Abstract
We use laboratory experiments to test a consumption-based general equilibrium model of asset pricing, which posits that agents buy and sell assets for the purpose of intertemporally smoothing consumption. Such asset pricing models are widely used by macroeconomists and finance researchers but have not yet been subjected to experimental testing. In the experiments we induced several features which, according to the theory, determine asset prices, such as risk and time preferences and the process for income and dividend payments. Our analysis indicates that intertemporal consumption-smoothing strongly inhibits the formation and magnitude of asset price bubbles, a stark departure from most recent asset pricing experiments. In fact, when subjects are motivated to smooth consumption, assets trade at a discount relative to their expected value and markets are thick; when this condition is eliminated in an otherwise identical economy, assets trade at a premium in thin markets.
Published Version
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