Out of Equilibrium Dynamics with Decentralized Exchange Cautious Trading and Convergence to Efficiency

Sayantan Ghosal and James Porter
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James Porter: Department of Economics, University of Warwick

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: Is the result that equilibrium trading outcomes are efficient in markets without frictions robust to a scenario where agents' beliefs and plans aren't already aligned at their equilibrium values? In this paper, starting from a situation where agents' beliefs and plans aren't already aligned at their equilibrium values, we study whether out of equilibrium trading converges to efficient allocations. We show that out-of-equilibrium trading does converge with probability 1 to an effcient allocation even when traders have limited information and trade cautiously. In economies where preferences can be represented by Cobb-Douglass utility functions, we show, numerically, that the rate of convergence will be exponential. We show that experimentation leads to convergence in some examples where multilateral exchange is essential to achieve gains from trade. We prove that experimentation does converge with probability 1 to an efficient allocation and the speed of convergence remains exponential with Cobb-Douglass utility functions.

Keywords: out-of-equilibrium; cautious; trading; efficiency; experimenting; computation JEL Codes: C62; C63; C78 (search for similar items in EconPapers)
Date: 2010
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https://warwick.ac.uk/fac/soc/economics/research/w ... s/2010/twerp_928.pdf

Related works:
Working Paper: OUT-OF-EQUILIBRIUM DYNAMICS WITH DECENTRALIZED EXCHANGE: CAUTIOUS TRADING AND CONVERGENCE TO EFFICIENCY (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:928

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