Three Essays on Market Institutions
Date
2020
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Abstract
This dissertation focuses on the equilibrium and efficiency of market institutions, a major determinant of market outcomes. The three chapters of the dissertation study market institutions in the presence of classic challenges: incomplete contracts, few traders, and incomplete information. Chapter 1 compares two mechanisms, posted-offer and posted-bid, in a procurement setting with incomplete contracts. Reciprocity has been identified in recent literature as a behavioral trait that mitigates moral hazard problems in the presence of incomplete contracts, along with repeated interactions and reputation concerns. This study builds a model of reciprocity based on inequality aversion, and takes it to the lab. In the laboratory experiment, the posted-offer mechanism induces higher level of inequality aversion on sellers, resulting in higher efficiency than the posted-bid mechanism. Chapter 2 studies minimal conditions for competitive behavior with few agents, adapting price-quantity strategic market games to an indivisible good environment, and taking it to the lab. In the proposed mechanism, all Nash equilibrium outcomes with active trading are competitive if and only if there are at least two buyers and two sellers willing to trade at every competitive price. In the laboratory experiment, this condition is enough to induce competitive results. Moreover, the performance of a sealed-bid auction following the rules of the strategic market game approaches that of its dynamic counterpart, the double auction, over time. Chapter 3 surveys the theoretical and experimental literature on the k-double auction. A k-double auction is a multi-unit sealed-bid call market in which the price is determined giving weight k in [0,1] to the upper bound of market-clearing prices and (1-k) to the lower bound. When agents' values of a commodity are private information, this institution features convergence to efficient outcomes in equilibria as the size of the market grows, supporting the use of Walrasian model as an asymptote of market outcomes in the absence of complete information. This chapter includes a history of the development of the theory, a summary of methods and results, the use in experimental economics, and the relation to other mechanisms.