Gale_101124 - Extreme Walrasian Dynamics: The Gale Example...

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Unformatted text preview: Extreme Walrasian Dynamics: The Gale Example in the Lab By Sean Crockett, Ryan Oprea, and Charles Plott * Abstract We study David Gales (1963) economy using laboratory markets. Tatonnement theory predicts prices will diverge from an equitable interior equilibrium towards infinity or zero depending only on initial prices. The inequitable equilibria determined by these dynamics give all gains from exchange to one side of the market. We show surprisingly strong support for these predictions. In most sessions one side of the market eventually outgains the other by more than twenty times, leaving the disadvantaged side to trade for mere pennies. We also find preliminary evidence that these dynamics are sticky, resisting exogenous interventions designed to reverse their trajectories. Keywords : Tatonnement, Disequilibrium, General Equilibrium, Experiment JEL codes: C92, D50 * Crockett: Department of Economics and Finance, Zicklin School of Business, Baruch College (City University of New York), 55 Lexington Avenue, Room 10-277, New York, NY 100010,; Oprea: Economics Department, University of California - Santa Cruz, 1156 High Street, Santa Cruz, CA 95064,; Plott: Division of the Humanities and Social Sciences, 228-77, California Institute of Technology, Pasadena, CA 91125, We thank three anonymous referees, Omar Al-Ubaydli, Dan Friedman, Stephen Spear, Steve Gjerstad, Bart Wilson, seminar participants at Baruch College, participants at the 2009 Economic Science Association North American Regional Meeting and participants at the 9th Society for the Advancement of Economic Theory Conference. We also thank Paul J. Brewer, Hsing Yang Lee, and Travis Maron for developing the laboratory market system we used to conduct our experiment (see http://marketscape, for details). For financial support, Crockett thanks the City University of New York through PSC-CUNY award #60095-3738. Plott thanks The Gordon and Betty Moore Foundation and the Caltech Laboratory for Experimental Economics and Political Science. 2 [F]or the case of two goods, one always has global stability ... Nevertheless, some queer things can happen even in this case. David Gale (1963) General equilibrium theory is a cornerstone of modern economics and our core account of the nature of competitive markets. However, the theory has usually been focused more on the existence and character of competitive equilibrium than on how, when and why economies come to be in equilibrium. Given the computational and epistemic requirements for calculating a competitive equilibrium, it seems implausible that economic agents could ever think their way there. More likely, adaptive dynamic processes govern disequilibrium prices, guiding them towards or away from equilibria. Until and unless we understand these dynamic processes, it is difficult to assess general equilibrium theory's usefulness for predicting and explaining the...
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This note was uploaded on 01/11/2012 for the course ECON 200 taught by Professor Riley during the Fall '10 term at UCLA.

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Gale_101124 - Extreme Walrasian Dynamics: The Gale Example...

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