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Experimental Study of Forward and Spot Markets: Contract Failure as a Contributing Factor of Vertical Integration

  • Esipov Victor
  • Menkhaus Dale J.

    ()

  • Yakunina Alla

    ()

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    A probability of a partner not fulfilling his forward contract obligations (contract failure) increases in a transition economy. This project investigates the process of price and quantity discovery in a laboratory setting when there is (1) an endogenous choice between forward and spot market institutions and vertical integration; and (2) a certain probability of forward contract failure. The results suggest that in some cases a contract failure creates incentives to integration. To develop a system, which efficiently allocates resources, the state policy should be oriented toward strengthening the legal system and developing of the spot market, which may act like an insurance mechanism for the failed forward trades

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    Paper provided by EERC Research Network, Russia and CIS in its series EERC Working Paper Series with number 99-02e.

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    Length: 86 pages
    Date of creation: 13 May 1999
    Date of revision:
    Handle: RePEc:eer:wpalle:99-02e
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    1. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70, pages 322.
    2. Davis, Douglas D. & Harrison, Glenn W. & Williams, Arlington W., 1993. "Convergence to nonstationary competitive equilibria : An experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 22(3), pages 305-326, December.
    3. Drabenstott, Mark, 1994. "Industrialization: Steady Current or Tidal Wave?," Choices, Agricultural and Applied Economics Association, vol. 9(4).
    4. Ward, Clement E., 1981. "Short-Period Pricing Models for Fed Cattle and Impacts of Wholesale Carcass Beef and Live Cattle Futures Market Prices," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 13(01), pages 125-132, July.
    5. Ward, Clement E., 1981. "Short-Period Pricing Models For Fed Cattle And Impacts Of Wholesale Carcass Beef And Live Cattle Futures Market Prices," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 13(01), July.
    6. A. Mitchell Polinsky, 1986. "Fixed Price Versus Spot Price Contracts: A Study in Risk Allocation," NBER Working Papers 1817, National Bureau of Economic Research, Inc.
    7. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
    8. Williams, Arlington W & Smith, Vernon L, 1984. "Cyclical Double-Auction Markets with and without Speculators," The Journal of Business, University of Chicago Press, vol. 57(1), pages 1-33, January.
    9. Thomas L. Sporleder, 1992. "Managerial Economics of Vertically Coordinated Agricultural Firms," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 74(5), pages 1226-1231.
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