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Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium

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Author Info
Shyam NMI Sunder () (School of Management)
Antoni Bosch-Domènech () (Department of Business and Economics)

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Abstract

Economics 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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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm204.

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Date of creation: 30 Jul 2001
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Handle: RePEc:ysm:somwrk:ysm204

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Related research
Keywords: Competitive Equilibrium; Convergence; Zero-Intelligence Traders; Minimal Rationality Economics;

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Find related papers by JEL classification:
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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. 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.
  2. Rothschild, Emma, 1994. "Adam Smith and the Invisible Hand," American Economic Review, American Economic Association, vol. 84(2), pages 319-22, May. [Downloadable!] (restricted)
  3. Theodore W. Schultz, 1962. "Reflections on Investment in Man," Journal of Political Economy, University of Chicago Press, vol. 70, pages 1. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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