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Divergence, Closed Cycles and Convergence in Scarf Environments: Experiments in the Dynamics of General Equilibrium Systems

Hirota, Masayoshi and Hsu, Ming and Plott, Charles R. and Rogers, Brian W. (2005) Divergence, Closed Cycles and Convergence in Scarf Environments: Experiments in the Dynamics of General Equilibrium Systems. Social Science Working Paper, 1239. California Institute of Technology , Pasadena, CA. (Unpublished) http://resolver.caltech.edu/CaltechAUTHORS:20170802-115208474

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Abstract

Previous experimental work has demonstrated the power of the classical theory of economic dynamics. In particular, the models have proved to be accurate in predicting the principle directions of movement and orbit-like behavior in general equilibrium systems. Questions left open and addressed in this study are (i) do the markets necessarily converge to a unique interior equilibrium or can markets exhibit the “explosive property” of instability and (ii) among the several variations of the classical model, which, if any, is most accurate in predicting what is actually observed in experiments? Markets were created and studied in the extreme environments identified by Scarf and Hirota. Such environments allow us to study features of market adjustments that are obscured by the complexity of naturally occurring markets. Two fundamental results are reported. First, the instability phenomenon of “expanding orbits” predicted by theory does actually exist in the markets and exists in much the form that theory suggests. That is, prices spiral outwardly around the equilibrium prices and do so in directions predicted by theory. This type of disequilibrium behavior is observed for the first time in actual market behavior. Thus, the principles governing market adjustment are not among those that guarantee convergence to a unique interior equilibrium. Second, the best dynamic model from among those studied is of the form [see PDF for equation] where the diagonal elements are positive and the E sub i (P) are excess demands.


Item Type:Report or Paper (Working Paper)
Additional Information:The financial support of the National Science Foundation and the Caltech Laboratory for Experimental Economics and Political Science is gratefully acknowledged. We thank Anjan Mukherji, Ken-Inchi Shimomura, Bill Zame, and Peter Bossaerts for their many helpful suggestions.
Group:Social Science Working Papers
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Funding AgencyGrant Number
NSFUNSPECIFIED
Caltech Laboratory for Experimental Economics and Political ScienceUNSPECIFIED
Subject Keywords:general equilibrium, stability, experiments
Classification Code:JEL: D50, C92, E3
Record Number:CaltechAUTHORS:20170802-115208474
Persistent URL:http://resolver.caltech.edu/CaltechAUTHORS:20170802-115208474
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79766
Collection:CaltechAUTHORS
Deposited By: Hanna Storlie
Deposited On:09 Aug 2017 19:01
Last Modified:09 Aug 2017 19:01

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