An Experimental Comparison of Two Exchange Mechanisms, An Asset Market versus a Credit Market

The Lucas (1978) asset pricing model lies at the heart of modern macro-finance. At its core, it provides an analysis of the equilibrium price of a long-lived financial asset in an economy where consumption is the objective, and the sole purpose of the asset is to smooth consumption through time. Experimental tests of the model are mainly confined to Crockett et al (forthcoming 2019) and Asparouhova et al (2016), both of them using a particular instantiation of the Lucas Model. Here we adopt a different instantiation, extending their analyses from a two-period oscillating world to a three-period cyclical world. We also go one step further, and compare this asset market solution (to a consumption-smoothing problem) with the perhaps intuitively more reasonable solution provided by a credit market, in which agents can directly trade consumption between periods. We find that the latter is more efficient in smoothing consumption, and that prices in the credit market are closer to their equilibrium values than those in the asset market, and also less volatile. We find evidence of uncompetitive trading in both markets.