Walrasian Auctioneer Research Articles

Non-blocking supervisory control of dynamic competitive markets

A competitive market is representative of the free market economy where it is well known that an invisible hand (also referred to as the Walrasian auctioneer) always achieves an equilibrium of demand and supply. In this study, the dynamic behaviours of supply and demand of a competitive market are modelled by finite-state automata. Using the discrete event models, this study shows that a competitive market controlled by the Walrasian auctioneer may fail in leading to equilibria. However, the Walrasian auctioneer can always achieve equilibria through a non-blocking supervisory control together with a government policy.

Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis

This paper is an exploratory analysis of the role that banks play in supporting what Jevons called the "mechanism of exchange.'' It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively, these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to reach prices at which peoples' trading plans are mutually compatible. Banks affect macroeconomic performance in this economy because their lending activities facilitate the entry and influence the exit decisions of trading firms. Both entry and exit have ambiguous effects on performance, and we resort to computational analysis to understand how they are resolved. Our analysis draws an important distinction between normal and worst-case scenarios, with the economy experiencing systemic breakdowns in the latter. We show that banks can provide a "financial stabilizer'' that more than counteracts the familiar financial accelerator, and that the stabilizing role of the banking system is particularly apparent in worst-case scenarios. In line with this result, we also find that under less restrictive lending standards banks are able to more effectively improve macroeconomic performance in the worst-case scenarios.

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This paper presents a new approach to analyze the stability of dynamic competitive markets within the framework of supervisory control of discrete event systems. A competitive market is representative of free market economy where it is well known that an invisible hand (also referred to as Walrasian auctioneer) always achieves an equilibrium of demand and supply. Upon the framework of supervisory control theory, this paper shows that Walrasian auctioneer is a stabilizing supervisor for a convergent competitive market, however a non-convergent competitive market (e.g. a free market under economic bubble and depression) controlled by Walrasian auctioneer may not be stable.

A Double-Track Adjustment Process for Discrete Markets With Substitutes and Complements

We propose a new Walrasian tatonnement process called a double-track procedure for efficiently allocating multiple heterogeneous indivisible items in two distinct sets to many buyers who view items in the same set as substitutes but items across the two sets as complements. In each round of the process, a Walrasian auctioneer first announces the current prices for all items, buyers respond by reporting their demands at these prices, and then the auctioneer adjusts simultaneously the prices of items in one set upward but those of items in the other set downward. It is shown that this procedure converges globally to a Walrasian equilibrium in finitely many rounds.

Unnoticed predecessors of the early Negishi theorems

From the studies of the history of economic thought, we can learn that many theorems of the modern general equilibrium theory were well anticipated in the classical economics and the economics of the marginal revolution. For example, first, what Johann Heinrich von Thünen (1783–1850) did, in his strange theory of natural wage, can be interpreted as an early, pioneering attempt to use the so‐called Negishi method (1960), which is now intensively used for the proof of the existence theorem and the numerical calculation of a general equilibrium. Second, as is well known, no exchanged transactions are permitted out of equilibria in the famous Walrasian tatonnement adjustment process towards market equilibria. Against this, the importance of transactions carried out at disequilibria is emphasized in the studies of the so‐called Hahn–Negishi non‐tatonnement process (1962). As a matter of fact, in the classical economics, this is exactly what William Thomas Thornton (1813–1380) insisted against the authority of John Stuart Mill (1800–1873). Finally, subjectively perceived (often kinked) demand curves are considered in my proof of the existence of a general equilibrium in the case of monopolistic competition (1961). To my surprise, however, I found later that such demand curves were already hidden in Adam Smith's (1723–1790) consideration of markets and the division of labor, and that the increase of demand never fails to lower the price of goods.

Are the antiglobalists right? Gains-from-trade without a Walrasian auctioneer

We show that the “fear” of globalisation can be rationalised by economic theory in the standard AD/AS equilibrium model, if we substitute the coordinational role of the Auctioneer by an implementation device based on learning (Guesnerie in Am Econ Rev 82, 1254–1278, 1992). When endowing producers with a learning ability to forecast market prices, individual profit-maximizing production decisions become interdependent in a strategic sense (strategic substitutes). Performing basic comparative statics exercises, we show that “competitiveness” matters in a precise sense: as foreign producers gain access to the home market, home producers’ ability to forecast market prices is undermined, so being their ability to forecast the profit consequences of their production decisions. A standard open economy exercise shows that the efficiency gains triggered by increased competition have to be traded-off against higher uncertainty (a lower likelihood to coordinate upon the welfare enhancing free-trade equilibrium). We interpret it as a new rationale for the existence of barriers to trade targeting coordination, rather than protecting mere inefficient sectors or industries (political economy driven). Finally, we show that classical measures evaluating ex-ante the desirability of economic integration (net welfare gains) do not always advice free trade.

Entrepreneurship and macroeconomic performance

AbstractThis paper develops a formal model of the impact of entrepreneurship on macroeconomic performance. It examines the role of entrepreneurs in creating markets for novel products. Entrepreneurs take over the coordination role that in traditional neoclassical economic models is performed by the Walrasian auctioneer. Entrepreneurs specialize in collecting information that permits them to make judgmental decisions about innovation. The quality of their judgment determines the success of innovations, and thereby impacts the long‐run performance of the economy. The model demonstrates rigorously that constraints on the supply of entrepreneurship reduce economic performance, and serves to identify the policy instruments that can improve performance by alleviating these constraints. Copyright © 2008 Strategic Management Society.

Adaptive Traders and the Design of Financial Markets

ABSTRACTThis paper studies a financial market populated by adaptive traders. Learning is modeled following Camerer and Ho (1999). A call market and a Walrasian tatonnement are compared in an environment in which both institutions have the same Nash and competitive equilibrium outcomes. When traders learn via a belief‐based model, equilibrium is discovered in both types of markets. In contrast, when traders learn via a reinforcement‐based model, convergence to equilibrium is achieved in the Walrasian tatonnement but not in the call market. This paper suggests that market mechanisms can be designed to foster traders' learning of equilibrium strategies.

Excess demand and price formation during a Walrasian auction

Abstract We conduct a detailed analysis of the relationship between excess demand and the convergence of price to equilibrium during a real-world Walrasian auction, paying special attention to the size and speed of the price adjustment. Using data from the Tokyo Grain Exchange (TGE), we first show that because auctions for the various futures contracts occur sequentially, information becomes more evenly dispersed across traders as an auction sequence progresses. Then we show that excess demand is positively correlated with both the eventual price change and the speed with which price adjusts. As information becomes more evenly dispersed, the strength of these relationships weakens. Finally, though excess demand explains a large proportion of the variability of the change in price, it explains only a small proportion of the variability of the speed of adjustment.

Financial market design and bounded rationality: An experiment

This paper experimentally compares a Call Market and a Walrasian Tatonnement under asymmetric information. The experimental environment and the market institutions are such that, at the theoretical equilibria, the two trading institutions exhibit identical prices and surpluses. During the experiment, prices are fully revealing on the two trading venues. However, the gains from trade are higher on the Walrasian Tatonnement than on the Call Market. This is because uninformed agents trade less on the CM. I show that this behavior is due to bounded rationality and strategic uncertainty, and that the Walrasian Tatonnement fosters learning by mitigating the impact of both factors. This paper supports the view that trading institutions should be designed including cognitively ergonomic features to fit the limited nature of human rationality.

Heterogeneous Expectations and Speculative Behavior in a Dynamic Multi-Asset Framework

Following the framework of a one risky - one riskless asset model developed by Brock and Hommes (1998), this paper considers a discrete-time model of a financial market where heterogeneous groups of agents allocate their wealth amongst multiple risky assets and a riskless asset. Agents follow different expectation formation schemes for both first and second moments of the distribution of returns. Instead of using a Walrasian auctioneer scenario as the market clearing mechanism, a market maker scenario is used. In particular, the paper focuses on the case of two risky assets and two agent types, fundamentalists and trend chasers. Conditions for the stability of the fundamental equilibrium are established in terms of the key parameters, in particular the extrapolation rate of the trend chasers and the weight of the two groups in the market. Numerical explorations are performed in order to analyze the combined effect of the interaction between heterogeneous traders and the diversification among multiple risky assets. Particular attention is paid to the effect of the correlation between the risky assets. It turns out that investors' anticipated correlation and portfolio diversification do not always have a stabilizing role, but rather may act as a further source of complexity in the financial market.

Testing the theory of emissions trading: Experimental evidence on alternative mechanisms for global carbon trading

Simulation models and theory prove that emission trading converges to market equilibrium. This paper sets out to test these results using experimental economics. Three experiments are conducted for the six largest carbon emitting industrialized regions. Two experiments use auctions, the first a single bid auction and the second a Walrasian auction. The third relies on bilateral, sequential trading. The paper finds that, in line with the standard theory, both auctions and bilateral, sequential trading capture a significant part (88% to 99%) of the potential cost savings of emission trading. As expected from trade theory, all experiments show that the market price converges (although not fully) to the market equilibrium price. In contrast to the theory, the results also suggest that not every country might gain from trading. In both the bilateral trading experiment and the Walrasian auction, one country actually is worse off with trade. In particular bilateral, sequential trading leads to a distribution of gains significantly different from the competitive market outcome. This is due to speculative behavior, imperfect foresight and market power.

Institutional architectures and behavioral ecologies in the dynamics of financial markets

The paper examines the properties of financial market dynamics, under different trading protocols. We start with an empirical analysis of the statistical properties of daily data from the world’s major Stock Exchanges, comparing the behavior of different market phases characterized by different trading protocols. The evidence lends support to the importance of investigating the outcome of alternative market mechanisms. Motivated by this finding, we present an agent-based model allowing the consistent treatment of agents’ behavior under three different trading set-ups, namely a Walrasian auction, a batch auction and an ‘order-book’ mechanism. The results highlight the importance of the institutional setting in shaping the dynamics of the market but also suggest that the latter can become the outcome of a complicated interaction between the trading protocol and the ecology of traders behaviors. In particular, we show that market architectures bear a central influence upon the time series properties of market dynamics. Conversely, the revealed allocative efficiency of different market settings is strongly influenced by the trading behavior of agents.

On the evolution of comparative advantage in matching models

This paper examines whether comparative advantage is the long-run outcome of an evolutionary process in the open economy. It formalizes the notion that natural selection eliminates inefficient firms and thus leads to stable and perhaps efficient patterns of world trade. Instead of assuming the existence of a Walrasian auctioneer, we study two simple matching processes that coordinate trade between firms. Our central result is that specialization according to comparative advantage, with the larger country possibly incompletely specialized, is the unique evolutionarily stable state of the world economy.

Double auction dynamics: structural effects of non-binding price controls

In competitive equilibrium, non-binding price controls (that is, price floors below and ceilings above the equilibrium) should not affect market outcomes, but in laboratory experiments they do. We build a simple dynamic model of double auction markets with “zero-intelligence” (ZI) computer traders that accounts for many, though not all, of the discrepancies between the data and the Walrasian tatonnement predictions. The success of the model in organizing the data, and in isolating various consequences of price controls, shows that the simple ZI model is a powerful tool to gain insights into the dynamics of market institutions.

Competitive Equilibria: Convergence, Cycles or Chaos

There are three types of Anything Goes results: two of them from economic theory and one from the realms of dynamical systems. The study considers the implications of such results and tries to identify conditions under which certain types of conclusions may be implied: convergence, cycles or chaos. The study has been divided up into five chapters. Chapters 1 and 2 contain the basic tools of analysis; the first refers to continuous time processes whereas the second refers to discrete time processes. These chapters contain a summary of definitions and results and some applications of these results. The chapters are by no means a comprehensive account of non-linear dynamic systems; they are there to keep the study self-contained. Chapters 3 and 4 contain an analysis of Stability of Competitive Equilibria; the first refers to Walrasian Tatonnement processes while the second to Non-Walrasian or Non-tatonnement processes. We have tried to make the analysis in these chapters as exhaustive as possible, so that readers may understand and appreciate the different aspects of this problem. In short, we examine the workings of the so-called and obtain conditions when the Invisible Hand is also successful in carrying out the tasks that we usually assume that it is capable of. Chapter 5, currently the last chapter, is devoted to processes of economic growth in one sector models. The aspect studied in some detail is the approach to the question of unemployment cycles.

An intertemporal general equilibrium model with given real wage rates

The paper proposes a general equilibrium model based on the classical assumption that the real wage rate is determined from outside the system of production. In this model, the Walrasian auctioneer in the labor market is replaced by a flexible accumulation rate. Several equilibrium concepts are introduced and studied.

The Walrasian Tatonnement to Economize on Cognitive Transaction Costs: An Experiment

This paper compares experimentally the price formation on a Walrasian Tatonnement and on a Call Market in a common value environment with insiders and gains from trade inspired by Plott and Sunder (1982). A game-theoretical analysis shows that these two institutions are strategically equivalent. In the experiment, the informational efficiency is almost perfect on the two trading venues indicating that agents coordinate on the fully revealing equilibrium. However, the gains from trade are higher on the Walrasian Tatonnement than on the Call Market. As uninformed agents' deviations from equilibrium are more frequent on this latter institution, the market experiences a lower liquidity. The Walrasian Tatonnement is interpreted as an explicit mechanism: during the trading process, tentative prices can be observed and the execution price is known before transactions occur. This pre-trade transparency which is not as high on the Call Market has no influence on equilibrium outcomes but yet helps subjects finding out equilibrium strategies. This paper supports the view that trading institutions should be designed including cognitively ergonomic features to fit the limited nature of human rationality.

Burgstaller on the Common Core of Classical and Walrasian Economics

This is a review article on Burgstaller's book Property and Prices (1995). It is argued that the book misrepresents the common ground and the differences between the classical and the Walrasian approaches to value and distribution, and furthermore that many of the author's claims, e.g. that arbitrageurs and speculators make the Walrasian auctioneer unnecessary for the reaching of a Walrasian equilibrium, are mistaken.

Markets for tradeable emission and ambient permits: A dynamic approach

This paper discusses trade mechanisms in pollutionpermit markets. Proofs are given, that sequential,bilateral trade in tradeable emissions permitsconverges to a market equilibrium with minimal totalcosts of pollution control. If ambient or depositionpermits are traded, the convergence of bilateraltransactions occurs only in the case of a singlereceptor. For multiple receptors, the proof ofconvergence for tradeable emissions and ambientpermits is given for two trade mechanisms: sequential,multilateral trade and a Walrasian auction.