Experimental Design Details
Our experimental markets follow the structure by Smith et al. (1988). We use adaptions to the original SSW markets, as in Caginalp et al. (2001), to promote bubble formation. The asset in our experiment has a finite lifetime of 15 periods, and participants trade its shares in an open order book continuous double auction market. The latter allows each participant to take on the role of both the buyer and the seller.
The asset pays a random dividend drawn from a uniform distribution at the end of each trading round. The dividend has four potential outcomes of 0, 8, 28, and 60 ECU with equal probabilities. Thus, the expected dividend for each round is equal to 24 ECU. The asset's fundamental value at the beginning of the experiment is equal to 360 ECU. After each round, the fundamental value decreases by the amount of the expected dividends of 24 ECU. The distribution of the dividends, the realized dividend payment in each round, and the current fundamental values are public information known to all participants. At the end of the experiment, the asset terminates worthless.
There are nine participants in each market. Using computerized instructions, we familiarize participants with the trading rules and mechanisms and give them information regarding the asset to be traded. Our participants are initially endowed with cash and shares: Three are endowed with 1800 ECU and 1 share of the risky asset, three with 1440 ECU and 2 shares of the risky asset, and three with 1080 ECU and 3 shares of the risky asset. The trading screen shows subjects all current information on their shares and cash holdings, buy and sell offers, and transaction prices.
We will videotape participants before and during trading. Participants are informed that they are being videotaped but are not informed about the purpose for which the videos will be used. The videos will only be used by the researchers to analyze participants' emotions.
Variation between Treatments
We divide participants into three treatments. Our treatments aim to test whether and how varying degrees of sustainability associated with an asset affect the size of bubbles. Hence, we manipulate the market setting for each treatment group in a way such that they knowingly trade an asset with a certain degree of sustainability. The degree of sustainability is different for each treatment group. To make participants aware of the asset's degree of sustainability, we include a description of the company's sustainability level in the instructions. Specifically, we tell participants that they are trading the shares of a fictitious company X that has been assigned a specific sustainability score and provide an explanation of the score. To make scores comparable across treatments and understandable for subjects, we add a scale with the possible score ranges and the corresponding sustainability performance levels. Additionally, to make the situation close to reality, we tie dividend payments from the company to real-world investments into carbon offset projects approved by the United Nations that we commit to undertake. The following paragraph describes each treatment in more detail.
Participants are randomly assigned to one of the following three treatments:
Positive: We provide participants with a positive description of the company's sustainability performance. We tell participants that the company has an above-average sustainability score and that it supports climate action. To actualize the positive impact of the company on the environment in the experiment, with each dividend payment of the company, we plan to increase the amount we donate for UN-approved carbon offset projects after the experiment.
Neutral: We provide participants with a neutral description of the company's sustainability performance. We tell participants that the company has an average sustainability score and do not tie the dividend payments to any real-world investments in carbon offsets projects.
Negative: We provide participants with a negative description of the company's sustainability performance. We tell participants that the company has a below-average sustainability score and that it harms the environment through its production by releasing carbon dioxide. To actualize the negative impact of the company on the environment in the experiment, with each dividend payment of the company, we decrease the amount we initially planned to donate for UN-approved carbon offset projects after the experiment.
In a post-experiment questionnaire, we ask participants about:
- gender, age, and ethnic background (required for the analysis of emotions using Facereader Software)
- social preferences
- degree of concern about climate crisis and carbon offset support
- cognitive ability (using standardized questions)