Extreme Walrasian Dynamics: The Gale Example in the Lab
Baruch College (CUNY) - Zicklin School of Business - Department of Economics and Finance
University of California, Santa Cruz
Charles R. Plott
California Institute of Technology - Division of the Humanities and Social Sciences
April 2, 2010
We study the classic Gale (1963) economy using laboratory markets. Tatonnement theory predicts prices will diverge from an equitable interior equilibrium towards infinity or zero depending only on initial prices. The inequitable equilibria selected by these dynamics give all gains from exchange to one side of the market. Our results show surprisingly strong support for these predictions. In most sessions one side of the market eventually outgains the other by more than twenty times, leaving the disadvantaged side to trade for mere pennies. We also find evidence that these dynamics are sticky, resisting exogenous interventions designed to reverse their trajectories.
Number of Pages in PDF File: 44
Keywords: Tatonnement, Disequilibrium, General Equilibrium, Experiment
JEL Classification: C92, D50working papers series
Date posted: May 5, 2010
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