Cheating in markets: A laboratory experiment |
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Authors: | Alessandra Cassar Daniel Friedman Patricia Higino Schneider |
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Affiliation: | aDepartment of Economics, University of San Francisco, 2130 Fulton Street, San Francisco, CA 94117, United States;bDepartment of Economics, 417 Building E2, University of California, Santa Cruz, CA 95064, United States;cDepartment of Economics, Agnes Scott College, Decatur, GA 30030, United States |
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Abstract: | We develop a two-market model under three conditions: autarky, frictionless free trade, and free trade with cheating. With cheating, buyers can underpay by π% in cross-market trades and sellers can deliver π% of full value. We solve for competitive equilibrium with cheating and obtain novel testable predictions on price, volume and surplus. We test these in a laboratory experiment using parameters intended to challenge the theory. The results are generally consistent with competitive equilibrium. We find evidence of price unification, market segmentation, a cross-market volume of trade lower under cheating than in frictionless free trade, but a higher overall volume. |
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Keywords: | Cheating Missing trade puzzle Frictions Market experiment |
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