Realizable Utility Maximization as a Mechanism for the Stability of Competitive General Equilibrium in a Scarf Economy

Tongkui Yu and Shu-Heng Chen
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Tongkui Yu: Southwest University

Computational Economics, 2021, vol. 58, issue 1, No 7, 133-167

Abstract: Abstract A competitive general equilibrium (CGE) is a Pareto-optimal allocation, but it is not always stable under the mechanism of the tâtonnement process. How to drive an economy to the CGE and maintain its stability remains to be an issue with a high intellectual interest. In this article, using the celebrated counterexample of the Scarf economy, we first provide an intuitive and explicit explanation to analyze why the CGE is unstable under the tâtonnement process. Then a novel mechanism, called the realizable utility maximization mechanism (RUMM), is proposed in which the price of a product is adjusted not according to the excess demand as in the standard tâtonnement process, but according to the potential utility of the individuals owning the product. It is found that the RUMM can maintain the stability of the CGE even in the Scarf economy, and can shed light on the role of social learning in stabilizing the Scarf economy as we have learned from the literature of agent-based non-tâtonnement models.

Keywords: Scarf economy; Walrasian equilibrium; Stability; Realizable utility; Tâtonnement process (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10614-020-09989-x

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