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American Economic Review Vol. 101 No. 7 2011

Extreme Walrasian Dynamics: The Gale Example in the Lab

Sean Crockett1; Ryan Oprea2; Charles R. Plott3

1 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 10010. · 2 Economics Department, University of California–Santa Cruz, 1156 High Street, Santa Cruz, CA 95064. · 3 Division of the Humanities and Social Sciences 228-77, California Institute of Technology, Pasadena, CA 91125.

Abstract

We study David Gale's (1963) economy using laboratory markets. Tatonnement theory predicts prices will diverge from an equitable interior equilibrium toward 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 20 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.

DOI
10.1257/aer.101.7.3196
Volume
101
Issue
7
Pages
3196-3220
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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