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The Walrasian Tatonnement to Economize on Cognitive Transaction Costs: An Experiment

43 Pages Posted: 13 Oct 2001  

Sebastien Pouget

Toulouse School of Economics

Date Written: June 2001

Abstract

This paper compares experimentally the price formation on a Walrasian Tatonnement and on a Call Market in a common value environment with insiders and gains from trade inspired by Plott and Sunder (1982). A game-theoretical analysis shows that these two institutions are strategically equivalent. In the experiment, the informational efficiency is almost perfect on the two trading venues indicating that agents coordinate on the fully revealing equilibrium. However, the gains from trade are higher on the Walrasian Tatonnement than on the Call Market. As uninformed agents' deviations from equilibrium are more frequent on this latter institution, the market experiences a lower liquidity. The Walrasian Tatonnement is interpreted as an "explicit" mechanism: during the trading process, tentative prices can be observed and the execution price is known before transactions occur. This pre-trade transparency which is not as high on the Call Market has no influence on equilibrium outcomes but yet helps subjects finding out equilibrium strategies. This paper supports the view that trading institutions should be designed including cognitively ergonomic features to fit the limited nature of human rationality.

Suggested Citation

Pouget, Sebastien, The Walrasian Tatonnement to Economize on Cognitive Transaction Costs: An Experiment (June 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=287098 or http://dx.doi.org/10.2139/ssrn.287098

Sebastien Pouget (Contact Author)

Toulouse School of Economics ( email )

21 allée de Brienne
31015 Toulouse Cedex 6
France

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