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Rationality and the Nature of the Market

Author

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  • Marco Castillo
  • Ragan Petrie
  • Maximo Torero

Abstract

We investigate the distribution of risk preferences and the frequency of expected utility violations along the gradient of market development. To do this, we collect experimental and survey data from a random sample of the population at four sites in Peru that differ in their level of competition and development. Similar to previous studies, we find that violations of expected utility theory are frequent. More importantly, however, violations are far less frequent the more competitive the market is. Also, our study suggests that experience in trade is not always associated with fewer behavioral anomalies. For instance, wholesale traders in an oligopolistic market with many years of experience are more likely to violate expected utility theory than entrepreneurs in an adjacent market with less experience. As hypothesized by Alchian (1950), it is in highly competitive markets where the evidence of rational behavior is found.

Suggested Citation

  • Marco Castillo & Ragan Petrie & Maximo Torero, 2008. "Rationality and the Nature of the Market," Experimental Economics Center Working Paper Series 2008-12, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:exc:wpaper:2008-12
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    File URL: http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2008-12.pdf
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    References listed on IDEAS

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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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