Trader matching and the selection of market institutions |
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Institution: | 1. Darla Moore School of Business, University of South Carolina, USA;2. Lancaster University Management School, Lancaster, UK;3. School of Economics, University of Nottingham, University Park, Nottingham NG7 2RD, UK;1. Maastricht University, Tongersestraat 53, 6370 Maastricht, Netherlands;2. ECARES, Université Libre de Bruxelles. Avenue F. D. Roosevelt 50, CP 114, B-1050 Brussels, Belgium |
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Abstract: | We analyze a stochastic dynamic learning model with boundedly rational traders who can choose among trading institutions with different matching characteristics. The framework allows for institutions featuring multiple prices (per good), thus violating the “law of one price.” We find that centralized institutions are stochastically stable for a broad class of dynamics and behavioral rules, independently of which other institutions are available. However, some decentralized institutions featuring multiple prices can also survive in the long run, depending on specific characteristics of the underlying learning dynamics such as fast transitions or optimistic behavior. |
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Keywords: | Market institution Law of one price Matching Stochastic stability |
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