Endogenous Choice of Institution Under Supply and Demand Risks in Laboratory Forward and Spot Markets

Laboratory methods are used to investigate the impacts of supply and demand risks in a forward market on prices, quantities traded, and earnings when the choice of transacting in a forward or spot market is endogenous. Forward market activity dominates spot trading, with 80-90% of the trades taking place in the forward market regardless of how risk arises. Buyer earnings tend to be higher than earnings for seller when there is risk. A correspondence exists between risk type and the relative increase in buyer earnings. Buyer earnings increase significantly when demand is random, and also when both supply and demand are random.