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Out of Equilibrium Dynamics with Decentralized Exchange Cautious Trading and Convergence to Efficiency

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  • Ghosal, Sayantan

    (Department of Economics, University of Warwick)

  • Porter, James

    (Department of Economics, University of Warwick)

Abstract

Is the result that equilibrium trading outcomes are efficient in markets without frictions robust to a scenario where agents' beliefs and plans aren't already aligned at their equilibrium values? In this paper, starting from a situation where agents' beliefs and plans aren't already aligned at their equilibrium values, we study whether out of equilibrium trading converges to efficient allocations. We show that out-of-equilibrium trading does converge with probability 1 to an effcient allocation even when traders have limited information and trade cautiously. In economies where preferences can be represented by Cobb-Douglass utility functions, we show, numerically, that the rate of convergence will be exponential. We show that experimentation leads to convergence in some examples where multilateral exchange is essential to achieve gains from trade. We prove that experimentation does converge with probability 1 to an efficient allocation and the speed of convergence remains exponential with Cobb-Douglass utility functions.

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 928.

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Date of creation: 2010
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Handle: RePEc:wrk:warwec:928

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Keywords: out-of-equilibrium ; cautious ; trading ; efficiency; experimenting ; computation JEL Codes: C62 ; C63 ; C78;

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  1. Rob Axtell, 1999. "The Complexity of Exchange," Computing in Economics and Finance 1999 211, Society for Computational Economics.
  2. Goldman, Steven M & Starr, Ross M, 1982. "Pairwise, t-Wise, and Pareto Optimalities," Econometrica, Econometric Society, vol. 50(3), pages 593-606, May.
  3. Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, vol. 54(4), pages 785-806, July.
  4. Herbert Gintis, 2006. "The Emergence of a Price System from Decentralized Bilateral Exchange," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 0(1), pages 13.
  5. Massimo Morelli & Sayantan Ghosal, 2001. "Retrading in Market Games," Working Papers 01-09, Ohio State University, Department of Economics.
  6. Gale, Douglas M, 1986. "Bargaining and Competition Part II: Existence," Econometrica, Econometric Society, vol. 54(4), pages 807-18, July.
  7. Fisher, Franklin M, 1981. "Stability, Disequilibrium Awareness, and the Perception of New Opportunities," Econometrica, Econometric Society, vol. 49(2), pages 279-317, March.
  8. 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.
  9. Herbert Gintis, 2007. "The Dynamics of General Equilibrium," Economic Journal, Royal Economic Society, vol. 117(523), pages 1280-1309, October.
  10. Arial Rubinstein & Asher Wolinsky, 1985. "Equilibrium in a Market with Sequential Bargaining," Levine's Working Paper Archive 623, David K. Levine.
  11. Feldman, Allan M, 1973. "Bilateral Trading, Processes, Pairwise Optimality, and Pareto Optimality," Review of Economic Studies, Wiley Blackwell, vol. 40(4), pages 463-73, October.
  12. McLennan, Andrew & Sonnenschein, Hugo, 1991. "Sequential Bargaining as a Noncooperative Foundation for Walrasian Equilibrium," Econometrica, Econometric Society, vol. 59(5), pages 1395-1424, September.
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