Designing package markets to eliminate exposure risk
This paper reports results from a series of laboratory experiments designed to evaluate the impact of exposure risk on market performance. Exposure risk arises when there are complementarities between trades, e.g. when the purchase of a new house requires selling the old one. The continuous double auction (CDA), which has proven to be remarkably effective in a wide variety of settings, performs poorly in a treatment with high exposure risk: overall market efficiency is only 20% and there are many instances of no trade. In a parallel treatment with lower exposure risk, efficiency under the CDA is higher (55%) but is dominated, for instance, by a top-trading-cycles procedure that uses no money. The CDA's poor performance does not depend on whether house values are private information or common knowledge, indicating that exposure risk is due to strategic uncertainty not objective uncertainty about others' preferences. We introduce a simple package market and show that it effectively resolves exposure risk: efficiency levels are 82% and 89% respectively for the low and high exposure treatments. The proposed package market is a simple extension of the CDA and could potentially be applied in a variety contexts.
|Date of creation:||Apr 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +41-1-634 21 37
Fax: +41-1-634 49 82
Web page: http://www.econ.uzh.ch/Email:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Van Boening, Mark V & Wilcox, Nathaniel T, 1996. "Avoidable Cost: Ride a Double Auction Roller Coaster," American Economic Review, American Economic Association, vol. 86(3), pages 461-77, June.
- Bossaerts, Peter & Fine, Leslie & Ledyard, John, 2002.
"Inducing liquidity in thin financial markets through combined-value trading mechanisms,"
European Economic Review,
Elsevier, vol. 46(9), pages 1671-1695, October.
- Ledyard, John O. & Bossaerts, Peter & Fine, Leslie., 2000. "Inducing Liquidity In Thin Financial Markets Through Combined-Value Trading Mechanisms," Working Papers 1095, California Institute of Technology, Division of the Humanities and Social Sciences.
- Friedman, Daniel, 2010. "Preferences, beliefs and equilibrium: What have experiments taught us?," Journal of Economic Behavior & Organization, Elsevier, vol. 73(1), pages 29-33, January.
- Smith, Vernon L., 2010. "Theory and experiment: What are the questions?," Journal of Economic Behavior & Organization, Elsevier, vol. 73(1), pages 3-15, January.
When requesting a correction, please mention this item's handle: RePEc:zur:econwp:071. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marita Kieser)
If references are entirely missing, you can add them using this form.