Three Essays on Market Institutions

Weiwei Zheng

Advisor: Cesar A Martinelli, PhD, Department of Economics

Committee Members: Daniel Houser, Kevin McCabe, Jason Shachat

Online Location, D150
July 24, 2020, 11:00 AM to 12:30 PM

Abstract:

This dissertation focuses on the equilibrium and efficiency of market institutions, a major determinant of market outcomes. The three chapters of the dissertation study market institutions in the presence of classic challenges: incomplete contracts, few traders, and incomplete information.

Chapter 1 compares two mechanisms, posted-offer and posted-bid, in a procurement setting with incomplete contracts.  Reciprocity has been identified in recent literature as a behavioral trait that mitigates moral hazard problems in the presence of incomplete contracts, along with repeated interactions and reputation concerns. This study builds a model of reciprocity based on inequality aversion, and takes it to the lab.  In the laboratory experiment, the posted-offer mechanism induces higher level of inequality aversion on sellers, resulting in higher efficiency than the posted-bid mechanism.

Chapter 2 studies minimal conditions for competitive behavior with few agents, adapting price-quantity strategic market games to an indivisible good environment, and taking it to the lab. In the proposed mechanism, all Nash equilibrium outcomes with active trading are competitive if and only if there are at least two buyers and two sellers willing to trade at every competitive price. In the laboratory experiment, this condition is enough to induce competitive results. Moreover, the performance of a sealed-bid auction following the rules of the strategic market game approaches that of its dynamic counterpart, the double auction, over time.

Chapter 3 surveys the theoretical and experimental literature on the k-double auction. The k-double auction is mechanism widely used in exchanges; for instance, it is used to set the daily opening price at New York Stock Exchange. It is also very common in smaller markets. A recent literature has explored the implications of the k-double auction for call markets with incomplete information. In contrast to the results in chapter 2, efficiency is not guaranteed in the k-double auction when there are few traders, but it can be approached as the market grows. This chapter includes a history of the development of the theory, a summary of methods and results, the use in experimental economics, and the relation to other mechanisms.