Recipient of the 2008 Arrow Prize for Senior Economists

A BEJEAP Frontiers article.

Abstract

Assumptions of individual rationality and preference stability provide the foundation for a convenient and tractable modeling approach. While both of these assumptions have come under scrutiny in distinct literatures, the two lines of research remain disjointed. This study begins by explicitly linking the two literatures while providing insights into whether market experience mitigates one specific form of individual rationality—consistent preferences. Using field experimental data gathered from more than 800 experimental subjects, we find evidence that the market is a catalyst for this type of rationality. The study then focuses on aggregate market outcomes by examining empirically whether individual rationality of this sort is a prerequisite for market efficiency. Using a complementary field experiment, we gathered data from more than 380 subjects of age 6-18 in multi-lateral bargaining markets at a shopping mall. We find that our chosen market institution is a filter of irrationality: even when markets are populated solely by irrational buyers, aggregate market outcomes converge to the intersection of the supply and demand functions.

Submitted: September 24, 2008 · Accepted: November 11, 2008 · Published: November 26, 2008

Recommended Citation

List, John A. and Millimet, Daniel L. (2008) "The Market: Catalyst for Rationality and Filter of Irrationality," The B.E. Journal of Economic Analysis & Policy: Vol. 8 : Iss. 1 (Frontiers), Article 47.
DOI: 10.2202/1935-1682.2115
Available at: http://www.bepress.com/bejeap/vol8/iss1/art47