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Trading in Networks: A Normal Form Game Experiment

Author

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  • Shachar Kariv
  • Douglas Gale

Abstract

This paper reports an experimental study of trading networks. Networks are incomplete in the sense that each trader can only exchange assets with a limited number of other traders. The greater the incompleteness of the network, the more intermediation is required to transfer the assets between initial and final owners. The uncertainty of trade in networks constitutes a potentially important market friction. Nevertheless, we find the pricing behavior observed in the laboratory converges to competitive equilibrium behavior in a variety of treatments. However, the rate of convergence varies depending on the network, pricing rule, and payoff function. (JEL C91, C92, G10, G19)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Shachar Kariv & Douglas Gale, 2007. "Trading in Networks: A Normal Form Game Experiment," Levine's Bibliography 843644000000000114, UCLA Department of Economics.
  • Handle: RePEc:cla:levrem:843644000000000114
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    File URL: http://socrates.berkeley.edu/~kariv/GKIV.pdf
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    References listed on IDEAS

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    1. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1984. " Futures Markets and Informational Efficiency: A Laboratory Examination," Journal of Finance, American Finance Association, vol. 39(4), pages 955-981, September.
    2. Plott, Charles R & Sunder, Shyam, 1982. "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 663-698, August.
    3. Charness, Gary & Corominas-Bosch, Margarida & Frechette, Guillaume R., 2007. "Bargaining and network structure: An experiment," Journal of Economic Theory, Elsevier, vol. 136(1), pages 28-65, September.
    4. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, vol. 56(5), pages 1085-1118, September.
    5. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
    6. Kosfeld Michael, 2004. "Economic Networks in the Laboratory: A Survey," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-23, March.
    7. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70, pages 111-111.
    8. Corominas-Bosch, Margarida, 2004. "Bargaining in a network of buyers and sellers," Journal of Economic Theory, Elsevier, vol. 115(1), pages 35-77, March.
    9. Vernon L. Smith, 1965. "Experimental Auction Markets and the Walrasian Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 73, pages 387-387.
    10. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1982. "Asset Valuation in an Experimental Market," Econometrica, Econometric Society, vol. 50(3), pages 537-567, May.
    11. repec:bpj:rneart:v:3:y:2004:i:1:p:19-41 is not listed on IDEAS
    12. Matthew O. Jackson, 2003. "A survey of models of network formation: Stability and efficiency," Working Papers 1161, California Institute of Technology, Division of the Humanities and Social Sciences.
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    Citations

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    Cited by:

    1. Edoardo Gallo & Chang Yan, 2015. "Effciency and equilibrium in network games: An experiment," Cambridge Working Papers in Economics 1546, Faculty of Economics, University of Cambridge.
    2. Kotowski, Maciej H. & Leister, C. Matthew, 2018. "Trading Networks and Equilibrium Intermediation," Working Paper Series rwp18-001, Harvard University, John F. Kennedy School of Government.
    3. Bedayo, Mikel & Mauleon, Ana & Vannetelbosch, Vincent, 2016. "Bargaining in endogenous trading networks," Mathematical Social Sciences, Elsevier, vol. 80(C), pages 70-82.
    4. Syngjoo Choi & Edoardo Gallo & Shachar Kariv, 2015. "Networks in the laboratory," Cambridge Working Papers in Economics 1551, Faculty of Economics, University of Cambridge.
    5. Goyal, S., 2016. "Networks and Markets," Cambridge Working Papers in Economics 1652, Faculty of Economics, University of Cambridge.
    6. Donna, Javier & Schenone, Pablo & Veramendi, Gregory, 2015. "Networks, Frictions, and Price Dispersion," MPRA Paper 66999, University Library of Munich, Germany.
    7. BEDAYO, Mikel & MAULEON, Ana & VANNETELBOSCH, Vincent, 2012. "Bargaining and delay in trading networks," CORE Discussion Papers 2012046, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. repec:hrv:hksfac:35165081 is not listed on IDEAS
    9. repec:oup:jeurec:v:15:y:2017:i:4:p:784-817. is not listed on IDEAS
    10. Edoardo Gallo, 2014. "Communication networks in markets," Cambridge Working Papers in Economics 1431, Faculty of Economics, University of Cambridge.
    11. Goyal, S., 2018. "Heterogeneity and Networks," Cambridge Working Papers in Economics 1812, Faculty of Economics, University of Cambridge.
    12. Syngjoo Choi & Andrea Galeotti & Sanjeev Goyal, 2017. "Trading in Networks: Theory and Experiments," Journal of the European Economic Association, European Economic Association, vol. 15(4), pages 784-817.

    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G19 - Financial Economics - - General Financial Markets - - - Other

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