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Disequilibrium Trade in a Large Market for an Indivisible Good

Author

Listed:
  • Corchón Luis C.

    (Department of Economics, Universidad Carlos III de Madrid, Calle Madrid 126, Getafe28903, Madrid, Spain)

  • Rueda-Llano José

    (Faculty of Mathematics and Computer Science, Friedrich Schiller University, Ernst-Abbe Platz 2, Jena07743, Germany)

Abstract

Disequilibrium trade can occur in a market lacking both recontracting and a computational system that maps utilities into prices. This paper studies disequilibrium trade in a large market for an indivisible good. We focus on the possible speed of adjustment when arbitrage among periods is feasible and the surplus loss. We find that incentive compatible sequential trade through a disequilibrium path is only compatible with sluggish price adjustments and sufficiently impatient agents. Thus, price adjustment does not depend on excess demand alone but on arbitrage opportunities and the willingness of agents to engage on them. We find that the upper bound on the speed of price adjustment involves a lower bound for the social surplus loss, whatever the kind of rationing. The reason is that even when the market price converges to the surplus maximizing value, as it happens when rationing is efficient, some pieces of surplus are not attainable at the current period due to arbitrage. Moreover, faster price adjustments do not imply less surplus loss, because the effect of price changes on transactions via arbitrage. Finally, under weaker-than-efficient rationing there is a one period incentive compatible trading procedure in which most of the surplus is destroyed. The procedure has the property that almost every agent in the market trades.

Suggested Citation

  • Corchón Luis C. & Rueda-Llano José, 2020. "Disequilibrium Trade in a Large Market for an Indivisible Good," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 20(2), pages 1-16, June.
  • Handle: RePEc:bpj:bejtec:v:20:y:2020:i:2:p:16:n:6
    DOI: 10.1515/bejte-2018-0194
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    References listed on IDEAS

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    1. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    2. Peter J. Hammond, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Oxford University Press, vol. 46(2), pages 263-282.
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    More about this item

    Keywords

    disequilibrium trade; large market; incentive compatibility; rationing; adjustment speed; market failure; competitive equilibrium;
    All these keywords.

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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