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Three Minimal Market Institutions with Human and Algorithmic Agents: Theory and Experimental Evidence

We define and examine the performance of three minimal strategic market games (sell-all, buy-sell, and double auction) in laboratory relative to the predictions of theory. Unlike open or partial equilibrium settings of most other experiments, these closed exchange economies have limited amounts of cash to facilitate transactions, and include feedback. General equilibrium theory, since it abstracts away from market mechanisms and has no role for money or credit, makes no predictions about how the paths of convergence to the competitive equilibrium may differ across alternative mechanisms. Introduction of markets and money as carriers of process creates the possibility of motion. The laboratory data reveal different paths, and different levels of allocative efficiency in the three settings. The results suggest that abstracting away from all institutional details does not help understand dynamic aspects of market behavior. For example, the oligopoly effect of feedback from buying an endowed good is missed. Inclusion of mechanism differences into theory may enhance our understanding of important aspects of markets and money and help link conventional equilibrium analysis with dynamics.

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File URL: http://cowles.econ.yale.edu/P/cd/d16a/d1623.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1623.

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Length: 56 pages
Date of creation: Aug 2007
Date of revision: Jun 2009
Publication status: Published in Games and Economic Behavior (2010), 70: 403-424
Handle: RePEc:cwl:cwldpp:1623
Contact details of provider: Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/

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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  15. Thomas Quint & Martin Shubik, 2004. "Gold, Fiat and Credit. An Elementary Discussion of Commodity Money, Fiat Money and Credit, Part II," Cowles Foundation Discussion Papers 1460, Cowles Foundation for Research in Economics, Yale University.
  16. Plott, Charles R & Sunder, Shyam, 1982. "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 663-98, August.
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  27. Alok Kumar & Martin Shubik, 2001. "Variations on the Theme of Scarf's Counter-Example," Working Papers 01-12-074, Santa Fe Institute.
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