An Experimental Examination of Two Exchange Institutions

Abstract

Economists have shown increasing interest in the analysis of information and organization in decentralized price adjustment processes. This interest is most frequently manifested at the theoretical level (summaries of the relevant literature, concepts, and methodologies have been provided by Hurwicz [3] and Rothschild [4]), but it also has found expression through several laboratory experimental studies. These latter have unusual appeal because they can serve as a "proving ground" for the former. If well-formulated theories consistently fail to predict simple laboratory behaviour, then one would be hesitant to trust their predictions in richer environments. Furthermore, when replicable laboratory behaviour can be demonstrated, one should seek those extensions of accepted theory which explain why it occurs. The laboratory studies have attempted to measure the effect of different forms of market organization on the efficiency, performance, convergence pattern and equilibrium level of prices. The variables of market organization examined have been the mechanisms or rules under which prices are communicated and contracts are executed. The focus on these particular variables has been motivated by the more prominent features of certain observed exchange institutions rather than formal models based on pre-scientific, casual observations of the kind that form the basis of embryonic modelling. We view the present work as providing a rigorous empirical foundation for a more formal development of theory.