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American Economic Review: Vol. 101 No. 7 (December 2011)

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Extreme Walrasian Dynamics: The Gale Example in the Lab

Article Citation

Crockett, Sean, Ryan Oprea, and Charles Plott. 2011. "Extreme Walrasian Dynamics: The Gale Example in the Lab." American Economic Review, 101(7): 3196-3220.

DOI: 10.1257/aer.101.7.3196

Abstract

We study David Gale's (1963) economy using laboratory markets. Tatonnement theory predicts prices will diverge from an equitable interior equilibrium toward infinity or zero depending only on initial prices. The inequitable equilibria determined by these dynamics give all gains from exchange to one side of the market. We show surprisingly strong support for these predictions. In most sessions one side of the market eventually outgains the other by more than 20 times, leaving the disadvantaged side to trade for mere pennies. We also find preliminary evidence that these dynamics are sticky, resisting exogenous interventions designed to reverse their trajectories. (JEL C92, D50)

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Authors

Crockett, Sean (Baruch College (CUNY))
Oprea, Ryan (University of California-Santa Cruz)
Plott, Charles (California Institute of Technology)

JEL Classifications

C92: Design of Experiments: Laboratory, Group Behavior
D50: General Equilibrium and Disequilibrium: General


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