The tension between efficiency and equilibrium is a central feature of economic systems. We examine this tradeoff in a network game with a unique Nash equilibrium in which agents can achieve a higher payoff by following a “collaborative norm.” Subjects establish and maintain a collaborative norm in the circle, but the norm weakens with the introduction of one hub connected to everyone in the wheel. In complex and asymmetric networks of 15 and 21 nodes, the norm disappears and subjects' play converges to Nash. We provide evidence that subjects base their decisions on their degree, rather than the overall network structure.

China launched a pilot scheme in March 2010 to lift the ban on short-selling and margin-trading for stocks on a designated list. We find that stocks experience negative returns when added to the list. After the ban is lifted, price efficiency increases while stock return volatility decreases. Panel data regressions reveal that intensified short-selling activities are associated with improved price efficiency. Short-sellers trade to eliminate overpricing by selling stocks with higher contemporaneous returns following a downward trend, and their trades predict future returns. In contrast, we find intensified margin-trading activities for stocks with lower contemporaneous returns, and these trades have no return predictive power.

When a firm cross-lists its shares in segmented markets, the price of the first issued share, as a reference, plays both an informational and anchoring role in pricing the second issued share. We develop a model illustrating the dual-role. Empirically, we examine a group of Chinese firms that first issue foreign shares and then domestic A-shares, for which the anchoring effect adds to the A-share underpricing. Consistent with the model predictions, we find that the A-share underpricing is positively related to the difference in costs of capital in the two segmented markets, and that this positive association is weaker when participants are less likely to resort to the anchoring heuristic and when the A-share valuation involves less uncertainty.

We measure an individual stock’s misvaluation based on the deviation of its price from predicted intrinsic value. Both under- and overvalued stocks identified by this misvaluation measure exhibit greater valuation uncertainty and arbitrage difficulty, and the misvaluation measure strongly predicts stock returns incremental to size, book-to-market ratio, past returns, and various return anomalies. Based on the misvaluation measure, we form a misvaluation factor and find that stock return covariances with this factor possess significant and robust return predictive power. We further show that the misvaluation factor predicts future economic conditions, providing additional insight into the real effect of systematic misvaluation in the stock market.