Abstract
The notion of present value is an integral part of economics. So far, however, its rationale rests upon the well-known neoclassical assumptions of complete information and perfect rationality. The present value derives as the result of a calculation that requires the knowledge of the discount rate and the future returns of the evaluated assets. This paper presents a laboratory experiment that demonstrates that the present value of assets can also be discovered by participants of a production process endowed with incomplete information. The knowledge concerning future returns is not given to any one, but dispersed among the participants who, in addition, have no idea of their position in the production chain. In accordance with Hayek’s theory of the market process as a discovery procedure, the present value is found without any one subject being able to determine it individually.
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Acknowledgements
We thank Professor Mathias Erlei and the Institute of Management and Economics at the Clausthal University of Technology for providing us with the infrastructure necessary for our experiment. We further thank Professor Mathias Erlei and our colleague Jens Weghake for helpful comments on an earlier draft of this paper. We also profited from discussions with several participants of the “Clausthaler Ökonomisches Oberseminar” and the 2014 annual meeting of the “Gesellschaft für experimentelle Wirtschaftsforschung e.V.”
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The datasets analysed during the current study are available from the corresponding author on reasonable request.
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Braun, E., Roß, W. The market process of capitalization: a laboratory experiment on the effectiveness of private information. J Evol Econ 28, 951–960 (2018). https://doi.org/10.1007/s00191-017-0508-6
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DOI: https://doi.org/10.1007/s00191-017-0508-6