Extreme Walrasian Dynamics: The Gale Example in the Lab
American Economic Review, Vol. 101(7), pp. 3196-3220, 2011
44 Pages Posted: 5 May 2010 Last revised: 20 Mar 2019
Date Written: 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.
Keywords: Tatonnement, Disequilibrium, General Equilibrium, Experiment
JEL Classification: C92, D50
Suggested Citation: Suggested Citation