Rationality and the Nature of the Market

33 Pages Posted: 9 Sep 2008

See all articles by Marco Castillo

Marco Castillo

Texas A&M University

Ragan Petrie

Texas A&M University - Department of Economics; University of Melbourne - Melbourne Institute of Applied Economic and Social Research

Maximo Torero

International Food Policy Research Institute (IFPRI)

Date Written: September 2008

Abstract

We investigate the distribution of risk preferences and the frequency of expected utility violations along the gradient of market development. To do this, we collect experimental and survey data from a random sample of the population at four sites in Peru that differ in their level of competition and development. Similar to previous studies, we find that violations of expected utility theory are frequent. More importantly, however, violations are far less frequent the more competitive the market is. Also, our study suggests that experience in trade is not always associated with fewer behavioral anomalies. For instance, wholesale traders in an oligopolistic market with many years of experience are more likely to violate expected utility theory than entrepreneurs in an adjacent market with less experience. As hypothesized by Alchian (1950), it is in highly competitive markets where the evidence of rational behavior is found.

Keywords: field experiments, rational behavior, competition, expected utility

JEL Classification: C91, C93, D81

Suggested Citation

Castillo, Marco and Petrie, Ragan and Torero, Maximo, Rationality and the Nature of the Market (September 2008). Available at SSRN: https://ssrn.com/abstract=1265015 or http://dx.doi.org/10.2139/ssrn.1265015

Marco Castillo

Texas A&M University ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

HOME PAGE: http://www.marcocastillo.org

Ragan Petrie (Contact Author)

Texas A&M University - Department of Economics ( email )

4228 TAMU
College Station, TX 77843-4228
United States

University of Melbourne - Melbourne Institute of Applied Economic and Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

Maximo Torero

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

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