Price Dynamics in General Equilibrium Experiments
18 Pages Posted: 4 Jun 2013
Date Written: July 2013
General equilibrium (GE) theory faces several related challenges. Classical theories of out‐of‐equilibrium adjustment are intuitive but implausibly centralized. Further, standard restrictions on individual preferences place little structure on aggregate excess demand functions. Amongst other issues, this fact implies that economies can be unstable under classical dynamics, and thus instability appears to be an unavoidable feature of GE theory. This paper recounts laboratory studies of GE environments which reveal that classical theories of dynamics do, in fact, organize market activity surprisingly well. These experiments suggest that the Walrasian auctioneer, for example, appears to be a constructive abstraction, and that instability should be accommodated within theory rather than circumscribed. Laboratory applications of GE theory focused on issues beyond stability and dynamics are also briefly surveyed.
Keywords: General equilibrium theory, Experimental economics, Stability
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