The impact of search frictions in experimental asset markets: Over-the-counter versus double auction

Abstract

This paper compares the performance of a centralized trading institution, Double Auction (DA), with a decentralized Over-the-Counter (OTC) trading institution in experimental asset markets. Variants of both are commonly used in field financial markets. While bids and asks are publicly displayed in the DA, they are only visible to the parties involved in a trade in the OTC market due to search frictions. We study the impact of these trading institutions on transaction prices, mispricing, trade volume, and bubble measures in controlled laboratory long-lived asset markets. We find that transaction prices, mispricing, trade volume and some bubble measures are significantly lower in OTC than in DA markets, due to reduced trading activities and stronger selling pressures brought about by search frictions.