Why Should an Economy Be Competitive?

17 Pages Posted: 18 Oct 2011

See all articles by Hugues Bersini

Hugues Bersini

affiliation not provided to SSRN

Nicolas van Zeebroeck

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, iCite

Date Written: October 18, 2011

Abstract

This paper provides a new look at the well-known trade-off between efficiency and equality with an agent-based model. By way of a computer program, our study simulates the interactions of agents producing and trading goods within different market structures and looks at the resulting production and distribution of welfare among agents at the end of an arbitrarily large number of iterations. Two market mechanisms are compared: the competitive market (a double auction market in which agents outbid each other in order to buy and sell products) and the random market (in which products are allocated randomly). Our results first confirm that the superior efficiency of the competitive market comes at a very high price in terms of inequality, compared with the random market. We further explore the effect of agent rationality in production and auctioning (i.e. different information sets used or not by the agents in making their choice) and observe that although rationality affects efficiency only at the margin, inequalities can be very strongly affected by the behavior of the agents. This latter result suggests that market mechanisms can ensure optimal efficiency under certain constraints (as shown by Gode and Sunder 1993), but that the degree of inequality emerging from a certain market design can strongly depend on the rationality of the agents.

Keywords: efficiency, inequality, agent-based model, information

JEL Classification: A13, C63, D31, D44, D61, D63, P51

Suggested Citation

Bersini, Hugues and van Zeebroeck, Nicolas, Why Should an Economy Be Competitive? (October 18, 2011). Available at SSRN: https://ssrn.com/abstract=1945660 or http://dx.doi.org/10.2139/ssrn.1945660

Hugues Bersini

affiliation not provided to SSRN ( email )

Nicolas Van Zeebroeck (Contact Author)

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, iCite ( email )

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Brussels, B-1050
Belgium
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