The Walrasian Tatonnement to Economize on Cognitive Transaction Costs: An Experiment
43 Pages Posted: 13 Oct 2001
Date Written: June 2001
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.
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