From personalized exchange towards anonymous trade: A field experiment on the workings of the invisible hand

Abstract

The experimental literature has shown the tendency for experimental trading markets to converge to neoclassical predictions. Yet, the extent to which theory explains the equilibrating forces in markets remains under-researched, especially in the developing world. We set up a laboratory in 94 villages in rural Sierra Leone to mimic a real market. In this laboratory market, average efficiency of the within-village treatment is somewhat lower than predicted by theory (and observed in different contexts), and markets do not fully converge to theoretical predictions across rounds of trading. We also find that trading with strangers reduces efficiency, and that anonymized trade within the village does not affect efficiency. This points to the importance of behavioral norms for trade. Intra-village social relationships or hierarchies, instead, appear less important as determinants of trade. This is confirmed by analysis of the trader-level data, showing that individual earnings in the experiment do not vary with one’s status or position in local networks.We thank N.W.O. 452-04-333, N.W.O. 451-14-001 and Cambridge Conservation Initiative (CCI 05/101005) for financial support.This is the author accepted manuscript. The final version is available from Elsevier via https://doi.org/10.1016/j.jebo.2016.10.01