The Effects of Seemingly Nonbinding Price Floors : An Experimental Analysis

Abstract. Price floors are common policies in markets for storable goods such as commodities, bankable emissions permits, and currencies. Hard price floors are implemented as unlimited governmental buybacks and prevent the price from falling below the floor; soft floors, including those implemented as auction reserve prices in emission permit auctions, allow the market price to fall below the floor. We specify and then test in the laboratory a two-period model with the same properties as our infinite-horizon model, Salant et al. (2022). Most of our experimental findings are consistent with theoretical predictions: a seemingly nonbinding floor can cause the price and carryover to jump up, the jump is higher with a hard floor than a soft one, and when the floor is so low that the theory predicts no effect, none is observed