The Hayek Hypothesis holds that prices contain enough information to direct the resources in the economy to their most efficient use. In a series of experiments, Vernon Smith (1992) found that, with the right trading institutions, a market with agents that know only their own valuations of a good will converge quite rapidly to the competitive equilibrium price and trading volume. In the series of experiments reported here, the extension of the Hayek Hypothesis to an economy with production is explored. When agents can choose between autarkic production and specialization, they have the opportunity to hedge against market risk. A coordination problem is also created, interfering with the ability of the system to converge on the theoretical Ricardian equilibrium.
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Paper provided by EconWPA in its series Experimental with number
0512005.
Find related papers by JEL classification: C9 - Mathematical and Quantitative Methods - - Design of Experiments D8 - Microeconomics - - Information, Knowledge, and Uncertainty F1 - International Economics - - Trade
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