Walrasian Dynamics with Endowment Changes: The Gale Example in a Laboratory Market Experiment

We study the stability of price dynamics when endowments change by a laboratory market experiment. We consider a general equilibrium model of an exchange economy based on Gale (1963). By changing endowments while keeping preferences the same, both demand and supply functions change so that stability of equilibria is reversed in the middle of our double auction experiment. We observe that when the interior equilibrium is unstable (resp. stable) in Walrasian tatonnement dynamics, transaction prices show a tendency moving away from (resp. toward to) the equilibrium. However, theoretical predictions on transaction prices movement works better when the interior equilibrium is unstable than when the interior equilibrium is stable. Moreover, efficiency is higher when the interior equilibrium is unstable than when the interior equilibrium is stable. Our observation reinforces the result by Crockett et al. (2010) regarding predictability of the Walrasian model in Gale's economy even when endowments of economies change such that stability of equilibrium is reversed in the middle of a double auction experiment.