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Market design and the stability of general equilibrium

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  • Goeree, Jacob K.
  • Lindsay, Luke

Abstract

We employ laboratory methods to study the stability of competitive equilibrium in Scarf's economy (Scarf, 1960). Tatonnement theory predicts that prices are globally unstable for this economy, i.e. unless prices start at the competitive equilibrium they oscillate without converging. Anderson et al. (2004) report that in laboratory double auction markets, prices in the Scarf economy do indeed oscillate with no clear sign of convergence. We replicate their experiments and confirm that tatonnement theory predicts the direction of price changes remarkably well. Prices are globally unstable with adverse effects for the economy's efficiency and the equitable distribution of the gains from trade.

Suggested Citation

  • Goeree, Jacob K. & Lindsay, Luke, 2016. "Market design and the stability of general equilibrium," Journal of Economic Theory, Elsevier, vol. 165(C), pages 37-68.
  • Handle: RePEc:eee:jetheo:v:165:y:2016:i:c:p:37-68
    DOI: 10.1016/j.jet.2016.04.004
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    References listed on IDEAS

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    Cited by:

    1. Crockett, Sean & Friedman, Daniel & Oprea, Ryan, 2017. "Aggregation and convergence in experimental general equilibrium economies constructed from naturally occurring preferences," Discussion Papers, Research Professorship Market Design: Theory and Pragmatics SP II 2017-501, WZB Berlin Social Science Center.

    More about this item

    Keywords

    Scarf economy; Tatonnement; Global Newtonian dynamic; Instability; General equilibrium; Market design;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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