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Published December 2011 | Published
Journal Article Open

Extreme Walrasian Dynamics: The Gale Example in the Lab

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.

Additional Information

© 2011 American Economic Association. We thank three anonymous referees, Omar Al-Ubaydli, Dan Friedman, Stephen Spear, Steve Gjerstad, Bart Wilson, seminar participants at Baruch College, participants at the 2009 Economic Science Association North American Regional Meeting, and participants at the ninth Society for the Advancement of Economic Theory Conference. We also thank Paul J. Brewer, Hsing Yang Lee, and Travis Maron for developing the laboratory market system we used to conduct our experiment (see http:// marketscape,caltech.edu/wiki for details). For financial support, Crockett thanks the City University of New York through PSC-CUNY award 60095-3738. Plott thanks The Gordon and Betty Moore Foundation and the Caltech Laboratory for Experimental Economics and Political Science. Formerly SSWP 1329.

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