On the relation between economic bubbles and effort gaps between sellers and buyers: An experimental study

Economic bubbles are an empirical puzzle because they do not readily fit the notion of an efficient market. We argue that bubbles are associated with a conflict and a gap in the allocation of effort during negotiation by sellers and buyers. We examined 21 experimental asset markets where in one condition players could buy and sell and in the other they could either buy or sell. The results indicated that when making concurrent buying and selling decisions the mean number of asks for sellers was 71% higher than the number of bids for buyers. Similar findings emerge in a re-analysis of data from Lei et al. (2001). Importantly, bubbles only emerged in markets where the number of asks was larger than that of bids. These findings indicate that bubbles are associated with increased negotiation effort when acting as a seller and diminished effort when acting as a buyer.