When Speculators Meet Constructors: Positive and Negative Feedback in Experimental Housing Markets

Cars Hommes and Te Bao

No 15-10, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: Asset markets are characterized by positive feedback through speculative demand. But housing markets distinguish themselves from other asset markets in that the supply of housing is endogenous, and adds negative feedback to the market. We design an experimental housing market and study how the strength of the negative feedback, i.e., the supply elasticity, a ects market stability. In the absence of endogenous housing supply, the experimental markets exhibit large bubbles and crashes because speculators coordinate on trend-following expectations. When the positive feedback through speculative demand is o set by the negative feedback of elastic housing supply the market stabilizes and prices converge to fundamental value. Individual expectations and aggregate market outcome is well described by a behavioral forecasting heuristics model. Our results suggest that negative feedback policies may stabilize speculative asset bubbles.

Date: 2015
New Economics Papers: this item is included in nep-exp and nep-ure
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Citations: View citations in EconPapers (7)

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