Experimental Studies on Survival in Markets

Ryan Oprea

Truland Building, 400-S
March 28, 2006, 07:00 PM to 07:00 PM


My dissertation experimentally studies the behavioral tendencies that affect how firms exit from markets. It consists of three experimental studies, each operationalizing a theoretical model. This work is part of a broader research program of understanding the behavioral tendencies which govern the long term dynamics of industries. The first chapter, ?Predatory Behavior and Financial Contracts,? examines the degree to which financial markets use the threat of liquidation to solve agency problems in their client firms and how competitors alter and take advantage of these threats. I find that competitors do not alter the way investors use the threat of liquidation. Instead, competitors indirectly alter the bargaining power between investors and their investments and thereby make investment more attractive. I believe that this surprising result confirms my intuition that careful experimental study of the interactions between capital markets and product markets is an important avenue for experimental research. My second chapter, ?Profit Maximizing Behavior and Natural Selection,? experimentally examines the ?market selection hypothesis,? the argument that, in the long run, market forces will weed out all behaviors other than profit maximizing ones. In order to test this, I incentivize half of my subjects to maximize the amount of time until they fail and the other half to maximize their profits in a dynamic, stochastic environment. I find that profit maximizers ?die out? much more quickly than those incentivized to survive. Thus, this study provides behavioral evidence against the market selection hypothesis. The third chapter, ?Exit and Evolution in the Laboratory,? studies whether cost efficient firms outlast inefficient firms in War of Attrition duopoly markets. The experiment is meant to study whether the market mechanism is capable of systematically weeding out inefficient firms. My findings reveal that relatively inefficient firms systematically leave markets earlier than their more efficient competitors.

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