A General Equilibrium Structure for Induced Supply and Demand

Steven Gjerstad () and Jason Shachat

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

Abstract: We construct a mapping between induced supply and demand environments, often used in laboratory market experiments, and general equilibrium production economies. This general equilibrium structure, when combined with the interpretation of market experiments as decentralized economic systems by Smith [1982], results in a stronger link between market experiments and the decentralized mechanisms literature. This facilitates a clearer delineation between environment, institution, and behavior in these experiments. In the absence of this structure these three aspects of market experiments have often been misconstrued. For example, Gode and Sunder [1993] claim that efficiency in their ``zero intelligence" model results primarily from the institutional structure of the double auction, rather than from rationality of traders. Using our structure, we show that in fact, their zero intelligence traders exhibit individual rationality.

* Hewlett-Packard Laboratories, Palo Alto, California

Date: 1996-10
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