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Designing package markets to eliminate exposure risk

Author

Listed:
  • Jacob K. Goeree
  • Luke Lindsay

Abstract

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.

Suggested Citation

  • Jacob K. Goeree & Luke Lindsay, 2012. "Designing package markets to eliminate exposure risk," ECON - Working Papers 071, Department of Economics - University of Zurich.
  • Handle: RePEc:zur:econwp:071
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    File URL: http://www.econ.uzh.ch/static/wp/econwp071.pdf
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    References listed on IDEAS

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    1. Cason, Timothy N, 1995. "An Experimental Investigation of the Seller Incentives in the EPA's Emission Trading Auction," American Economic Review, American Economic Association, vol. 85(4), pages 905-922, September.
    2. 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 461-477, June.
    3. Smith, Vernon L., 2010. "Theory and experiment: What are the questions?," Journal of Economic Behavior & Organization, Elsevier, vol. 73(1), pages 3-15, January.
    4. 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.
    5. 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.
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    Cited by:

    1. Margarita Gáfaro & César Mantilla, 2019. "Preferences, Uncertainty, and Biases in Land Division: A Bargaining Experiment in the Field," Borradores de Economia 1092, Banco de la Republica de Colombia.
    2. Gáfaro, Margarita & Mantilla, César, 2020. "Land division: A lab-in-the-field bargaining experiment," Journal of Development Economics, Elsevier, vol. 146(C).
    3. John D. Hey & Daniela Di Cagno, 2018. "Does money impede convergence?," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 18, pages 391-408, World Scientific Publishing Co. Pte. Ltd..
    4. Lindsay, Luke, 2018. "Shapley value based pricing for auctions and exchanges," Games and Economic Behavior, Elsevier, vol. 108(C), pages 170-181.

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    More about this item

    Keywords

    Exposure risk; package markets; market design; laboratory experiments;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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