Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium
AbstractEconomics is the science of want and scarcity. We show that want and scarcity, operating within a simple exchange institution (double auction), can be 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 middle markets to enter speculative trades, prices still converge to CE, but allocative efficiency of the economy declines. Optimization by individual agents, often used to derive competitive equilibria, is 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 which are highly inefficient, such equilibria can be attained under a range of surprisingly weak assumptions about agent behavior.
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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm204.
Date of creation: 30 Jul 2001
Date of revision:
Competitive Equilibrium; Convergence; Zero-Intelligence Traders; Minimal Rationality Economics;
Other versions of this item:
- Antoni Bosch-Domenech & Shyam Sunder, 2000. "Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium," Computational Economics, Society for Computational Economics, vol. 16(3), pages 257-284, December.
- Bosch, A. & Sunder, S., 1994. "Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium," GSIA Working Papers 1994-11, Carnegie Mellon University, Tepper School of Business.
- Antoni Bosch-Domènech & Shyam Sunder, 1996. "Tracking the invisible hand: Convergence of double auctions to competitive equilibrium," Economics Working Papers 91, Department of Economics and Business, Universitat Pompeu Fabra.
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
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- Theodore W. Schultz, 1962. "Reflections on Investment in Man," Journal of Political Economy, University of Chicago Press, vol. 70, pages 1.
- Rothschild, Emma, 1994. "Adam Smith and the Invisible Hand," American Economic Review, American Economic Association, vol. 84(2), pages 319-22, May.
- 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.
- 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.
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