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The Hayek hypothesis and long run competitive equilibrium: an experimental investigation

Shachat, Jason and Zhang, Zhenxuan (2012): The Hayek hypothesis and long run competitive equilibrium: an experimental investigation.

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Abstract

We report on an experiment investigating whether the Hayek 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 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. Price formation is adaptive and quickly converges to realized short run equilibrium, but long run investment decisions exhibit nominal rationality. We formulate and estimate an Markovian investment choice model incorporating this nominal rationality. We show this model, coupled with repeated decisions, is enough to achieve high long run allocative efficiency when markets use continuous double auctions.

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