carbone, hey and neugebauer - Centre for Experimental Economics, University of York

An Experimental Comparison of Two Exchange Mechanisms

Enrica Carbone, John Hey and Tibor Neugebauer

Abstract

The Lucas (1978) Tree Model lies at the heart of modern macro-finance. At its core, it provides an analysis of the equilibrium price of a long-lived asset in an exchange economy where consumption is the objective, and the sole purpose of the asset is to smooth consumption through time. Experimental tests of the model are mainly confined to Crockett et al (2018) and Asparouhova et al (2016), both of them using a particular instantiation of the Lucas Model. Here we adopt a different instantiation, extending their analyses from a two-period oscillating world to a three-period cyclical world. We also go one step further, and compare this solution (to a consumption-smoothing problem) in which consumption claims are traded via the long-lived asset, with the alternative solution provided by a market, in which agents can directly trade (short-lived) consumption claims between periods. We find that the latter exchange economy is more efficient in encouraging consumption smoothing than the economy with the long-lived asset. We find evidence of uncompetitive trading in both markets.