LAUSR

We investigate how informational frictions affect trading in decentralized markets in theory and in a laboratory setting. Subjects, matched pairwise at random, trade divisible commodities that have different private values for a divisible asset with a common value (interpreted as money). We compare a bargaining game with complete information with a bargaining game where agents can produce fraudulent assets at some cost and are privately informed about the quality of their assets. The threat of fraud strongly reduces the subjects’ ability to exploit the gains from trade, it reduces significantly both the size of the trade and the acceptability of the asset, but only a small fraction of all assets are actually fraudulent.