YALE DEPARTMENT OF ECONOMICS
WORKING PAPER NO. 27

THREE MINIMAL MARKET INSTITUTIONS:
THEORY AND EXPERIMENTAL EVIDENCE

Juergen Huber, Martin Shubik and Shyam Sunder

August 2007

In this experiment we examine the performance of three minimal strategic market games relative to theoretical predictions. These models of a closed exchange economy with monetary and financial structures have limited amounts of cash to facilitate transactions. Subsequent experiments will deal with credit limitations, banking and credit, the role of clearinghouses and the possibility for the universal issue of credit by individuals. In theory, with enough money the non-cooperative equilibria should converge to the respective competitive equilibria as the number of players increases. Since general equilibrium theory abstracts away from the market mechanism, it makes no predictions about how the paths of convergence to the CE may differ across market mechanisms. GE allows no role for money or credit. In contrast to most market experiments conducted in open or partial equilibrium settings, we report on closed settings that include feedbacks.

Laboratory examination of the three market mechanisms reveals convergence to CE with increasing number of players. It also reveals significant differences in the convergence paths across the mechanisms, suggesting that to the extent deviations from CE are of interest (either because the number of players in the environment of substantive interest is small, or because disequilibrium behavior itself is of substantive interest), theoretical abstraction from the market mechanisms has been taken too far. For example, the oligopoly effect of feedback from buying a good that the player is endowed with is missed. Inclusion of mechanism differences into theory would help us understand markets better.

Keywords: Strategic market games, Laboratory experiments, General equilibrium

JEL Classification: C92, D43, D51, D58, L13