An experimental comparison of two exchange economies : long-lived asset versus short-lived asset

The Lucas (1978) Tree Model lies at the heart of modern macro-finance. At its core, it provides an analysis of the equilibrium price of a long-lived asset in an exchange economy where consumption is the objective, and the sole purpose of the asset is to smooth consumption through time. Experimental tests of the model are mainly confined to Crockett et al (2018), Asparouhova et al (2016) and Halim et al (2016), all of them using a particular instantiation of the Lucas Model. Here we adopt a different instantiation to the first two, extending their analyses from a two-period oscillating world to a three-period cyclical world; this is partly to test the robustness of their results. We also go one step further, and compare this solution (to a consumption-smoothing problem), in which consumption claims are traded via the long-lived asset, with the alternative solution provided by a market, in which agents can directly trade (short-lived) consumption claims between periods. We find that the latter exchange economy is more efficient in encouraging consumption smoothing than the economy with the long-lived asset. We find evidence of uncompetitive trading in both markets