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Equilibrium Selection in an Experimental Macroeconomy

  • Vivian Lei


    (Department of Economics, University of Wisconsin–Milwaukee, Milwaukee, WI 53201, USA)

  • Charles N. Noussair


    (Department of Economics, Faculty of Economics and Business, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands)

In this paper we report the results of an experiment designed to study the behavior of a laboratory macroeconomy with two stable steady states. The economy has the structure of an optimal growth model in which resources are allocated between consumption and investment over a sequence of time periods. The economy is decentralized, with a market for capital in operation. We find that the economy often falls into the Pareto-inferior steady state, which can be viewed as a poverty trap. The initial endowment of capital stock is varied as a treatment variable in the experiment, and the economy is more likely to reach the optimal steady state when its initial endowment is high than when it is low. Organizing the economy with a central planner directing economic activity fails to induce it to reach the optimal steady state.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 74 (2007)
Issue (Month): 2 (October)
Pages: 448-482

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Handle: RePEc:sej:ancoec:v:74:2:y:2007:p:448-482
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  1. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  2. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  3. Lei, V. & Noussair, C., 2000. "An Experimental Test of an Optimal Growth Model," Purdue University Economics Working Papers 1131, Purdue University, Department of Economics.
  4. Plott, Charles R & George, Glen, 1992. "Marshallian vs. Walrasian Stability in an Experimental Market," Economic Journal, Royal Economic Society, vol. 102(412), pages 437-60, May.
  5. J. B. Van Huyck & R. C. Battalio & R. O. Beil, 2010. "Tacit coordination games, strategic uncertainty, and coordination failure," Levine's Working Paper Archive 661465000000000393, David K. Levine.
  6. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
  7. Kenneth Matheny & Charles Noussair, 2000. "An experimental study of decisions in dynamic optimization problems," Economic Theory, Springer, vol. 15(2), pages 389-419.
  8. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  9. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
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