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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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    Cited by:

    1. Aad Ruiter, 2020. "Approximating Walrasian Equilibria," Computational Economics, Springer;Society for Computational Economics, vol. 55(2), pages 577-596, February.
    2. Benjamin J. Gillen & Masayoshi Hirota & Ming Hsu & Charles R. Plott & Brian W. Rogers, 2021. "Divergence and convergence in Scarf cycle environments: experiments and predictability in the dynamics of general equilibrium systems," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(3), pages 1033-1084, April.
    3. Emiko Fukuda & Shuhei Sato & Junyi Shen & Ken-Ichi Shimomura & Takehiko Yamato, 2020. "Walrasian Dynamics with Endowment Changes: The Gale Example in a Laboratory Market Experiment," Discussion Paper Series DP2020-20, Research Institute for Economics & Business Administration, Kobe University, revised Apr 2021.
    4. Timothy N. Cason & Daniel Friedman & Ed Hopkins, 2021. "An Experimental Investigation of Price Dispersion and Cycles," Journal of Political Economy, University of Chicago Press, vol. 129(3), pages 789-841.
    5. Sean Crockett & Daniel Friedman & Ryan Oprea, 2021. "Naturally Occurring Preferences And General Equilibrium: A Laboratory Study," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(2), pages 831-859, May.
    6. 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.

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    More about this item

    Keywords

    Scarf economy; Tatonnement; Global Newtonian dynamic; Instability; General equilibrium; Market design;
    All these keywords.

    JEL classification:

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

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