Market design and the stability of general equilibrium

Jacob Goeree and Luke Lindsay

Journal of Economic Theory, 2016, vol. 165, issue C, 37-68

Abstract: We employ laboratory methods to study the stability of competitive equilibrium in Scarf's economy (Scarf, 1960). Tatonnement theory predicts that prices are globally unstable for this economy, i.e. unless prices start at the competitive equilibrium they oscillate without converging. Anderson et al. (2004) report that in laboratory double auction markets, prices in the Scarf economy do indeed oscillate with no clear sign of convergence. We replicate their experiments and confirm that tatonnement theory predicts the direction of price changes remarkably well. Prices are globally unstable with adverse effects for the economy's efficiency and the equitable distribution of the gains from trade.

Keywords: Scarf economy; Tatonnement; Global Newtonian dynamic; Instability; General equilibrium; Market design (search for similar items in EconPapers)
JEL-codes: C92 D50 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:165:y:2016:i:c:p:37-68

DOI: 10.1016/j.jet.2016.04.004

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