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Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium

Computational Economics, Vol. 16, Issue 3, pp. 257-284, December 2000

Posted: 30 Jul 2001  

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Antoni Bosch i Domènech

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Abstract

Economics is the science of want and scarcity. We show that want and scarcity, operating within a simple exchange institution (double auction), can be sufficient for an economy consisting of multiple inter-related markets to attain competitive equilibrium (CE). We generalize Gode and Sunder's (1993a, 1993b) Single-market finding to multi-market economies, and explore the role of the scarcity constraint in convergence of economies to CE. When the scarcity constraint is relaxed by allowing arbitrageurs in middle markets to enter speculative trades, prices still converge to CE, but allocative efficiency of the economy declines. Optimization by individual agents, often used to derive competitive equilibria, is unnecessary for an actual economy to approximately attain such equilibria. From the failure of humans to optimize in complex tasks, one need not conclude that the equilibria derived from the competitive model are descriptively irrelevant. We show that even in complex economic systems which are highly inefficient, such equilibria can be attained under a range of surprisingly weak assumptions about agent behavior.

Keywords: Competitive Equilibrium, Convergence, Zero-Intelligence Traders, Minimal Rationality Economics

JEL Classification: C92, D40, D44

Suggested Citation

Sunder, Shyam and Bosch i Domènech, Antoni, Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium. Computational Economics, Vol. 16, Issue 3, pp. 257-284, December 2000. Available at SSRN: https://ssrn.com/abstract=273996

Shyam Sunder (Contact Author)

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Antoni Bosch i Domènech

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 27 28 (Phone)
(34-93) 542 17 46 (Fax)

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