Rational and Irrational Bubbles: an Experiment
AbstractThis 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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Bibliographic InfoPaper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 09-045.
Date of creation: May 2009
Date of revision:
Publication status: Published in Econometrica, vol.�81, n°2, mars 2013.
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-22 (All new papers)
- NEP-CBE-2010-05-22 (Cognitive & Behavioural Economics)
- NEP-EXP-2010-05-22 (Experimental Economics)
- NEP-HPE-2010-05-22 (History & Philosophy of Economics)
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