An Experiment on the Core
50 Pages Posted: 13 Oct 2008
Date Written: March 28, 2008
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: Suggested Citation