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

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Author Info
Antoni Bosch-Domènech ()
Shyam Sunder

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Abstract

Economics is the science of want and scarcity. We show that want and scarcity, operating within a simple exchange institution (double auction), are 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 multiple markets to enter speculative trades, prices still converge to CE, but allocative efficiency of the economy drops. \\ Optimization by individual agents, often used to derive competitive equilibria, are 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, such equilibria can be attained under a range of surprisingly weak assumptions about agent behavior.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 91.

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Date of creation: Jun 1996
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Handle: RePEc:upf:upfgen:91

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Related research
Keywords: Competitive model; equilibrium; double auction; experimental economics; Leex;

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Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D40 - Microeconomics - - Market Structure and Pricing - - - General
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions

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  1. 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.
  2. Theodore W. Schultz, 1962. "Reflections on Investment in Man," Journal of Political Economy, University of Chicago Press, vol. 70, pages 1. [Downloadable!] (restricted)
  3. Rothschild, Emma, 1994. "Adam Smith and the Invisible Hand," American Economic Review, American Economic Association, vol. 84(2), pages 319-22, May. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

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