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

Emiko Fukuda, Shuhei Sato, Junyi Shen, Ken-Ichi Shimomura and Takehiko Yamato
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Emiko Fukuda: Department of Industrial Engineering and Economics, School of Engineering, Tokyo Institute of Technology, JAPAN
Shuhei Sato: Department of Social Engineering, Graduate School of Decision Science and Technology, Tokyo Institute of Technology, JAPAN
Takehiko Yamato: Department of Industrial Engineering and Economics, School of Engineering, Tokyo Institute of Technology, JAPAN

No DP2020-20, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

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 (search for similar items in EconPapers)
JEL-codes: C92 D51 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2020-07, Revised 2021-04
New Economics Papers: this item is included in nep-exp and nep-ore
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