Collateral Constraints and the Law of One Price: An Experiment

We test the asset pricing implications of collateralized borrowing (that is, of using assets as collateral to borrow money) in the laboratory. To this purpose, we develop a general equilibrium model with collateral constraints amenable to laboratory implementation and gather experimental data. In the laboratory, assets that can be leveraged fetch higher prices than assets that cannot, even though assets' payoffs are identical in all states of the world. Collateral value, therefore, creates deviations from the Law of One Price. The spread between collateralizeable and noncollateralizeable assets is significant and quantitatively close to theoretical predictions.