The effects of seemingly nonbinding price floors: An experimental analysis

Abstract

Price floors are common policies in markets for storable goods such as commodities, bankable emissions permits, and currencies. Hard price floors are implemented as unlimited government buybacks and prevent the price from falling below the floor; soft floors, whether implemented as limited buybacks or as reserve prices in emission permit auctions, allow the market price to fall below the floor. We specify and then test in the laboratory a two-period model with the same properties as our infinite-horizon model, Salant et al. (2022). Theory predicts that asset prices will respond to price floors even in a set of circumstances where the floor seems nonbinding. Most of our experimental findings are consistent with theoretical predictions: a seemingly nonbinding floor can cause the price and carryover to jump up, the jump is higher with a hard floor than a soft one, and when the floor is so low that the theory predicts no effect, none is observed. In contrast to theoretical predictions, however, the soft floor fails to increase the carryover and market price in our experiment.