Shachat, Jason and Zhang, Zhenxuan (2012): The Hayek hypothesis and long run competitive equilibrium: an experimental investigation.
Download (948kB) | Preview
We report on an experiment investigating whether the Hayak Hypothesis (Smith, 1982) extends to the long run setting. We consider two environments; one with a common production technology having a U-shaped long run average cost curve and a single competitive equilibrium, and another with a common constant returns to scale technology having a constant long run average cost curve and multiple competitive equilibria. While there is convergence in both environments to the long run equilibrium, it takes longer and is less robust than usually observed in the short run setting. We show that price formation is adaptive and quickly converges to realized short run equilibrium, but long run investment decisions exhibit very limited rationality. We present and estimate an investment choice model that shows that only minimal rationality, coupled with repeated decisions, is enough to achieve high long run allocative efficiency when markets use continuous double auctions.
|Item Type:||MPRA Paper|
|Original Title:||The Hayek hypothesis and long run competitive equilibrium: an experimental investigation|
|Keywords:||Experiment; Double Auction; Hayek Hypothesis; Long Run Equilibrium; Bounded Rationality|
|Subjects:||C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior
D - Microeconomics > D4 - Market Structure, Pricing, and Design > D41 - Perfect Competition
D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles
|Depositing User:||Jason Shachat|
|Date Deposited:||20. Jun 2012 22:08|
|Last Modified:||18. Mar 2015 11:32|
Asparouhova, E., P. Bossaerts, and J. O. Ledyard (2011): "Price formation in continuous double auctions; with implications for Finance," Working paper, University of Utah.
Cabrales, A., and R. Serrano (2011): "Implementation in adaptive better-response dynamics: Towards a general theory of bounded rationality in mechanisms," Games and Economic Behavior, 73(2), 360-374.
Camerer, C., and T.-H. Ho (1999): "Experience-weighted attraction learning in normal form games," Econometrica, 67(4), 827-874
Davis, D. D., and A. W. Williams (1991): "The Hayek hypothesis in experimental auctions: institutional effects and market power," Economic Inquiry, 29(2), 261-274.
Easley, D., and J. Ledyard (1993): "Theories of price formation and exchange in double oral auctions," in The Double Auction Market: Institutions, Theories and Evidence, ed. by D. Friedman, and J. Rust, vol. 15 of Proceedings volume in the Santa Fe Institute studies in the sciences of complexity, pp. 63-97. Addison-Wesley Publishing Company.
Fehr, E., and A. Falk (1999): "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, 107(1), 106-134.
Fehr, E., and J.-R. Tyran (2005): "Individual irrationality and aggregate outcomes," Journal of Economic Perspectives, 19(4), 43-66.
Gjerstad, S., and J. Dickhaut (1998): "Price formation in double auctions," Games and Economic Behavior, 22(1), 1-29.
Gode, D. K., and S. Sunder (1993): "Allocative eciency of markets with zero-intelligence traders: Market as a partial substitute for individual rationality," The Journal of Political Economy, 101(1), 119-137.
Goodfellow, J., and C. R. Plott (1990): "An experimental examination of the simultaneous determination of input prices and output prices," Southern Economic Review, 56(4), 969-983.
Greiner, B. (2004): "An online recruitment system for economic experiments," in Forschung und wissenschaftliches Rechnen, ed. by K. Kremer, and V. Macho, vol. 63 of Ges. fur Wiss. Datenverarbeitung, pp. 79-93. GWDG Bericht.
Hayek, F. A. v. (1945): "The use of knowledge in society," American Economic Review, 35(4), 519-530.
Holt, C. A., L. W. Langan, and A. P. Villamil (1986): "Market power in oral double auctions," Economic Inquiry, 24(1), 107-123.
Hurwicz, L., R. Radner, and S. Reiter (1975): "A stochastic decentralized resource allocaton process: Part I," Econometrica, 43(2), 187-221.
Mckelvey, R. D., and T. R. Palfrey (1995): "Quantal response equilibria for normal form games," Games and Economic Behavior, 10(1), 6-38.
Mestelman, S. (1988): "Advance production in experimental markets," The Review of Economic Studies, 55(4), 641-654.
Mestelman, S., and D. Welland (1987): "Advance production in oral double auction markets," Economics Letters, 23(1), 43-48.
Mestelman, S., and D. Welland(1991): "Inventory carryover and the performance of alternative market institu- tions," Southern Economic Journal, 57(4), 1024-1042.
Mestelman, S., and D. Welland (1995): "Experience and inventory management in double-auction markets," Journal of Economic Behavior and Organization, 26(1), 35-48.
Noussair, C., C. Plott, and R. Riezman (2007): "Production, trade, prices, exchange rates and equilibration in large experimental economies," European Economic Review, 51(1), 49-76.
Phillips, O. R., D. J. Menkhaus, and J. L. Krogmeier (2001): "Production-to-order or production-to-stock: the endogenous choice of institution in experimental auction markets," Journal of Economic Behavior and Organization, 44(3), 333-345.
Riedl, A., and F. A. van Winden (2007): "An experimental investigation of wage taxation and unemployment in closed and open economies," European Economic Review, 51(4), 871-900.
Riedl, A., and F. A. van Winden (2012): "Input versus output taxation in an experimental international economy," European Economic Review, 56(2), 216-232.
Smith, V. L. (1962): "An experimental study of competitive market behavior," Journal of Political Economy, 70(2), 111-137.
Smith, V. L.(1976): "Experimental economics: Induced value theory," American Economic Review, 66(2), 274-279.
Smith, V. L.(1982): "Markets as economizers of information: Experimental examiniation of the Hayek Hypothesis", Economic Inquiry, 20(2), 165-179.
Available Versions of this Item
- The Hayek hypothesis and long run competitive equilibrium: an experimental investigation. (deposited 20. Jun 2012 22:08) [Currently Displayed]