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A Simple Decentralized Institution for Learning Competitive Equilibrium

26 Pages Posted: 2 Dec 2002  

Shyam Sunder

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

Sean Crockett

Baruch College (CUNY) - Zicklin School of Business - Department of Economics and Finance

Stephen Spear

Carnegie Mellon University - Financial Economics

Date Written: November 2002

Abstract

The epsilon-intelligent competitive equilibrium algorithm is a decentralized alternative to Walrus' tatonnement procedure for markets to arrive at competitive equilibrium. We build on the Gode-Spear-Sunder zero-intelligent algorithm in which random generation of bids and offers from agents' welfare-enhancing opportunity sets generates Pareto optimal allocations in a pure exchange economy. We permit agents to know if they are subsidizing others at such allocations, and to veto such allocations, restricting the subsequent iterations of the algorithm only to those trades that are both Pareto-improving and provide strictly greater wealth, and ultimately utility, for such agents. In this simple institution actions of minimally intelligent agents based on local information can lead the market to approximate competitive equilibrium in a larger set of economies than the tatonnement process would allow. This helps address one of the major shortcomings of the Arrow-Debreu-McKenzie model with respect to the instability of tatonnement in an open set of economies. It also addresses the behavioral critique of mathematically derived equilibria for the inability of cognitively-limited humans to maximize. The proof of convergence of the algorithm presented here also provides a way of showing the existence of competitive equilibrium for monotonic, convex exchange economies with heterogeneous agents and many goods without application of a fixed-point theorem.

Keywords: Learning Competitive Equilibrium, Minimal Rationality, Allocative Efficiency, Scarfs' Example

JEL Classification: C63, C68, D44, D51, D58, D61

Suggested Citation

Sunder, Shyam and Crockett, Sean and Spear, Stephen, A Simple Decentralized Institution for Learning Competitive Equilibrium (November 2002). Yale ICF Working Paper No. 02-43. Available at SSRN: https://ssrn.com/abstract=354124 or http://dx.doi.org/10.2139/ssrn.354124

Shyam Sunder

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

Sean Crockett

Baruch College (CUNY) - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Ave., Box B10-225
New York, NY 10010
United States
646-312-3520 (Phone)

Stephen E. Spear (Contact Author)

Carnegie Mellon University - Financial Economics ( email )

GSIA
Schenley Park
Pittsburgh, PA 15213
United States

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