When and Where Can Institutionalization Occur? The Case of Price Bubbles in Financial Markets

37 Pages Posted: 3 Mar 2009 Last revised: 26 May 2009

Date Written: March 2, 2009

Abstract

This study analyzes the oft-neglected linkage between the micro-foundations of institutionalization and their macro-institutional outcomes. We use price bubbles in financial markets to contextualize our analysis, and employ a well-established experimental methodology, allowing us to (1) analyze institutionalization processes at the most granular level, (2) examine institutions as they form, and (3) control more precisely for alternative, non-institutional explanations. We find evidence that institutionalization processes can quickly occur, even in seemingly efficient financial markets. Additionally, we specify, test, and reject alternative individual-level explanations such as skill deficiency or overconfidence. Finally, we address more precisely the mechanisms presumed to be driving institutionalization by demonstrating how institutionalization processes in markets respond to varying levels of ambiguity. We conclude with a discussion of our sociological explanation for price bubble outcomes, and its relevance for neo-institutional theory.

Keywords: Institutionalization, Market, Price, Bubble, Experiment, Institution, Behavioral Economics, Economic Sociology

JEL Classification: B52, C91, D41, D53, D83, G12

Suggested Citation

Levine, Sheen S. and Zajac, Edward J., When and Where Can Institutionalization Occur? The Case of Price Bubbles in Financial Markets (March 2, 2009). Atlanta Competitive Advantage Conference Paper, Available at SSRN: https://ssrn.com/abstract=1352112 or http://dx.doi.org/10.2139/ssrn.1352112

Sheen S. Levine (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Edward J. Zajac

Northwestern University - Kellogg School of Business ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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