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The Exposure Problem and Market Design

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  • Jacob K Goeree
  • Luke Lindsay

Abstract

Markets have an exposure problem when getting to the optimal allocation requires a sequence of transactions which if started but not completed leaves at least one trader with losses. We use laboratory experiments to evaluate the effect of the exposure problem on alternative market mechanisms. The continuous double auction performs poorly: efficiency is only 20% when exposure is high and 55% when it is low. A package market effectively eliminates the exposure problem: in low and high-exposure treatments efficiency is 82% and 89%, respectively. Building on stability notions from matching theory we introduce the concept of mechanism stability. A model of trade that combines mechanism stability with noisy best responses and imperfect foresight explains the difference in market performance. Finally, decentralized bargaining with contingent contracts performs well with perfect information and communication but not in the more realistic case when traders’ preferences are privately known.

Suggested Citation

  • Jacob K Goeree & Luke Lindsay, 2020. "The Exposure Problem and Market Design," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(5), pages 2230-2255.
    • Handle: RePEc:oup:restud:v:87:y:2020:i:5:p:2230-2255.
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    File URL: http://hdl.handle.net/10.1093/restud/rdz048
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    Citations

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    Cited by:

    1. Jacob K Goeree, 2023. "Yquilibrium: A Theory for (Non-) Convex Economies," Papers 2305.06256, arXiv.org.
    2. Fernanda Nakano Kazama & Aluizio Fausto Ribeiro Araujo & Paulo Barros Correia & Elaine Guerrero-Peña, 2021. "Constraint-guided evolutionary algorithm for solving the winner determination problem," Journal of Heuristics, Springer, vol. 27(6), pages 1111-1150, December.

    More about this item

    Keywords

    Exposure problem; Package markets; Market design; Laboratory experiments;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design

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