Decentralized Trade, Random Utility and the Evolution of Social Welfare

Abstract

We study decentralized trade processes in general exchange economies and house allocation problems with and without money. Such processes are subject to persistent random shocks stemming from agents' maximization of random utility. By imposing structure on the utility noise term - logit distribution - one is able to calculate exactly the stationary distribution of the perturbed Markov process for any level of noise. We show that the stationary distribution places the largest probability on the maximizer of several social welfare functions in different variants of the model.

Keywords: decentralized trade, exchange economies, housing markets, stochastic stability, logit model, social welfare functions

JEL Classification: C79, D51, D71