An Experiment on the Core

50 Pages Posted: 13 Oct 2008

See all articles by Daniel Friedman

Daniel Friedman

University of California, Santa Cruz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Huibin Yan

University of California, Santa Cruz

Date Written: March 28, 2008

Abstract

Each of n (greater than or equal to) 1 identical buyers (and m (greater than or equal to) 1 identical sellers) wants to buy (sell) a single unit of an indivisible good. The core predicts a unique and extreme outcome: the entire surplus is split evenly among the buyers when m > n and among the sellers when m < n; the long side gets nothing. We test this core conjecture in the lab with n m = 3 or 5 randomly rematched traders and minimal imbalances (m = n plus or minus 1) in three market institutions. In the standard continuous double auction, the surplus indeed goes overwhelmingly towards the short side. The DA-Chat institution allows traders to have cheap talk prior to the double auction, while the DA-Barg institution allows the long siders to negotiate enforceable profit sharing agreements while trading. Despite frequent attempts to collude and occasional large deviations from the core prediction, we find that successful collusion is infrequent in both new institutions. A disproportionate fraction of the successful collusions are accompanied by appeals to fairness.

Keywords: core, market, experiment, fairness

JEL Classification: C71, C78, C92, D43

Suggested Citation

Friedman, Daniel and Yan, Huibin, An Experiment on the Core (March 28, 2008). Available at SSRN: https://ssrn.com/abstract=1282227 or http://dx.doi.org/10.2139/ssrn.1282227

Daniel Friedman (Contact Author)

University of California, Santa Cruz - Department of Economics ( email )

Social Sciences I
Santa Cruz, CA 95064
United States
831-459-4981 (Phone)
831-459-5900 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Huibin Yan

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

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