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Equilibrium Selection in an Experimental Macroeconomy

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  • Vivian Lei

    ()
    (Department of Economics, University of Wisconsin–Milwaukee, Milwaukee, WI 53201, USA)

  • Charles N. Noussair

    ()
    (Department of Economics, Faculty of Economics and Business, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands)

Abstract

In this paper we report the results of an experiment designed to study the behavior of a laboratory macroeconomy with two stable steady states. The economy has the structure of an optimal growth model in which resources are allocated between consumption and investment over a sequence of time periods. The economy is decentralized, with a market for capital in operation. We find that the economy often falls into the Pareto-inferior steady state, which can be viewed as a poverty trap. The initial endowment of capital stock is varied as a treatment variable in the experiment, and the economy is more likely to reach the optimal steady state when its initial endowment is high than when it is low. Organizing the economy with a central planner directing economic activity fails to induce it to reach the optimal steady state.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 74 (2007)
Issue (Month): 2 (October)
Pages: 448-482

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Handle: RePEc:sej:ancoec:v:74:2:y:2007:p:448-482

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  1. Vivian Lei & Charles N. Noussair, 2002. "An Experimental Test of an Optimal Growth Model," American Economic Review, American Economic Association, American Economic Association, vol. 92(3), pages 549-570, June.
  2. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  3. Plott, Charles R & George, Glen, 1992. "Marshallian vs. Walrasian Stability in an Experimental Market," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(412), pages 437-60, May.
  4. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  5. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  6. Kenneth Matheny & Charles Noussair, 2000. "An experimental study of decisions in dynamic optimization problems," Economic Theory, Springer, Springer, vol. 15(2), pages 389-419.
  7. J. B. Van Huyck & R. C. Battalio & R. O. Beil, 2010. "Tacit coordination games, strategic uncertainty, and coordination failure," Levine's Working Paper Archive 661465000000000393, David K. Levine.
  8. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(1), pages 112-156, March.
  9. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262022834, December.
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Cited by:
  1. Roberto Ricciuti, 2003. "Bringing Macroeconomics into the Lab," Royal Holloway, University of London: Discussion Papers in Economics, Department of Economics, Royal Holloway University of London 03/9, Department of Economics, Royal Holloway University of London, revised Dec 2003.
  2. Steven Tucker & Charles Noussair & Fortuna Casoria & Arno Riedl, 2013. "Experimental Labor Markets And Policy Considerations: Incomplete Contracts And Macroeconomic Aspects," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 27(3), pages 398-420, 07.
  3. C. Monica Capra & Tomomi Tanaka & Colin Camerer & Lauren Munyan & Veronica Sovero & Lisa Wang & Charles Noussair, 2005. "The Impact of Simple Institutions in Experimental Economies with Poverty Traps," Emory Economics, Department of Economics, Emory University (Atlanta) 0508, Department of Economics, Emory University (Atlanta).
  4. Ferruccio Ponzano & Roberto Ricciuti, 2012. "An Experimental AK Model of Growth," CESifo Working Paper Series 3744, CESifo Group Munich.
  5. C. Monica Capra & Tomomi Tanaka, 2006. "Communication and the Extraction of Natural Renewable Resources with Threshold Externalities," Emory Economics, Department of Economics, Emory University (Atlanta) 0602, Department of Economics, Emory University (Atlanta).
  6. John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Papers, University of Pittsburgh, Department of Economics 334, University of Pittsburgh, Department of Economics, revised Jun 2014.
  7. Jasmina Arifovic & George Evans & Olena Kostyshyna, 2013. "Are Sunspots Learnable? An Experimental Investigation in a Simple General-Equilibrium Model," Working Papers, Bank of Canada 13-14, Bank of Canada.

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