Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium

Shyam Sunder and Antoni Bosch-Domènech

Yale School of Management Working Papers from Yale School of Management

Abstract: Economics is the science of want and scarcity. We show that want and scarcity, operating within a simple exchange institution (double auction), can be sufficient for an economy consisting of multiple inter-related markets to attain competitive equilibrium (CE). We generalize Gode and Sunder's (1993a, 1993b) Single-market finding to multi-market economies, and explore the role of the scarcity constraint in convergence of economies to CE. When the scarcity constraint is relaxed by allowing arbitrageurs in middle markets to enter speculative trades, prices still converge to CE, but allocative efficiency of the economy declines. Optimization by individual agents, often used to derive competitive equilibria, is unnecessary for an actual economy to approximately attain such equilibria. From the failure of humans to optimize in complex tasks, one need not conclude that the equilibria derived from the competitive model are descriptively irrelevant. We show that even in complex economic systems which are highly inefficient, such equilibria can be attained under a range of surprisingly weak assumptions about agent behavior.

Keywords: Competitive Equilibrium; Convergence; Zero-Intelligence Traders; Minimal Rationality Economics (search for similar items in EconPapers)
JEL-codes: C92 D40 D44 (search for similar items in EconPapers)
Date: 2001-07-30
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium (2000)
Working Paper: Tracking the invisible hand: Convergence of double auctions to competitive equilibrium (1996)
Working Paper: Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium (1994)
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:somwrk:ysm204

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