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How to shake the Invisible Hand (when Robinson meets Friday)

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Antoine Billot

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Abstract

We propose to define the invisible hand by (i) modelling the mechanism itself (not to just assume its existence) and (ii) making explicit the limit conditions for its working. For that purpose, we simply assimilate the working of the invisible hand mechanism to the existence of a social preference such that individual and social optimalities are consistent. In introducing the possibility of interaction among individuals, we then suggest that the standard "Robinson case" or social atomicity is just a degenerate feature of a more general requirement that we call the Global Network Agreement. Our main result is that the invisible hand mechanism does keep on working when there is an interaction between Robinson and Friday if the former (resp. the latter) is sensitive to the latter (resp. the former) in such a way that they exhibit some agreement in preferences. Hence, the "Robinson case" naturally satisfies this property since nor Robinson neither Friday can disagree with himself. But more cooperative situations are also allowed in order to extent the invisible hand mechanism to cases with interactions.

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Paper provided by PSE (Ecole normale supérieure) in its series PSE Working Papers with number 2007-13.

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Date of creation: 2007
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Handle: RePEc:pse:psecon:2007-13

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  1. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, vol. 65(5), pages 1005-1028, September.
  2. Samet, Dov & Schmeidler, David, 2003. "Between liberalism and democracy," Journal of Economic Theory, Elsevier, vol. 110(2), pages 213-233, June. [Downloadable!] (restricted)
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  3. Billot, Antoine & Walliser, Bernard, 1999. "Epistemic properties of knowledge hierarchies," Journal of Mathematical Economics, Elsevier, vol. 32(2), pages 185-205, October. [Downloadable!] (restricted)
  4. Stephen Morris, . ""Interaction Games: A Unified Analysis of Incomplete Information, Local Interaction and Random Matching''," CARESS Working Papres 97-02, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences. [Downloadable!]
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  5. Postlewaite, Andrew, 1998. "The social basis of interdependent preferences," European Economic Review, Elsevier, vol. 42(3-5), pages 779-800, May. [Downloadable!] (restricted)
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  6. Rothschild, Emma, 1994. "Adam Smith and the Invisible Hand," American Economic Review, American Economic Association, vol. 84(2), pages 319-22, May. [Downloadable!] (restricted)
  7. Morris, Stephen, 2000. "Contagion," Review of Economic Studies, Blackwell Publishing, vol. 67(1), pages 57-78, January.
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  8. Billot, Antoine, 2003. " How Liberalism Kills Democracy or Sen's Theorem Revisited," Public Choice, Springer, vol. 116(3-4), pages 247-70, September. [Downloadable!] (restricted)
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