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Published April 2021 | public
Journal Article

Divergence and convergence in Scarf cycle environments: experiments and predictability in the dynamics of general equilibrium systems

Abstract

Previous experimental work demonstrates the power of classical theories of economic dynamics to accurately characterize equilibration in multiple market systems. Building on the literature, this study examines the behavior of experimental continuous double auction markets in convergence-challenging environments identified by Scarf (Int Econ Rev 1:157–171, 1960) and Hirota (Int Econ Rev 22:461–467, 1981). The experiments provide insight into two important economic questions: (a) Do markets necessarily converge to a unique interior equilibrium? and (b) which model, among a set of classical specifications, most accurately characterizes observed price dynamics? We observe excess demand-driven prices spiraling outwardly away from the interior equilibrium prices as predicted by the theory of disequilibrium price dynamics. We estimate a structural model establishing that partial equilibrium dynamics characterize price changes even in an unstable general equilibrium environment. We observe linkages between excess demand in one market and price changes in another market, but the sign of expected price change in a market does not depend on the magnitude of excess demand in other markets unless disequilibrium is severe.

Additional Information

© Springer-Verlag GmbH Germany, part of Springer Nature 2020. Received 03 September 2019; Accepted 07 April 2020; Published 23 April 2020. The financial support of the John Templeton Foundation (Grand No. 58067) the Rising Tide Foundation, and the Caltech Laboratory for Experimental Economics and Political Science is gratefully acknowledged. Comments of Peter Bossaerts, Anjan Mukherji, and Bill Zame contributed significantly.

Additional details

Created:
August 22, 2023
Modified:
March 5, 2024