The Nature of Excess: Using Randomized Treatments to Investigate Price Dynamics

27 Pages Posted: 30 Aug 2010

See all articles by Omar Al-Ubaydli

Omar Al-Ubaydli

George Mason University - Department of Economics; Derasat; George Mason University - Mercatus Center

John A. List

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Michael K. Price

University of Tennessee, Knoxville

Date Written: August 2010

Abstract

This study explores empirically the price dynamics within two distinct market institutions - a double oral auction, which resembles modern asset markets, and a bilateral exchange market, which represents markets that have existed for centuries. To provide a theoretical basis to our investigation, we test and compare the excess supply model (Walras (1874, 1877, 1889, 1896)) and the excess rent model (Smith (1962, 1965)) in both market institutions. Our approach is unique in that we make use of appropriate demand and supply systems coupled with randomization of the main treatment variable to discriminate between the theories. All previous efforts, including Smith's (1965) seminal experiments, use designs that cannot appropriately parse the models. We report several insights, perhaps most importantly, we consistently reject the Walrasian model in favor of the excess rent model, regardless of market institution. This finding has important implications both positively and normatively.

Suggested Citation

Al-Ubaydli, Omar and List, John A. and Price, Michael K., The Nature of Excess: Using Randomized Treatments to Investigate Price Dynamics (August 2010). NBER Working Paper No. w16319, Available at SSRN: https://ssrn.com/abstract=1667350

Omar Al-Ubaydli (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
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Derasat ( email )

Bahrain

George Mason University - Mercatus Center ( email )

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Arlington, VA 22201
United States

John A. List

University of Chicago - Department of Economics ( email )

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Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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IZA Institute of Labor Economics

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Bonn, D-53072
Germany

Michael K. Price

University of Tennessee, Knoxville ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

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