Georg Kirchsteiger: Learning and Market Clearing: Theory and Experiments

Abstract:

This paper investigates theoretically and experimentally whether traders learn to use market-clearing trading institutions or whether other (inefficient) market institutions can survive in the long run. Using a framework with boundedly rational traders, we find that market clearing institutions are always stable under a general class of learning dynamics. However, we show that there exist other, non-market clearing institutions that are also stable. Therefore, in the long run traders may fail to coordinate exclusively on market clearing institutions. The theoretical predictions were confirmed in a series of platform choice experiments. Specifically, traders coordinated on platforms predicted to be stable, including market-clearing as well as non-market clearing ones, while platforms predicted to be unstable were avoided in the long run.