Non-Performance Risk and Transaction Costs in Laboratory Forward and Spot Markets
Posted: 28 Sep 2006
Traders choose to participate in forward or spot auctions having some probability of contract non-performance in the forward market with no associated real cost or with a transaction cost levied randomly on a forward trade. Results from laboratory markets suggest that the spot market becomes a backstop to failed units in the forward market. Forward market activity is particularly sensitive to increased transaction costs. An increase of about 6% for each trader shifts about 40% of all sales to a spot market. If institutions are ineffective in enforcing forward contracts, a spot outlet is essential for exchange to continue.
Keywords: Experimental economics, Contract non-performance, Transaction costs
JEL Classification: C92, D23, D44, D80
Suggested Citation: Suggested Citation