off floor trading disintegration and the bid ask spread in experimental markets this article uses experimental methods to establish that greater uncertainty in the environment increases the naturally emerging bid ask spread in double auction trading the opportunity to trade off floor is then introduced off floor trading is greater in the environment with a wider bid ask spread increases with block trading and increases still more with increasing subject experience finally the authors find that the preponderance of off floor trades are inside the bid ask spread supporting the hypothesis that a motive for such trades is to split privately the gain represented by the bid ask spread without revealing publicly a willingness to make price concessions coauthors are shawn lamaster vernon l smith and mark van boening copyright 1991 by university of chicago press

experimental tests of core theory and the coase theorem inefficiency and cycling abstract we examine experimentally the bargaining process and the final allocation of payoffs in games that differ in terms of whether the core exists and in the initial allocation of property rights among the players this paper highlights the interaction among property rights transaction costs and the empty core our experimental results indicate that the existence of the core is an important determinant of bargaining generally and the coase theorem in particular they confirm our conjecture that when the core is empty and property rights are ill defined coasean efficiency breaks down among other results our experiments show that the number of inefficient non pareto optimal agreements and bargaining rounds with cycling are significantly greater when the core is empty than when the core exists especially when property rights are ill defined our results suggest an economic role for specific property right arrangements to resolve the empty core

equilibrium selection in an experimental macroeconomy author affiliation vivian lei department of economics university of wisconsin milwaukee milwaukee wi 53201 usa vlei uwm edu corresponding authorcharles n noussair department of economics faculty of economics and business tilburg university p o box 90153 5000 le tilburg the netherlands c n noussair uvt nl acknowledgment we are grateful to the college of letters and science and center for research on international economics at the university of wisconsin milwaukee for financial support we thank colin camerer katarina kellar lutz hendricks nazrul islam tomomi tanaka filip vesely and two anonymous referees for helpful comments 1 introductionone of the most influential literatures in economics is the theory of growth for surveys see azariadis 1993 barro and sala i martin 1995 romer 1996 sala i martin 2002 the basis of much of the literature is the ramsey 1928 cass 1965 koopmans 1965 growth model in this model the economy is assumed to behave like a benevolent social planner who chooses capital stock and consumption levels over an infinite time horizon with the goal of maximizing the discounted utility of the consumption stream the principal result of the model is that consumption and capital stock converge to unique optimal steady state levels that are independent of the initial endowment and the utility function of the social planner an implication of the model therefore is that different countries would converge toward a common income level even if their initial endowment of capital differed provided that they have access to the same production technology relatively poor countries would exhibit higher growth rates than richer ones these two predictions are testable with field data however field studies have generally failed to support the hypothesis of convergence toward a common income level see durlauf and quah 1999 temple 1999 and islam 2003 for surveys rather the data are more consistent with the alternative hypothesis of club convergence baumol 1986 which postulates that a small number of steady states exist and that each country has a tendency to converge toward one of them 1 such a framework can explain the observed pattern over time of an increase in income differences between the organisation for economic cooperation and development countries and the developing world as well as a decrease in the differences within each of the two groups the empirical support for club convergence has encouraged the development of theoretical models with multiple equilibria while some countries may reach optimal equilibria unfortunate countries might find themselves in low income equilibria which are often labeled as poverty traps these countries are unable to reach a better equilibrium without coordination originally due to rosenstein rodan 1943 the insight that the existence of multiple equilibria might provide an explanation of international income differences has led to a literature that considers a variety of growth models with multiple equilibria for example azariadis and drazen 1990 construct an overlapping generations model with two stable pareto rankable equilibria in the inferior equilibrium no agent trades with members of other generations murphy shleifer and vishny 1989 build a model with synergies between industries each industry is profitable only if other industries are operating and there are equilibria where all of the industries operate and other pareto dominated equilibria where none operate galor and zeira 1993 and banerjee et al 2001 show that inequality and differential access to credit can keep an economy in a pareto dominated equilibrium recognizing whether or not an economy has multiple equilibria is important because policy prescriptions differ depending on whether an economy is in an inferior equilibrium or whether it is in an equilibrium that is unique

a generalization of the endogenous grid method abstract this paper extends carroll s 2005 the method of endogenous gridpoints for solving dynamic stochastic optimization problems national bureau of economic research technical working paper 309 endogenous grid method to perform value function iteration in models with more than one control variable we propose to mix the endogenous grid method with standard value function iteration to achieve higher efficiency we illustrate the method using the stochastic neoclassical growth model with and without labor leisure choice we report important gains in efficiency that make value function iteration an attractive computational method in terms of both computing time and accuracy

the effects of nonstationarities on performance in call markets abstract this experiment investigates the responsiveness of laboratory call markets to repetitive systematic shocks in underlying demand or supply conditions results of nine call markets conducted under three treatment conditions are compared with nine previously reported double auctions the informationally sparse call auctions perform no worse than the double auctions allocative efficiency is similar across institutions and call markets appear to track underlying equilibrium price movements more accurately than double auctions

the effects of rent asymmetries in experimental auction markets abstract we report the results of twelve double auction market experiments designed to analyze the effects of asymmetric induced supply and demand configurations on the price convergence path toward a competitive equilibrium the proposition convergence bias that prices tend to approach the competitive equilibrium from above below when consumer surplus is greater less than producer surplus cannot be rejected we do however reject the proposition convergence symmetry that these convergence biases are of equal absolute magnitude excesses of producer over consumer surplus are found to have a more pronounced effect on the sequence of contract prices

a reinterpretation of the optimal demand for risky assets in fund separation theorems in a continuous time portfolio selection model with n risky assets and k state variables driving their risk and return parameters we derive simple expressions for the allocation to each asset in the k 1 risky funds of the k 2 fund separation theorem we show that the allocation to any given risky asset in each fund can be written in terms of the parameters of a regression of the excess returns of this asset on those of the n 1 remaining assets we also use these parameters to provide quantitative measures of the increase in sharpe ratio of the speculative demand or in the maximum correlation of each hedging demand with respect to the corresponding risk factor associated with the introduction of a new asset in the investment universe finally we show that in a multiperiod setting an asset is spanned by others if and only if it improves neither the maximum sharpe ratio of the speculative demand nor the maximum correlations of the hedging demands with the risk factors this paper was accepted

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

bubbles crashes and endogenous expectations in experimental spot asset markets1 spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of t 15 or 30 trading periods fourteen of twenty two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value when traders are experienced this reduces but does not eliminate the probability of a bubble the regression of changes in mean price on lagged excess bids number of bids minus the number of offers in the previous period p pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o goes to zero we have convergence to rational expectations in the sense of fama 1970 that arbitrage becomes unprofitable the observed bubble phenomenon can also be interpreted as a form of temporary myopia tirole 1982 from which agents learn that capital gains expectations are only temporarily sustainable ultimately inducing common expectations or priors tirole 1982 four of twenty six experiments all using experienced subjects yield outcomes that appear to the chart s eye to converge early to rational expectations although even in these cases we get 0 and small price fluctuations of a few cents that invite scalping

equilibrium in securities markets with heterogeneous investors and unspanned income risk abstract in a finite time horizon incomplete market continuous time setting with dividends and investor incomes governed by arithmetic brownian motions we derive closed form solutions for the equilibrium risk free rate and stock price for an economy with finitely many heterogeneous cara investors and unspanned income risk in equilibrium the sharpe ratio is the same as in an otherwise identical complete market economy whereas the risk free rate is lower and consequently the stock price is higher the reduction in the risk free rate is highest when the more risk averse investors face the largest unspanned income risk

experimental evidence of a sunk cost paradox a study of pricing behavior in bertrand edgeworth duopoly a well known implication of microeconomic theory is that sunk costs should have no effect on decision making we test this hypothesis with a human subjects experiment students recruited from graduate business courses with an average of over six years of work experience played the role of firms in a repeated price setting duopoly game in which both firms had identical capacity constraints and costs including a sunk cost that varied across experimental sessions over six different values we find contrary to the prediction of microeconomic theory that subjects pricing decisions show sizable differences across treatments the effect of the sunk cost is non monotonic as it increases from low to medium levels average prices decrease but as it increases from medium to high levels average prices increase these effects are not apparent initially but develop quickly and persist throughout the game cachon and camerer s 1996 loss avoidance is consistent with both effects while cost based pricing predicts only the latter effect and is inconsistent with the former

optimal portfolio choice for long horizon investors with nontradable labor income this paper examines how risky labor income and retirement affect optimal portfolio choice with idiosyncratic labor income risk the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors consistent with the typical recommendations of investment advisors increasing idiosyncratic labor income risk raises investors willingness to save and reduces their stock portfolio allocation towards the level of retired investors positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors financial advisors typically recommend that their customers invest more in stocks than in safe assets when they are working and to shift their investments towards safe assets when they retire jagannathan and kocherlakota 1996 malkiel 1996 by contrast the standard academic models of portfolio choice merton 1969 1971 samuelson 1969 show that retirement is irrelevant for portfolio decisions if investment opportunities are constant and human capital is tradable in this case the fraction of wealth optimally invested in risky assets should be constant over the lifetime of an individual recent research building on the pioneering work by merton 1971 shows that time varying investment opportunities result in portfolio rules with an intertemporal hedging component whose magnitude depends on the investment horizon of the investor kim and omberg 1996 balduzzi and lynch 1997 brennan schwartz and lagnado 1997 brandt 1999 campbell and viceira 1999 2001 barberis 2000 with time variation in investment opportunities retirement and death play an instrumental role as events that exogenously fix the individual s investment horizon more importantly retirement also marks the time at which individuals stop working and thereafter must live off their lifetime savings and possibly transfers from this perspective retirement matters for portfolio choice

portfolio choice in the presence of background risk in this paper we focus on how the presence of background risks from sources such as labour and entrepreneurial income influences portfolio allocations this interaction is explored in a theoretical model that is calibrated using cross sectional data from a variety of sources the model is shown to be consistent with some but not all aspects of cross sectional observations of portfolio holdings the paper also provides a survey of the extensive theoretical and empirical literature on portfolio choice

who should buy long term bonds according to conventional wisdom long term bonds are appropriate for conservative long term investors this paper develops a model of optimal consumption and portfolio choice for infinite lived investors with recursive utility who face stochastic interest rates solves the model using an approximate analytical method and evaluates conventional wisdom as risk aversion increases the myopic component of risky asset demand disappears but the intertemporal hedging component does not conservative investors hold assets to hedge the risk that real interest rates will decline long term inflation indexed bonds are most suitable for this purpose but nominal bonds may also be used if inflation risk is low

a limit of bilateral contracting institutions i introduction the double auction da institution has a solid and deserved reputation as the archetypal efficient market institution beginning with smith 1962 30 years of experimental research shows that the da achieves very high and stable efficiency for a wide variety of underlying market structures davis and holt 1993 the da resembles many naturally occurring market institutions including some of the world s largest financial exchanges in the da any agent may at any time unilaterally make a price quantity quote to other agents revise his or her quote or accept an outstanding quote made by another agent these actions occur publicly at some central location whether spatial or electronic so all traders may continuously view quote and contract activity in both the field and the laboratory these basic rules are often augmented with bid ask improvement rules variations on the display of bid ask queues or books limit orders and so on many of these augmentations improve the da s price stability and trading efficiency smith and williams 1982 but more recent studies e g banks et al 1989 van boening and wilcox 1996 show that the da has its limits in particular it fails to produce stable and efficient allocations when market structures contain nonstandard preferences and or technological features particularly when markets are relatively thin in our own previous work the nonconvexity of batch production was the source of the difficulty walrasian equilibria do not always exist in this case and the da is inefficient in those situations this article describes our attempt to generalize the da institution so that it might encourage efficient nonuniform pricing in such situations taken at face value this attempt must be judged a failure and other past attempts to solve this problem durham et al 1996 archibald et al 2002 have not been wholly satisfying either yet examination of these results and the process of elimination strongly suggest that an implicit restriction to bilateral contracting is an essential part of the received da s limitations as we have briefly described it the da may initially appear to be the very essence of free contracting but it does not provide a mechanism whereby three or more agents may simultaneously negotiate and then enter into a mutually agreeable multiagent contract all contracts are necessarily bilateral ones under the da and in fact under almost all conventional marketlike institutions in market structures where preferences and technologies are convex the restriction to bilateral contracts is generally unimportant but when nonconvexities are severe it may be impossible to reliably achieve efficiency under the constraint of bilateral contracting telser 1987 in this article we show this is true even if the da is modified so that bilateral negotiation and contracting possibilities are made particularly rich we believe these results have important policy implications privatization and deregulation initiatives have gained momentum around the globe over the past 20 years and many economists including us have little doubt of their potential for good nonetheless poorly articulated calls for regulation by the market carry an unnecessary potential for harm although the possible institutional rules governing negotiation and contracting under private property come in nearly infinite varieties regulation by the market typically means the adoption of traditional bilateral contracting institutions like the da yet there are good theoretical reasons to doubt that these are always the best choice telser 1987 and accumulating experimental evidence supports these doubts moreover there are now promising alternatives to traditional bilateral contracting institutions that outperform the da in several nonstandard structural situations bossaerts et al 2002 bykowski et al 2000 ishikida et al 2001 we conclude that calls for regulation by the market are sometimes too vague to unambiguously serve the public interest

non competing persuaders abstract i study bayesian persuasion games with multiple persuaders in which the persuaders are non competing all persuaders want the decision maker to take the same action regardless of the state in the case of a single persuader it is known from previous research that the persuader optimal information design leaves the decision maker with no surplus in this paper i show that with two or more non competing persuaders and independent tests there are always equilibria in which the decision maker receives surplus if there is exogenous noise then the decision maker receives surplus in every symmetric equilibrium provided the number of persuaders is sufficiently large asymptotically the decision maker learns the true state in every pareto optimal symmetric equilibrium with infinitely many persuaders moreover with sufficient exogenous noise having more than one persuader not only improves the welfare of the decision maker but also improves the welfare of the persuaders

competitivity in auction markets an experimental and theoretical investigation the authors report successive rounds of theory and laboratory experiments investigating price taking behavior and market efficiency they focus on the impact of structural parameters as well as trading institution the structural parameters involve noncompetitive supply and demand and a new odd lot trading procedure for divisible goods the trading institutions include the continuous double auction and the one shot clearinghouse as well as a new quantities only clearinghouse institution the authors present and justify an as if complete information theory that explains the competitive outcomes and that correctly predicts highly noncompetitive outcomes in quantities only clearinghouse markets copyright 1995 by royal economic society

explaining deviations from equilibrium in auctions with avoidable fixed costs abstract bidders often face avoidable fixed costs or other synergies that can make bidding decisions complex and risky and market outcomes volatile if bidders deviate from risk neutral best responses either due to faulty optimization or a preference to avoid volatility then equilibrium predictions can perform poorly in this paper we confront laboratory bidders with three auction formats that make bidding difficult in different ways we find that measures of difficulty provide a consistent explanation of deviations from best response bidding across the three formats

endogenizing market institutions an experimental approach abstract we study experimental two sided markets in which the information structure is endogenous when submitting an offer a trader decides which other traders will be informed about the offer this setup allows both a decentralized bargaining market chamberlin j polit econ 56 1948 95 and a double auction market smith j polit econ 70 1962 111 as special cases the results show that offers are typically directed to all traders of the other side of the market but to none of the traders of the same side of the market even though traders receive much less information the resulting market institution leads to the same outcomes in terms of prices and efficiency as a double auction market in two additional treatments we examine the robustness of these results first it is found that the market institution adapts predictably but not necessarily efficiently to the imposition of transaction costs second we find that the preference of sellers to conceal offers from competitors is strict at the same time sellers benefit collectively when they reveal offers to each other

price formation in double auction markets abstract this paper reports 14 laboratory experiments that examine existing theories of the price formation process in the continuous double auction the experiments feature random values and costs and therefore a new price formation observation each period we find that efficiency is high and rises with experience in this environment we also find that trades with greater exchange surplus tend to occur earlier in the period that increased trader experience reduces an anomalous intertemporal arbitrage opportunity observed previously and that only when traders are very experienced does exchange surplus accrue disproportionately to the side of the market with a smaller number of traders

the effect of transaction costs on double auction markets abstract the ability of the continuous double auction to attain the competitive equilibrium outcome is one of the most robust results in experimental economics in this paper we study the sensitivity of the behavior of the double auction to the imposition of a monetary cost on the submission of offers to buy and sell we find that even with the transaction cost prices converge toward the competitive equilibrium level however the presence of the transaction cost leads to lower quantity exchanged and market efficiency than in the competitive equilibrium

allocating uncertain and unresponsive resources an experimental approach we identify an important class of economic problems that arise naturally in several applications the allocation of multiple resources when there are uncertainties in demand or supply unresponsive supplies no inventories and fixed capacities and significant demand indivisibilities rigidities examples of such problems include scheduling job shops airports or supercomputers zero inventory planning and the allocation and pricing of nasa s planned space station using experimental methods we show that the two most common organizations used to deal with this problem markets and administrative procedures can perform at very low efficiencies 60 65 efficiency in a seemingly robust example thus there is a need to design new mechanisms that more efficiently allocate resources in these environments we develop and analyze two mechanisms that arise naturally from auctions used to allocate single dimensional goods these new mechanisms involve computer assisted coordination made possible by the existence of networked computers both mechanisms significantly improve on the performance of administrative and market procedures

borrowing costs and the demand for equity over the life cycle abstract we construct a life cycle model that delivers realistic behavior for both equity holdings and borrowing the key model ingredient is a wedge between the cost of borrowing and the risk free investment return borrowing can either raise or lower equity demand depending on the cost of borrowing a borrowing rate equal to the expected return on equity which we show roughly matches the data minimizes the demand for equity alternative models with no borrowing or limited borrowing at the risk free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings

saving and investing for early retirement a theoretical analysis we study optimal consumption and portfolio choice in a framework where investors adjust their labor supply through an irreversible choice of their retirement time we show that investing for early retirement tends to increase savings and reduce an agent s effective relative risk aversion thus increasing her stock market exposure contrary to common intuition an investor might find it optimal to increase the proportion of financial wealth held in stocks as she ages and accumulates assets even when her income and the investment opportunity set are constant the model predicts a decrease in risk aversion following strong market gains like those observed in the nineties

market power in emissions trading markets ruled by a multiple unit double auction further experimental evidence we discuss selected methodological problems of previous double auction da experiments and test the hypothesis that a multiple unit double auction muda is able to prevent market power in an emissions trading market additionally we analyze how the information subjects receive about the market structure and different levels of subjects experience influence the behavior based on a larger number of independent observations than analyzed in previous studies the experiment generates two main results first emissions trading markets ruled by a muda realize a high degree of efficiency even under market power conditions however a muda is in general not able to restrict market power we observe persistent price discrimination in two market power environments i e the distribution of profits is strongly shifted in favor of the strong market side without greatly harming efficiency this result is independent of the information to subjects about the market structure second when subjects are experienced the efficiency is higher and the ability of the strong market side to exercise market power declines strongly however the variability of behavior is large and the strong market side is still able to realize supracompetitive profits in some groups

price formation in double auctions abstract we develop a model of information processing and strategy choice for participants in a double auction sellers in this model form beliefs that an offer will be accepted by some buyer similarly buyers form beliefs that a bid will be accepted these beliefs are formed on the basis of observed market data including frequencies of asks bids accepted asks and accepted bids then traders choose an action that maximizes their own expected surplus the trading activity resulting from these beliefs and strategies is sufficient to achieve transaction prices at competitive equilibrium and complete market efficiency after several periods of trading journal of economic literatureclassification numbers d41 d44 d8

the informational efficiency of experimental asset markets a fundamental difficulty in devising any test of general efficient market hypotheses is the specification of the relevant public and private information sets of traders without a consensus as to reasonable empirical specifications tests of the hypotheses remain minimal or controversial in this study we examine the efficiency of experimental asset markets in which one may unambiguously identify the public and private information sets of traders we focus on how market efficiency is affected by the presence of futures markets in settings that incorporate different types of uncertainty and inside information our experimental results support four conclusions 1 market outcomes tend to evolve toward strong form informationally efficient equilibria whether or not futures markets and or event uncertainty are present 2 the presence of futures markets clearly stabilizes spot prices 3 the presence of futures markets tends to speed the evolution of asset markets to more efficient equilibria where there

oligopoly competition in fixed cost environments abstract many industries with avoidable fixed costs face competitive price instability problems in an attempt to maintain profitability we designed an experimental environment where profitability is eroded by the addition of sunk and avoidable fixed costs while we cannot reject the hypothesis that sunk fixed costs have no effect on prices we observe a pattern of price signaling and responses which maintain above normal profits this success implies that a firm does not have to exit such an industry in order to avoid loses and may help to explain why some competitive industries appear to maintain an inefficient number of firms

evidence games truth and commitment an evidence game is a strategic disclosure game in which an informed agent who has some pieces of verifiable evidence decides which ones to disclose to an uninformed principal who chooses a reward the agent regardless of his information prefers the reward to be as high as possible we compare the setup where the principal chooses the reward after the evidence is disclosed to the mechanism design setup where he can commit in advance to a reward policy the main result is that under natural conditions on the truth structure of the evidence the two setups yield the same equilibrium outcome

efficiency of experimental security markets with insider information an application of rational expectations models the study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one priced security returns to the security depended upon a randomly drawn state of nature some agents insiders whose identity was unknown to other agents knew the state before the markets opened with replication of market conditions the predictions of a fully revealing rational expectations model are relatively accurate prices adjusted immediately to near rational expectations prices profits of insiders were virtually indistinguishable from non insiders and efficiency levels converged to near 100 percent

competition in persuasion we study symmetric information games where a number of senders choose what information to communicate we show that the impact of competition on information revelation is ambiguous in general we identify a condition on the information environment i e the set of signals available to each sender that is necessary and sufficient for equilibrium outcomes to be no less informative than the collusive outcome regardless of preferences the same condition also provides an easy way to characterize the equilibrium set and governs whether introducing additional senders or decreasing the alignment of senders preferences necessarily increases the amount of information revealed

redistribution and market efficiency an experimental study abstract we study the interaction between competitive markets and income redistribution that reallocates unequal pre tax market incomes away from the rich to the poor majority in one setup participants earn their income by trading in a double auction da with exogenous zero or full redistribution in another setup after trading they vote on redistributive tax policies in a majoritarian election with two competing candidates this results in virtually full redistribution even when participants have the opportunity to influence taxes by transferring money to the candidates we find that the high redistribution reduces trading efficiency but not as much as predicted if market participants trade randomly this is because rather than capitulating to the much lower trading incentives many participants respond to redistribution by asking and bidding more conservatively in the da and in this way help to prevent further efficiency losses

price dynamics in general equilibrium experiments general equilibrium ge theory faces several related challenges classical theories of out of equilibrium adjustment are intuitive but implausibly centralized further standard restrictions on individual preferences place little structure on aggregate excess demand functions amongst other issues this fact implies that economies can be unstable under classical dynamics and thus instability appears to be an unavoidable feature of ge theory this paper recounts laboratory studies of ge environments which reveal that classical theories of dynamics do in fact organize market activity surprisingly well these experiments suggest that the walrasian auctioneer for example appears to be a constructive abstraction and that instability should be accommodated within theory rather than circumscribed laboratory applications of ge theory focused on issues beyond stability and dynamics are also briefly surveyed

expectation puzzles time varying risk premia and dynamic models of the term structure abstract linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional expectations theory this paper shows that these findings are not puzzling relative to a large class of richer dynamic term structure models specifically we match all the key empirical findings reported by fama and bliss 1987 american economic review 77 4 680 692 and campbell and shiller 1991 review of economic studies 58 495 514 among others within large subclasses of affine and quadratic gaussian term structure models additionally we show that certain risk premium adjusted projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly and not only through factor volatilities the risk premiums have a simple form consistent with fama s findings on the predictability of forward rates and are also shown to be consistent with interest rate feedback rules used by a monetary authority in setting monetary policy

the annuity puzzle remains a puzzle abstract we examine incomplete annuity menus background risk bequest motives and default risk as possible drivers of divergence from full annuitization contrary to what is often suggested in the literature we find that full annuitization remains optimal if saving is possible after retirement this holds irrespective of whether real or only nominal annuities are available whenever liquidity is desired individuals save sizeable amounts out of their annuity income to smooth consumption shocks similarly adding equity linked annuities to the menu does not increase welfare significantly since individuals can invest in stocks in order to get the desired equity exposure

don t let your robots grow up to be traders artificial intelligence human intelligence and asset market bubbles abstract researchers who have examined markets populated by robot traders have claimed that the high level of allocative efficiency observed in experimental markets is driven largely by the intelligence implicit in the rules of the market furthermore they view the ability of agents artificial or human to process information and make rational decisions as unnecessary for the efficient operation of markets this paper presents a new series of market experiments that show that markets populated with standard robot traders are no longer efficient if time is a meaningful element as it is in all asset markets while simple two season markets with human subjects reliably converge to an efficient equilibrium markets with minimally intelligent robot traders fail to attain this equilibrium instead these markets overshoot the equilibrium and then crash below it in addition to firmly establishing the role of trader intelligence in asset market equilibrium these experiments also provide insights into why bubbles and crashes are consistently observed in many asset market laboratory experiments using human subjects

the competitive market paradox abstract the competitive market model is paradoxical in perfect competition agents cannot influence price they only select an output quantity such passive behavior does not conform to the intuitive notion of competition this paper describes an experiment which demonstrates that near or even at a competitive equilibrium price competition is undiminished a substantial difference between the performance of sellers and buyers frequently results from this vigorous competition even with low price variability and approximate efficiency in double auction experiment sessions conducted with both automated and human agents exogenous variation of the pace of asks and bids of automated agents demonstrates that the performance difference between sellers and buyers results primarily from a difference between the pace of asks and bids if the buyers pace is slower than sellers pace buyers make price concessions less frequently than sellers so that prices move below the equilibrium price then more buyers become active and fewer sellers remain active prices stabilize when changes to the numbers of active buyers and sellers offset the superior bargaining capability of one side or the other in competitive equilibrium to a first approximation agents are price takers but that does not preclude vigorous competition competitive behavior moves to the dimension of bargaining pace

labor supply flexibility and portfolio choice in a life cycle model abstract this paper examines the effect of the labor leisure choice on portfolio and consumption decisions over an individual s life cycle the model incorporates the fact that individuals may have considerable flexibility in varying their work effort including their choice of when to retire given this flexibility the individual simultaneously determines optimal levels of current consumption labor effort and an optimal financial investment strategy at each point in his life cycle we show that labor and investment choices are intimately related the ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante

market power in tradable emission markets a laboratory testbed for emission trading in port phillip bay victoria abstract in theory competitive emission permit markets minimize total abatement costs permit markets are often imperfectly competitive however and may be thin and dominated by large firms the dominant firm s could exercise market power and increase other firms costs of pollution control while reducing their own emission control costs this paper reports a testbed laboratory experiment to examine whether a dominant firm can exercise market power in a permit market organized using the double auction trading institution our parameters approximate the abatement costs of sources in a proposed tradable emissions market for the reduction of nitrogen in the port phillip watershed in victoria australia we vary across treatments the initial allocation of permits to sources so that in one treatment the seller of permits is a monopolist and in another treatment the market is duopolistic we also vary the information that subjects have about the number and abatement costs of their competitors we find that prices and seller profits are higher and efficiency is lower on average in the monopoly sessions compared with the duopoly sessions but the differences are not substantial and are not statistically significant due to pronounced variation across sessions moreover prices profits and transaction volumes are usually much closer to the competitive equilibrium ce than the monopoly equilibrium

the exposure problem and market design markets have an exposure problem when getting to the optimal allocation requires a sequence of transactions which if started but not completed leaves at least one trader with losses we use laboratory experiments to evaluate the effect of the exposure problem on alternative market mechanisms the continuous double auction performs poorly efficiency is only 20 when exposure is high and 55 when it is low a package market effectively eliminates the exposure problem in low and high exposure treatments efficiency is 82 and 89 respectively building on stability notions from matching theory we introduce the concept of mechanism stability a model of trade that combines mechanism stability with noisy best responses and imperfect foresight explains the difference in market performance finally decentralized bargaining with contingent contracts performs well with perfect information and communication but not in the more realistic case when traders preferences are privately known

offering versus choice in 401 k plans equity exposure and number of funds records of over half a million participants in more than 600 401 k plans indicate that participants tend to allocate their contributions evenly across the funds they use with the tendency weakening with the number of funds used the number of funds used typically between three and four is not sensitive to the number of funds offered by the plans which ranges from 4 to 59 a participant s propensity to allocate contributions to equity funds is not very sensitive to the fraction of equity funds among offered funds the paper also comments on limitations on inferences from experiments and aggregate level data analysis how much and how to save for retirement is one of the most important financial decisions made by most people defined contribution dc pension plans such as the popular 401 k plans are important instruments of such savings by 2001 year end about 45 million american employees held 401 k plan accounts with a total of 1 75 trillion in assets holden and vanderhei 2001 an important characteristic of these plans is that the participant has responsibility over his savings among a plan s various funds how responsibly do the participants behave in particular how sensitive are participants choices to possible framing effects associated with the menu of choices they are offered to explore these questions this paper analyzes a data set recently provided by the vanguard group consisting of records of more than half a million participants in about 640 dc plans these plans offer between 4 and 59 funds in which participants can invest all plans offer at least one stock fund 635 plans

varieties of agents in agent based computational economics a historical and an interdisciplinary perspective in this paper we trace four origins of agent based computational economics ace namely the markets origin the cellular automata origin the tournaments origin and the experiments origin along with this trace we examine how these origins have motivated different concepts and designs of agents in ace which starts from the early work on simple programmed agents randomly behaving agents zero intelligence agents human written programmed agents autonomous agents and empirically calibrated agents and extends to the newly developing cognitive agents psychological agents and culturally sensitive agents the review also shows that the intellectual ideas underlying these varieties of agents cross several disciplines which may be considered as a part of a general attempt to study humans and their behavior with an integrated interdisciplinary foundation

intertemporal asset allocation a comparison of methods abstract this paper compares two recent monte carlo methods advocated for the computation of optimal portfolio rules the candidate methods are the approach based on monte carlo with malliavin derivatives mcmd proposed by detemple garcia and rindisbacher detemple et al 2003 a monte carlo method for optimal portfolios journal of finance 58 401 406 and the approach based on monte carlo with regression mcr of brandt goyal santa clara and stroud brandt et al 2003 a simulation approach to dynamic portfolio choice with an application to learning about return predictability working paper wharton school our comparisons are carried out in the context of various intertemporal portfolio choice problems with two assets a risky asset and a riskless asset and different configurations of the state variables the specifications studied include a linear model with a single state variable admitting an exact solution and a non linear model with two state variables that requires a purely numerical resolution the accuracies of the candidate methods are compared we provide in particular efficiency plots displaying the speed accuracy trade off for various selections of the relevant simulation and discretization parameters mcmd is shown to dominate in all the settings considered

avoidable cost ride a double auction roller coaster the double auction trading institution has been highly efficient across diverse marginal cost market structures whether human subjects or zero intelligence robots populated those markets accordingly many researchers suspect that double auction performance transcends market structure and agent strategy but the authors show that large avoidable costs undermine the efficiency and stability of human subject double auctions and these low human efficiencies are simultaneously well above zero intelligence efficiencies their results dramatically illustrate the potential havoc wrought by highly competitive institutions when they must cope with nonconvex technologies copyright 1996 by american economic association

a simple testable model of double auction markets abstract we propose a model of price formation in double auction markets which employs the strong simplifying assumption that agents neglect strategic feedback effects and regard themselves as playing a game against nature agents otherwise are strict expected utility maximizers employing bayesian updating procedures we prove the optimality of simple aggressive reservation price strategies in our general model and propose a parametric form that yields very detailed and computable predictions of market behavior

allocative efficiency of markets with zero intelligence traders market as a partial substitute for individual rationality we report market experiments in which human traders are replaced by zero intelligence programs that submit random bids and offers imposing a budget constraint i e not permitting traders to sell below their costs or buy above their values is sufficient to raise the allocative efficiency of these auctions close to 100 percent allocative efficiency of a double auction derives largely from its structure independent of traders motivation intelligence or learning adam smith s invisible hand may be more powerful than some may have thought it can generate aggregate rationality not only from individual rationality but also from individual irrationality

when can life cycle investors benefit from time varying bond risk premia we study the importance of time varying bond risk premia in a consumption and portfolio choice problem for a life cycle investor facing short sales and borrowing constraints tilts in the optimal asset allocation in response to changes in bond risk premia exhibit pronounced life cycle patterns we find that the investor is willing to pay an annual fee up to 1 to implement a strategy that optimally conditions on prevailing bond risk premia in addition to her age and wealth to solve our model we extend recently developed simulation based techniques to life cycle problems featuring multiple state variables and multiple risky assets

the impact of investment behaviour for individual welfare the industrialized world has experienced a demographic shift that is straining public pension systems employer sponsored pension plans change from defined benefit to defined contribution more emphasis is put on individually managed retirement funds one concern with this movement is the potential negative effect on individual welfare if households investment behaviour is suboptimal using micro level us data we compare the optimal utility computed using a lifecycle model with the actual utility as reflected in empirical asset allocation choices average estimated welfare costs are below 3 of households endowment assets and human capital yet specific population groups experience higher welfare costs

markets as information gathering tools the academic literature wall street commentary and even daily news reporting reflect a belief that markets can anticipate events the current movements in the stock market are interpreted as reflecting the likelihood that the federal reserve system will change interest rates futures markets are interpreted as reflecting the best estimates of things to come movements in individual stock prices are thought to anticipate earnings reports or the probability of a merger or buyout if we want to know about future weather in the south we should study the orange juice futures the academic journals are filled with the concept of rational expectations in which current prices are supposed to reflect the sum of all knowledge in the system prices according to this theory are a statistic that indicates the aggregation of information about underlying states of the economy those who are outsiders to the information in the system become insiders by simply observing the economic activity

market power in oral double auctions this paper reports the results of a series of oral double auction experiments in which some traders possess market power a market is set up in which the configuration of the supply and demand curves leads to an asymmetry between buyers and sellers in their abilities to influence transactions prices this market structure does not always lead to convergence to the competitive equilibrium price despite the competitive nature of the oral double auction institution the nonconvergence occurs most frequently in the experiments involving experienced subjects

characterizing effective trading strategies insights from a computerized double auction tournament abstract this paper presents a comparative analysis of 30 computer trading programs that participated in a double auction tournament held at the santa fe institute in 1990 and 1991 our objective is to characterize the form of effective trading strategies in double auction markets we find that a simple rule of thumb is a highly effective and robust performer over a wide range of trading environments significantly outperforming more complex algorithms that use statistically based predictions of future transaction prices explicit optimizing principles and sophisticated learning algorithms