A Limit of Bilateral Contracting Institutions
Nonconvexities undermine the efficiency of the usually robust "double auction" or DA market institution. We experimentally examine two modified DAs that allow for particularly rich bilateral contracting such as arbitrarily nonlinear pricing. The first allows for arbitrarily nonlinear pricing but should not necessarily promote it; the second should promote efficient nonlinear pricing. Experiments support predictions on the emergence of nonlinear pricing, but not those concerning efficiency. Coordination problems are the culprit. We conclude that institutions capable of dealing with some nonconvexities must frequently provide multilateral contracting possibilities not permitted by DA rules and other market-like bilateral contracting institutions. (JEL C92, D49, L19) Copyright 2005, Oxford University Press.
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Volume (Year): 43 (2005)
Issue (Month): 4 (October)
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