2006•SSRN Electronic JournalOpen access

Non-Performance Risk and Transaction Costs in Laboratory Forward and Spot Markets

Alla V. Yakunina, Dale J. Menkhaus, Owen R. Phillips, Victor E. Esipov

Abstract

Traders choose to participate in forward or spot auctions having some probability of contract non-performance in the forward market with no associated real cost or with a transaction cost levied randomly on a forward trade. Results from laboratory markets suggest that the spot market becomes a backstop to failed units in the forward market. Forward market activity is particularly sensitive to increased transaction costs. An increase of about 6% for each trader shifts about 40% of all sales to a spot market. If institutions are ineffective in enforcing forward contracts, a spot outlet is essential for exchange to continue.

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Key concepts: Spot market, Spot contract, Forward contract, Transaction cost, Forward market, Database transaction, Business, Common value auction