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The Hayek hypothesis and long run competitive equilibrium: an experimental investigation

Author Info

Listed author(s):
  • Jason Shachat

    ()

    (The Wang Yanan Institute for Studies in Economics, and MOE Key Laboratory in Econometrics, Xiamen University)

  • Zhenxuan Zhang

    ()

    (The Wang Yanan Institute for Studies in Economics, and MOE Key Laboratory in Econometrics, Xiamen University)

Abstract

We report on an experiment investigating whether the Hayek Hypothesis (Smith, 1982) extends to the long run setting. We consider two environments; one with a common production technology having a U-shaped long run average cost curve and a single competitive equilibrium, and another with a common constant returns to scale technology having a constant long run average cost curve and multiple competitive equilibria. While there is convergence in both environments to the long run equilibrium, it takes longer and is less robust than usually observed in the short run setting. We show that price formation is adaptive and quickly converges to realize short run equilibrium, but long run investment decisions exhibit very limited rationality. We present and estimate an investment choice model that shows that only minimal rationality, coupled with repeated decisions, is enough to achieve high long run allocative efficiency when markets use continuous double auctions.

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File URL: http://feel.xmu.edu.cn/RePEc/wpaper/The_Hayek_hypothesis_and_long_run_competitive_equilibrium.pdf
File Function: 2012
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Paper provided by Xiamen Unversity, The Wang Yanan Institute for Studies in Economics, Finance and Economics Experimental Laboratory in its series Working Papers with number 1201.

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Length: 38 pages
Date of creation: 21 Jun 2012
Date of revision: 29 Jun 2013
Handle: RePEc:fee:wpaper:1201
Contact details of provider: Phone: 86-592-2180855
Fax: 86-592-2187708
Web page: http://feel.xmu.edu.cn
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Keywords: Experiment; Double Auction; Hayek Hypothesis; Long Run Equilibrium; Bounded Rationality;

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Find related papers by JEL classification:
  • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
  • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact

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Cited by:

  1. Manahov, Viktor & Hudson, Robert & Hoque, Hafiz, 2015. "Return predictability and the ‘wisdom of crowds’: Genetic Programming trading algorithms, the Marginal Trader Hypothesis and the Hayek Hypothesis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 85-98.

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