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Does Sequentiality Impede Convergence?

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  • John D. Hey
  • Daniela Di Cagno

Abstract

Inspired by the conjecture that the necessity of trading through money in monetarised economies might hinder convergence to competitive equilibrium, and hence, for example, cause unemployment, we experimentally investigate behaviour in sequential markets. In order to evaluate the properties of these markets, we compare their behaviour to behaviour in simultaneous markets, where money does not intervene. As the trading mechanism might be a compounding factor, we investigate two kinds of mechanism: the double auction, where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house, where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. We thus have four treatments, the pairwise combinations of simultaneous/sequential with double auction/clearing house. We find that: convergence is faster under simultaneous trading, implying that the necessity of using money to facilitate trade hinders convergence; that sequential trading is noisier than simultaneous trading; and that the volume of trade and realised surpluses are higher with the double auction than the clearing house. We suspect that the double auction, although on the surface more complicated for subjects to understand, enables them better to realise their desired trades. We also confirm the conjecture that inspired these experiments: that the necessity to use money in trading hinders convergence to competitive equilibrium, lowers realised trades and surpluses, and hence may cause unemployment.

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Bibliographic Info

Paper provided by Department of Economics, University of York in its series Discussion Papers with number 13/03.

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Date of creation: Jan 2013
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Handle: RePEc:yor:yorken:13/03

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Keywords: clearing house mechanism; double auction mechanism; experimental markets; money; sequential trade; simultaneous trade;

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  1. 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.
  2. John Hey & Daniela Cagno, 1998. "Sequential Markets: An Experimental Investigation of Clower's Dual-Decision Hypothesis," Experimental Economics, Springer, vol. 1(1), pages 63-85, June.
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