Do Market Institutions Adapt Efficiently to Transaction Costs?

We study an experimental market with an endogenous institution. In particular, the information and matching structure of the market is determined by the decisions of the individual traders. We examine the effects of the imposition of exogenous transaction (communication) costs. We find that the institution adapts in the predicted direction but it does not do so in a fully efficient manner. Traders incur avoidable transactions costs, and the market outcome does not fully exhaust the possible gains from trade.