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Do markets (institutions) drive out lemmings - or vice versa?

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  • Morone, Andrea
  • Nuzzo, Simone

Abstract

We investigate, by mean of a lab experiment, a market inspired by two strands of literature on one hand we have herd behaviour in non-market situations, and on the other hand aggregation of private information in markets. The former suggests that socially undesirable herd behaviour may result when information is private; the latter suggests that socially undesirable behaviour may be eliminated through the market. As the trading mechanism might be a compounding factor, we investigate two kinds of market mechanism: the double auction, where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house, where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. As a main result, this paper shows that double auction markets are, in several instances, superior to clearing house markets in terms of informational efficiency. Moreover, the employed trading institutions do not exhibit significant differences in both market volume and price volatility.

Suggested Citation

  • Morone, Andrea & Nuzzo, Simone, 2016. "Do markets (institutions) drive out lemmings - or vice versa?," Kiel Working Papers 2061, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkwp:2061
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    References listed on IDEAS

    as
    1. Gernot Hinterleitner & Philipp Hornung & Ulrike Leopold-Wildburger & Roland Mestel & Stefan Palan, 2012. "A Good Beginning Makes a Good Market: The Effect of Different Market Opening Structures on Market Quality," Working Paper Series, Social and Economic Sciences 2012-01, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
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    6. Schnitzlein, Charles R, 1996. " Call and Continuous Trading Mechanisms under Asymmetric Information: An Experimental Investigation," Journal of Finance, American Finance Association, vol. 51(2), pages 613-636, June.
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      • Andrea Morone & Eleni Samanidou, 2007. "A simple note on Herd Behaviour," SERIES 0013, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Feb 2007.
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    11. Simone Alfarano & Andrea Morone & Eva Camacho, 2011. "The role of public and private information in a laboratory financial market," Working Papers. Serie AD 2011-06, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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    Cited by:

    1. Zonna, Davide, 2016. "Sprechi di cibo e tentativi di riduzione. Un caso sperimentale
      [Avoiding food waste. A field experiment]
      ," MPRA Paper 76097, University Library of Munich, Germany.

    More about this item

    Keywords

    Experimental Markets; Market Efficiency; Double Auction; Clearing House;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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