NO.1201

The Hayek hypothesis and long run competitive equilibrium: an experimental investigation

Jason Shachat and Zhenxuan Zhang

Abstract
We report on an experiment investigating whether the Hayek Hypothesis (Smith, 1982) extends to the long run setting. We consider two environments; one with a common production technology having a U-shaped long run average cost curve and a single competitive equilibrium, and another with a common constant returns to scale technology having a constant long run average cost curve and multiple competitive equilibria. While there is convergence in both environments to the long run equilibrium, it takes longer and is less robust than usually observed in the short run setting. We show that price formation is adaptive and quickly converges to realize short run equilibrium, but long run investment decisions exhibit very limited rationality. We present and estimate an investment choice model that shows that only minimal rationality, coupled with repeated decisions, is enough to achieve high long run allocative efficiency when markets use continuous double auctions.

Creation Date
2012/6/21

Revision Date
2013/6/29

Classification-JEL
C92, D02

Keywords
Experiment; Double Auction; Hayek Hypothesis; Long Run Equilibrium; Bounded Rationality

File Attachments
Full Text (2012)