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Equilibrium Selection in an Experimental Macroeconomy

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Vivian Lei & Charles N. Noussair, 2007. "Equilibrium Selection in an Experimental Macroeconomy," Southern Economic Journal, Southern Economic Association, vol. 74(2), pages 448-482, October.
  • Handle: RePEc:sej:ancoec:v:74:2:y:2007:p:448-482
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
    3. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, pages 234-248.
    4. Noussair, C. & Matheny, K. & Olson, M., 1998. "An Experimental Study of Decisions in Dynamic Optimization Problems," Purdue University Economics Working Papers 1110, Purdue University, Department of Economics.
    5. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
    6. Marimon, Ramon & Sunder, Shyam, 1993. "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence," Econometrica, Econometric Society, vol. 61(5), pages 1073-1107, September.
    7. Costas Azariadis & Allan Drazen, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 501-526.
    8. Plott, Charles R & George, Glen, 1992. "Marshallian vs. Walrasian Stability in an Experimental Market," Economic Journal, Royal Economic Society, vol. 102(412), pages 437-460, May.
    9. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, pages 121-144.
    10. Healy, Paul & Noussair, Charles, 2004. "Bidding behavior in the price is right game: an experimental study," Journal of Economic Behavior & Organization, Elsevier, pages 231-247.
    11. Kenneth Matheny & Charles Noussair, 2000. "An experimental study of decisions in dynamic optimization problems," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 389-419.
    12. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
    13. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, pages 112-156.
    14. Vivian Lei & Charles N. Noussair, 2002. "An Experimental Test of an Optimal Growth Model," American Economic Review, American Economic Association, pages 549-570.
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    Citations

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    Cited by:

    1. Ferruccio Ponzano & Roberto Ricciuti, 2012. "An Experimental AK Model of Growth," CESifo Working Paper Series 3744, CESifo Group Munich.
    2. C.Mónica Capra & Tomomi Tanaka & ColinF. Camerer & Lauren Feiler & Veronica Sovero & CharlesN. Noussair, 2009. "The Impact of Simple Institutions in Experimental Economies with Poverty Traps," Economic Journal, Royal Economic Society, vol. 119(539), pages 977-1009, July.
    3. Fortuna Casoria & Arno Riedl, 2013. "Experimental Labor Markets And Policy Considerations: Incomplete Contracts And Macroeconomic Aspects," Journal of Economic Surveys, Wiley Blackwell, pages 398-420.
    4. C. Monica Capra & Tomomi Tanaka, 2006. "Communication and the Extraction of Natural Renewable Resources with Threshold Externalities," Emory Economics 0602, Department of Economics, Emory University (Atlanta).
    5. Luba Petersen & Guidon Fenig, 2015. "Distributing scarce jobs and output: Experimental evidence on the effects of rationing," Discussion Papers dp15-02, Department of Economics, Simon Fraser University.
    6. Ricciuti, Roberto, 2008. "Bringing macroeconomics into the lab," Journal of Macroeconomics, Elsevier, pages 216-237.
    7. repec:pit:wpaper:334 is not listed on IDEAS
    8. Jasmina Arifovic & George Evans & Olena Kostyshyna, 2013. "Are Sunspots Learnable? An Experimental Investigation in a Simple General-Equilibrium Model," Staff Working Papers 13-14, Bank of Canada.

    More about this item

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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