Peer Effects and Risk Sharing in Experimental Asset Markets

Abstract

We investigate the effect of introducing information about peer portfolios in an experimental Arrow-Debreu economy. Confirming the prediction of a general equilibrium model with inequality averse preferences, we find that peer information leads to reduced variation in payoffs within peer groups. Information also improves risk sharing, as the data suggests that experiencing earnings deviations from peers induces a shift to more balanced portfolios. In a treatment where we highlight the highest earner, we observe a reduction in risk sharing, while highlighting the lowest earner has no effects compared to providing neutral information. Our results indicate that the presence of social information and its framing is an important determinant of equilibrium in financial markets.

Keywords: peer effects, laboratory experiments, risk taking, asset markets

JEL Classification: C92, D53, G11