Retrading, production, and asset market performance

Area of Science:

• Behavioral economics
• Asset pricing
• Experimental economics

Background:

• Traders reach equilibrium in consumption goods markets but create speculative bubbles in resalable asset markets.
• Existing models of durable assets include depreciation and production, but lack experimental validation regarding speculative bubbles.

Purpose of the Study:

• To investigate the role of consumption value and resale options in the formation of speculative price bubbles in durable asset markets.
• To determine if prior experience with consumption value mitigates bubble formation when resale is introduced.

Main Methods:

• A stock-flow model of durable assets was developed.
• Laboratory experiments were conducted with two groups of inexperienced consumers.
• One group traded assets with resale options; the other experienced consumption value first before resale was introduced.

Main Results:

• Inexperienced consumers who could resell immediately disregarded consumption value, competing with producers and depressing prices and production.
• Consumers who first learned consumption value before resale traded at equilibrium prices.
• Experimental reproducibility proved to be an effective method for suppressing asset market bubbles.

Conclusions:

• Asset market bubbles are linked to the disregard of consumption value, particularly when immediate resale is possible.
• Prior experience with an asset's consumption value is crucial for rational trading behavior and achieving market equilibrium.
• Experimental design, specifically ensuring reproducibility and understanding of consumption value, is vital for studying and preventing speculative bubbles.