Walrasian Sequential Equilibrium, Bounded Rationality, and Social Experiments

Abstract

In the paper, the concept of Walrasian sequential equilibrium is developed to formalize the notions of fundamental social and endogenous uncertainties and entrepreneurial discovery. It predicts that social sequential experiments with efficient as well as inefficient network patterns of division of labor can gradually acquire organization information for society as a whole. The experiment process is decentralized and based on individuals' bounded rationality. In this process, each individual never knows others' characteristics, although all players collectively learn abstract organization information carried by price signals gradually. This paper proves an existence theorem of equilibrium for a general class of well-closed Walrasian sequential equilibrium models and avoids the recursive paradox in the presence of individual bounded rationality.

Keywords: Bounded rationality, social experiments, fundamental, endogenous uncertainties

JEL Classification: D11, D50, D51