Abstract
An Experimental Study of Bubble Formation in Asset Markets Using the Tâtonnement Pricing Mechanism
Volodymyr Lugovskyy, Daniela Puzzello, and Steven Tucker
We report the results of an experiment designed to study the role of institutional structure in the
formation of bubbles and crashes in laboratory asset markets. In a setting employing double
auctions and call markets as trading institutions, bubbles and crashes are a quite robust
phenomenon. The only factor appearing to reduce bubbles is experience across markets. In this
study, we employ the tâtonnement trading institution, which has not been previously explored in
laboratory asset markets. The results show that bubbles are eliminated, suggesting that the
trading institution plays a crucial role in the formation of bubbles.