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The Bubble Game : An experimental Study of Speculation (An earlier version of this paper was circulated under the title "The Rational and Irrational Bubbles : an Experiment")

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  • Moinas, Sophie
  • Pouget, Sébastien

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.

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File URL: http://idei.fr/doc/wp/2012/bubbles.pdf
File Function: Revise and resubmit in Econometrica
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File URL: http://idei.fr/doc/wp/2012/suppapp_bubbles.pdf
File Function: Supplementary Appendix
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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 560.

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Date of creation: May 2009
Date of revision: Jan 2012
Handle: RePEc:ide:wpaper:9600

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  1. Lucy F. Ackert & Bryan K. Church & Richard Deaves, 2002. "Bubbles in experimental asset markets: Irrational exuberance no more," Working Paper 2002-24, Federal Reserve Bank of Atlanta.
  2. Martin Dufwenberg & Tobias Lindqvist & Evan Moore, 2005. "Bubbles and Experience: An Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1731-1737, December.
  3. Colin F. Camerer & Teck-Hua Ho & Juin-Kuan Chong, 2004. "A Cognitive Hierarchy Model of Games," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 861-898, August.
  4. Lucy F. Ackert & Narat Charupat & Richard Deaves & Brian D. Kluger, 2006. "The origins of bubbles in laboratory asset markets," Working Paper 2006-06, Federal Reserve Bank of Atlanta.
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