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The Endogenous Evolution of Market Institutions: An Experimental Investigation

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  • Kirchsteiger, G.
  • Niederle, M.
  • Potters, J.J.M.

    (Tilburg University, Center for Economic Research)

Abstract

We study an experimental market in which the structure of the information flows is endogenized. When making an offer, traders choose not only the price at which they are prepared to trade, but also the subset of traders they want to inform about the offer. This design allows for two extreme institutions as special cases. If traders always inform every other trader about each offer, the resulting institution is equivalent to a double auction. If, on the other hand, traders always inform only one other trader about each offer, the resulting institution is equivalent to a decentralized bargaining market. The institution that actually evolved in the experiments, however, was in between the two extreme cases. Subjects typically informed all traders of the other market side, but none of their own side. This endogenously evolving institution, however, turned out to have the same properties as the double auction.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1998-67.

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Date of creation: 1998
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Handle: RePEc:dgr:kubcen:199867

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Related research

Keywords: market institution; information structure; efficiency;

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References

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  1. Rutherford,Malcolm, 1996. "Institutions in Economics," Cambridge Books, Cambridge University Press, number 9780521574471.
  2. Steven Gjerstad & John Dickhaut, 2003. "Price Formation in Double Auctions," Microeconomics 0302001, EconWPA.
  3. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
  4. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
  5. Easley, David & Ledyard, John., . "Theories of Price Formation and Exchange in Double Oral Auctions," Working Papers 611, California Institute of Technology, Division of the Humanities and Social Sciences.
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  8. Grether, David M & Plott, Charles R, 1984. "The Effects of Market Practices in Oligopolistic Markets: An Experimental Examination of the Ethyl Case," Economic Inquiry, Western Economic Association International, vol. 22(4), pages 479-507, October.
  9. North, Douglass C., 1993. "Economic Performance through Time," Nobel Prize in Economics documents 1993-2, Nobel Prize Committee.
  10. Kenneth M. Lusht, 1996. "A Comparison of Prices Brought by English Auctions and Private Negotiations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(4), pages 517-530.
  11. James T. Hong & Charles R. Plott, 1982. "Rate Filing Policies for Inland Water Transportation: An Experimental Approach," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 1-19, Spring.
  12. Michael Peters, 1995. "Decentralized Markets and Endogenous Institutions," Canadian Journal of Economics, Canadian Economics Association, vol. 28(2), pages 227-60, May.
  13. Joyce, Patrick, 1983. "Information and behavior in experimental markets," Journal of Economic Behavior & Organization, Elsevier, vol. 4(4), pages 411-424, December.
  14. Friedman, Daniel, 1991. "A simple testable model of double auction markets," Journal of Economic Behavior & Organization, Elsevier, vol. 15(1), pages 47-70, January.
  15. Gode, Dhananjay K & Sunder, Shyam, 1997. "What Makes Markets Allocationally Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 603-30, May.
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Cited by:
  1. Morten Søberg, 2000. "Imperfect competition, sequential auctions, and emissions trading: An experimental evaluation," Discussion Papers 280, Research Department of Statistics Norway.
  2. Gary Charness & Margarida Corominas, 2000. "Bargaining on networks: An experiment," Economics Working Papers 492, Department of Economics and Business, Universitat Pompeu Fabra.

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