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

  • 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)

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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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
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