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Decentralised exchange, out-of-equilibrium dynamics and convergence to efficiency

  • Ghosal, Sayantan
  • Porter, James

In this paper, we study out-of-equilibrium dynamics with decentralised exchange (bilateral bargaining between randomly matched pairs of agents). We characterise the conditions under which out-of-equilibrium trading converges to efficient allocations when agents are myopic, have limited information and incur utility losses relative to current holdings by engaging in (bounded) experimentation. We show, numerically, that the rate of convergence to efficient allocations is exponential across a variety of different settings where agents’ preferences can be represented by a Cobb–Douglas utility function. Finally the results are generalised to explicit exchange networks.

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Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 66 (2013)
Issue (Month): 1 ()
Pages: 1-21

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Handle: RePEc:eee:matsoc:v:66:y:2013:i:1:p:1-21
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505565

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  1. Gale, Douglas M, 1986. "Bargaining and Competition Part II: Existence," Econometrica, Econometric Society, vol. 54(4), pages 807-18, July.
  2. Michihiro Kandori & Roberto Serrano & Oscar Volij, 2004. "Decentralized Trade, Random Utility and the Evolution of Social Welfare," CIRJE F-Series CIRJE-F-286, CIRJE, Faculty of Economics, University of Tokyo.
  3. Feldman, Allan M, 1973. "Bilateral Trading, Processes, Pairwise Optimality, and Pareto Optimality," Review of Economic Studies, Wiley Blackwell, vol. 40(4), pages 463-73, October.
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  5. Fisher, Franklin M, 1981. "Stability, Disequilibrium Awareness, and the Perception of New Opportunities," Econometrica, Econometric Society, vol. 49(2), pages 279-317, March.
  6. Oscar Volij, 2000. "The Evolution of Exchange," Econometric Society World Congress 2000 Contributed Papers 0292, Econometric Society.
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  8. Jackson, Matthew O., 1998. "The Evolution of Social and Economic Networks," Working Papers 1044, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Gintis Herbert, 2006. "The Emergence of a Price System from Decentralized Bilateral Exchange," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-15, December.
  10. Goldman, Steven M & Starr, Ross M, 1982. "Pairwise, t-Wise, and Pareto Optimalities," Econometrica, Econometric Society, vol. 50(3), pages 593-606, May.
  11. Arial Rubinstein & Asher Wolinsky, 1985. "Equilibrium in a Market with Sequential Bargaining," Levine's Working Paper Archive 623, David K. Levine.
  12. Massimo Morelli & Sayantan Ghosal, 2001. "Retrading in Market Games," Working Papers 01-09, Ohio State University, Department of Economics.
  13. Robert Axtell, 2005. "The Complexity of Exchange," Economic Journal, Royal Economic Society, vol. 115(504), pages F193-F210, 06.
  14. Herbert Gintis, 2007. "The Dynamics of General Equilibrium," Economic Journal, Royal Economic Society, vol. 117(523), pages 1280-1309, October.
  15. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
  16. Shapley, Lloyd & Scarf, Herbert, 1974. "On cores and indivisibility," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 23-37, March.
  17. Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, vol. 54(4), pages 785-806, July.
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