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Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium

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Author Info

  • Bosch, A.
  • Sunder, S.

Abstract

Economics is the science of want and scarcity. We show that want and scarcity, operating within a simple exchange institution (double auction), can be sufficient for an economy consisting of multiple inter-related markets to attain competitive equilibrium (CE). We generalize Gode and Sunder's (1993a, 1993b) Single-market finding to multi-market economies, and explore the role of the scarcity constraint in convergence of economies to CE. When the scarcity constraint is relaxed by allowing arbitrageurs in middle markets to enter speculative trades, prices still converge to CE, but allocative efficiency of the economy declines. Optimization by individual agents, often used to derive competitive equilibria, is unnecessary for an actual economy to approximately attain such equilibria. From the failure of humans to optimize in complex tasks, one need not conclude that the equilibria derived from the competitive model are descriptively irrelevant. We show that even in complex economic systems which are highly inefficient, such equilibria can be attained under a range of surprisingly weak assumptions about agent behavior.

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Bibliographic Info

Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 1994-11.

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Length: 22 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:cmu:gsiawp:1994-11

Contact details of provider:
Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

Related research

Keywords: competition ; economic equilibrium ; auctions;

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References

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  1. Smith, Vernon L, 1991. "Rational Choice: The Contrast between Economics and Psychology," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 877-97, August.
  2. Rothschild, Emma, 1994. "Adam Smith and the Invisible Hand," American Economic Review, American Economic Association, vol. 84(2), pages 319-22, May.
  3. Sunder, S., 1992. "Lower Bounds for Efficiency of Surplus Extraction in Double Auctions," GSIA Working Papers 1992-17, Carnegie Mellon University, Tepper School of Business.
  4. Theodore W. Schultz, 1962. "Reflections on Investment in Man," Journal of Political Economy, University of Chicago Press, vol. 70, pages 1.
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