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Do Markets (Institutions) Drive Out Lemmings or Vice Versa?

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  • Morone, Andrea
  • Nuzzo, Simone

Abstract

We investigate, by mean of a lab experiment, a market inspired by two strands of literature on one hand we have herd behaviour in non-market situations, and on the other hand aggregation of private information in markets. The former suggests that socially undesirable herd behaviour may result when information is private; the latter suggests that socially undesirable behaviour may be eliminated through the market. As the trading mechanism might be a compounding factor, we investigate two kinds of market mechanism: the double auction, where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house, where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. As a main result, this paper shows that double auction markets are, in several instances, superior to clearing house markets in terms of informational efficiency. Moreover, the employed trading institutions do not exhibit significant differences in both market volume and price volatility.

Suggested Citation

  • Morone, Andrea & Nuzzo, Simone, 2016. "Do Markets (Institutions) Drive Out Lemmings or Vice Versa?," MPRA Paper 74322, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:74322
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Experimental Markets; Market Efficiency; Double Auction; Clearing House;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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