RIEB Discussion Paper Series No.2020-20

RIEB Discussion Paper Series No.2020-20

Title

Walrasian Dynamics with Endowment Changes: The Gale Example in a Laboratory Market Experiment

Abstract

We study the stability of price dynamics when endowments change by a laboratory market experiment of double auction. We consider a two-commodity exchange economy based on the Gale example, in which there are consumers with non-smooth preferences and exists a unique interior equilibrium. Keeping preferences and total amounts of the commodities fixed, we change individual endowments without informing subjects of when to switch so that stability of the equilibrium in Walrasian tatonnement dynamics is reversed in the middle of the experiment. We observe that, the tendency of divergence from the equilibrium is switched to convergence to the equilibrium when endowments change from an unstable setting to a stable setting, and vice versa. Theoretical predictions on movements of transaction prices work better when the interior equilibrium is unstable than when it is stable. Moreover, efficiency is higher when the interior equilibrium is unstable than when it is stable. Our observations reinforce experimental results of the Walrasian dynamics by examining a simple economy in which implausible outcomes are predicted.

Keywords

Walrasian stability; Experiments; Double auction

JEL Classification

C92, D51

Inquiries

Emiko FUKUDA
Department of Industrial Engineering and Economics, School of Engineering, Tokyo Institute of Technology

Shuhei SATO
Department of Social Engineering, Graduate School of Decision Science and Technology, Tokyo Institute of Technology

Junyi SHEN
Research Institute for Economics and Business Administration, Kobe University
School of Economics, Shanghai University

Ken-Ichi SHIMOMURA
Research Institute for Economics and Business Administration, Kobe University
2-1 Rokkodai, Nada, Kobe 657-8501, Japan.
Phone: +81-78-803-7036
FAX: +81-78-803-7059
Email: ken-ichi@rieb.kobe-u.ac.jp

Takehiko YAMATO
Department of Industrial Engineering and Economics, School of Engineering, Tokyo Institute of Technology

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