Institutionalization in Efficient Markets: The Case of Price Bubbles

TL;DR

This paper explores how financial markets develop institutionalized patterns during price bubbles, even under conditions of high efficiency and perfect information, contributing to sociological market theory.

Contribution

It provides new insights into the micro-foundations of institutionalization in markets, specifically explaining the emergence of patterns during price bubbles.

Findings

Markets develop institutional patterns during bubbles despite textbook efficiency.

Price bubbles exhibit institutionalization processes.

Markets quickly form patterns consistent with institutionalization.

Abstract

We seek to deepen understanding of the micro-foundations of institutionalization while contributing to a sociological theory of markets by investigating the puzzle of price bubbles in financial markets. We find that such markets, despite textbook conditions of high efficiency -- perfect information, atomistic agents, no uncertainty -- quickly develop patterns consistent with institutionalization processes.