Chapter 40 Markets and Information Aggregation Mechanisms

The experimental work demonstrates that markets have the capacity to collect information through a process of equilibration and that fact suggests the feasibility of creating a system of markets that have only a purpose of gathering information. The laboratory work suggests that theory and experiments can be turned to the design and implementation of Information Aggregation Mechanisms. The issue of whether or not laboratory methods are useful can now be brought into view. The idea of an information aggregation mechanism as a product of institutional design is a direct product of experimental work. Bubbles can be observed in experiments in which the wrong market emerges with a high price and strongly signals the wrong state. This can be seen in period six in which the wrong state emerges. However, it must be added that such events are rare, given strong underlying information and they are reduced with experience.