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Can Real-Effort Investments Inhibit the Convergence of Experimental Markets?

  • Timothy N. Cason
  • Lata Gangadharan
  • Nikos Nikiforakis

Evidence shows that real-effort investments can affect bilateral bargaining outcomes. This paper investigates whether similar investments can inhibit equilibrium convergence of experimental markets. In one treatment, sellers’ relative effort affects the allocation of production costs, but a random productivity shock ensures that the allocation is not necessarily equitable. In another treatment, sellers’ effort increases the buyers’ valuation of a good. We find that effort investments have a short-lived impact on trading behavior when sellers’ effort benefits buyers, but no effect when effort determines cost allocation. Efficiency rates are high and do not differ across treatments.

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Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1232.

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Length: 33
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:pur:prukra:1232
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Web page: http://www.krannert.purdue.edu/programs/phd

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