a clear preference for enforceable taxes to finance public goods in this setting.

The effects of a financial transaction tax (FTT) are scientifically disputed, as seemingly small details of its implementation may matter a lot. In this article, we provide experimental evidence on the different effects of an FTT, depending on whether it is implemented as a tax on markets, on residents, or a combination of both. We find that a tax on markets has negative effects on volatility and trading volume, whereas a tax on residents shows none of these undesired effects. Additionally, we observe that individual risk attitude is not related to traders' reaction to the different forms of an FTT.

Risk is an integral part of many economic decisions, and is vitally important in finance. Despite extensive research on decision-making under risk, little is known about how risks are actually perceived by financial professionals, the key players in global financial markets. In a large-scale survey experiment with 2,213 finance professionals and 4,559 lay people in nine countries representing ~50% of the world's population and more than 60% of the world's gross domestic product, we expose participants to return distributions with equal expected return and we systematically vary the distributions' next three higher moments. Of these, skewness is the only moment that systematically affects financial professionals' perception of financial risk. Strikingly, variance does not influence risk perception, even though return volatility is the most common risk measure in finance in both academia and the industry. When testing other, compound risk measures, the probability to experience losses is the strongest predictor of what is perceived as being risky. Analyzing professionals' propensity to invest, skewness and loss probability have strong predictive power too. However, volatility and kurtosis also have some additional effect on participants' willingness to invest. Our results are very similar for lay people, and they are robust across and within countries with different cultural backgrounds as well as for different job fields of professionals.

When the information of many individuals is pooled, the resulting aggregate often is a good predictor of unknown quantities or facts (“wisdom of crowds”). This aggregate predictor frequently outperforms the forecasts of experts or even the best individual forecast included in the aggregation process. However, an appropriate aggregation mechanism is considered crucial to reaping the benefits of a “wise crowd”. Of the many possible ways to aggregate individual forecasts, we compare (uncensored and censored) mean and median, continuous double auction market prices and sealed bid-offer call market prices in a controlled experiment. We use an asymmetric information structure where subjects know different subsets of the total information needed to exactly calculate the asset value to be estimated. We find that prices from continuous double auction markets clearly outperform all alternative approaches for aggregating dispersed information and that information is only useful to the best-informed subjects.

Supplemental material, VerschuereOpenPracticesDisclosure for Registered Replication Report on Mazar, Amir, and Ariely (2008) by Bruno Verschuere, Ewout H. Meijer, Ariane Jim, Katherine Hoogesteyn, Robin Orthey, Randy J. McCarthy, John J. Skowronski, Oguz A. Acar, Balazs Aczel, Bence E. Bakos, Fernando Barbosa, Ernest Baskin, Laurent Bègue, Gershon Ben-Shakhar, Angie R. Birt, Lisa Blatz, Steve D. Charman, Aline Claesen, Samuel L. Clay, Sean P. Coary, Jan Crusius, Jacqueline R. Evans, Noa Feldman, Fernando Ferreira-Santos, Matthias Gamer, Sara Gomes, Marta González-Iraizoz, Felix Holzmeister, Juergen Huber, Andrea Isoni, Ryan K. Jessup, Michael Kirchler, Nathalie klein Selle, Lina Koppel, Marton Kovacs, Tei Laine, Frank Lentz, David D. Loschelder, Elliot A. Ludvig, Monty L. Lynn, Scott D. Martin, Neil M. McLatchie, Mario Mechtel, Galit Nahari, Asil Ali Özdoğru, Rita Pasion, Charlotte R. Pennington, Arne Roets, Nir Rozmann, Irene Scopelliti, Eli Spiegelman, Kristina Suchotzki, Angela Sutan, Peter Szecsi, Gustav Tinghög, Jean-Christian Tisserand, Ulrich S. Tran, Alain Van Hiel, Wolf Vanpaemel, Daniel Västfjäll, Thomas Verliefde, Kévin Vezirian, Martin Voracek, Lara Warmelink, Katherine Wick, Bradford J. Wiggins, Keith Wylie and Ezgi Yıldız in Advances in Methods and Practices in Psychological Science

The efficiency of financial markets, but also their potential to produce bubbles are central topics in academic and professional debates. Yet, little is known about the contribution of financial professionals to price efficiency. We run 116 experimental markets with 412 professionals and 502 students. We find that professional markets with bubble-drivers - capital inflows or high initial capital supply - are susceptible to bubbles, although they are more efficient than student markets. In mixed markets with students, bubbles also occur, but professionals act as price stabilizers. We show that heterogeneous price beliefs drive overpricing, especially in bubble-prone market environments.

Supplemental material, McCarthyLabImplementationAppendix for Registered Replication Report on Srull and Wyer (1979) by Randy J. McCarthy, John J. Skowronski, Bruno Verschuere, Ewout H. Meijer, Ariane Jim, Katherine Hoogesteyn, Robin Orthey, Oguz A. Acar, Balazs Aczel, Bence E. Bakos, Fernando Barbosa, Ernest Baskin, Laurent Bègue, Gershon Ben-Shakhar, Angie R. Birt, Lisa Blatz, Steve D. Charman, Aline Claesen, Samuel L. Clay, Sean P. Coary, Jan Crusius, Jacqueline R. Evans, Noa Feldman, Fernando Ferreira-Santos, Matthias Gamer, Coby Gerlsma, Sara Gomes, Marta González-Iraizoz, Felix Holzmeister, Juergen Huber, Rafaele J. C. Huntjens, Andrea Isoni, Ryan K. Jessup, Michael Kirchler, Nathalie klein Selle, Lina Koppel, Marton Kovacs, Tei Laine, Frank Lentz, David D. Loschelder, Elliot A. Ludvig, Monty L. Lynn, Scott D. Martin, Neil M. McLatchie, Mario Mechtel, Galit Nahari, Asil Ali Özdoğru, Rita Pasion, Charlotte R. Pennington, Arne Roets, Nir Rozmann, Irene Scopelliti, Eli Spiegelman, Kristina Suchotzki, Angela Sutan, Peter Szecsi, Gustav Tinghög, Jean-Christian Tisserand, Ulrich S. Tran, Alain Van Hiel, Wolf Vanpaemel, Daniel Västfjäll, Thomas Verliefde, Kévin Vezirian, Martin Voracek, Lara Warmelink, Katherine Wick, Bradford J. Wiggins, Keith Wylie and Ezgi Yıldız in Advances in Methods and Practices in Psychological Science

With a novel experimental design we investigate whether risk perception, return expectations, and investment propensity are influenced by the scale of the vertical axis in charts. We explore this for two presentation formats, namely return charts and price charts, where we depict low- and high-volatility assets with distinct trends. We find that varying the scale strongly affects people's risk perception, as a narrower scale of the vertical axis leads to significantly higher perceived riskiness of an asset even if the underlying volatility is the same. Furthermore, past returns predict future return expectations almost perfectly. In our setting perceived profitability was considered more important than perceived riskiness when making investment choices. Overall we show that adapting the scale of a chart makes it easier to recognize yearly return variations within a single security, but at the same time makes it harder to identify differences between dissimilar securities. This is something regulators should be aware of and take into account in the rules they set.

Supplemental material, VerschuereLabImplementationAppendix for Registered Replication Report on Mazar, Amir, and Ariely (2008) by Bruno Verschuere, Ewout H. Meijer, Ariane Jim, Katherine Hoogesteyn, Robin Orthey, Randy J. McCarthy, John J. Skowronski, Oguz A. Acar, Balazs Aczel, Bence E. Bakos, Fernando Barbosa, Ernest Baskin, Laurent Bègue, Gershon Ben-Shakhar, Angie R. Birt, Lisa Blatz, Steve D. Charman, Aline Claesen, Samuel L. Clay, Sean P. Coary, Jan Crusius, Jacqueline R. Evans, Noa Feldman, Fernando Ferreira-Santos, Matthias Gamer, Sara Gomes, Marta González-Iraizoz, Felix Holzmeister, Juergen Huber, Andrea Isoni, Ryan K. Jessup, Michael Kirchler, Nathalie klein Selle, Lina Koppel, Marton Kovacs, Tei Laine, Frank Lentz, David D. Loschelder, Elliot A. Ludvig, Monty L. Lynn, Scott D. Martin, Neil M. McLatchie, Mario Mechtel, Galit Nahari, Asil Ali Özdoğru, Rita Pasion, Charlotte R. Pennington, Arne Roets, Nir Rozmann, Irene Scopelliti, Eli Spiegelman, Kristina Suchotzki, Angela Sutan, Peter Szecsi, Gustav Tinghög, Jean-Christian Tisserand, Ulrich S. Tran, Alain Van Hiel, Wolf Vanpaemel, Daniel Västfjäll, Thomas Verliefde, Kévin Vezirian, Martin Voracek, Lara Warmelink, Katherine Wick, Bradford J. Wiggins, Keith Wylie and Ezgi Yıldız in Advances in Methods and Practices in Psychological Science

Supplemental material, VerschuereSupplementalFigures for Registered Replication Report on Mazar, Amir, and Ariely (2008) by Bruno Verschuere, Ewout H. Meijer, Ariane Jim, Katherine Hoogesteyn, Robin Orthey, Randy J. McCarthy, John J. Skowronski, Oguz A. Acar, Balazs Aczel, Bence E. Bakos, Fernando Barbosa, Ernest Baskin, Laurent Bègue, Gershon Ben-Shakhar, Angie R. Birt, Lisa Blatz, Steve D. Charman, Aline Claesen, Samuel L. Clay, Sean P. Coary, Jan Crusius, Jacqueline R. Evans, Noa Feldman, Fernando Ferreira-Santos, Matthias Gamer, Sara Gomes, Marta González-Iraizoz, Felix Holzmeister, Juergen Huber, Andrea Isoni, Ryan K. Jessup, Michael Kirchler, Nathalie klein Selle, Lina Koppel, Marton Kovacs, Tei Laine, Frank Lentz, David D. Loschelder, Elliot A. Ludvig, Monty L. Lynn, Scott D. Martin, Neil M. McLatchie, Mario Mechtel, Galit Nahari, Asil Ali Özdoğru, Rita Pasion, Charlotte R. Pennington, Arne Roets, Nir Rozmann, Irene Scopelliti, Eli Spiegelman, Kristina Suchotzki, Angela Sutan, Peter Szecsi, Gustav Tinghög, Jean-Christian Tisserand, Ulrich S. Tran, Alain Van Hiel, Wolf Vanpaemel, Daniel Västfjäll, Thomas Verliefde, Kévin Vezirian, Martin Voracek, Lara Warmelink, Katherine Wick, Bradford J. Wiggins, Keith Wylie and Ezgi Yıldız in Advances in Methods and Practices in Psychological Science

Supplemental material, McCarthySupplementalTables for Registered Replication Report on Srull and Wyer (1979) by Randy J. McCarthy, John J. Skowronski, Bruno Verschuere, Ewout H. Meijer, Ariane Jim, Katherine Hoogesteyn, Robin Orthey, Oguz A. Acar, Balazs Aczel, Bence E. Bakos, Fernando Barbosa, Ernest Baskin, Laurent Bègue, Gershon Ben-Shakhar, Angie R. Birt, Lisa Blatz, Steve D. Charman, Aline Claesen, Samuel L. Clay, Sean P. Coary, Jan Crusius, Jacqueline R. Evans, Noa Feldman, Fernando Ferreira-Santos, Matthias Gamer, Coby Gerlsma, Sara Gomes, Marta González-Iraizoz, Felix Holzmeister, Juergen Huber, Rafaele J. C. Huntjens, Andrea Isoni, Ryan K. Jessup, Michael Kirchler, Nathalie klein Selle, Lina Koppel, Marton Kovacs, Tei Laine, Frank Lentz, David D. Loschelder, Elliot A. Ludvig, Monty L. Lynn, Scott D. Martin, Neil M. McLatchie, Mario Mechtel, Galit Nahari, Asil Ali Özdoğru, Rita Pasion, Charlotte R. Pennington, Arne Roets, Nir Rozmann, Irene Scopelliti, Eli Spiegelman, Kristina Suchotzki, Angela Sutan, Peter Szecsi, Gustav Tinghög, Jean-Christian Tisserand, Ulrich S. Tran, Alain Van Hiel, Wolf Vanpaemel, Daniel Västfjäll, Thomas Verliefde, Kévin Vezirian, Martin Voracek, Lara Warmelink, Katherine Wick, Bradford J. Wiggins, Keith Wylie and Ezgi Yıldız in Advances in Methods and Practices in Psychological Science

Supplemental material, McCarthyOpenPracticesDisclosure for Registered Replication Report on Srull and Wyer (1979) by Randy J. McCarthy, John J. Skowronski, Bruno Verschuere, Ewout H. Meijer, Ariane Jim, Katherine Hoogesteyn, Robin Orthey, Oguz A. Acar, Balazs Aczel, Bence E. Bakos, Fernando Barbosa, Ernest Baskin, Laurent Bègue, Gershon Ben-Shakhar, Angie R. Birt, Lisa Blatz, Steve D. Charman, Aline Claesen, Samuel L. Clay, Sean P. Coary, Jan Crusius, Jacqueline R. Evans, Noa Feldman, Fernando Ferreira-Santos, Matthias Gamer, Coby Gerlsma, Sara Gomes, Marta González-Iraizoz, Felix Holzmeister, Juergen Huber, Rafaele J. C. Huntjens, Andrea Isoni, Ryan K. Jessup, Michael Kirchler, Nathalie klein Selle, Lina Koppel, Marton Kovacs, Tei Laine, Frank Lentz, David D. Loschelder, Elliot A. Ludvig, Monty L. Lynn, Scott D. Martin, Neil M. McLatchie, Mario Mechtel, Galit Nahari, Asil Ali Özdoğru, Rita Pasion, Charlotte R. Pennington, Arne Roets, Nir Rozmann, Irene Scopelliti, Eli Spiegelman, Kristina Suchotzki, Angela Sutan, Peter Szecsi, Gustav Tinghög, Jean-Christian Tisserand, Ulrich S. Tran, Alain Van Hiel, Wolf Vanpaemel, Daniel Västfjäll, Thomas Verliefde, Kévin Vezirian, Martin Voracek, Lara Warmelink, Katherine Wick, Bradford J. Wiggins, Keith Wylie and Ezgi Yıldız in Advances in Methods and Practices in Psychological Science

We compare laboratory general equilibrium economies in which maintenance of a depreciating public facility is financed either by anonymous voluntary contributions or taxes. Agents individually allocate their private goods between consumption and investment in production. The experimental economies sustain public goods at 80-90 percent of the infinite horizon but 25-30 percent above the finite horizon optimum. Payoff efficiency is around 90 percent. This contrasts with rapid decline of public goods under voluntary contributions. When subjects have the choice between a system with voluntary contributions or taxation, 23 out of 24 voting decisions favor taxation. Taxation appears to be superior on grounds of both long run efficiency and fairness. Economy is too complex for subjects to solve for optimally, but simple institutional constraints yield aggregate efficiency.

What people perceive as risk clearly goes beyond variance. Several papers have shown that, e.g., probability of loss plays a more prominent role in perceived risk than does variance. We are the first to explore how individual risk perception influences prices and trading behavior in a market setting by exposing subjects to a number of differently shaped return distributions which they then trade on. We first elicit subjects’ individual risk perceptions, finding results in line with earlier papers. We then let subjects trade assets with these return distributions on a continuous double auction market. In the markets we observe active trading and prices strongly driven by average risk perception. While standard finance theory predicts identical prices for most of our assets we find average prices to vary by up to 20 percent, with assets perceived as being less risky trading at significantly higher prices.

Contributions by investor-owned companies play major roles in financing the campaigns of candidates for elective office in the United States. We look at the presidential level and analyze contributions by companies before an election and their stock market performance following US presidential elections from 1992 to 2004. We find that companies experienced abnormal positive post-election returns with (i) a higher percentage of contributions given to the eventual winner and (ii) with a higher total contribution given. Hypothetical portfolios of the 30 largest corporate contributors formed according to (i) the percentage of contributions given to the winner in a presidential election and (ii) the total contribution (divided by market capitalization) would have earned significant abnormal returns in the two years after an election. While all results hold for Bill Clinton and George W. Bush, they are stronger by a magnitude of two to three under W. Bush.

We examine how different investment horizons, and consequently the number of hands through which a security passes during its life, affect prices in a laboratory market populated by overlapping generations of investors. We find that (i) price deviations are larger in markets populated only by short-horizon investors compared to markets with long-horizon investors; (ii) for a given maturity of security, price deviations increase as investment horizons shrink (and frequency of transfers increases); and (iii) short investment horizons create upward pressure on prices when liquidity is high and downward pressure when liquidity is low.

We explore how speculative trading causes price indeterminacy in financial markets. Contrary to standard finance theory, we argue that speculating investors’ difficulty in forming rational expectations induces security prices to deviate from the fundamental values. We conducted a laboratory asset market experiment with overlapping generations of investors. We find that in markets with speculating investors (i) price deviations are larger; (ii) price deviations increase as the holding period of investors shrinks (and frequency of security transfers increases); (iii) speculative trading creates upward (downward) pressure on prices when liquidity is high (low); and (iv) price expectations are formed through forward induction from recent price changes, instead of backward induction from the fundamentals. The results suggest that speculation causes price indeterminacy when dynamic formation of inter-temporal rational expectations is infeasible.

We examine how different investment horizons, and consequently the number of hands through which a security passes during its life, affect prices in a laboratory market populated by overlapping generations of investors. We find that (i) price deviations are larger in markets populated only by shorthorizon investors compared to markets with long-horizon investors; (ii) for a given maturity of security, price deviations increase as investment horizons shrink (and frequency of transfers increases); and (iii) short investment horizons create upward pressure on prices when liquidity is high and downward pressure when liquidity is low.

We present a model in which an outside bank and a default penalty support the value of fiat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money and use of the bank rate to influence inflation or deflation, although other institutions could provide alternatives.

Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper, we report experimental evidence on the effectiveness of this approach to resolving multiplicity: a society can assign default penalties on fiat money so that the economy selects one of the equilibria. Our data show that the choice of default penalty takes the economy close to the chosen equilibrium. The theory and evidence together reinforce the idea that accounting, bankruptcy and possibly other aspects of social mechanisms play an important role in resolving the otherwise mathematically intractable challenges associated with multiplicity of equilibria in closed economies.

We present a model in which an outside bank and a default penalty support the value of fiat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money and use of the bank rate to influence inflation or deflation, although other institutions could provide alternatives.

We compare general equilibrium economies in which building and maintenance of a depreciating public facility is financed either by anonymous voluntary contributions or by taxing agents on their income from private production. Agents start with an endowment of private goods and money, while the government starts with an endowment of public good and money. All private goods produced are tendered for sale in exchange for money in a sell-all market mechanism. Agents' proceeds from sale are taxed, and they individually allocate their private goods between current consumption and investment in production for the following period. The optimal levels of supply of the public good, and tax rate to sustain it over time, are defined and calculated for infinite and finite horizons. These equilibrium theoretical predications are compared to the outcomes of laboratory economies when (1) the starting public facility is either at or below the optimal level; and (2) the tax rate is either exogenously set at the optimal level, or at the median of rates proposed by individual agents. We find that the experimental economies sustain public goods at about 70-90 percent of the infinite horizon but considerably more than the finite horizon optimum. Payoffs (efficiency) is at 90 percent of the infinite horizon equilibrium level even when the rate of taxation is determined by voting. Starting conditions play only a minor role for outcomes of the economies, as efficiency and the stock of public good adjusts to about the same level irrespective of the starting level. These results contrast with rapid decline in provision of public goods under anonymous voluntary contributions, and point to the possibility that the social institution of government enforced taxation may have evolved to address the problem of under-production of public goods through anonymous voluntary contributions.

We use a laboratory experiment to compare general equilibrium economies in which agents individually allocate their private goods among consumption, investment in production and maintenance of a depreciating public facility. The public facility is financed either by voluntary anonymous contributions (VAC) or taxes. We find that rates of taxation chosen by majority vote remain at an intermediate level, converging neither to zero nor to 100%, and the experimental economies sustain public goods at levels between the finite- and infinite-horizon optima. This contrasts with a rapid decline of public goods under voluntary anonymous contributions (VAC). Both the payoff efficiency and production of private goods are higher when taxes are set endogenously instead of being fixed at the optimum level. When subjects choose between VAC and taxation, 23 out of 24 majority votes favor taxation.

Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper we report experimental evidence on the effectiveness of this approach to resolving multiplicity: society can assign default penalties on fiat money so the economy selects one of the equilibria. Our data show that the choice of default penalty takes the economy close to the chosen equilibrium. The theory and evidence together reinforce the idea that accounting, bankruptcy and possibly other aspects of social mechanisms play an important role in resolving the otherwise mathematically intractable challenges associated with multiplicity of equilibria in closed economies. Additionally we discuss the politico-economic meaning and experimental implications of default penalties that support an active bankruptcy-modified competitive equilibrium.

We compare general equilibrium economies in which building and maintenance of a depreciating public facility is financed either by anonymous voluntary contributions or by taxing agents on their income from private production. Agents start with an endowment of private goods and money, while the government starts with an endowment of public good and money. All private goods produced are tendered for sale in exchange for money in a sell-all market mechanism. Agents' proceeds from sale are taxed, and they individually allocate their private goods between current consumption and investment in production for the following period. The optimal levels of supply of the public good, and tax rate to sustain it over time, are defined and calculated for infinite and finite horizons. These equilibrium theoretical predications are compared to the outcomes of laboratory economies when (1) the starting public facility is either at or below the optimal level; and (2) the tax rate is either exogenously set at the optimal level, or at the median of rates proposed by individual agents. We find that the experimental economies sustain public goods at about 70-90 percent of the infinite horizon but considerably more than the finite horizon optimum. Payoffs (efficiency) is at 90 percent of the infinite horizon equilibrium level even when the rate of taxation is determined by voting. Starting conditions play only a minor role for outcomes of the economies, as efficiency and the stock of public good adjusts to about the same level irrespective of the starting level. These results contrast with rapid decline in provision of public goods under anonymous voluntary contributions, and point to the possibility that the social institution of government enforced taxation may have evolved to address the problem of under-production of public goods through anonymous voluntary contributions.

We define and examine three minimal market games (sell-all, buy-sell, and double auction) in the laboratory relative to the predictions of theory. These closed exchange economies have some cash to facilitate transactions, and include feedback. The experiment reveals that (1) the competitive general equilibrium (CGE) and non-cooperative (NCE) models are reasonable anchors to locate most but not all the observed outcomes of the three market mechanisms; (2) outcomes tend to get closer to CGE predictions as the number of players increases; (3) prices and allocations in double auctions deviate persistently from CGE predictions; (4) the outcome paths across the three market mechanisms differ significantly and persistently; (5) importance of market structures for outcomes is reinforced by algorithmic trader simulations; and (6) none of the three markets dominates the others across six measures of performance. Inclusion of some mechanism differences into theory may enhance our understanding of important aspects of markets.

Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper we report experimental evidence on the effectiveness of this approach to resolving multiplicity: society can assign default penalties on fiat money so the economy selects one of the equilibria. Our data show that the choice of default penalty takes the economy close to the chosen equilibrium. The theory and evidence together reinforce the idea that accounting, bankruptcy and possibly other aspects of social mechanisms play an important role in resolving the otherwise mathematically intractable challenges associated with multiplicity of equilibria in closed economies. Additionally we discuss the politico-economic meaning and experimental implications of default penalties that support an active bankruptcy-modified competitive equilibrium.

Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper we report experimental evidence on the effectiveness of this approach to resolving multiplicity: society can assign default penalties on fiat money so the economy selects one of the equilibria. Our data show that the choice of default penalty takes the economy to the neighborhood of the chosen equilibrium. The theory and evidence together reinforce the idea that accounting, bankruptcy and possibly other aspects of social mechanisms play an important role in resolving the otherwise mathematically intractable challenges associated with multiplicity of equilibria in closed economies. Additionally we discuss the meaning and experimental implications of default penalties that support an active bankruptcy-modified competitive equilibrium.

Building on Grossman and Stiglitz (1980) and Sunder (1992) we present results from experimental asset markets where subjects endogenously choose between five information levels. Depending on the specific treatment either the costs of information or the maximum number of subjects with each information level is fixed. We find mostly supporting evidence for the conjectures of Grossman and Stiglitz (1980) and the results of Sunder (1992). More importantly, we observe that the relationship between information level and gross returns is not linear, but J-shaped. Looking at net returns after information costs, the uninformed have the highest net returns in each treatment, while informed traders are not able to recover their information costs.

We study whether information about imminent future dividends can abate bubbles in experimental asset markets. Using the seminal design of Smith et al. (1988) we find that markets where traders are asymmetrically informed about future dividends have smaller, and shorter, bubbles than markets with symmetrically informed or uninformed traders. Hence, fundamental values are better reflected in market prices - implying higher market efficiency - when some traders know more than others about the future prospects of an asset. We also find that asymmetric information has a similar abating impact on bubbles as when uninformed traders accumulate experience, though for different reasons.

We define and examine the performance of three minimal strategic market games (sell-all, buy-sell, and double auction) in laboratory relative to the predictions of theory. Unlike open or partial equilibrium settings of most other experiments, these closed exchange economies have limited amounts of cash to facilitate transactions, and include feedback. General equilibrium theory, since it abstracts away from market mechanisms and has no role for money or credit, makes no predictions about how the paths of convergence to the competitive equilibrium may differ across alternative mechanisms. Introduction of markets and money as carriers of process creates the possibility of motion. The laboratory data reveal different paths, and different levels of allocative efficiency in the three settings. The results suggest that abstracting away from all institutional details does not help understand dynamic aspects of market behavior. For example, the oligopoly effect of feedback from buying an endowed good is missed. Inclusion of mechanism differences into theory may enhance our understanding of important aspects of markets and money and help link conventional equilibrium analysis with dynamics.

Is personal currency issued by participants sufficient to operate an economy efficiently, with no outside or government money? Sahi and Yao (1989) and Sorin (1996) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues her personal IOUs, and a costless efficient clearinghouse adjusts the exchange rates among them so the markets always clear. The results suggest that if the information system and clearing are so good as to preclude moral hazard, any form of information asymmetry, and need for trust, the economy operates efficiently at any price level without government money. These conditions cannot reasonably be expected to hold in natural settings. In a second set of treatments when agents have the option of not delivering on their promises, a high enough penalty for non-delivery is necessary to ensure an efficient market; a lower penalty leads to inefficient, even collapsing, markets due to moral hazard.

Is personal currency issued by participants sufficient to operate an economy efficiently, with no outside or government money? Sahi and Yao (in J Math Econ, 1989) and Sorin (in J Econ Theory, 1996) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues his/her personal IOUs, and a costless efficient clearinghouse adjusts the exchange rates among them so the markets always clear. The results suggest that if the information system and clearing are so good as to preclude moral hazard, any form of information asymmetry, and need for trust, the economy operates efficiently at any price level without government money. These conditions cannot reasonably be expected to hold in natural settings. In a second set of treatments when agents have the option of not delivering on their promises, a high enough penalty for non-delivery is necessary to ensure an efficient market; a lower penalty leads to inefficient, even collapsing, markets due to moral hazard.