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The Evolution of Exchange

Listed author(s):
  • Volij, Oscar
  • Ben-Shoham, Asaf
  • Serrano, Roberto

ABSTRACT: Stochastic stability is applied to the problem of exchange. We analyze the stochastic stability of two dynamic trading processes in a simple housing market. In both models, traders meet in pairs at random and exchange their houses when trade is mutually beneficial, but occasionally they make mistakes. The models differ in the probability of mistakes. When all mistakes are equally likely, the set of stochastically stable allocations contains the set of efficient allocations. When more serious mistakes are less likely, the stochastically stable states are those allocations, always efficient, with the lowest envy level.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers Archive with number 10247.

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Date of creation: 01 Feb 2004
Publication status: Published in Journal of Economic Theory, February 2004,
Handle: RePEc:isu:genres:10247
Contact details of provider: Postal:
Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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  1. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-1071, September.
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  8. Allan M. Feldman, 1973. "Bilateral Trading Processes, Pairwise Optimally, and Pareto Optimality," Review of Economic Studies, Oxford University Press, vol. 40(4), pages 463-473.
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