Friday, December 2, 2016

Chamberlain (1948) vs Smith (1962): non-ideal vs ideal information transfer

I was reading an interesting historical perspective on economics centering around the year 1952 (written as a massive tweetstorm). I may have more to say about it later, but one thing that caught my eye was a quote from Vernon Smith about Chamberlain's (1948) experiment:


Smith is essentially saying that there wasn't enough exploration of the state space to come to equilibrium. Chamberlain's experiment was essentially redone in List (2004), which I was able to reproduce using via a simulation with random agents. In my code, I let the agents "circulate" until no more transactions could occur. However, if I limit the time (allow only a few attempts at transactions), you certainly don't get the expected equilibrium (left/first is limited, right/second is from the previous link):


This is an example of non-ideal information transfer where the price (and quantity) fall below the equilibrium because of incomplete transfer of information between supply and demand. In a sense Chamberlain's (1948) conclusion
Perhaps it is the perfect Market which is "strange"; at any rate, the nature of the discrepancies between it and reality deserves study.
Should be taken as support that markets sometimes fail ‒ especially when the state space hasn't been fully explored. Different auction/market constructions can lead to different "efficiency" (more or less ideal information transfer, more or less exploration of the state space). Vernon Smith's (1962) experiments show ideal information transfer (shown with a random agent simulation from me):



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