Divergence and convergence in Scarf cycle environments: experiments and predictability in the dynamics of general equilibrium systems

Benjamin J. Gillen, Masayoshi Hirota, Ming Hsu, Charles R. Plott () and Brian W. Rogers
Additional contact information
Benjamin J. Gillen: Claremont McKenna College
Masayoshi Hirota: Information and Social Science Research
Ming Hsu: University of California, Berkeley
Charles R. Plott: California Institute of Technology
Brian W. Rogers: California Institute of Technology

Economic Theory, 2021, vol. 71, issue 3, No 8, 1033-1084

Abstract: Abstract Previous experimental work demonstrates the power of classical theories of economic dynamics to accurately characterize equilibration in multiple market systems. Building on the literature, this study examines the behavior of experimental continuous double auction markets in convergence-challenging environments identified by Scarf (Int Econ Rev 1:157–171, 1960) and Hirota (Int Econ Rev 22:461–467, 1981). The experiments provide insight into two important economic questions: (a) Do markets necessarily converge to a unique interior equilibrium? and (b) which model, among a set of classical specifications, most accurately characterizes observed price dynamics? We observe excess demand-driven prices spiraling outwardly away from the interior equilibrium prices as predicted by the theory of disequilibrium price dynamics. We estimate a structural model establishing that partial equilibrium dynamics characterize price changes even in an unstable general equilibrium environment. We observe linkages between excess demand in one market and price changes in another market, but the sign of expected price change in a market does not depend on the magnitude of excess demand in other markets unless disequilibrium is severe.

Keywords: General equilibrium; Stability; Experiments (search for similar items in EconPapers)
JEL-codes: C92 D50 E3 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s00199-020-01265-1

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