Stabilizing the Economy: Market Design and General Equilibrium

38 Pages Posted: 16 Sep 2012

See all articles by Jacob K. Goeree

Jacob K. Goeree

University of Zurich

Luke Lindsay

University of Exeter Business School - Department of Economics

Date Written: September 4, 2012

Abstract

We employ laboratory methods to study stability of competitive equilibrium in Scarf's economy (International Economic Review, 1960). Tatonnement theory predicts that prices are globally unstable for this economy, i.e. unless prices start at the competitive equilibrium they oscillate without converging. Anderson et al. (Journal of Economic Theory, 2004) report that in laboratory double auction markets, prices in the Scarf economy do indeed oscillate with no clear sign of convergence. We replicate their experiments and confirm that tatonnement theory predicts the direction of price changes remarkably well. Prices are globally unstable with adverse effects for the economy's efficiency and the equitable distribution of the gains from trade. We also introduce a novel market mechanism where participants submit demand schedules and prices are computed using Smale's global Newtonian dynamic (American Economic Review, 1976). We show that for the Scarf economy, submitting a competitive schedule, i.e. a set of quantities that maximize utility taking prices as given, is a weakly dominant strategy. The resulting outcome corresponds to the unique competitive equilibrium of the Scarf economy. In experiments that employ the schedule market, prices do not oscillate but instead converge quickly to the competitive equilibrium. Besides stabilizing prices, the schedule market is more efficient and results in highly egalitarian outcomes.

Keywords: Scarf economy, tatonnement, global Newtonian dynamic, instability, general equilibrium, market design

JEL Classification: C92, D50

Suggested Citation

Goeree, Jacob K. and Lindsay, Luke, Stabilizing the Economy: Market Design and General Equilibrium (September 4, 2012). Available at SSRN: https://ssrn.com/abstract=2146695 or http://dx.doi.org/10.2139/ssrn.2146695

Jacob K. Goeree (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/jgoeree.html

Luke Lindsay

University of Exeter Business School - Department of Economics ( email )

Streatham Court
Exeter, EX4 4RJ
United Kingdom

HOME PAGE: http://business-school.exeter.ac.uk/about/whoswho/index.php?web_id=Luke_Lindsay

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
50
Abstract Views
746
PlumX Metrics