ABSTRACT
In his seminal 1962 paper, Vernon Smith demonstrated that laboratory markets with repeated centralized trading could generate price sequences that converge to competitive equilibrium predictions. The convergence and efficiency of these markets was surprising, given the small numbers of traders and severe informational imperfections. This contribution was followed by a companion paper with a comparison of three trading institutions, holding structural conditions constant. Smith set a high standard for careful instructions, incentives, procedures, and data analysis, which persists even today. The remarkable regularity of these laboratory markets contrasts with the misbehavior of markets for durable assets that can be held and re-traded for speculative purposes. Even though the initial asset experiments run by Smith and his co-authors were intended to be transparent and simple, they produced robust price bubbles, especially with high cash endowments and easy credit. Taken together, these papers constituted a bedrock foundation for the new field of experimental economics.
