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A General Equilibrium Structure for Induced Supply and Demand

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Steven Gjerstad
Jason Shachat

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Abstract

We construct a mapping between induced supply and demand environments, often used in laboratory market experiments, and general equilibrium production economies. This general equilibrium structure, when combined with the interpretation of market experiments as decentralized economic systems by Smith [1982], results in a stronger link between market experiments and the decentralized mechanisms literature. This facilitates a clearer delineation between environment, institution, and behavior in these experiments. In the absence of this structure these three aspects of market experiments have often been misconstrued. For example, Gode and Sunder [1993] claim that efficiency in their ``zero intelligence" model results primarily from the institutional structure of the double auction, rather than from rationality of traders. Using our structure, we show that in fact, their zero intelligence traders exhibit individual rationality.

* Hewlett-Packard Laboratories, Palo Alto, California

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number 96-35.

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Date of creation: Oct 1996
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Handle: RePEc:cdl:ucsdec:96-35

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  1. Hurwicz, Leonid & Radner, Roy & Reiter, Stanley, 1975. "A Stochastic Decentralized Resource Allocation Process: Part I," Econometrica, Econometric Society, vol. 43(2), pages 187-221, March. [Downloadable!] (restricted)
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  2. Rustichini, Aldo & Satterthwaite, Mark A & Williams, Steven R, 1994. "Convergence to Efficiency in a Simple Market with Incomplete Information," Econometrica, Econometric Society, vol. 62(5), pages 1041-63, September. [Downloadable!] (restricted)
  3. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70, pages 322. [Downloadable!] (restricted)
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  4. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February. [Downloadable!] (restricted)
  5. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December. [Downloadable!] (restricted)
  6. Plott, Charles R, 1982. "Industrial Organization Theory and Experimental Economics," Journal of Economic Literature, American Economic Association, vol. 20(4), pages 1485-1527, December. [Downloadable!] (restricted)
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  1. Jason Shachat & Anthony Westerling, 2004. "Information Aggregation in a Catastrophe Futures Markets," Experimental 0403002, EconWPA. [Downloadable!]
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  2. Paul Brewer & Maria Huang & Brad Nelson & Charles Plott, 2002. "On the Behavioral Foundations of the Law of Supply and Demand: Human Convergence and Robot Randomness," Experimental Economics, Springer, vol. 5(3), pages 179-208, December. [Downloadable!] (restricted)
  3. Steven Gjerstad & John Dickhaut, 2003. "Price Formation in Double Auctions," Microeconomics 0302001, EconWPA. [Downloadable!]
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