Abstract
The Lucas tree model [Lucas RE Jr (1978) Asset prices in an exchange economy. Econometrica 46(6):1429–1445.] lies at the heart of modern macrofinance. At its core, it provides an analysis of the equilibrium price of a long-lived asset in an exchange economy where consumption is the objective and the sole purpose of the asset is to smooth consumption through time. Experimental tests of the model use a particular instantiation of the Lucas model. Here we adopt a different instantiation to the first two, extending their analyses from a two-period oscillating world to a three-period cyclical world; this is partly to test the robustness of their results. We also go one step further and compare this solution (to a consumption-smoothing problem), in which consumption claims are traded via the long-lived asset, with the alternative solution provided by a market, in which agents can directly trade (short-lived) consumption claims between periods. We find that the latter exchange economy is more efficient in encouraging consumption smoothing than the economy with the long-lived asset. We find evidence of uncompetitive trading in both markets. This paper was accepted by Yan Chen, decision analysis.
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