ICES Seminar in Experimental Economics and Game Theory
Uniform Pricing and Capital Allocation
Friday, September 12, 2025 12:00 PM to 1:00 PM EDT
Vernon Smith Hall (formerly Metropolitan Building), 5183
The ICES Seminar in Experimental Economics and Game Theory of the Fall 2025 semester will feature:
Massachusetts Institute of Technology
Uniform Pricing and Capital Allocation
Abstract
A fundamental question in finance is whether capital is allocated within a financial institution to equalize marginal returns across divisions. In this paper, we develop an approach to test for such allocative efficiency and quantify the resulting profit losses. Our approach uses pricing variation to identify divisional marginal returns, and links the heterogeneity in marginal returns across divisions to the profit loss. We apply this approach to study the efficiency of a large bank’s internal capital markets through a field experiment that facilitates reallocation by supplying capital at prices assigned randomly. We statistically reject efficiency, and estimate a profit loss of 11%. Uniform pricing across divisions, while not a traditional friction and not necessarily the root cause, emerges as the key impediment to efficiency: it prevents banks from using pricing as a tool for capital reallocation to address frictions that lead to divisional underperformance. This lack of contingency in pricing has redistributive effects, subsidizing divisions that persistently underperform expectations. We discuss implications.
For more information about the Seminar Series, please visit the Seminar Schedule homepage.
