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Less Rationality, More Efficiency: a Laboratory Experiment on "Lemons" Markets

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  • Kirstein, Annette
  • Kirstein, Roland

Abstract

In this paper we experimentally test a theory of boundedly rational behavior in a "lemons market." We analyzed two different market designs, for which perfect rationality implies complete and partial market collapse, respectively. Our empirical observations deviate substantially from these predictions of rational choice theory: Even after 20 repetitions, the actual outcome is closer to efficiency than expected. Our bounded rationality approach to explaining these observations starts with the insight that perfect rationality would require the players to perform an infinite number of iterative reasoning steps. Boundedly rational players, however, carry out only a limited number of such iterations. We have determined the iteration type of the players independently from their market behavior. A significant correlation exists between the iteration types and the observed price offers. --

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Bibliographic Info

Paper provided by Saarland University, CSLE - Center for the Study of Law and Economics in its series CSLE Discussion Paper Series with number 2004-02 [rev.].

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Date of creation: 2004
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Handle: RePEc:zbw:csledp:200402r

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Related research

Keywords: guessing games; beauty contests; market failure; adverse selection; lemon problem; regulatory failure; paternalistic regulation;

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  1. Jacob K Goeree & Charles A Holt, 2004. "Ten Little Treasures of Game Theory and Ten Intuitive Contradictions," Levine's Working Paper Archive 618897000000000900, David K. Levine.
  2. Schotter Andrew & Weigelt Keith & Wilson Charles, 1994. "A Laboratory Investigation of Multiperson Rationality and Presentation Effects," Games and Economic Behavior, Elsevier, Elsevier, vol. 6(3), pages 445-468, May.
  3. Rosenthal, Robert W., 1981. "Games of perfect information, predatory pricing and the chain-store paradox," Journal of Economic Theory, Elsevier, Elsevier, vol. 25(1), pages 92-100, August.
  4. T. Randolph Beard & Richard O. Beil, 1994. "Do People Rely on the Self-Interested Maximization of Others? An Experimental Test," Management Science, INFORMS, INFORMS, vol. 40(2), pages 252-262, February.
  5. Colin F. Camerer, 1997. "Progress in Behavioral Game Theory," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(4), pages 167-188, Fall.
  6. McKelvey, Richard D & Palfrey, Thomas R, 1992. "An Experimental Study of the Centipede Game," Econometrica, Econometric Society, Econometric Society, vol. 60(4), pages 803-36, July.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  8. Antoni Bosch-Dom?nech & Jose Garcia-Montalvo & Rosemarie Nagel & Albert Satorra, 2002. "One, two, (three), infinity: Newspaper and lab beauty-contest experiments," Artefactual Field Experiments, The Field Experiments Website 00011, The Field Experiments Website.
  9. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1313-26, December.
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Cited by:
  1. Roland Kirstein & Annette Kirstein, . "Europäischer Verbraucherschutz – Ausdruck grenzenloser Regulierungswut oder sinnvoller Schutz für Käufer? Erkenntnisse aus einem Laborexperiment," German Working Papers in Law and Economics, Berkeley Electronic Press 2006-1-1160, Berkeley Electronic Press.

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