Transfer Paradox in a General Equilibrium Economy: a First Experimental Investigation

20 Pages Posted: 22 Jun 2020

See all articles by Kenju Kamei

Kenju Kamei

Durham University - Department of Economics and Finance

Date Written: May 27, 2020

Abstract

The transfer paradox, whereby a transfer of resources that influences the equilibrium price benefits the donor while harming the recipient, is a classic paradox in general equilibrium theory. This paper pursues an experimental investigation of the transfer paradox using a theoretical framework of a three-agent pure exchange economy that is predicted to have such a paradox. Two treatments were conducted. In the first treatment, there was one subject for each agent role in the experimental economy. In the other treatment, there were five subjects for each agent role (a total of 15 subjects) in the experimental economy. The experiment results indicate that a transfer of endowments among agents influenced the market clearing price, and consequently the donors benefited from this transfer, consistent with the competitive equilibrium theory. The equilibrium effects were strongest in the treatment with larger group size, resonating with the idea that having a larger number of market participants encourages them to behave competitively. Further, when given an option to make a transfer, the majority of the donor agents endogenously decide to adjust the endowment distribution. A detailed analysis found that the subjects’ decisions to transfer were mainly driven by the equilibrium effects on prices, and their decisions were largely unaffected by their measured level of cognitive ability.

Keywords: experiments, transfer paradox, general equilibrium, equilibrium effects

JEL Classification: C92, D51

Suggested Citation

Kamei, Kenju, Transfer Paradox in a General Equilibrium Economy: a First Experimental Investigation (May 27, 2020). Available at SSRN: https://ssrn.com/abstract=3611756 or http://dx.doi.org/10.2139/ssrn.3611756

Kenju Kamei (Contact Author)

Durham University - Department of Economics and Finance ( email )

Durham, DH1 3HY
United Kingdom

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