Out of Equilibrium Dynamics with Decentralized Exchange Cautious Trading and Convergence to Efficiency
AbstractIs 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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Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 928.
Date of creation: 2010
Date of revision:
out-of-equilibrium ; cautious ; trading ; efficiency; experimenting ; computation JEL Codes: C62 ; C63 ; C78;
Find related papers by JEL classification:
- com - - - - - -
- JEL - Labor and Demographic Economics - - - - -
- Cod - Mathematical and Quantitative Methods - - - - -
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-11 (All new papers)
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