Extreme Walrasian Dynamics: The Gale Example in the Lab

Sean Crockett, Ryan Oprea and Charles Plott ()

American Economic Review, 2011, vol. 101, issue 7, 3196-3220

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. (JEL C92, D50)

Date: 2011
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