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The evolution of exchange

  • Ben-Shoham, Assaf
  • Serrano, Roberto
  • Volij, Oscar

ABSTRACT: Stochastic stability is applied to the problem of exchange. We analyze the stochastic stability of two dynamic trading processes in a simple housing market. In both models, traders meet in pairs at random and exchange their houses when trade is mutually beneficial, but occasionally they make mistakes. The models differ in the probability of mistakes. When all mistakes are equally likely, the set of stochastically stable allocations contains the set of efficient allocations. When more serious mistakes are less likely, the stochastically stable states are those allocations, always efficient, with the lowest envy level.

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File URL: http://www.sciencedirect.com/science/article/B6WJ3-48R1TRW-5/2/33f04fc705075f70e4e9b2c7655f8353
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 114 (2004)
Issue (Month): 2 (February)
Pages: 310-328

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Handle: RePEc:eee:jetheo:v:114:y:2004:i:2:p:310-328
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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