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Bubbles, Crashes and Endogenous Uncertainty in Linked Asset and Product Markets

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Abstract

In laboratory asset markets, subjects trade shares of a firm whose profits in a linked product market determine dividends. Treatments vary whether dividend information is revealed once per period or in real-time and whether the firm is controlled by a profit-maximizing robot or human subject. The latter variation induces uncertainty about firm behavior, bridging the gap between laboratory and field markets. Our data replicate well-known features of laboratory asset markets (e.g. bubbles), suggesting these are robust to a market-based dividend process. Compared to a sample of previous experiments, both real-time information revelation and endogenous uncertainty impede the bubble-mitigating impact of experience.

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  • Erik O. Kimbrough & Taylor Jaworski, 2014. "Bubbles, Crashes and Endogenous Uncertainty in Linked Asset and Product Markets," Discussion Papers dp14-07, Department of Economics, Simon Fraser University.
  • Handle: RePEc:sfu:sfudps:dp14-07
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    Keywords

    Asset Markets; Uncertainty; Experimental Economics;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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