Working Paper: NBER ID: w26701
Authors: Marco Cipriani; Ana Fostel; Daniel Houser
Abstract: We develop a model of leverage that is amenable to laboratory implementation and gather experimental data. We compare two identical economies: in one economy, agents cannot borrow; in the other, they can leverage a risky asset to issue debt. Leverage increases asset prices in the laboratory. This increase is significant and quantitatively close to what theory predicts. Moreover, also as theory suggests, leverage allows gains from trade to be realized in the laboratory. Finally, the mechanism generating the price increase in the lab is due to the asset role as collateral, and different from what we would observe with a simple credit line or bigger cash endowments.
Keywords: leverage; asset pricing; experimental economics; elicitation method; incomplete markets
JEL Codes: A10; C90; D52; D53; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| leverage (G24) | asset prices (G19) |
| leverage (G24) | gains from trade (F11) |
| asset prices (G19) | demand from agents (L85) |
| leverage (G24) | collateral (G33) |