In this study, the authors report the results from laboratory asset markets designed to test the rational expectations hypothesis that markets aggregate and transmit the information of differentially informed traders. After documenting evidence in favor of the rational expectations model, they examine which features of their environment are necessary or sufficient to achieve an rational expectations equilibrium. The authors find that trading experience and common knowledge of dividends are jointly sufficient to achieve a rational expectations equilibrium, but that neither is a sufficient condition by itself. They also present some stylized facts about the convergence process leading to a rational expectations equilibrium.

Douglas V. DeJong, Robert Forsythe, Russell J. Lundholm, Wilfred C. Uecker, A Laboratory Investigation of the Moral Hazard Problem in an Agency Relationship, Journal of Accounting Research, Vol. 23, Studies on Accounting Earnings and Security Valuation: Current Research Issues (1985), pp. 81-120

Results from the Iowa Political Stock Market are analyzed to ascertain how well markets work as aggregators of information. The authors find that the market worked extremely well, dominating opinion polls in forecasting the outcome of the 1988 presidential election, even though traders in the market exhibited substantial amounts of judgment biases. Their explanation is that judgment bias refers to average behavior, while in markets it is marginal traders who influence price. They present evidence that in this market a sufficient number of traders were free of judgment bias so that the market was able to work well.

We examine communication in laboratory games with asymmetric information. Sellers know true asset qualities. Potential buyers only know the quality distribution. Prohibiting communication, we document the degree of adverse selection. Then we examine two alternative communication mechanisms. Under “cheap talk”, each seller can announce any subset of qualities. Under “antifraud”, the subset must include the true quality. Both mechanisms improve market efficiency, but very differently. Relying on sellers' frequently exaggerated claims, buyers often overpay under cheap talk. Efficiency gains come at the buyer's expense. The antifraud rule improves efficiency further and eliminates the wealth transfer from buyers to sellers.

This paper examines the effect of the moral hazard problem in an agency relationship where the principal cannot observe the level of service provided by the agent. Using data from laboratory markets, we demonstrate that the presence of moral hazard leads to shirking by agents. However, this “lemons” phenomenon occurs only about one‐half of the time. While there is evidence of reputation effects in these markets, seemingly reputable agents are often able to use opportunities for false advertising to their advantage and “ripoff” principals.

The time path of asset prices is studied within a stationary experimental environment. After several replications prices converge to a perfect foresight equilibrium. A sequential market having an "informational trap" and a futures market are also studied.

This paper provides experimental evidence on forward induction as a refinement criterion. In the basic extensive form, one of the two players chooses to play a battle-of-the-sexes game or to receive a certain payoff. According to forward induction, choosing to play the game is a signal about intended action. Though the presence of the outside option changes play, the authors find only limited support for the forward-induction hypothesis. The effects of the outside option also reflect the creation of a focal point through the asymmetry created by offering the outside option to one of the two players.