Rational and Irrational Bubbles: an Experiment

Abstract

This paper proposes a theory of rational bubbles in an economy with finite trading opportunities. Bubbles arise because agents are never sure to be last in the market sequence. This theory is used to design an experimental setting in which bubbles can be made rational or irrational by varying one parameter. This complements the experimental literature on irrational bubbles initiated by Smith, Suchanek and Williams (1988). Our experimental results suggest that it is pretty difficult to coordinate on rational bubbles even in an environment where irrational bubbles flourish. Maximum likelihood estimations show that these results can be reconciled within the context of Camerer, Ho, and Chong (2004)'s cognitive hierarchy model, and Mc Kelvey and Palfrey (1995)'s quantal response equilibrium.

Replaced by

Sophie Moinas, and Sébastien Pouget, “The Bubble Game : An experimental Analysis of Speculation”, Econometrica, vol. 81, n. 4, July 2013, pp. 1507–1539.

Reference

Sophie Moinas, and Sébastien Pouget, “Rational and Irrational Bubbles: an Experiment”, TSE Working Paper, n. 09-045, May 2009.