Less Rationality, More Efficiency: a Laboratory Experiment on "Lemons" Markets

Arbeitspapier

In this paper we experimentally test a theory of boundedly rational behavior in a "lemons market." We analyzed two different market designs, for which perfect rationality implies complete and partial market collapse, respectively. Our empirical observations deviate substantially from these predictions of rational choice theory: Even after 20 repetitions, the actual outcome is closer to efficiency than expected. Our bounded rationality approach to explaining these observations starts with the insight that perfect rationality would require the players to perform an infinite number of iterative reasoning steps. Boundedly rational players, however, carry out only a limited number of such iterations. We have determined the iteration type of the players independently from their market behavior. A significant correlation exists between the iteration types and the observed price offers.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CSLE Discussion Paper ; No. 2004-02 [rev.]

Classification and Topics

• Classification: Wirtschaft
• Subject: guessing games ; beauty contests ; market failure ; adverse selection ; lemon problem ; regulatory failure ; paternalistic regulation ; Marktmechanismus ; Asymmetrische Information ; Adverse Selection ; Beschränkte Rationalität ; Spieltheorie ; Experiment

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kirstein, Annette ; Kirstein, Roland
• Event: Veröffentlichung
• (who): Universität des Saarlandes, Center for the Study of Law and Economics (CSLE)
• (where): Saarbrücken
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/23091
• Last update: 10.03.2025, 11:43 AM CET