EXPERIMENTAL COMPARISON OF TWO ECONOMIC EXCHANGES: LONG-LIVED ASSETS VS. LONG-LIVED ASSETSSHORT-LIVED ASSETS

Abstract

Lucas tree model [Lucas RE Jr (1978) Asset prices in an exchange economy. Econometrica 46(6):1429–1445.] lies at the heart of modern macrofinance. In essence, it provides an analysis of the equilibrium prices of long-lived assets in an exchange economy where consumption is the goal and the sole purpose of assets is to smooth consumption over time. Experimental tests of the model using specific examples from Luke's model. In this experiment, adopting a different example from the first two, extends the analysis from a two-period oscillating world to a three-period cyclical world; this is partly to test the robustness of the final result. We also go further and compare this solution (with the consumption smoothing problem), where consumption claims are traded through long-lived assets, with an alternative solution provided by the market, where agents can directly trade consumption claims (short-lived) between periods. There is a trade-off end economy that is more efficient at driving consumption smoothing than an economy with long-lived assets. The results found are evidence of uncompetitive trading in both markets.